Partnership

- Is a contract wereby, two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profit among themselves.
- Two or more persons may form a partnership for the exercise of a profession (Civil code
of the Phil. Article 1767).
Characteristics of a Partnership:
1. Mutual Contribution – All partners should have contribution whether money, property or
industry.
2. Division of Profit or Losses - Partners must share in the profit or losses.
3. Co-Ownership of contribution assets – What’s yours is mine.
4. Mutual Agency – What I earn is yours too.
5. Limited Life – may be dissolved by admission, death, incapacity, withdrawal or expiration of
term.
6. Unlimited Liability – all partners are liable up to the extent of their personal assets. Except
Limited partners.
7. Income Taxes – subject to tax rate 30% (per R.A 9337) taxable income. Except General
professional Partnership.
8. Partners Equity Account – each partner has capital and withdrawal accounts.
Classification of Partnerships:
1. According to Object:
A. Universal partnership of all present property – all personal assets will be shared in
partnership. absolute
B. Universal partnership of profits – only share in profits not the assets. Conjugal
C. Particular Partnership – the asset to be shared is specific, ex. Were only partners in cars
not in house.
2. According to Liability:
A. General – partners are liable up to the extent of their personal assets.
B. Limited - liable only to what you contribute; should at least have a one General partner.
3. According to duration:
A. With a fixed term or particular undertaking.
B. At will – as long as partners wants.
4. According to purpose:
A. Commercial or trading - for business.
B. Professional or non-trading – to exercise profession.
5. According to Legality of Existence:
A. De jure – compiled w/ legal requirements
B. De facto – failed to comply legal requirements.
Kinds of Partners:
1. General partner – liable up to extent of personal property.
2. Limited partner - liable only to what you contribute.
3. Capitalist partner – contribute money or property
4. Industrial partner – contribute your skills or labor
5. Managing partner – manager
6. Liquidating partner – designate to wind up or settle the affairs after dissolution.
 7. Ostensible partner – known by public and doing work.
8. Dormant partner – does not take active part in business and not known.
9. Silent partner – does not take active part; may be known.
10. Secret partner – takes active part but not known.
11. Nominal partner or partner by estoppel – not actually partner but act as one.

Partnership Formation
 Partnership is formed through a contract: oral; written
 Articles of Partnership
 File this at SEC; therefore approved.
 SEC – partnership capital is at least 3,000 pesos; monitors what happen to the business
Valuation of investments by Partners
- Asset were debited while liability and capital were credited. They may invest Cash or Non
cash; if non cash it will be recorded based on agreed by partners; if there is non, it
should be recorded at their Fair Market value.
Adjustment of accounts prior to Formation
- Since partners will use new books, all transaction in previous books must be closed at fair
value.

1. Individuals w/ no existing business for a partnership - dr. assets cr. Liability assumed, cr. Capital
of each partner.
2. A Sole Proprietor and Another Individual form a Partnership – the assets and liability of the
proprietorship will be transferred to the newly formed partnership at values agreed by partners
or at their Fair values.
 Proprietor should;
- Adjust account balances depends on agreed or fair value
- Close the book
- Transfer to new book.
3. Two or more Sole Proprietors Form a Partnership – adjust previous books at agreed value or fair
value, then transfer to the new book.
 Proprietors should;
- Adjust account balances depends on agreed or fair value
- Close the book
- Transfer to new book.
*note the A/R & Allow. BD will be transfer as it is but, Accum Dep. will be minus on the equip. as it is
not needed to be shown at the new book.
Limited Liability Company (LLC) – provides limited liability to the owners.
Limited Liability Partnership (LLP) - investment is restricted to professionals.

Partnership Operations
Rules for the distribution of the profit or losses
Profits:
1. According to partners agreement.
2. If there is no agreement.
- Capitalist Partner: based on (original, if not given then the beg. cap) capital
contributions.
- Industrial Partner: just and equitable share depend on the situation. Shall be receive
before capitalist partner divide the profits.
Losses:
1. According to partners agreement
2. If there is no as to the division of losses but there is an agreement as to division of profit, use
the profit-sharing agreement.
3. If no agreement at all
- Capitalist Partner: according to capital contributions. Orig.
- Industrial Partner: not liable for any losses.
Distribution Based on Agreement
1. Equally or another agreed ratio.
2. Based on partner’s capital contribution.
 Original Capital; maybe beg. Capital (profit*orig.)/ total inv.)
The orig investment is A 400, B 800 respectively. The profit of 300 is divided as follows;
Income Summary (profit) 300
A, Drawing (300*400)/1,200 100
B, Drawing (300*800)/1,200 200

 Beg. Capital of current period:

- Additional investment will be discouraged; (ex. Orig. 2020 1m; beg. 2021 1.2m)
(profit*beg.)/ total inv.)
Income Summary (profit) 300
A, Drawing (300*400)/1,200 100
B, Drawing (300*800)/1,200 200

 End. Capital of current period:

- Year end investments are encouraged; no penalties to withdrawals and you van
reinvested it at year end as it is Add. Inv is encouraged. (profit*end.)/ total inv.)
The ending balance is A 500, B 750 respectively. The profit of 300 is divided as follows;
Income Summary (profit) 300
A, Drawing (300*500)/1,250 120
B, Drawing (300*750)/1,250 180
  Weighted Ave. Capital: count kung ilang mos pa ang layo nya sa kasunod nya or sa year end.
Date Capital Activity No. of mos. Until Peso equivalent
year end
Jan-1 400,000 3/12 100,000
Apr-1 500,000 9/12 375,000 3. B
Average Capital balance, A 475,000 y
Jan-1 800,000 6/12 400,000
Jul-1 750,000 6/12 375,000
Average Capital balance, B 775,000
Total Ave. capital Bal. (475k+775k) 1,250,000
Entry to record the division of profit 300,000
Income summary 300,000
A, drawings (300k*475k)1,250 114,000
B, drawings(300k*775k)1,250 186,000
allowing Interest on partners’ capital and the balance in an agreed ratio.
 A and B profit is 300,000 and partners agreed to 15% interest on ave. cap. Bal. with the balance
to be divided equally.
15% interest on ave. A B total
cap:
A: 475,000 *15% 71,250
B: 775,000 * 15% 116,250
Subtotal: 187,500
Balance to be divided
equally ( 300k-
187.5k) = 112.5k
A:112,500 * 50% 56,250
B:112,500 * 50% 56,250 112,500
Share of partners in 127,500 172,500 300,000
Profits

4. By allowing salaries to partners and balances in an agreed ratio.

5. By allowing bonus to the managing partner based on profit and the balance in an agreed ratio.
 After bonus: partner A only has a bonus.
B= .25(300,000 – B) 300k-60k =240k /2 =120k
B= 75,000 - .25B A – 120k+60k=180k
1.15B = 75,000 B – 120k
B= 60,000 Total (180k+120k) = 300,000
 Before bonus: 300k-75k=225k/2=112.5k
A – 75k+112.5k =187.5k
B= .25 * 300k
B – 112k Total (187.5k+112.5k) = 300,000
B= 75,000
6. By allowing salaries, interest on partners capital, bonus to the managing partner and the
balance in an agreed ratio.
 Profit 400,000
- Bonus to A 25% of profit after salaries and interest but before bonus.
- Annual salary 100k & 60k respectively. Sal = 100k+60k =160k
- Interest 71,250 and 116,250. Int.= 116250+71250=187.5k
- Bal will be divided to 40:60. A – 39,375*.40= 15,750
B= B (400k – (salaries– interest) B – 39,375*.60=23,625
Income Summary 400,000
A Drawings (100+71.250+13.125+15.750) 200,125
B Drawings (60+116.250+23.625) 199,875
 Profit before salaries and interest and bonus: 400,000
B=.25(400k-160k-187.5k) Less: Salaries 160,000
B=13,125 Interest 187,500 347,500
Bal to be divided 40:60; 52,500 125%
Bal= (400k-160k-187.5k-13,125) (52,500/125%) 42,000 100%
Bal= 39,375 to be divided Bonus 10,500 25%
- Assume it is after salaries and interest and after bonus. see table above. After getting the
bonus subtract all the STB then divide the balance to 40:60 ratio.
# Note salaries & Interest are NOT expense; they are profit of the partner.

Financial Reporting
Financial Statements – is to provide accounting information useful for making economic decisions.
Going Concern –
Accrual basis of accounting

Partnership Dissolution – change in the relation of the partners.

Partnership Liquidation – winding up Liquidation is always preceded by dissolution.
# Liability of incoming partner for existing obligations; kapag ang old partners ay may utang then
may napasok na new partner; then kasali na rin sya sa pagbabayad ng utang evenif wala pa sya
nung inutang iyon. Kapag kulang pa ang capital sa pagbabayad ng liability, maghahati hati duon ang
mga old partners lang.
Causes of Dissolution:
1. Admission of a partner – delectus personae, means that no one can be added to the
partnership w/o consent of all.
- By Purchase – purchasing interest directly from partners. (Transfer of capital to new
partner.)
 Payment to old partners is equal to interest purchase.
 Payment to old partners is less than the interest purchased. (The new partner bought the
interest less than its value.)
 Payment to old partners is more than the interest purchased. (Bought interest in higher
price thus result to bonus to old partners.)
- By Investment – new partner will Invest cash or other assets.
Definition of terms:
Total Contributed Capital – Actual Investment.
Total agreed Capital – Capital credits.
Capital credits – obtained by multiplying the agreed capital by partners to the % interest that new
partner invest.
  Bonus to old partners –you invested higher than its percentage value in the partnership. Ex.
250 k for ¼, but ¼ interest just amount to 180, so old partners have bonus of 70k which
they will share based on their P&L ratios.
 Bonus to new Partner – invested less than the % acquired.
2. Withdrawal of retirement of a Partner
- By selling his equity interest to one or more remaining partner.
- By selling his equity interest to an outsider. Total asset of the partnership is not affected
as this transaction affect only the buyer and seller.
- By selling his equity interest to the partnership. Partner is paid from the assets of the
partnership; may receive equal, greater or less than the balance of his capital account.
3. Death of a Partner – interest will be receiving by relatives, treated as same to retirement.
4. Incorporation of Partnership – share received is based on equity interest.

Partnership Liquidation – winding up of its business activities.

Steps in Liquidation:
1. Realization – conversion of all non-cash asset into cash.
Gain on realization – Cash you get is greater than the noncash that you give up.
Loss on realization – non cash given up is greater than the cash you get.
2. Settlement of Liabilities:
- Outside creditors: not related to your business
 Liquidation Expenses ex. Commission expense.
 Salaries of the Employees.
 Taxes
 Creditors
- Inside creditors: partnership has liability(loan) to the partner.
3. Distribution to Partners:
- Capital Contribution
- Share of the profits.
Right of offset – Loans to partner, partner may offset his loans if the partnership has loans to partners.
Capital deficiency – negative balance of capital account.
 Insolvent – Asset is less than your liabilities. (Wala syang pambayad). Yung mga solvent partner ang
magbabayad non.
 Solvent – asset greater than his liabilities. (kaya nyang bayaran ang utang nya.)
Entries Related to Liquidation:
1. Sale of Non-cash assets:
a. At book value – dr. cash cr. NCA
b. Above book value – dr. cash cr. NCA cr. Gain on realization
c. Below book value – dr. cash dr. loss on realization cr. NCA
2. Distribution of Gain or Loss on realization based on Partners P&L ratio:
a. Distribution on Gain on Realization – dr. Gain on realization cr. A, B, & C capital.
b. Distribution of Loss on Realization – dr. A, B, & C capital cr. Loss on realization.
3. Payment of Liabilities – dr. liabilities cr. Cash
4. Exercise of Right of Offset – dr. A, loan cr. A, Capital.
5. Additional Investment by Deficient partner – dr. cash cr. A, capital.
6. Deficiency absorbs by solvent partner – dr. B, Capital cr. A, Capital.
7. Distribution of cash to partners – dr. A,B,C Capital cr. Cash.
Methods of Partnership Liquidation
1. Lump sum method – all non-cash asset is realized and all liabilities are settled before a single final cash
distribution to partners.
 Realization of non-cash asset.
 Payment of liabilities.
 Elimination of partners’ capital deficiencies.
- If a deficient partner has a loan balance, then exercise the right of offset.
- If the deficient partner is solvent, then make additional cash contribution.
- If insolvent, then other partners should absorb his deficiency.
 Payment to partners, in the order of priority:
- Loans accounts.
- Capital accounts.
2. Installment method – realization of non-cash asset is accomplished over an extended period of time.
Steps: realization, settlement, distribution, ulit ulit lang.
Safeguard:
Schedule of safe payments – assumes possible losses due to inability of partnership to dispose
of part or all the remaining non cash assets and failure to partners with capital deficiencies to
make additional contributions.
Cash Priority program – schedule to whose partner should be prioritize when there is a cash.

Corporation – an artificial being created by operation of law, having the right of succession and the powers,
attributes and the properties expressly authorize by law or incident to its existence.
SEC
- Articles of incorporation
- By Laws
- AOI & by law leads to Certificate of Incorporation , and then the birth of Corporation.

CLASSES OF CORPORATIONS
1. Stock Corporation – has stocks or shares, they are called holders. Made to have profit and
distribute to its holders.
2. Non-stock Corporation – corporation that no part of its income is distributable as dividends to
its members, trustees or Officers.
OTHER CLASSIFICATIONS OF CORPORATIONS
1. According to number of persons:
a. Corporation of aggregate – consist more than one corporation
b. Corporation sole – special form usually associated with clergy. Consist only one member.
2. According to nationality:
a. Domestic corporation – organized under Philippine Laws.
b. Foreign Corporation – Organized other than Philippine Laws.
3. According to wheter public or private purpose:
a. Public Corporation – organized for the portion of the state (brgy., cities, municipality).
b. Private Corporation – created for private aim, benefit or purpose.
4. According to whether charitable or purpose or not:
a. Ecclesiastical – religious purpose.
b. Eleemosynary – public charity.
 c. Civil Corporation – for business or profit oriented.
5. According to their legal right to corporate existence:
a. De jure Corporation – Existing by laws.
b. De Facto Corporation - exist in fact but not in law.
6. According to degree of public participation with regard to share ownership:
a. Close Corporation – members of the Family/close friends not exceeding 20 persons.
b. Open Corporation – available for subscription or purpose by any person.
c. Public-held Corporation – listed on stock exchange; having 200 or more holders, at least 200 of
which are holding 100 shares.
7. According to their relation to another corporation:
a. Parent or Holding corporation – related to another corporation; has the power to either directly or
indirectly elect the majority of directors of a subsidiary corporation.
b. Subsidiary corporation – controlled by parent corporation.
Components of a corporations
1. Corporators – stockholder or shareholders.
2. Incorporators – members mention in articles of incorporation. Originally compose the corporation. Min.
was 5 incorporators.
# Under RCCP one person can form a corporation and called One person Corporation (OPC).
Note: all incorporators are corporators of a corporation, but not all corporators are incorporators.
3. Shareholders or stockholders – are corporators that may be natural or juridical persons.
4. Members – corporators of non-stock corporations.
5. Subscribers – agreed to take and pay for original, unissued shares of a corporation formed or to be
formed.
Note: all Incorporators are subscriber but a subscriber need not be an incorporator.
6. Promoter – person who acts alone or with others, takes initiative in founding and organizing the
corporations.
7. Underwriters – usually investment bankers who have
 Agreed, alone or with others, to buy at stated terms an entire or substantial part of an issue of
securities; or
 Guaranteed the sale of an issue by agreement to by from issuing corporation unsold portion at a
stated price; or
 Agreed to use his best efforts to market all or part of an issue; or
 Offered for sale shares he has purchased from a controlling stockholder.
8. Independent Director – apart from shareholdings and fees received from the corporation, free from any
business.
CLASSE OF SHARES
1. Par value shares – listed in AOI and share certificate; specific amount is fixed. The par value is minimum
issue price of the shares.
# Section 6 of the code states that preference shares of stock may be issued only as par value share.
2. No-par value shares – without any value appearing on the face of the certificate of stock. Issue price may
vary from time to time.
3. Minimum stated value of a no-par value share is five pesos (5.00) per share.
# Banks, trust, insurance or other corporations authorized to obtained or access funds from the public whether
publicly listed or not, shall not be permitted to issue no-par value shares of stocks.
4. Voting shares – issued with the right to vote.
5. Non-voting shares – those issued without the right to vote.
6. Ordinary shares – equal pro rata division of profits without any preferences.
7. Preference shares - entitle the holder to certain advantages or benefits over the holders of ordinary shares.
8. Founder’s shares may be given certain rights and privileges not enjoyed by the owners of the other stocks.
9. Redeemable shares – share which may be purchased by the corporation from the holders of such share.
10. Treasury shares – issued by the corporation as fully paid and later reacquired but not retired.
11. Promotion shares – issued to compensate promoters in promoting the incorporation of a corporation.
12. Convertible shares – changeable from one class to another class to another class.
Shareholders elects the Bord of Directors elect the officers hire the employees.
President must be a director
Share Capital
1. Authorized Share – maximum number of shares the capitalization can issue.
2. Issued shares- sold and paid in full.
3. Subscribe share – portion of authorized share that has been subscribed but not yet fully paid.
4. Retained Earnings – component of shareholders Equity arising from the retention of asset generated from
profit-directed activities of the corporations.
5. Share premium – portion of paid-in capital representing amounts paid by shareholders in excess of par.
6. Treasury shares – issued by the corporation as fully paid and later reacquired but not retired.
7. Outstanding shares – issued share which are at the hands of the shareholders.