Fund W1-3

Fundamentals of Accounting Theory and Practice Part 2
1 Review of the Basic Accounting Concepts and Principles
Module 001: Review of the Basic Accounting Concepts and Principles
In this module, we will review the basic accounting concepts and principles we
have studied in Fundamentals of Accounting Part 1 in preparation for partnership
accounting. Our review will cover the definition of accounting; phases of
accounting; the accounting elements; rules of debit and credit; normal balances of
accounts; the accounting cycle.
At the end of this module, you should be able to:

1. Recall the definition of accounting and enumerate the different phases of
accounting.
2. Enumerate the accounting elements and the account titles under them.
3. Recall the normal balances of each account title.
4. Remember the T-account and the rules of debit and credit
5. Recall the accounting equation.
6. Recall and perform the different steps in the accounting cycle
Accounting Definition and the Different Phases
Definition of Accounting
We will be using the AICPA version of the definition of accounting. Accounting is the
art of recording, , classifying, summarizing, in a significant manner and in terms of
money, transactions and events, which are in part at least of a financial character and
interpreting the results thereof.
Accounting is also called the language of business. This is simply because, through the
accounting process, the stakeholders of a business will be able to know the
status or position of the firm, operationally and
financially.
Phases of Accounting
The different stages of accounting are enumerated in our definition above. These are:
1. Recording the transactions or events of the business in chronological order and in
monetary terms during the accounting period. Example is recording the business
transactions in journals.
2. Classifying refers to sorting and grouping the transactions recorded under their
category or account. We usually use the ledger as company’s book in this stage.
Course Module
2 Review of Accounting Process and Cycle
3. Summarizing phase involves recapping or encapsulating all the data after an

accounting period so that it will be easier for the financial data users to understand the
results of the business operations. In this stage, the accountant will prepare the trial
balance and the financial statements.
4. Interpreting the results stage means analyzing the financial data gathered from stage 1
to 3, to serve as a guide in decision –making of the owner/management regarding the
profitability and financial condition of the business.
Accounting Elements and their Normal Balances
Accounting Elements
The three accounting values or elements are Assets, Liabilities, and Capital. Assets are the
things (rights or properties), tangible or intangible, owned by the business.
Liabilities are the debts or obligations of the business to its creditors.
Capital refers to the equity or right of the owner over the assets of the business.
Account Titles under Each Element

Every business has its own chart of accounts. A chart of accounts includes the account
number, corresponding account title, and account description as what we have studied in
FATP1. We will just enumerate again the account titles under each
element and their normal balances. Normal balance pertains to the account’s amount or balance
position in the accounting equation or in T-accounts. The normal balance of an account is
usually on its increase side (in T-accounts).
Classification of Accounts
Nominal or Temporary Accounts - accounts that should be closed or zeroed out at the end
of the accounting period. These include accounts found in the income statement-
revenues, costs and expenses.
Real or Permanent Accounts – are accounts found in the balance sheet and are not closed
not unless the business or the firm will be closed down. These are assets, liabilities, and
capital accounts.
Normal Balance
Account Title Accounting Element (Debit or Credit )

Cash Asset Debit
Accounts Receivable Asset Debit
Allowance for Uncollectible Accounts Contra-Asset Account Credit
Merchandise Inventory or Inventory Asset Debit
Supplies Asset Debit
Prepaid Expenses Asset Debit
Accrued Income Asset Debit

Land Asset Debit
Building Asset Debit
Accumulated Depreciation Contra-Asset account Credit
Equipment and Machinery Asset Debit
Furniture and Fixtures Asset Debit

Accounts Payable Liability Credit
Notes Payable Liability Credit
Accrued Expense Liability Credit
Unearned Income Liability Credit
Capital Capital Credit

Drawing Drawing Debit
Service Income Revenue Credit
Sales Revenue Credit
Sales Returns and Allowances Contra-account of Sales Debit
Sales Discount Contra-account of Sales Debit

Purchases Cost Debit
Purchase Returns and Allowances Conta-account of Purchases Credit
Purchase Discount Conta-account of Purchases Credit
Cost of Goods Sold Cost Debit
Salary Expense Expense Debit

Transportation Expense Expense Debit
Insurance Expense Expense Debit
Rent Expense Expense Debit
Depreciation Expense Expense Debit
Uncollectible Accounts Expense Expense Debit
Please take note of the sub-elements that affect the Capital account. These are Drawing,
Revenues (and its contra-account), Costs and Expenses.
T-account and Rules of Debit and Credit

T-account is only a tool that is very helpful in analyzing transactions and properly
recording them. It is called T-account as it resembles the letter T. It is also considered a
dummy for account and/or the ledger.
Illustration of T-account:
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Debit to: Credit to:

Increase Asset Decrease in Asset
Increase Expense Decrease in Expense
Increase Drawing Decrease in Drawing
I just prepare one for every element. From the T-accounts above and using the arrow up
and arrow down, we can devise the rules of debit and credit:
Decrease in Liability Increase in Liability

Decrease in Capital Increase in Capital
Decrease in Revenues Increase in Revenues
Again, remember that the normal balance of an account is on the increase side.
Accounting Equation
I will be giving you the equations relative to accounting to aid in proper recording and
accounting computations. a) Debit = Credit b) Assets = Liabilities + Capital
c) Assets = Liabilities + Capital – Drawing + Revenues – Expenses

Drawing, Revenue and Expenses affect Capital account. Drawing decreases Capital,
Revenues increase Capital and Expenses decrease Capital.
Accounting Cycle
Accounting cycle is a series of steps that starts with the first journal entry of the
accounting period and ends with the preparation of financial statements and closing of
temporary or nominal accounts. Following the time-period principle, a firm needs to
prepare its financial statements on periodic basis, hence, accounting cycle is observed
once in every accounting period.
Steps in the Accounting Cycle
Following are the steps involved in the completion of an accounting cycle:
1. Analyzing and recording the business transactions and events through journal
entries.
2. Posting the journal entries to the ledger accounts.
3. Extracting the unadjusted trial balance from the ledger.
4. Preparing the adjusting entries (at the end of the accounting period).
5. Preparing the adjusted trial balance.
6. Preparing the financial statements (Income statement, Statement of Financial Position,
etc.)
7. Closing the nominal or temporary accounts (Revenues, Expenses, Drawing
8. Preparing the post-closing trial balance.
Illustrative Problem: Accounting Cycle

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Note to the students: Our sample problem will be on Partnership, since its accounting
process is almost the same with sole proprietorship. Our setting would be merchandising
type of business. This is to prepare you to partnership accounting.
Maria and Clara agreed to form a partnership on July 1, 2017. Their agreed to divide
profit and loss equally. The partnership accounting period is monthly. Following are the
selected transactions of the partnership for the month of July.
July 1 Maria and Clara invested P 250,000 each in the partnership with the purpose of
putting up an appliance store.
2 Bought store equipment worth P50, 000, paying ½ and the balance on account.
3 Paid rent of the store for three months, P30, 000.
4 Bought office furniture worth P 10,000 cash.
5 Bought merchandise (appliances) from ABC Manufacturing Company worth P750,
000, terms: 30% down payment and the balance to be paid in two equal installments on
August 15 and September 15 of the same year.
7 Returned defective merchandise, P 25,000.
8 Bought a second hand mini delivery van worth P 80,000. Issued a 30-day non-interest
bearing note.
10 Paid insurance, P 2,500.
11 Bought store supplies, P5, 000.
15 Hired a store helper with a salary of P6, 500 a month.
17 Sold appliances for cash, P25, 000.
19 Delivered 2 TV sets at P 11,500 each; electric fans, 5 at P1, 200 each. Received
P10, 000 cash a check for the balance.
22 Purchased additional appliances worth P 500,000, paying P100, 000 and issued a
90-day, 12% note for the balance.
25 Sold assorted appliances: Cash, P 200,000; on credit, P50, 000.
26 Received returned merchandise from customer on the 25th, P 15, 000, returned cash.
30 Paid the wage of helper.
31 Paid utilities (electricity, telephone, water), P 4,500.
Instructions: 1. Journalize the transactions above. (You may omit the explanations.)
2. Post to the ledger.
3. Prepare the unadjusted trial balance.
The journal entries are:

(Just ignore the entries in the F column. These are results of the cross referencing while
posting the entries to the ledger.)
Maria and Clara Appliance Center
General Journal Page 1

Date Account Titles F Debit Credit
2017
July 1 Cash 11 ₱ 500,000
Maria, Capital 51 ₱ 250,000
Clara, Capital 52 250,000
2 Store Equipment 21 50,000
Cash 11 25,000
Accounts Payable 31 25,000
3 Prepaid Rent 15 30,000
Cash 11 30,000
4 Office Furniture 22 10,000
Cash 11 10,000
5 Purchases 70 750,000
Cash 11 225,000
Installment Payable 32 525,000
7 Installment Payable 32 25,000
Purchase Returns and Allowances 70A 25,000
8 Delivery Van 23 80,000
Notes Payable 33 80,000
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10 Insurance Expense 81 2,500
Cash 11 2,500
11 Store Supplies 14 5,000
Cash 11 5,000
15 No journal entry. You may prepare a memo
entry if you wish.
17 Cash 11 25,000
Sales 60 25,000
19 Cash 11 29,000
Sales 60 29,000
22 Purchases 70 500,000
Cash 11 100,000
Notes Payable 33 400,000
25 Cash 11 200,000
Accounts Receivable 12 50,000
Sales 60 250,000
26 Sales Returns and Allowances 60A 15,000

Cash 11 15,000
30 Wages Expense 82 3,250
Cash 11 3,250
31 Utilities Expense 83 4,500
Cash 11 4,500
The ledger, after posting the journal entries:

Cash Account No. 11
Date Particulars F Debit Date Particulars F Credit
2017 2017
July 1 J1 500,000 July 2 J1 25,000
17 J1 25,000 3 J1 30,000
19 J1 29,000 4 J1 10,000
25 J1 200,000 5 J1 225,000
754,000 10 J1 2,500
31 Bal. 333,750 11 J1 5,000
22 J1 100,000
26 J1 15,000
30 J1 3,250
31 J1 4,500
420,250
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A ccounts Receivable Account No. 12
2017
July 25 J1
50,000
31 Bal.
50,000
Store Supplies Account No. 14
2017
July 11 J1
5,000
31 Bal.
5,000
Prepaid Rent Account No. 15
2017
July 3 J1
30,000
31 Bal.
30,000
Store Equipment Account No. 21
2017
July 2 J1
50,000
31 Bal.
50,000
Office Furniture Account No. 22

2017
July 4 J1
10,000
31 Bal.
10,000
Delivery Van Account No. 23
2017
July 8 J1
80,000
31 Bal.
80,000
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Accounts Payable Account No. 31
2017
July 2 J1
25,000
31 Bal.
25,000
I nstallment Payable Account No. 32
2017 2017
July 7 J1 July 5 J1
25,000 525,000
31 Bal.
500,000
Notes Payable Account No. 33
2017
July 8 J1
80,000
22 J1
400,000
31 Bal.
480,000
Maria, Capital Account No. 51
2017
July 1 J1
250,000
31 Bal.
250,000
Clara, Capital Account No. 52
2017
July 1 J1
250,000
31 Bal.
250,000
Sales Account No. 60
2017
July 17 J1
25,000
19 J1
29,000
25 J1
250,000
31 Bal.
304,000
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Sales Returns and Allowances 60A
2017
July 26 J1
15,000
31 Bal.
15,000
Purchase Returns and Allowances Account No. 70A
2017
July 7 J1
25,000
31 Bal.
25,000
I nsurance Expense Account No. 81
2017
July 10 J1
2,500
31 Bal.
2,500
Wages Expense Account No. 82
2017
July 30 J1
3,250
31 Bal.
3,250
Utilities Expense Account No. 83
2017
July 31 J1
4,500
31 Bal.
4,500
The Unadjusted Trial Balance

Unadjusted Trial Balance
July 31, 2017
Cash ₱ 333,750
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Accounts Receivable 50,000
Store Supplies 5,000
Prepaid Rent 30,000
Store Equipment 50,000
Office Furniture 10,000
Delivery Van 80,000
Accounts Payable ₱ 25,000
Installment Payable 500,000
Notes Payable 480,000
Maria, Capital 250,000
Clara, Capital 250,000
Sales 304,000
Sales Returns and Allowances 15,000
Purchases 1,250,000
Purchase Returns and Allowances 25,000
Wages Expense 3,250
Insurance Expense 2,500
Utilities Expense 4,500
Total ₱ 1,834,000 ₱ 1,834,000

Illustrative Problem (continued): We will continue the accounting cycle using the same
problem.
On July 31, the following data for adjustments were provided:
1. Store supplies on hand, P 1,500.
2. The rent paid was intended for three months.
3. The store equipment has a useful life of 3 years with a salvage value of P5, 000.
4. The office furniture will be depreciated at 15% per annum.
5. The delivery van has a remaining useful life of 5 years with a salvage value of P5,
000.
6. Unexpired insurance, P1, 500.
7. Accrued interest for July 22 transaction, P4, 000. (consider July a whole month)
8. Merchandise (appliances) physical count, P1, 100,000.
Required:
1. Prepare the necessary adjusting entries.
2. Prepare the adjusted trial balance.
3. Construct the following financial statements:
A. Income Statement
B. Statement of Changes in Partners’ Capital C. Statement of
Financial Position (Balance Sheet) 4. Prepare the closing entries.
5. Prepare the post- closing trial balance.
Answers:
Adjusting Entries
Adjusting Entries
2017
July 31 Store Supplies Expense ₱3,500
Store Supplies ₱3,500
31 Rent Expense 10,000
Prepaid Rent 10,000
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31 Depreciation Expense-Store Equipment 1250
Accumulated Depreciation-Store Equipment 1250
31 Depreciation Expense-Office Furniture 125
Accumulated Depreciation-Office Furniture 125
31 Depreciation Expense-Delivery Van 1250
Accumulated Depreciation-Delivery Van 1250
31 Prepaid Insurance 1500
Insurance Expense 1500
31 Interest Expense 4000
Interest Payable 4000
Adjusted Trial Balance

Adjusted Trial Balance
July 31, 2017
Cash ₱ 333,750
Accounts Receivable 50,000
Prepaid Rent 20,000
Prepaid Insurance 1,500
Accumulated Depreciation-Store Equipment ₱ 1,250
Office Furniture 10,000
Accumulated Depreciation-Office Furniture 125
Delivery Van 80,000
Accumulated Depreciation-Delivery Van 1,250
Accounts Payable 25,000
Installment Payable 500,000
Notes Payable 480,000
Interest Payable 4,000
Maria, Capital 250,000
Clara, Capital 250,000
Sales 304,000
Sales Returns and Allowances 15,000
Purchases 1,250,000
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Wages Expense 3,250
Store Supplies Expense 3,500
Interest Expense 4,000
Rent Expense 10,000
Depreciation Expense-Store Equipment 1,250
Depreciation Expense-Office Furniture 125
Depreciation Expense-Delivery Van 1,250
Total
₱ 1,840,625 ₱ 1,840,625
Financial Statements
A. Income Statement
Income Statement
For the Month Ended July 31, 2017
Sales ₱ 304,000
Less: Sales Returns and Allowances 15,000
Net Sales ₱ 289,000
Less: Cost of Sales
Purchases ₱ 1,250,000
Less; Purchase Returns and Allowances 25,000
Net Purchases
₱ 1,225,000
Less: Merchandise Inventory, end 1,100,000
Cost of Sales 125,000
Gross Profit
₱ 164,000
Less: Expenses
Wages
₱ 3,250
Insurance 1,000
Utilities 4,500
Interest 4,000
Rent 10,000
Depreciation -Store Equipment 1,250
Depreciation -Office Furniture 125
Depreciation -Delivery Van 1,250 28,875
Net Profit
₱ 135,125
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Profit Distribution: Equal Maria Clara
Net Profit: P135,125 /2 ₱ ₱

67,562.50 67,562.50
B. Statement of Partners’ Capital

Statement of Changes in Partners' Capital
For the Month Ended July 31, 2017
Maria Clara
Capital balance, July 1

₱ 250,000.00 ₱ 250,000.00
Add: Share in Net Income 67,562.50 67,562.50
Capital Balance, July 31

₱ 317,562.50 ₱ 317,562.50
C. Balance Sheet
Statement of Financial Position
July 31, 2017

Assets
Current Assets
Cash ₱ 333,750.00
Accounts Receivable 50,000.00
Merchandise Inventory 1,100,000.00
Store Supplies 1,500.00
Prepaid Rent 20,000.00
Prepaid Insurance 1,500.00
Total Current Assets ₱ 1,506,750.00
Non-current Assets
Store Equipment ₱ 50,000
Less:Accumulated Depreciation-Store Equipment 1,250 48,750.00
Office Furniture ₱ 10,000
Less:Accumulated Depreciation-Office Furniture 125 9,875.00
Delivery Van ₱ 80,000
Less:Accumulated Depreciation-Delivery Van 1,250 78,750.00
Total Non-current Assets ₱ 137,375.00
Total Assets ₱ 1,644,125.00
Liabilities and Capital
Liabilities
Accounts Payable ₱ 25,000.00
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Installment Payable 500,000.00
Notes Payable 480,000.00
Interest Payable 4,000.00
Total Liabilities ₱ 1,009,000.00
Capital
Maria, Capital ₱ 317,562.50
Clara, Capital 317,562.50
Total Capital ₱ 635,125.00
Total Liabilities and Capital ₱ 1,644,125.00
4. Closing Entries
Closing Entries
2017
July 31 Sales ₱ 304,000
Sales Returns and Allowances ₱ 15,000
Income Summary 289,000
Income Summary 1,253,875
Purchases 1,250,000
Wages Expense 3,250
Store Supplies Expense 3,500
Interest Expense 4,000
Rent Expense 10,000
Depreciation Expense-Store Equipment 1,250
Depreciation Expense-Office Furniture 125
Depreciation Expense-Delivery Van 1,250
Merchandise Inventory 1,100,000
Income Summary 1,100,000
5. Post-closing Trial Balance

Post-Closing Trial Balance
July 31, 2017
Cash ₱ 333,750.00
Accounts Receivable 50,000.00
Merchandise Inventory 1,100,000.00
Store Supplies 1,500.00
Prepaid Rent 20,000.00
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Prepaid Insurance 1,500.00
Store Equipment 50,000.00
Office Furniture 10,000.00
Delivery Van 80,000.00
Accumulated Depreciation-Delivery Van ₱ 1,250.00
Accumulated Depreciation-Store Equipment 1,250.00
Accumulated Depreciation-Office Furniture 125.00
Accounts Payable 25,000.00
Installment Payable 500,000.00
Notes Payable 480,000.00
Interest Payable 4,000.00
Maria, Capital 317,562.50
Clara, Capital 317,562.50
Total ₱ 1,646,750.00 ₱ 1,646,750.00
You will notice that the only difference between the sole proprietorship and partnership
accounting basics is the plurality of capital accounts for the latter. All other accounting
concepts and principles are the same for the two types of business entities.
Glosary
Assets: anything of economic value owned by the firm.
Liabilities: are the debts of the business to third parties.
Capital: refers to the equity of the owner.
Nominal accounts: are the accounts found in the income statement, consisting of
revenues and expenses.
Real accounts: also called permanent accounts and are the balance sheet accounts,
consisting of assets, liabilities, and capital.
Accounting cycle: the complete accounting process that starts from recording business
transactions or journalizing and ends in the preparation of the post-closing trial balance.
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Partnership Defined
Partnership is one of the forms of business entities. It is more complex as compared to sole
Proprietorship. Its complexities include the capital requirements and contributions of the
Partners, the sharing of profits and losses, the dissolution process among others.
Partnership has been defined by the United States’ Uniform Partnership Act as “an
Association of two or more persons who co-owns a business for profit.”
Article 1787 of Republic Act 386 defines Partnership as “By the contract of partnership,
Two or more persons bind themselves to contribute money, property, or industry to a
Common fund, with the intention of dividing the profits among themselves. Two or more
Persons may also form a partnership for the exercise of a profession.”
From the last definition, we can extract the possible contributions of the partners to the
Common fund of the partnership, these are: money, property, or industry or services.
Characteristics of Partnership
Following are the characteristics of partnerships:
1. Separate legal personality. Partnership has a juridical personality separate and distinct
From that of each of the partners (Article 1768, RA386)
2. Limited life. A partnership’s life is limited depending on the length of time a partner or
All of the partners continue to own the business. If one or more of the partners
Withdraws from the partnership, the old partnership will be dissolved and a new
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Partnership might be created to continue the same business.
3. Mutual agency. This means that each partner can act as agent of the partnership in
Matters within the regular partnership business operations.
4. Unlimited liability. Each partner, except the limited partners, is individually or
Personally liable to the partnership debts, in the event that the partnership can no
Longer pay its obligations with the business assets. Creditors may run after the personal
Assets of the general partners in cases where the partnership cannot meet its debts.
5. Co-ownership of properties and division of profits. All the assets invested by all
Partners and those acquired or owned by the partnership belongs to the partnership,
Hence, all the partners own them. Profits of the partnership are shared by the partners
Depending on their agreement. In the absence of any agreement on how the profits and
Losses will be divided, it will be shared in the ratio of their contributions to the
Partnership. Industrial partners do not share in the losses of the partnership.
Advantages and Disadvantages of Partnership
Advantages of partnership
1. Compared to a sole proprietorship, partnership’s capital is bigger as it can raise
More capital because of the two or more persons forming it.
2. It has a better management, as compared to sole proprietorship, because all the
Partners bring together their expertise and are considered agents of the business in
Matters within the scope of its operations.
3. Compared to a corporation, partnership is easier and less expensive to form or
Organize.
4. Less legal requirements of the government as compared to corporation.
Partnerships must also be registered with the Securities and Exchange Commission.
5. It can be organized for the practice of professions like partnership of certified public
Accountants, lawyers, doctors, engineers, architects, etc.
Disadvantages of partnership
1. The possibility that disputes and misunderstanding may arise among partners.
2. Unlimited liability of general partners will result to their personal obligation to the
Partnership debts.
3. Limited life of the partnership as compared to a corporation. Corporations have a
Maximum life of 50 years and renewable.
4. The transfer of interest of a partner requires the consent of all partners.
5. Compared to a corporation, a partnership has a smaller capital.
The Partnership Contract
The partnership contract is also termed Partnership Agreement or Articles of Partnership.
Although partnership can be orally formed, it is advisable that it be made in writing in
Order to avoid future misunderstanding among partners. The information and agreements
That should be clearly stated in the Articles of Partnership include the following:
1. The name of the partnership and the partners forming it.
2. The purpose of the partnership.
3. The location of the business.
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4. The nature and scope of the operations.
5. The date of its formation and terms of existence.
6. The contributions to be made by every partner and the capital credits given to them.
7. The books of accounts to be used by the partnership and how will they are kept.
8. The methods or ways on how the profits or losses will be shared by the partners and
The special compensation that might be given to partners for services to be rendered to
The business.
9. Rights, powers, roles, responsibilities and obligations of each partner.
10. Issues on additional investment that a partner will put into the partnership and
Limitations on withdrawals that a partner can make.
11. Arbitration of misunderstandings and disputes among partners.
12. Provisions in case of the dissolution of the partnership.
13. The methods that will be used in determining the value of the business in case of sale,
Death, disability, or withdrawal of a partner, and dissolution.
Below is an example of a Partnership Agreement for General Partnership (retrieved from
The Securities and Exchange Commission website)
General Partnership
ARTICLES OF PARTNERSHIP
OF
_________________________________________________________
(Partnership Name)
KNOW ALL MEN BY THESE PRESENTS:
That we, the undersigned partners, all of legal age, residents and citizens of the
Philippines have on this day voluntarily associated us together for the purpose of forming a
General partnership under the following terms and conditions and subject to existing and
Applicable laws of the Republic of the Philippines:

AND WE HEREBY CERTIFY:
ARTICLE I. Partnership Name: That the name of this partnership shall be
And shall transact business under the said company name.
ARTICLE II. Business Purpose: That the purpose/s for which this partnership is formed
Is/are:
ARTICLE III. Principal Place of Business: That the principal place of business of this partnership
Shall be located at:
(Complete address)
ARTICLE IV. Term of Existence: That this partnership shall have a term of _________ years
From and after the original recording of its Articles of Partnership by the Securities and
Exchange Commission.
ARTICLE V. Partners’ Circumstances: That the names, nationalities and complete residence
Addresses of the partners are as follows:

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Name Nationality Complete Residence Address
ARTICLE VI. Capital Contributions: That the capital of this Partnership shall be the amount of
____________ (P_________), Philippine Currency, contributed in cash by the partners, as
Follows:
Name Amount Contributed
That no transfer of interest which will reduce the ownership of Filipino citizens to less than the
Required percentage of capital as provided by existing laws shall be allowed or permitted to be
Recorded in the proper books of the partnership.
ARTICLE VII. Sharing Ratios: That the profits and losses of this partnership shall be divided and
Distributed proportionately on the ratio of the capital contribution of each partner.
ARTICLE IX. Management: That this partnership shall be under __________, as General
Manager, who shall be in charge of the management of the affairs of the company. He shall
Have the power to use the partnership name and in otherwise performing such acts as are
Necessary and expedient in the management of the firm and to carry out its lawful purposes.
ARTICLE X. Undertaking to Change Name: That the partners undertake to change the name of
This partnership, as herein provided or as amended thereafter, immediately upon receipt of
Notice or directive from the Securities and Exchange Commission that another corporation,
Partnership or person has acquired a prior right to the use of that name or that the name has
Been declared as misleading, deceptive, confusingly similar to a registered name, or contrary to
Public morals, good customs or public policy.
IN WITNESS WHEREOF, we have here unto affixed our signatures this ____ day of ______,
20___, at ________.
______________________ _______________________
(Name of partner) (Name of partner)
TIN TIN
______________________ _______________________
(Name of partner) (Name of partner)
TIN TIN
(Names and Signatures of the partners and TIN)
REPUBLIC OF THE PHILIPPINES)
____________________________) S.S.
BEFORE ME, a Notary Public, for and in _________________, this ____day of _________,
20___, personally appeared the following persons:
Name TIN/ID/Passport No. Date & Place Issued
Known to me and to me known to be the same persons who executed the foregoing Articles of
Partnership constituting of _____pages, including this page where the acknowledgement is
Written, and they acknowledged to me that the same is their free and voluntary act and deed.
WITNESS MY HAND AND SEAL on the date and place above written.
NOTARY PUBLIC
Doc. No. ______;
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Page No. ______;
Book No. ______;
Series of 20 ______.
Classification of Partnerships
Partnership may be classified in the following ways:
1. Universal and particular partnership
1.1 Universal partnership is a kind of partnership in which the partners agree to bring
1.2
Into the partnership their whole property. This is of two kinds;
1.1.1 Universal partnership of all present properties- this is a kind in which the
1.1.2
Whole property of a partner in the time of the formation of the partnership
Becomes common property for all partners, as well as the profits that can be
Derived from them.
1.1.3 Universal partnership of profits-one which states that only all the property
1.1.4
Acquired through work and services of the partners during the existence of
The business become part of the common fund of the partnership. The
Property of each of the partners, movable or immovable, at the time of the
Contract shall still be owned by each of them.
1.2 Particular partnership is one where the partners unite to have a single individual
1.3
Transaction or business and divide the profits among themselves. Example is one
Formed for the practice of a profession like the partnership of CPAs or lawyers.
2. General and Limited partnership
2.1 General partnership is the basic form of partnership. Each partner, called general
2.2
Partner, is an owner of the firm sharing all the privileges, profits, losses, and risks of
The business.
2.3 Limited partnership is a partnership composed of at least two kinds of partners- a

2.4
General partner and limited partners. The general partner will absorb the majority
Of risks of the business especially when it goes bankrupt. The limited partners are
So called because their personal obligation to the liabilities of the partnership is up
To the extent of their capital contributions
Kinds of Partners
Partners can be categorized under the following kinds:
1. General partner – one whose obligation to the partnership liabilities is unlimited and
Can extend to his personal properties.
2. Limited partner- one whose obligation to the partnership debts is limited to the extent
Of his personal contribution to the firm.
3. Capitalist partner- one who contributes money or property to the common fund.
4. Industrial partner- one who contributes his industry or services only to the partnership.
He shared in the profits of the partnership but not in the losses.
5. Silent partner – one who is known publicly as a partner but does not participate in
Running the affairs of the partnership.
6. Dormant partner one who is not known as a partner does not participate in running the
Affairs of the partnership.
7. Secret partner – one not known as a partner but actively participates in managing the
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Partnership.
8. Nominal partner- a partner who contributes nothing to the partnership but allows his
Name to be used by the firm.
9. Capitalist-industrial partner – one who contributes money, property and services to the
Partnership.
10. Ostensible partner-m one whose name appears in the firm name and known publicly as
A partner.
Glossary
Co-ownership of Properties: All the partners are co-owners of all partnership properties be it
Contributed by them or acquired by the firm.
General Partner: A partner who absorbs the risk of paying partnership obligations in case of
Bankruptcy with his/her personal properties.
General Partnership: A partnership consists of general partners as owners including all the
Privileges and risks.
Legal personality: A partnership has a different personality from the partners and it can act as
A legal entity or unit.
Liability: Debts or obligations of the business (partnership) to an outside creditor.
Limited life: For the partnership, the uncertainty of its term of existence.
Limited Partner: One partner who is answerable to the obligations of the partnership to the
Extent of this personal capital contribution only.
Limited Partnership: A partnership composed of limited partners and at least a single general
Partner.
Mutual agency: Any partner can bind the partnership in any contract or negotiation as
Long as it is within its regular business operations.
Partnership Contract: This is the document that contains all the agreements of the
Partners relative to the formation and operation of the partnership.
Partnership: An organization composed of two or more persons for business and profit.
Profit: The excess of revenues over expenses or the positive result of operations of a business
Enterprise.
W3
Introduction
In the previous module, we have cited the definition of partnership using the Article 1787
Of Republic Act 386. It defines Partnership as “By the contract of partnership, two or more
Persons bind themselves to contribute money, property, or industry to a common fund,
With the intention of dividing the profits among themselves. Two or more persons may also
Form a partnership for the exercise of a profession.”
From the definition, we can extract the possible contributions of a partner – money,
Property, industry or services. In the following sections of the module we will record the
Initial investments of the partners. But before doing this, let me add some additional
Features in partnership accounting.
Plurality of Capital accounts and Drawing accounts.
In partnership, each partner has its own individual capital and drawing accounts.
A partner’s capital account will be credited for their initial investment or
Contribution in the partnership, additional contributions, if any, and for his share in
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The profits of the partnership. It will be debited for the permanent withdrawal of
Cash and other assets made by each partner, and for his share in the losses of the
Business.
A partner’s drawing account will be debited for the partner’s withdrawal of assets,
Partner’s personal obligation paid by the partnership, partner’s collection and non-
Remittance of partnership’s collectibles and funds. It is credited for the obligations of
The partnership paid by the partner and the collection and retention by the
Partnership of the partner’s personal receivable.
Partners’ loans to the partnership
There are some cases where a partner lends money to the partnership, and this is
Credited to Loans Payable or Notes Payable of the business.
Partnership loans to the partners
In cases where a partner borrows money from the partnership funds, a debit to
Loans Receivable or Notes Receivable will be made.
Salaries of Partners
Partners may allocate allowances or salaries to themselves but this is not true
Business expenditures. This is usually a method of dividing profits.
Provision for interest on investments
This is also a way of sharing profits among partners. Interest can be based on initial
Capital contribution, average capital, beginning capital (if on succeeding years of
Business operations), ending capital balances.
Profits and Losses Sharing

The profits can be divided among partners based on their agreement. If there is no
Agreement, it is fairer to divide profits based on their capital contributions.
Formation of a Partnership
Ways of Forming a Partnership
Money, property, and services can be the partners’ contribution to the common of the
Partnership. Following are the ways of forming a partnership:
1. Two or more persons may organize a partnership to operate a business for the
First time, contributing
a) Cash only
b) Cash and other property
c) Cash, property and industry.
2. Two or more persons to form a partnership whereby one or both of them are
Already in business and
a) New set of books will be opened for the partnership
b) Either one of the books of the existing business will be used as the
Partnership books
3. Admitting a new partner in an existing partnership by
a) The new or incoming partner will purchase an interest from one or more of
The old or current partners.
b) The incoming partner to purchase the interest of one or of all the old
Partners by investing in the partnership.

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This will be discussed fully in the Module on Dissolution and Liquidation of
Partnership.
Illustrative Problems on Recording the Formation of Partnership
Illustrative Problem 1. Recording the formation of partnership (using
Partnership books)
Case 1. Cash contribution only
On May 2 of the current year, Ana, Bella, and Carla decided to form a partnership.
They invested cash of P 100,000, P150, 000, and P200, 000, respectively.
The journal entry is:
Page 1
Date Explanation F Debit Credit
2017
May 2 Cash P 450,000
Ana, Capital P 100,000
Bella, Capital 150,000 Carla, Capital 200,000
Initial investment of partners.
General Journal
Case 2. Cash and other assets contributed to the common fund of the
Partnership.
Ana invested cash of P 100,000; Bella contributed P50, 000, cash and store
Equipment worth P80, 000; while Carla invested cash equivalent to 50% of the
Combined contribution of Ana and Bella.
The journal entry is:
Page 1
2017
May 2 Cash P265,000
Store Equipment 80,000 Ana, Capital P 100,000
Bella, Capital 130,000 Carla, Capital 115,000
General Journal
Case 3. Cash, other assets and services are contributed to the common fund of
The partnership.
Ana invested cash of P 100,000; Bella P50,000, cash and store equipment worth
P80,000; while all the partners agreed that Carla will be an industrial partner with
15% share on the profits.
2017
May 2 Cash P 150,000
Ana, Capital P 100,000
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Bella, Capital 130,000
2 Memorandum entry: Carla will be an industrial partner with

3
A 15% share in the profits of the partnership. (note: this memo
Entry will be signed by the partners.)
Illustrative Problem 2. Forming the partnership whereby one or more of the
Partners are already in business (as sole proprietors)
On July 1, 2017, Diday and Ebay, both sole proprietors, agreed to combine
Their businesses and form a partnership. Their balance sheets on June 30,
2017 show the following accounts and balances:
Diday Store
Cash P 25,000
Accounts Receivable 10,000 Merchandise Inventory 45,000
Store Supplies 2,500 Store Equipment 15,000
Accounts Payable 12,500
Ebay General Merchandise
Cash P 35,000
Accounts Receivable 8,500 Merchandise Inventory 35,000 Delivery Van 50,000
Accounts Payable 8,500 Notes Payable 35,000
Their agreement includes the following:
a) Only 80% of the accounts receivable of both partners will be taken at the
Partnership books.
b) The merchandise inventory of Diday will be valued at the partnership at P
40,000. While Ebay’s inventory will be reduced by 10%.
c) The store equipment of Diday will be taken at P 12,500.
d) The Delivery Van will be depreciated by 20%. Provision for depreciation
Will be established in the partnership books.

e) Of the liabilities of both partners, it is only the notes payable that will be
Absorbed by the partnership.
Required: Record the formation of the partnership under each of the
Following cases.
1) New set of books will be used by the partnership
2) The books of Diday will be used as the partnership books.
Solution:
Case 1. New set of books for the partnership
Page 1
2017
July 1 Cash P 25,000
Accounts Receivable 8,000 Merchandise Inventory 40,000 Store Supplies 2,500
Diday, Capital P88,000
Diday’s investment.
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Cash 35,000 Accounts Receivable 6,800 Merchandise Inventory 31,500
Delivery Van 50,000
Notes Payable 35,000 Accumulated Depreciation-Del. Van 10,000
Ebay, Capital 78,300
Ebay’s investment.
Case 2. The books of Diday will be used as the partnership books
Page 1
2017
July 1 Diday, Capital P 2,000
Accounts Receivable P 2,000
To adjust the Accounts Receivable
Based on the agreement.
Diday, Capital 5,000 Merchandise Inventory 5,000 To adjust the Merchandise inventory
Based on the agreement.
Diday, Capital 2,500 Store Equipment 2,500 To adjust the value of the store equipment.
Accounts Payable 12,500 Diday, Capital 12,500 To adjust or close the accounts payable.
Cash 35,000 Accounts Receivable 6,800 Merchandise Inventory 31,500
Delivery Van 50,000
Notes Payable 35,000 Accumulated Depreciation-Del. Van 10,000
Ebay, Capital 78,300

Ebay’s investment.
General Journal
Please take note that since the books of Diday will be used, some accounts
Will only be adjusted based on their agreement. The adjusting entries were
Made directly to the capital account. Ebay will close her old books by simply
Debiting all accounts with credit balances and crediting all accounts with
Debit balances.
Division of Partnership’s Profits and Losses
Ways of Sharing Profits and Losses
There are so many ways by which the partners can agree of how to divide profits and
Losses among themselves. These are:
1. Sharing Equally
2. Sharing based on some arbitrary ratios or stated fraction
3. Sharing based on Capital contributions

4. A certain percentage of interest is allowed on capital balances and the remaining profits
Based on agreement.
5. Salaries allowed to partners and the remaining balance on agreed ratios.
6. Interest on capital, salary allowances to partners, and the remainder on agreed ratios.
Illustrative Problem 5. Division of Profits and Losses
The partnership of Ella, Flora, and Gina started on January 2, 2017 and applies a semi-
Annual accounting period. Their initial contributions are
P 50,000, P80, 000, and P 120,000, respectively. At the end of the first half of the year
Course Module
Operations, their books show that the business has earned total sales of P P1, 200,000.
Other account balances on June 30 are: Sales Returns and allowances, P 5,000; Cost of
Goods sold, P 500,000; selling and administrative expenses is 40% of gross profit.
Required: Under each of the following cases or assumptions, compute for the share of each
Partner in the profits (losses) of the partnership and record the same. Show also the capital
Balances after the division of the results of operations.
Case 1. The partners agreed that the profits and losses of the firm will be shared equally.
(Equal sharing of profits and losses might not be a fair means at all times. Other partners
May have bigger contribution or have much work to perform in the partnership but it can
Be used as a basis as long as all the partners agreed.)
Computation of Net Profit
Gross Sales P 1,200,000
Less: Sales returns 5,000 Net Sales P 1,195,000
Less Cost of Goods Sold 500,000 Gross Profit P 695,000
Less: Selling and general expenses 278,000
Net Profit P 417,000
Equal Sharing of partners of the p rofit
P417,000 / 3 =P139,000 each partner
Entry to close Net Income to Capital
Page 1

2017
June 30 Income Summary P 417,000
Ella, Capital P 139,000
Flora, Capital 139,000 Gina, Capital 139,000
Profit sharing of the partners.
General Journal
The new capital balances:
Ella, Capital – P 189,000
Flora, Capital – P 219,000
Gina, Capital – P 259,000
Case 2. The partners agreed on 20:30:50 profit and loss sharing ratio.
Profit sharing computation:
Ella P417,000 x 20% = P83,400
Flora P417,000 x 30% = P125,100
Gina P417,000 x 50% = P208,500
Page _
2017
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General Journal
Case 3. The partners agreed that the profit will be divided according to their initial capital
Contribution to the partnership.
Profit sharing computation:
Ella (P50,000/P250,000) x P417,000 = P83,400
Flora (P80,000/P250,000) x P417,000 = P133,440
Gina (P120,000/P250,000) x P417,000 = P200,160
Page _
2017

Case 4. The partners agreed that 10% interest will be allowed on their capital contribution
And the remaining profits are shared on a 30:30:40 ratio.
Net Income Allocation: P417,000
Ella Flora Gina Total
Interest on capital, 10% 5,000 8,000 12,000 25,000 Remainder: 30:30:40 117,600 117,600 156,800 392,000
Total 122,600 125,600 168,800 417,000
Page _
2017
General Journal
Case 5. As part of their profit and loss sharing agreement, salary of P15,000 per month will be
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Given to Ella while the remaining partners will receive an allowance of P 5,000 each a month.
The remaining profits will shared equally.
Salary (P15,000 x 6 months) 90,000 90,000 Allowance (P5,000 x 6 months) 30,000 30,000 60,000
Remainder: Equally 89,000 89,000 89,000 267,000 Total 179,000 119,000 119,000 417,000
Page _
2017
General Journal
Case 6. Their profit and loss agreement includes the following: Interest of 12% on capital
Contributions of all partners; Salary of P 10,000 each per month; Bonus to Gina of P20, 000;
Remainder to be shared equally.

Interest, 12% of capital 6,000 9,600 14,400 30,000 Salary (P10,000 each per month ) 60,000 60,000 60,000
180,000 Bonus 20,000 20,000 Remainder: Equally 62,333 62,333 62,334 187,000 Total 128,333 131,933
156,734 417,000
Page _
2017
General Journal
Partners’ Drawing Accounts
Partners also need cash for personal expenses just like sole proprietors.
Withdrawal of cash or sometimes non-cash assets is also allowed by the
Partnership.
Recording drawings is made by debiting the drawing account and crediting cash or
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Any other assets allowed to be withdrawn. At the end of the period, the drawing
Account is also closed to capital account, since this is considered permanent
Withdrawal.
In some instances, there are businesses that close the balance of Income Summary
(Profit if credit balance and Losses if debit balance) to the Drawing account and then
The balance of Drawing account will be closed to capital accounts. This process will
Yield the same result or impact on the capital accounts of partners.
Illustrative Problem 6. Recording drawings
Cora and Dina’s partnership allows that they can make withdrawals of cash when
Needed. Their capital balances at the beginning of their accounting period are P100,
000 and P150, 000, respectively. The partnership has a quarterly accounting period.
During the first quarter of the year, both partners made withdrawals of cash for
Their personal expenses. On February 15, Cora withdrew P 10,000 while Dina made
Her withdrawal of P 5,000 cash and P3, 000 worth of merchandise on March 2. To
Add, the partnership earned a net profit of P500, 000 during the quarter.
Required: 1. Record the withdrawals made by the partners.
3. Prepare the closing entry for drawings at the end of the quarter.
4. Assuming that the profit sharing was coursed through the drawing account,
Prepare all the necessary closing entries.
5. Present the capital balances under the following scenarios:
a) Net income and drawings will be closed directly to the capital account.
b) Net income sharing will pass through drawing accounts.
1) Entry to record drawings
Page _
2017
Feb 15 Cora, Drawing 10,000 Cash 10,000 Cora’s withdrawal of cash.
Mar 2 Dina, Drawing 8,000 Cash 5,000 Merchandise Inventory 3,000
Dina’s withdrawal of cash and
Merchandise.
General Journal
2) Closing entry for Drawings
Page _
2017
Marc 31 Cora, Capital 10,000 Cora, Drawing 10,000 Dina, Capital 8,000 Dina, Drawing 8,00
3) Division of profit recorded through Drawing accounts
Page _
2017
Marc 31 Income Summary P 500,000
Cora, Drawing 200,000 Dina, Drawing 300,000
Division of profit.
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Supporting Computation:
Cora = (P100,000/P250,000) x P500,000 = P200,000
Dina = (P150,000/P250,000) x P500,000 = P300,000
32 Cora, Drawing 190,000 Dina, Drawing 292,000

33
Cora, Capital 190,000 Dina, Capital 292,000
Closing drawing to capital.
General Journal
Net income and drawing Net income passed through
4) Capital balances closed to capital account drawing account
Cora Dina Cora Dina
Beginning Capital 100,000 150,000 100,000 150,000 Net income 200,000 300,000 Drawing (10,000)
(8,000) 190,000 292,000 Ending Capital 290,000 442,000 290,000 442,000
Capital Capital
Glossary
Industry: As used in this module, it pertains to services being contributed to a
Partnership.
Partners’ investment: the partners’ contributions or capital to the common fund of the
Partnership.
Partners’ Drawing Account: an account used to accumulate a partner’s withdrawal of
Cash or other non-cash assets from the funds of the partnership.
Profit and Loss Agreement: An understanding among partners on how the net earnings
Or losses of a partnership will be shared among them

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Fundamentals of Accounting Theory and Practice Part 2

1 Review of the Basic Accounting Concepts and Principles

Module 001: Review of the Basic Accounting Concepts and Principles

At the end of this module, you should be able to:

Accounting Definition and the Different Phases

3. Summarizing phase involves recapping or encapsulating all the data after an

Accounting Elements and their Normal Balances

Account Titles under Each Element

Account Title Accounting Element (Debit or Credit )

Accrued Income Asset Debit

Furniture and Fixtures Asset Debit

Capital Capital Credit

Sales Discount Contra-account of Sales Debit

Salary Expense Expense Debit

T-account and Rules of Debit and Credit

Debit to: Credit to:

Decrease in Liability Increase in Liability

c) Assets = Liabilities + Capital – Drawing + Revenues – Expenses

Illustrative Problem: Accounting Cycle

The journal entries are:

Maria and Clara Appliance Center

General Journal Page 1

Date Account Titles F Debit Credit

July 1 Cash 11 ₱ 500,000

Maria, Capital 51 ₱ 250,000

Clara, Capital 52 250,000

2 Store Equipment 21 50,000

Accounts Payable 31 25,000

3 Prepaid Rent 15 30,000

4 Office Furniture 22 10,000

Installment Payable 32 525,000

7 Installment Payable 32 25,000

Purchase Returns and Allowances 70A 25,000

8 Delivery Van 23 80,000

Notes Payable 33 80,000

10 Insurance Expense 81 2,500

11 Store Supplies 14 5,000

15 No journal entry. You may prepare a memo

entry if you wish.

Notes Payable 33 400,000

Accounts Receivable 12 50,000

26 Sales Returns and Allowances 60A 15,000

30 Wages Expense 82 3,250

31 Utilities Expense 83 4,500

The ledger, after posting the journal entries:

Date Particulars F Debit Date Particulars F Credit

July 1 J1 500,000 July 2 J1 25,000

31 Bal. 333,750 11 J1 5,000

A ccounts Receivable Account No. 12

Date Particulars F Debit Date Particulars F Credit

Store Supplies Account No. 14

Date Particulars F Debit Date Particulars F Credit

Prepaid Rent Account No. 15

Date Particulars F Debit Date Particulars F Credit

Store Equipment Account No. 21

Date Particulars F Debit Date Particulars F Credit

Office Furniture Account No. 22

Delivery Van Account No. 23

Date Particulars F Debit Date Particulars F Credit

Accounts Payable Account No. 31

Date Particulars F Debit Date Particulars F Credit

I nstallment Payable Account No. 32

Date Particulars F Debit Date Particulars F Credit