PARTNERSHIP FORMATION:

Partnership – contract; 2 or more persons; intention of dividing profits

- May contribute money, property, or industry to the common fund

Characteristics of Partnership

1) Separate Legal Personality: has a juridical personality separate from its owners
2) Mutual Contribution: money, property or industry is contributed to the common fund
3) Division of profits and losses: partnership is formed for the intention of dividing profits and
losses among the partners
4) Co-ownership: all properties invested to the partnership become the properties of the
partnership means that all of these are co-owned by the partners.
5) Limited Life: even if there is only a change in partnership: admission of a new partner,
withdrawal, retirement or death of a partner may lead to dissolution of the partnership.
6) Mutual Agency: each partner is an agent of the partnership. Partner can act within the scope of
his authority and they can enter into the contract in behalf of the partnership with the consent
of other partners.
7) Unlimited Liability: each partner is held liable for any partnership obligation if the partnership
asset is not enough to pay its liabilities. The liability can extend from the partners’ personal
property.
a. General Partner: partner that is liable to the extent of his personal property.
b. Limited Partner: partner who is only liable to the extent of his capital contribution.
8) Income Taxes: partnership is only taxed if their income is more than 25%

Kinds of Partners

1) Capitalist Partner: One who contributes capital to the partnership

2) Industrial Partner: One who contributes profession, skills and knowledge to the partnership
3) Capitalist-Industrial: One who contribute both capital and industrial
4) General Partner: one who is liable to the extent of his personal property
5) Limited Partner: one who is liable only to the extent of his capital contribution
6) Managing Partner: one who manage the partnership
7) Liquidating Partner: one who is appointed to settle a dissolving or insolvent firm’s finances
8) Ostensible Partner: one who takes active participation in the business
9) Partner by estoppel: One who acts as a partner but not totally a partner
10) Continuing Partner: one who still continues to run the partnership after its dissolution
11) Surviving Partner: one who survives after the partnership liquidation
12) Secret Partner: one whose membership is kept from the public
13) Silent Partner: one who is a member of the partnership but is inactive.
14) Dormant partner: one who contributes capital but does not take part in the business

Partners Ledger Accounts

a) Capital Accounts: normal balance is credit. Increased by original investment, additional

investments and partner’s share in the profits. Decreased by permanent withdrawal of capital,
 debit balance of the drawing account at the end of the period and partner’s share capital in
losses.
b) Drawing or Personal Accounts: (normal balance is debit) temporary account because at the end
of the accounting period it will be closed at capital account. Increased by withdrawal of assets
by the partners in anticipation of net income, partner’s personal indebtedness paid or assumed
by the partnership, and funds or claims of partnership collected and retained by the partner.
Decreased by partnership obligations assumed or paid by the partner, personal funds or claims
of partner collected and retained by the partnership, and periodic partner’s salaries depending
on the accounting and disbursement procedures agreed upon.
c) Loans to and from Partners
a. Loans to Partners: viewed as receivable of partnership from partners. (partnership ang
maniningil dahil siya ang nagpautang)
b. Loans from Partners: viewed as payable to the partners. (partnership ang magbabayad
dahil siya ang nangutang)

Accounting for Partnership Formation

A partnership maybe formed in several ways:

1) Formation of partnership for the first time (Individuals and Individuals)

2) Formation of partnership by sole proprietorship

A) Sole Proprietor and an Individual

B) Sole Proprietor and another Sole Proprietor

3) Admission of a New Partner

Valuation of Partner’s Investment

1) CASH: Face value, kapag dominated sa foreign currency dapat iconvert muna sa peso using the
current exchange rate.
2) NON-CASH ASSETS: Agreed value, kapag walang agreement, irerecognize yung contribution at
their fair market values sa date of transfer sa partnership.
3) SERVICES OR INDUSTRIES: Memorandum Entry.
 Any liabilities na iaassume ng partnership ay dapat nakavalue sa present value (FV) ng remaining
cash flows.

FORMATION OF PARTNERSHIP FOR THE FIRST TIME (INDIV. & INDIV.)

CASE 1: Net Investment Method (yung initial capital contribution ay equal sa amount credited sa capital
account) (remember: agreed to receive a capital credit na equal sa agreed value of their net assets
invested)

Cash Investments (accounted @ FV): Cash

Capital
Non-Cash Investments (accounted @ FV on the date of investment): Non-Cash Asset

Capital

CASE 2: Bonus Method (TCC = TAC) (agreed to bring their respective capital in proportion to their
respective profit and loss ratio)

TCC Agreed Ratio TAC Diff

C 65 000 30% 103 500 38 500

F 280 000 70% 241 500 (38 500)

Total 345 000 345 000 -

F, Capital 38,500

C, Capital 38,500

CASE 3: Revaluation Method (TCC>TAC: overvaluation; TCC<TAC: undervaluation)(agreed to bring their

respective capital in proportion to their respective profit and loss ratio and asset of C is undervalued)

TCC Agreed Ratio TAC Diff

C 65 000 30% 400k x 30% = 120 000 55 000

F 280 000 70% 280 000 -

Total 345 000 280k/70% = 400 000 -

Asset 55, 000

C, Capital 55,000

CASE 4: Investment or Withdrawal (agreed to bring their respective capital in proportion to their
respective profit and loss ratio and using F as a base)

F, Capital ENTRY:

Divided by: F’s Interest Cash

Total Partners Capital F, Capital

Multiply by: C’s Interest

Agreed Capital of C

Less: C’s Capital Contribution

Cash Investment
ONE SOLE PROPRIETOR AND ANOTHER INDIVIDUAL WHO HAS NO BUSINESS

1) Adjust the books of the proprietor

2) Close the books of the proprietor
3) Record new set of books (investments)
4) Record investment of the individual
 Adjusted Capital Balance of the Proprietor

Divided by: Capital Interest of the Proprietor

Total Agreed Capital

Multiplied by: Capital Interest of the Individual

Investment of Individual

ENTRY: Cash

Capital

5) Combine the amounts and prepare balance sheet

TWO SOLE PROPRIETORS FORM A PARTNERSHIP

1) Adjust the books of the proprietor

2) Close the books of the proprietor
3) Record new set of books (investments)
4) If there is insufficient capital, the following computation must be followed:
a. Contributed Capital

Divided by: Capital Interest of Proprietor

Total Agreed Capital

Multiplied by: Capital Interest of Insufficient Proprietor

Investment of Insufficient Proprietor

5) Combine the amounts and prepare balance sheet