AC 1104: PARTNERSHIP AND CORPORATION

CHAPTER 1: PARTNERSHIP b. Ostensible/by Estoppel

FORMATION
VI. As to Publicity
Definition of Partnership
a. Secret
1. Art. 1767, Civil Code of the Phils. b. Open or Notorious
2. Uniform Partnership Act, Section 6
3. Eastman vs Clark, 52 N.H. 276, 16 Am. VII. As to Purpose
Rep. 192 a. Commercial
4. Mechem, Elements of the Law of b. GPPs
Partnership
5. Words and Phrases, 1957 Ed., page 291- VIII. As to Nature of Business
293 a. Trading
b. Non-trading
General Professional Partnership (GPP)
Classification of Partners
I. Profession
II. Exercise of a Profession I. As to Contribution
a. Capitalist
Characteristics of a Partnership b. Industrial
1. Mutual Contribution c. Capitalist-Industrial
2. Division of Profits or Losses II. As to Liability
3. Mutual Agency a. General
4. Co-Ownership of Contributed Assets b. Limited
5. Limited Life III. Other Classifications
6. Partner’s Equity Accounts a. Nominal
7. Income Taxes b. Secret
c. Silent
Advantages d. Dormant
I. Over Sole Proprietorships e. Managing
II. Over Corporations f. Liquidating

Disadvantages Steps to Register a Partnership Business

I. Over Sole Proprietorships 1. Register the business in the Securities

II. Over Corporations and Exchange Commission (SEC)
2. Get a Barangay Clearance
Classification of Partnership 3. Register the business and employees in
I. As to Object Social Security System (SSS)
a. Particular 4. Obtain a Business or Mayor’s Permit
b. Universal 5. Register the business with the Bureau of
- All present property Internal Revenue (BIR)
- Profits Partnership Contract

II. As to Liability of the partners There is a need for a partnership contract to be

a. General in writing when:
b. Limited a. Capital of the partnership is P3,000 or
more in money or property
III. As to Duration b. Immovable property or real rights are
a. Partnership at will contributed into the partnership
b. Partnership with a fixed term
The same shall also appear in the public
IV. As to Legality of its Existence instrument to be recovered in the SEC.
a. De jure Articles of Co-Partnership
b. De facto
a. Partnership name
V. As to Representation to Others
a. Ordinary or Real
 b. Names, nationalities, and residences of the
partners (indicate if general or limited if
limited partnership)
c. Principal office of the partnership
d. Purpose of the partnership
e. Duration of the partnership (term of
existence)
f. Capital of the Partnership
g. Transfer clause
h. Undertaking to change partnership name
i. Other provisions, conditions, terms, and
stipulations
j. Signatures of the partners
k. Notarial Page
Partnership Taxation
- GPPs are exempt from income of tax
- Co-partnership subject to 25%
- Partner’s share in GPP is subject to
10% tax
- Dividend tax of 10% in co-
partnership
- GPP individual income is subject to
individual income tax
- Co-partnership individual partners are
not subject to individual income tax
CHAPTER 1.1: ACCOUNTING FOR
PARTNERSHIP
Owner’s Equity Accounts
- Credited for initial and additional net
investments (credit balance)
- Debited for permanent withdrawals
(debit balance)
Loans to/from Partners
- If a partner withdraws a substantial
amount of money with the intention
of repaying it, the debit should be to
Loans Receivable-Partner.
- A partner may lend amounts to the
partnership more than his intended
permanent investment, credited to
Loans Payable-Partner
- In case of liquidation loans payable to
partners must be paid after the claims
of outside creditors have been paid in
full
- These loans have priority over
partners equity.
CHAPTER 1.2 PARTNERSHIP
FORMATION
Valuation of Investments by Partners
a. Agreed value (upon agreement of
partners)
b. Fair Market Value – estimated amount a
willing seller would receive from a
capable buyer for the sale of the asset in
a free market
Opening Entries of a Partnership upon
Formation
I. Individuals with no existing business
form a partnership
a. Record investment of each partner in
the partnership books
II. A sole proprietor and another individual
forming a partnership
a. Adjust the sole proprietor’s books
b. Close the books of the sole
proprietor
c. Record the opening entries in the
new partnership books
III. Two sole proprietorships forming a
partnership
a. Adjust each proprietor’s capital
accounts in accordance with the
agreement
b. Close the books
c. Record the investment of each
partner
CHAPTER 2: PARTNERSHIP
OPERATIONS
Divisions of Profits and Losses
If no agreement is made, profits and losses are
divided according to original capital
contributions.
I. Equally
II. In unequal/arbitrary ratio
a. Multiply profit by ratio
b. Record the product according to
each partner
Division of P/L in the Ratio of Partners’ Capital
Account Balances
III. Ratio of Original Capital Balances
a. Profit x original investment/total
capital investment of all partners
IV. Ratio of Beginning Capital Balances
(is the same with ratio of original
capital balances but will differ after
next accounting period since the
beginning capital balance refers to
beginning capital of partner in the
accounting period)
 a. Profit x capital balance at end of Balance divided equally
[(350,000)-228750]=121250 60,625 60,625 121,250
the period/total ending capital
balance of all partners
Partners’ Share in Profits 225,450 124,550 350,000
IX. Net profit before allowances for
V. Ratio of Average Capital Balances
salaries and interest but after
a. Calculate capital account balance
deduction of the bonus
x year unchanged = average
capital balances Net profit before
salaries, interest, and
Ex. bonus 300,000 =125%
Net profit after bonus
Capital Portion of the
(300,000/125%) 280,000 =100%
Date Account year
Bonus 70,000 =25%
Balance unchanged
Jan. 1 100,000 3/12 a. Follow standard procedure after
Apr. 1 190,000 6/12
getting the bonus by adding
Oct. 1 150,000 3/12
bonus

b. Add average capital balances of X. Net profit after allowances for

each partner for total average salaries and interest but before bonus
capital balances
c. Profit x average capital balance
Net profit before salaries,
of partner/total ave. capital 350,000
interest, and bonus
balance (Salaries) 100,000
(Interest) 41,250 141,250
VI. Interest allowed on Partners’ Capital Net profit before bonus 208,750
with Remaining Profit and Loss Bonus percentage 25%
Divided in an Agreed Ratio Bonus 52,188
a. Multiply interest with capital
b. Add total interest a. Follow standard procedure by
c. Subtract total interest from net adding bonus as subtrahend
profit = remainder from profit to calculate
d. Remainder divided equally (or remainder
according to agreement) = b. Share profits
partner’s share in profit/loss
e. Subtract/add share from capital XI. Net profit after allowances for
salaries, interest, and bonus
VII. Salary Allowance to Partners with Net profit before salaries,
Remaining Net Profit or Loss interest, and bonus 350,000
Divided in an Agreed Ratio
a. Add salary allowance to get total (Salaries) 100,000
salaries allowance (Interest) 41,250 141,250
b. Remainder = profit – total Net profit before bonus
208,750 =125%
salaries allowance
c. Divide remainder according to Net profit after bonus
167,000 =100%
agreement
Bonus 41,750 =25%
Bonus to Managing Partners Based on Net
Profit a. Follow standard procedure by
adding bonus as subtrahend
VIII. Net profit before allowances for from profit to calculate
salaries, interest, and bonus remainder
b. Share profits
Gomez Cando Total
Bonus x Profit
87,500 - 87,500
Salaries Allowance
60,000 40,000 100,000
Interest on Ave. capital
balances 17,325 23,925 41,250