MODULE 1: PARTNERSHIP FORMATION
ACCOUNTING FOR PARTNERSHIPS • Creditors’ claims attach first to partnership assets. If these are
1.1 PARTNERSHIP FORM OF ORGANIZATION
• The Partnership Law is the general authority for partnerships.
• Article 1767 of the Partnership Law embodies the definition of
partnership and states that “by the contract of partnership, two or more
persons bind themselves to contribute money, property or industry to a
common fund with the intention of dividing profits among themselves”
1.2 CHARACTERISTICS OF PARTNERSHIP
1) Association of individuals
• May be based on as simple an act as a handshake; however, it is
preferable to state the agreement in writing.
• A partnership is a legal entity for certain purposes (i.e., property can be
owned in the name of the partnership).
• A partnership is an accounting entity for financial reporting purposes.
• Net income of a partnership is taxed as a separate entity; except for
general professional partnerships where partner’s share of income is
taxable at personal tax rates.
2) Mutual agency
• Means that each partner acts on behalf of the partnership when
engaging in partnership business.
• The act of any partner is binding on all other partners. This is true even
when partners act beyond the scope of their authority, so long as the act
appears to be appropriate for the partnership.
3) Limited life
• Partnerships have a limited life.
• Partnership dissolution occurs whenever a partner withdraws, or a new
partner is admitted.
• Partnerships end involuntarily by death or incapacity of a partner.
• Partnerships may end voluntarily through acceptance of a new partner
or withdrawal of a partner.
4) Unlimited liability
• Unlimited liability means that each partner is personally and
individually liable for all partnership liabilities.
PARTNERSHIP & CORPORATION ACCOUNTING
insufficient, the claims then attach to the personal resources of any
partner, irrespective of that partner’s capital equity in the company.
5) Co-ownership of property
• Partnership assets are co-owned by the partners; once assets have been
invested in the partnership; they are owned jointly by all the partners.
• Partnership income or loss is also co-owned.
1.3 ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP
Advantages Disadvantages
Combining skills and resources of
Mutual agency
two or more individuals
Freedom from government
Limited life
regulations and restrictions
Ease of decision making Unlimited liability
1.4 THE PARTNERSHIP AGREEMENT
The written contract referred to as the partnership agreement contains
such basic information as the name and principal location of the firm,
the purpose of the business, and the date of inception.
• The following relationships among the partners should be specified:
1. Names and capital contributions of the partners.
2. The effective date and duration of the contract.
3. The purpose/s and principal office of the business
4. The authorities, rights, and duties of each partner.
5. Basis for sharing net income or net loss.
6. Provision for withdrawals of assets.
7. Procedures for submitting disputes to arbitration.
8. The manner of keeping the books of accounts.
9. Rights and duties of partners.
10. Procedures for the withdrawal or addition of a partner.
11. Rights and duties of surviving partners in the event of a partner’s
death.
 MODULE 1: PARTNERSHIP FORMATION
1.5 ACCOUNTING FOR THE FORMATION OF PARTNERSHIP
• Each partner’s initial investment in a partnership should be recorded at
the fair market value of the assets at the date of their transfer to the
partnership.
• The values assigned must be agreed to by all the partners.
• After the partnership has been formed, the accounting is similar to
accounting for transactions of any other type of business organization.
Illustrative Problem 1-1: Recording Investments in A Partnership
Entries to record the investments are:
PARTNERSHIP & CORPORATION ACCOUNTING
Activity 1-1.
Sally, as her original investment in the firm of Sally and Mar,
contributed equipment that had been recorded in the books of her own
business as costing P900,000, with accumulated depreciation of
P620,000. The partners agreed on a valuation of P400,000. They also
agreed to accept Sally’s accounts receivable of P360,000, realizable to
the extent of 85%. Required: prepare the journal entry to record Sally’s
investment in the partnership.
Activity 1-2.
Moo and Quack have just formed a partnership. Moo contributed
cash of P1,260,000, and a computer equipment that cost P540,000. The
fair value of the computer is P360,000. Moo has notes payable on the
computer of P120,000 to be assumed by the partnership. Moo is to have
60% capital investment in the partnership. Quack contributed only
P900,000. The partners agreed to share profit and losses equally. Moo
should make additional investment (or withdrawal) of _________.
Activity 1-3.
On April 8,2021, Tolentino who has her own retail business and Tan,
decided to form a partnership wherein they will divide profits in the
ratio of 40:60, respectively. The statement of financial position of
Tolentino is as follows:
MODULE 1: PARTNERSHIP FORMATION PARTNERSHIP & CORPORATION ACCOUNTING
Activity 1-1. (Individuals with no existing business form a partnership) Activity 1-3.
Sally, as her original investment in the firm of Sally and Mar, contributed On April 8,2021, Tolentino who has her own retail business and Tan, decided
equipment that had been recorded in the books of her own business as to form a partnership wherein they will divide profits in the ratio of 40:60,
costing P900,000, with accumulated depreciation of P620,000. The partners respectively. The statement of financial position of Tolentino is as follows
agreed on a valuation of P400,000. They also agreed to accept Sally’s Conditions agreed before the formation of the partnership:
accounts receivable of P360,000, realizable to the extent of 85%. 1. Accounts receivable of Tolentino is estimated to be 70% realizable.
Accounts Debit Credit 2. The accumulated depreciation of the equipment is to be increased
Equipment 400,000 by P10,000.
Accounts Receivable 360,000 3. The accounts payable will be assumed by the partnership 4. The
Sally, Capital 706,000 capital of the partnership is based on the adjusted capital of
Allowance for bad debts 54,000 Tolentino. Tan is to contribute cash in order to make the partner’s
Investment of Sally capital balances proportionate to the profit and loss ratio.

Activity 1-2. (Individuals with no existing business form a partnership) Required:

Moo and Quack have just formed a partnership. Moo contributed cash of 1. Prepare the adjusting and closing entries in the books of Tolentino.
2. Prepare the opening journal entries in the books of the partnership
P1,260,000, and a computer equipment that cost P540,000. The fair value of
3. Prepare the statement of financial position upon the formation of
the computer is P360,000. Moo has notes payable on the computer of
the partnership.
P120,000 to be assumed by the partnership. Moo is to have 60% capital
investment in the partnership. Quack contributed only P900,000. The
partners agreed to share profit and losses equally.
Moo should make additional investment (or withdrawal) of _______.
Solutions:
Mo = 60%
Quack = 40%
Cash 1,260,000
Computer 360,000
Notes payable 120,000
Moo, Capital 1,500,000
Moo’s total invests prior to agreed interest rate
Total partnership capital = 900,000/.40 = 2,250,000

Mo’s interest = 2,250,000 x .60 = 1,350,000

Moo should make a withdrawal of Php 150,000.00
Initial investment Php 1,500,000
Agreed investment 1,350,000
Withdrawal of 150,000
MODULE 1: PARTNERSHIP FORMATION PARTNERSHIP & CORPORATION ACCOUNTING
Solutions: 4. Financial Statement
Tan and Tolentino Marketing
1.Old Books – Adjustments (c/o Capital Account)
Tolentino, Capital 32,000 Statement of Financial Position
Allowance for doubtful accounts 32,000 April 8,2021
Tolentino, Capital 10,000
Assets Liabilities & Equity
Accumulated Depreciation 10,000
Accounts Payable 36,000 Cash 469,000 Accounts Payable 36,000
Tolentino, Capital 10,000 Accounts
160,000 Tolentino, Capital 310,000
Receivable
Closing Entries: Old Books Allow. for bad
(48,000) 112,000 Tan, Capital 465,000
Accounts Payable 36,000 debts
Tolentino, Capital 310,000 Inventory 200,000
Allowance for doubtful accounts 48,000 Equipment 30,000
Cash 4,000
Accounts Receivable 160,000 Total Liabilities &
Total Assets 811,000 811,000
Inventories 200,000 Equity
Equipment 30,000

2. Opening Entries – New Partnerships

Cash 4,000
Accounts Receivable 160,000
Inventories 200,000
Equipment 30,000
Accounts Payable 36,000
Tolentino, Capital 310,000
Allowance for doubtful accounts 48,000
Investment of Tolentino

Adjusted capital of Tolentino (40% agreed interest)

Total partnership capital = 310,000/.40 = 775,000

Cash 465,000
Tan, Capital 465,000
MODULE 1: PARTNERSHIP FORMATION PARTNERSHIP & CORPORATION ACCOUNTING
Activity 1-1. (Individuals with no existing business form a partnership) Activity 1-3.
Sally, as her original investment in the firm of Sally and Mar, contributed On April 8,2021, Tolentino who has her own retail business and Tan, decided
equipment that had been recorded in the books of her own business as to form a partnership wherein they will divide profits in the ratio of 40:60,
costing P900,000, with accumulated depreciation of P620,000. The partners respectively. The statement of financial position of Tolentino is as follows
agreed on a valuation of P400,000. They also agreed to accept Sally’s Conditions agreed before the formation of the partnership:
accounts receivable of P360,000, realizable to the extent of 85%. 1. Accounts receivable of Tolentino is estimated to be 70% realizable.
Accounts Debit Credit 2. The accumulated depreciation of the equipment is to be increased by
Equipment 400,000 P10,000.
Accounts Receivable 360,000 3. The accounts payable will be assumed by the partnership 4. The
capital of the partnership is based on the adjusted capital of
Sally, Capital 706,000
Tolentino. Tan is to contribute cash in order to make the partner’s
Allowance for bad debts 54,000
capital balances proportionate to the profit and loss ratio.
Investment of Sally
Required:
Activity 1-2. (Individuals with no existing business form a partnership) 1. Prepare the adjusting and closing entries in the books of Tolentino.
Moo and Quack have just formed a partnership. Moo contributed cash of 2. Prepare the opening journal entries in the books of the partnership
P1,260,000, and a computer equipment that cost P540,000. The fair value of 3. Prepare the statement of financial position upon the formation of the
the computer is P360,000. Moo has notes payable on the computer of partnership.
P120,000 to be assumed by the partnership. Moo is to have 60% capital
investment in the partnership. Quack contributed only P900,000. The
partners agreed to share profit and losses equally.
Moo should make additional investment (or withdrawal) of _______.
Solutions:
Mo = 60%
Quack = 40%
Cash 1,260,000
Computer 360,000
Notes payable 120,000
Moo, Capital 1,500,000
Moo’s total invests prior to agreed interest rate
Total partnership capital = 900,000/.40 = 2,250,000

Mo’s interest = 2,250,000 x .60 = 1,350,000

Moo should make a withdrawal of Php 150,000.00
Initial investment Php 1,500,000
Agreed investment 1,350,000
Withdrawal of 150,000
MODULE 1: PARTNERSHIP FORMATION PARTNERSHIP & CORPORATION ACCOUNTING
Solutions: 4. Financial Statement
Tan and Tolentino Marketing
1.Old Books – Adjustments (c/o Capital Account)
Tolentino, Capital 32,000 Statement of Financial Position
Allowance for doubtful accounts 32,000 April 8,2021
Tolentino, Capital 10,000
Assets Liabilities & Equity
Accumulated Depreciation 10,000
Accounts Payable 36,000 Cash 469,000 Accounts Payable 36,000
Tolentino, Capital 10,000 Accounts
160,000 Tolentino, Capital 310,000
Receivable
Closing Entries: Old Books Allow. for bad
(48,000) 112,000 Tan, Capital 465,000
Accounts Payable 36,000 debts
Tolentino, Capital 310,000 Inventory 200,000
Allowance for doubtful accounts 48,000 Equipment 30,000
Cash 4,000
Accounts Receivable 160,000 Total Liabilities &
Total Assets 811,000 811,000
Inventories 200,000 Equity
Equipment 30,000

2. Opening Entries – New Partnerships

Cash 4,000
Accounts Receivable 160,000
Inventories 200,000
Equipment 30,000
Accounts Payable 36,000
Tolentino, Capital 310,000
Allowance for doubtful accounts 48,000
Investment of Tolentino

Adjusted capital of Tolentino (40% agreed interest)

Total partnership capital = 310,000/.40 = 775,000

Cash 465,000
Tan, Capital 465,000