Chapter 2

Nature of Partnership Business

Definition of PARTNERSHIP:

“By the contract of the partnership, two or more persons bind themselves to contribute
money, property and industry to a common fund with the intention of deviding the profits
among themselves. Two or more persons may also form a partnership for the exercise of a
profession.

CHARACTERISTICS OF A PARTNERSHIP

Based on contract Mutual Agency

Association of individuals Income Participation

Ease of Formation Co-Ownership

Unlimited Liability Limited Life

Assignment of Interest

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 ADVANTAGES and DISADVANTAGES of PARTNERSHIP

Advantages Disadvantages

Ease of Formation Unlimited Liability

Joint Resources Mutual Agency

Tax Exemption Consensual

Less Govenrment Supervision Limited Life

Kinds of Partnerships
1. As to nature of business
• Trading Partnership
• Non-Trading Partnership
2. As to Purpose
• Commercial Partnership
• General Professional Partnership
3. As to Object
• Universal Partnership
o Of all present Partnership
o Of Profits
• Particular Partnership
4. As to Liability
• General Partnership
• Limited Partnership
5. As to Duration
• Partnership at Will
• Partnership with a fixed term
6. As to Legality
• De jure Partnership
• De facto artnership

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 Kinds of Partners

As to Contribution As to Liability As to Participation As to third Persons

Capitalist Partner General Partner Managing Partner Secret Partner

Industrial Partner
Limited Partner Silent Partner Dormant Partner

Capitalist-Industrial Nominal or Ostensible

Liquidating Partner
Partner Partner

Chapter 3
Accounting for Partnership Formation

= LIABILITIES + CAPITAL
ASSETS

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Partnership Accounts

• Partner’s capital and drawing accounts

• Loans recievable from partners
• Loans payable to partners
• Loans to and from partners

Partner’s Capital Account

- 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.

Partner’s Drawing Account

- 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.

Loans Recievable from Partners

- Also called “loans to partner” or “due from partners,”

- It represent the substantial advances made by the partners from the partnership with
the intention of repaying it.

Loans Payable to Partners

- Also called “loans from partner” or :due to partner,”

- It represent the subtantial amounts lent to the partnership by the partner which the
partnership is obliged to pay.

Loans to and from Partners

- 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.

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 Partnership Formation

• Execution of partners’ agreement.

• Valuation of partners’ investments.
• Adjustment of accounts.
I. Initial Investments by partners

AMOUNT OF PARTNER’S CONTRIBUTION

Contribute and record as

Do partners agree upon YES per agreement.
their respective capital
contribution?
NO To be contributed
equally.

II. Valuation of partners’ contribution

VALUATION OF PARTNERS’ CONTRIBUTION

Is it cash
contribution?

NO YES

To be recorded at ACTUAL
Is it
AMOUNT of cash contributed
property

N YE To be recorded at AGREED VALUE, otherwise at

FAIR VALUE

Industry Recorded in MEMORANDUM ENTRY form

(skill/labor)

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Recording Industrial Partner’s Contribution

Mendoza, Capital

Mendoza is an industrial partner to share 10% in the

Partnership profits.

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.

STAGES FROM WHICH PARTNERSHIPS ARE FORMED

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.

Actual investment method

- 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)

Is any of the partner’s agreed Capital Credit

GREATER THAN his ACTUAL CONTRIBUTION?

YE N No Bonus

Additional Investments and Withdrawals

There is a BONUS :
The bonus is equal to the INCREASE of his actual
capital contribution.

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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 in Large Amounts

- It is charge directly to the capital account of a withdrawing partner.

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:

1. Accounting treatment of profit and loss

- The profit and loss is subsequently distributed to the partners by closing the income
summary account to the respective partners’ capital accounts.
2. Proper distribution of profit and loss
Arbitrary agreements in Computing Profits and Losses
▪ Equally
▪ Specified ratio or percentage
▪ Capital ratio
o Original capital contribution
o Beginning capital balance
o Ending capital balance
o Average capital balace
▪ Simple average capital
▪ Weighted average capital
▪ Interest allowed on partner’s capitals, the remainder to be devided in an agreed
ratio
▪ Salaries or bonus allowed for partners’ services, the remainder to be devided in
an agreed ratio
▪ Multiple bases of allocation
3. Preparation of financial statements such as:
• Income statement (Statement of Recognized Income and Expenses)
• Statement of Financial Position
• Statement of Changes in Partners’ Equity

Salaries or Bonus Allowed for Partner’s Services