Notes: Financial Accounting and Reporting 2 (Partnership and Corporation)

A Partnership is defined in Article 1767 of the Civil Code of the Philippines as

“A contract whereby two or more persons bind themselves to contribute money, property or industry
(skills or knowledge) into a common fund with the intention of dividing profits among themselves”

Two or more persons may also form a partnership for the exercise of a profession

Characteristics of Partnerships

- Mutual Agency. Any partner may act as an agent of the partnership in conducting its affairs
- Unlimited Liability. Personal assets of any partner may be used to satisfy the partnership
creditors’ claim upon liquidation
- Limited Life. A partnership may be dissolved at any time by action of the partners or by
operation of law (changes to the original agreement or achieved the purpose of the partnership)
- Mutual Participation in Profit. A partner has the right to share in the partnership of profits
- Legal Entity. Has a legal personality separate and distinct from that of each of the partners
- Co-ownership of contributed assets. Property contributed to the partnership is owned by the
partnership by virtue of its separate legal personality
- Voluntary Association of Individuals. Partners are responsible under the law for the actions
committed by other partners within the scope of the business
- Co-ownership of profits. Profits/Loss is based on the agreement. Partners must share in the
profits or losses of the venture.
- Income Taxes. Partnerships, except general professional partnerships, are subject to tax at the
rate of 25% (per CREATE Act) of taxable income.
- Partners’ Equity Account. Each partner has a capital account and a withdrawal account that
serves a similar function as the related accounts for a sole proprietorship.

Industrial Partner – Technical “Know-how”

Underlying Equity Theories

- Entity Theory (Business Entity Concept). The business is treated as a unit separate and distinct
from the owners
- Proprietary Theory. Salaries to partners are viewed as a distribution of income rather than a
component of income

Advantages of Partnership

- Ease of Information, to form and dissolve

- Greater source of capital
- Better management
- Flexibility of operation
- Unlimited Liability
Disadvantages of Partnership

- Unlimited Liability
- Limited Life of the Business
- Difficulty in the transfer of partner’s interest
- Limited Capital
- Likelihood of dissension and disagreement

Essential Features of a Partnership

- There must be a valid contract. Articles of Co-Partnership (Distribution of Capital/Loss)

- The parties must have the legal capacity to enter into a contract. Any person who cannot give
consent to a contract cannot be a partner
- There must be a mutual contribution of Money, Property, or Industry to a common good.
- The purpose must be lawful. No partnership can arise as the contract is void from the beginning
- Primary purpose must be to obtain profits and divide the same among partners

Formation of Partnership

- 2 or more single persons (without existing business)

a. Cash Distribution (Face Value)

b. Always used the fair market value or the agreed value of the partners

c. Industrial Service. Memorandum Entry only in the general ledger of the partnership

- With existing sole proprietorship businesses and others having none

a. All nominal accounts including the drawing account should be closed to the capital account
(revenue, drawing, expense)

b. Adjust the value of the assets based on the fair value/agreed value

c. Close the accumulated depreciation account (if any) to their respective fixed asset account

d. After updating the values, close all the accounts of the old books and transfer them to the
new books.

e. Record the investment of the incoming partners

- Business partners have both/or all sole proprietorship businesses

Important Terms

- Contributed Capital
- Total Contributed Capital
- Agreed Capital
- Total Agreed Capital
Net Investment Method/Exact Method (CC=AC)

- Agreed Capital and Contributed Capital are the same

- TAC and TCC are the same as well
- No difference in TAC and TCC

Bonus Method

- Agreed Capital and Contributed Capital are not the same

- But the TAC and TCC are the same
- One partner is transferring to another to maintain the agreed value

Revaluation Approach

Revised Corporation Code of the Philippines

Corporation - A corporation is an artificial being created by operation of law, having the right of
succession and the powers, attributes, and properties expressly authorized by law or incidental to its
existence

Partnership v.s Corporation

The partnership is created through the voluntary agreement of parties, while the corporation is created
by a general enabling law or the corporation code