Partnership – Formation

Contributions
1. Cash – When cash is contributed, it shall be accounted for at face value.
2. Non-cash asset – Non-cash assets shall be valued at agreed values, or at fair value in the absence of such. When these
two are not given, these shall be accounted for at book value.
Special Notes:
a. Receivable – This shall be accounted for at the gross amount. Allowance for Doubtful Accounts shall be
established separately in the books of partnership.
b. Property, plant, and equipment – This shall be accounted for at net of Accumulated Depreciation. This means
that the Accumulated Depreciation is not carried forward in the books of the partnership.
3. Service or industry – This is recorded through a memorandum entry.

Formation:
A. All partners are new to the business.
Tine and Sarawat are individuals who have no existing businesses. They decided to form a partnership by
contributing the following:
Tine Sarawat
Cash P50,000 P30,000
Accounts Receivable 70,000 30,000
Allowance for Doubtful Accounts 15,000 10,000
Inventory 90,000 70,000
Land 200,000
Equipment 150,000

Accumulated Depreciation – Equipment 35,000

The partners agreed to the following:

1. P10,000 of Tine’s Accounts Receivable is uncollectible and allowance for doubtful accounts shall be reduced to
P5,000. While Sarawat’s allowance for doubtful accounts shall be increased to P12,000.
2. Inventory of Tine and Sarawat shall be valued ate their fair value at P85,000 and P80,000, respectively.
3. The Equipment is to be valued at P120,000.

Here, we have to establish the values that will be carried at the books of the partnership.

Old Values New Values Total

Tine Sarawat Tine Sarawat
Cash P50,000 P30,000 P50,000 P30,000 P80,000
Accounts Receivable 70,000 30,000 60,000 30,000 90,000
Allowance for Doubtful Accounts 15,000 10,000 5,000 12,000 17,000
Inventory 90,000 70,000 85,000 80,000 165,000
Land 200,000 200,000 200,000
Equipment 150,000 120,000 120,000
Accumulated Depreciation – Equipment 35,000
Total P310,000 P328,000 P638,000
 After determining the values, we can now proceed to the entry, as follows:

Cash P80,000
Accounts Receivable 90,000
Inventory 165,000
Land 200,000
Equipment 120,000
Allowance for Doubtful Accounts P17,000
Tine, Capital 310,000
Sarawat, Capital 328,000

B. A sole proprietor and an individual forms a partnership (new partnership books)

Tine is a sole proprietor of a business with the following records:

Tine
Cash P50,000
Accounts Receivable 70,000
Allowance for Doubtful Accounts 15,000
Inventory 90,000
Land 200,000
Equipment 150,000
Accumulated Depreciation – Equipment 35,000
Accounts Payable 90,000
Tine, Capital 420,000

Tine is forming a partnership with Sarawat and Together, both new to the business. Sarawat will contribute P415,000
cash while Together will contribute his industry. As per agreement, Tine’s assets are to be valued as follows:
1. P10,000 of Accounts Receivable is uncollectible and allowance for doubtful accounts is P10,000.
2. Inventory shall be valued ate their fair value at P85,000.
3. The Equipment is to be valued at P120,000.
No other adjustments are to be made.
To start, we have to adjust first Tine’s separate books as follows:
1. We write off P10,000 of Accounts Receivable as follows:

Allowance for Doubtful Accounts P10,000

Accounts Receivable P10,000

Note that the Allowance for Doubtful Accounts should have a P10,000 balance. However, after the entry above, the
current balance of such only amounts to P5,000. Thus, we have to increase the allowance by P5,000 more as follows:

Tine, Capital P5,000

Allowance for Doubtful Accounts P5,000
Alternatively, this could be recorded as follows:

Allowance for Doubtful Accounts P5,000

Tine, Capital 5,000
Accounts Receivable P10,000
2. We decrease the value of the inventory as follows:

Tine, Capital P5,000

Inventory P5,000

3. First, close (reduce to zero) the balance of Accumulated depreciation. This is because this account will not be
carried forward to the partnership books.

Accumulated Depreciation – Equipment P35,000

Equipment P35,000

After the entry above, the current balance of Equipment is P115,000. However, as agreed, Equipment should be
valued at P120,000. Thus, we record the increase as follows:

Equipment P5,000
Tine, Capital P5,000

Alternatively, we adjust the value of the Equipment as follows:

Accumulated Depreciation – Equipment P35,000

Equipment P30,000
Tine, Capital 5,000

The above values are computed as follows:

Gross Value of Equipment P150,000

Agreed Value (New Gross Value) 120,000
Decrease P 30,000 - to be credited to Equipment

Gross Value of Equipment P150,000

Accumulated Depreciation 35,000 - to be closed (debited)
Net Book Value (Carrying Amount) P115,000 - compare to the agreed value to
determine increase or decrease
in the carrying amount.

See below:
Agreed Value P120,000
Net Book Value 115,000
Increase in Carrying Amount P 5,000 - to be credited to Tine, Capital

4. After adjusting the books of Tine, since new partnership books will be used, we now close Tine’s books as
follows:

Tine, Capital P415,000

Allowance for Doubtful Accounts 10,000
 Accounts Payable 90,000
Cash P50,000
Accounts Receivable 60,000
Inventory 85,000
Land 200,000
Equipment 120,000

The next step is to open the books of the partnership by recording the investments of the three partners as follows:
a. Tine’s Contribution

Cash P50,000
Accounts Receivable 60,000
Inventory 85,000
Land 200,000
Equipment 120,000
Allowance for Doubtful Accounts P10,000
Accounts Payable 90,000
Tine, Capital 415,000

b. Sarawat’s Contribution

Cash P415,000
Sarawat, Capital P415,000

Alternatively, Tine’s and Sarawat’s contribution may be recorded as follows:

Cash P465,000
Accounts Receivable 60,000
Inventory 85,000
Land 200,000
Equipment 120,000
Allowance for Doubtful Accounts P10,000
Accounts Payable 90,000
Tine, Capital 415,000
Sarawat, Capital 415,000

c. Together’s Contribution – Since Together will only contribute his industry, we record his contribution
through a memorandum entry as follows:
Together is admitted into the partnership as an industrial partner to share one-third in the partnership profit.

Do note that the on-third share is not fixed. Profit sharing may vary depending on the partner’s agreement.

C. A sole proprietor and an individual forms a partnership (using the books of the sole proprietor)
We will use the example in Section B above. Just like above, we adjust the books of Tine as follows:

1. For the Accounts Receivable and Allowance for Doubtful Accounts:

Allowance for Doubtful Accounts P5,000

Tine, Capital 5,000
Accounts Receivable P10,000
 2. For the Inventory:

Tine, Capital P5,000

Inventory P5,000

3. For the Equipment and Accumulated Depreciation:

Accumulated Depreciation – Equipment P35,000

Equipment P30,000
Tine, Capital 5,000

We stop here and skip the closing of the books of Tine as we will be using his books as the partnership books. Next,
we record the contribution of Sarawat and Together as follows:
1. Sarawat’s Contribution

Cash P415,000
Sarawat, Capital P415,000

2. Together’s Contribution
Together is admitted into the partnership as an industrial partner to share one-third in the partnership profit.

D. Two or more sole proprietors form a partnership

The partners may choose to set up new set of partnership books like in Section B above. If such is the case, the
steps are the same.
1. Adjust each of the sole proprietor’s separate books to match the agreed values
2. Close the separate books.
3. Set-up the new partnership books by recording their contributions, separately or in a compound entry.
If the partners would agree to use one of the existing sole proprietor books like in Section C, the steps are as follows:
For the one whose books will not be used:
1. Adjust his books to match the agreed values.
2. Close his separate books.
For the one whose books will be used:
1. Adjust his books to match the agreed values.
2. Record the contribution of the partner/s whose books were closed.
Do note, that only Natural Persons (humans) can for a partnership. That is, an existing partnership cannot become a
partner, nor can corporations and joint ventures. But if partners of two different partnerships would form a new
partnership, this is possible.
To illustrate, A and B are partners of CD partnership, while Z and Y are partners of XW Partnership. In this case, A, B, Z
and Y may form a partnership because they are natural persons. However, CD partnership cannot form a partnership with
Z, Y, or XW partnership. The same goes with XW partnership where it cannot form a partnership with A, B, or CD
partnership. The reason for such is because CD partnership and XW partnership are juridical persons, that is, they
acquired a personality only by virtue of the law.