PARTNERSHIP

● There is difficulty in transferring ownership interest

-Owned and sometimes run by two or more people or because ownership interest in the partnership
entities. cannot be transferred without the consent of all the
partners.
-The partners share in the profits or losses.
● Limited amount of capital may be raised compared
-Mutual Contribution to a corporation.
-Consensual in nature ● There is likelihood of dissension and disagreement
-Bind themselves together (money, property or industry) when each of the partners has the same authority in
the management of the firm.
-Division of profit (capital contribution, agreement, degree of
participation and equal)
KINDS OF PARTNERSHIPS

CHARACTERISTICS OF A PARTNERSHIP

Mutual agency – any partner may act as an agent of the According to activity
partnership in conducting its affairs.
a.
Limited life- The withdrawal, death, retirement, bankruptcy, b.
incapacity of a partner and the admission of a new partner
dissolves the partnership. c.
Unlimited liability – the personal assets of a general partner
may be used to satisfy the claims of the creditors of the According to liability
partnership.
a.
Co-ownership of property – properties contributed to the
partnership are owned by the partnership.
Co-ownership of profit – a partner has the right to share in b.
partnership profits.
c.
Legal entity – a partnership has a legal personality separate
and distinct from that of each of the partners.
Service – main activity is the rendering of services
Merchandising or Trading – main activity is the
purchase or sale of goods
Manufacturing – main activity is the production of
goods
General Partnership – one consisting of general
partners who are liable prorate and sometimes
solidarily with their separate property for
partnership liabilities.
Limited Partnership – one consisting of one or more
general partners and one or more limited partners.
Limited Liability partnership – extends legal
protection from liability to all partners, including
general partners.

According to object
ADVANTAGES OF A PARTNERSHIP
a. Universal partnership of all present property- All
assets contributed to the partnership and
● It is easy to form and to dissolve. subsequent acquisitions become common
● Greater amount of capital. partnership assets.
b. Universal partnership of profits- The original
● There is relative freedom and flexibility in decision- movable or immovable property contributed do not
making compared to a corporation. become common partnership assets.
c. Particular partnership – one which has for its object
● It is better managed because business affairs are determinate things, their use or fruits or a specific
supervised by more than one person. undertaking or the exercise of a profession of
● The unlimited liability of a general partner makes it vocation.
reliable from the point of view of creditors. According to Duration

a. W/ fixed term
b. Partnership at will – no term specified
DISADVANTAGES OF A PARTNERSHIP

● The unlimited liability of a partnership deters many

According to Purpose
from investing in a partnership.
● There is lack of business continuity because it can be a. Commercial/trading – for business transaction,
subject to income tax
easily dissolved.
 b. Professional/non-trading – exercise of profession, 5. Interest on investment – interest is allowed to earn on the
not subject to income tax (GPP) asset investment of the partners.

According to Legality 6. Division of profit and losses – net profit or net loss is to be
divided among the partners based on their agreement.
a. De jure – complied all legal requirements
b. De facto – failed to comply all legal requirements

(Answer the problem in Module 1)

KINDS OF PARTNERS

According to Investment INITIAL CAPITAL CONTRIBUTION – distribution of profit and

loss will be based on their respective capital contribution
a. Capitalist – one who contributes capital in money or upon formation.
property.
b. Industrial – one who contributes industry, labor, skill ENDING CAPITAL CONTRIBUTION – distribution of profit and
or service. loss will be based on their respective capital balances before
c. Capitalist-Industrial – one who contributes money, distribution.
property and industry
WEIGHTED/MOVING AVERAGE BALANCES – which uses the
According to Liability formula:

a. General – one whose liability to third persons

extends to his private property
b. Limited – one whose liability to third persons is Methods of Dividing Net Income
limited only to the extent of his capital contribution Equally
to the partnership.
Arbitrary Ratio
According to Participation
a. Fractions
Nominal- a partner in name only.
b. Percentages
Secret – one who takes active part in the business but whose
connection with the partnership is concealed or unknown to c. Ratio and Proportion
the public.
Capital Ratio
Silent – one who does not participate actively in the
management of partnership affairs. a. Original/Initial investment

Managing – one who manages actively the business of the
partnership.
Dormant – one who is a participant in the profits of a firm,
but his name being concealed, his interest is not apparent.
FEATURES OF PARTNERSHIP ACCOUNTING
1. Plurality of capital and drawing accounts – there will be as
many capital accounts and as many drawing accounts as
there are partners
2. Partner’s loans – partners may advance money to the
partnership in the form of loans when the business is in need
of additional funds.
3. Partner’s borrowings – the partnership may advance
money to partners other than withdrawals in the form of
loans.
4. Partner’s salaries – partners are paid salaries for services
rendered in the conduct of partnership business.
b. Beginning capital balance
c. Ending capital balance
d. Average capital – most equitable method
Allowing Salaries, Interest and Bonus – considered as part of
the distribution of net income
a. Salaries – to give recognition to the ability, experience or
time devoted by a partner to the business.
b. Interest - to give recognition to differences in the capital
contribution given in proportion to the period such capital
was actually used.
c. Bonus – incentive/special compensation given to a partner
for superior income realized. It is usually based on net
income.
A dissolution of a partnership generally occurs when one of
the partners ceases to be a partner in the firm. Dissolution is
distinct from the termination of a partnership and the
"winding up" of partnership business. Although the term
dissolution implies termination, dissolution is actually the
beginning of the process that ultimately terminates a
partnership. It is, in essence, a change in the relationship
between the partners.
Purchase of interest by another partner or an outsider
- It is considered a personal transaction between the
buying and selling partners. It involves the transfer
of the withdrawing partners’ capital to the capital
account of the buying partner.

DISSOLUTION OF AN OLD PARTNERSHIP MAY BE FOLLOWED Purchase of interest by the partnership

BY EITHER:
- It is considered a transaction between the
Formation of a new partnership partnership and the outgoing partner. It involves a
decrease in partnership assets or increase in
-New partnership continues the business activities of the partnership liabilities.
dissolved partnership without interruption.

Liquidation
PARTNERSHIP LIQUIDATION
-Termination of business activities and winding up of
partnership affairs preparatory to going out of business.
CONDITIONS RESULTING TO PARTNERSHIP DISSOLUTION
1. Admission of a new partner
2. Withdrawal of a partner due to retirement, death,
incapacity, bankruptcy or voluntary withdrawal
3. Incorporation of a partnership
TYPES OF ADMISSION OF A NEW PARTNER
- process starts with the partnership selling off all of
its noncash assets at auction. Most of the time these
assets will create a loss because they will be sold for
less than what the partnership purchased them for,
but some assets, like building, can appreciate and be
sold at a gain.
- Conversion of non-cash assets to cash (Sale of NCA)
- Pay liquidation expenses
- Pay outside creditors
- Pay INTEREST of partners
- safe payment schedule
- cash priority program

1. By purchase of interest from one or more of the old

partners- It merely involves a transfer of capital of
the selling partner to the capital of the buying
partner. (personal transaction
2. By investment or asset contribution in the
partnership- It is a transaction between the
partnership and the incoming partner.

BONUS

-It is an amount partners are willing to allow as additional

credit to a partner’s capital in excess of his actual capital
contribution.

Total Agreed Capital (TAC) – new capitalization of the new

partnership which will be equal to total contributed capital.

Total Contributed Capital (TCC) – the sum of the investments

or contributions of the new and old partners.

Fraction of interest – this is the interest or equity of a partner

expressed in fraction

Percentage of interest – this is the interest or equity of a

partner expressed in percentage.

TYPES OF WITHDRAWAL OF A PARTNER