Professional Documents
Culture Documents
Par Cor Accounting
Par Cor Accounting
Nature of accounting
Function of accounting
● Audit function – to test the truthfullness of the financial reports, to trace fraudelent
transactions and to locate and rectify accounting errors.
ACCOUNTING CYCLE
2 3
● Partnership at Will
● De facto artnership
Kinds of Partners
Industrial Partner
Limited Partner Silent Partner Dormant Partner
Chapter 3
Accounting for Partnership Formation
- It is a permanent account. Each partner has its own capital account which has a
normal credit balance. The balance in the capita account represents the partner’s
share in the net assets of the partnership.
- It is a temporary account and its periodically closed to the partner’s capital account.
- Each partner has its own drawing account to reflect temporary withdrawals and other
minor amounts taken by the partner from the partnership in anticipation of his share
in the partnership income.
- This account titles is a combination of loans receivable from partner and loans
payable to partners account.
- It represent both a claim and obligation. It is a claim when its balance is found on the
debit side. If its balance is found on the credit side, it represent a liability.
Note: any loans between a partner and the partnership should always be accompanied by
proper loan documentation, such as a promissory note. As in any other loan, a loan from a
partner is shown as a payable on the partnership’s books.
Partnership Formation
● Adjustment of accounts.
I. Initial Investments by partners
Is it cash
contribution?
NO YES
To be recorded at ACTUAL
Is it
AMOUNT of cash contributed
property
Mendoza, Capital
Note: when the net income of the partnership has been distributed to the partners, the capital
account of an industrial partner would have a journal entry equivalent to his share in the profit.
1. First time in business – individual persons without existing business form a partnership
2. Convertion of single propriertorship to a partnership – this could be made when:
● A sole proprietor admits into his business another individual who has no business of
is own.
● Two or more sole propriertorship converted into a partnership.
3. Admission of a new partner to an existing partnership – by nature, this is a form of
dissolution of an old partnership which gives rise to the formation of a new partnership.
- When the agreed partners’ capital shares are credited with the same value as their
actual net contributed tangible assets, the approech of initial investment used is
called “Actual Investment Method.”
Bonus Method
BONUS METHOD
Partnership’s Total Agreed Capital (TAC) = Partners’ Total Contributed Capital (TCC)
YE N No Bonus
There is a BONUS :
The bonus is equal to the INCREASE of his actual capital
contribution.
Additional Investments and Withdrawals
The partnership agreement should include guidelines regarding additional investments and
withdrawals. The additional investment is recerded directly to the capital account. However, the
accounting treatment of withdrawals would depend on whether the withdrawn amount is
subtantial or irregular.
Withdrawals of Allowances
- The business rewards of partners are not in the form of a salary as the take-home
pay of employees, but in the form of a share in the partnership profits.
Chapter 4
ACCOUNTING FOR PARTNERSHIP OPERATIONS
The accounting for partnership operation is concerned with the following activities:
▪ Capital ratio
o Original capital contribution
o Beginning capital balance
o Ending capital balance
o Average capital balace
▪ Simple average capital
▪ Net income after deducting salaries and interest (if any) but before bonus
▪ Net income after deducting salaries, interest (if any) and bonus
Chapter 5
ACCOUNTING FOR PARTNERSHIP DISSOLUTION
“ The dissolution of the partnership is the change in the relation of the partners caused by
any partner ceasing to be associated in the carrying on of the business”
- dissolution terminates all the authority of any partner to act for the partnership.
- It does not necessarily mean an automatic terminaton of the business activities. The
dissolved partnership may continue until the winding up or liquidation of partnership
affairs is completed.
Causes of Dissolution
Asset Revaluation
The accounting process for the partnership dissolution requires that the existing
partners’ capital accounts be updated first before dissolution.
Accordingly, assets and liabilities of the partnership should be restated at thier fair
market values to determine the fair and equitable capital balances of the existing partners.
NO YES No Bonus
There is Bonus
BONUS METHOD
Under this method, the total contributed capital is equal to the total partnership agreed
capital, but some individual partners’ contribution is not equal to their respective capital credit
because there is a transfer of capital from one partner to another.
▪ Remaining Partner(s)
▪ Partnership
Insolvency of Partnership or a Partner
It is commonly a result of excessive losses from operations, the over-extension of credit
to customers, or excessive investments in inventories or in plant assets.
NO YES
The solvent general partner will absorb the The general partners must invest
required payment to outside creditors and additional amount to pay the outside
will have existing claim against the other creditors.
general partners.
Incorporation of a Partnership
If the partnership is incorporated, the partners will become the stockholders of the corporation.
The corporation then takes place over the assets and assumes the liabilities of the partnership.
As a result, the partnership is dissolved.