Accounting for Partnership

“ART. 1767. 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 the profits among themselves.”
Characteristics:
1. Ease of formation - less formality
2. Separate legal entity - has a juridical personality
3. Mutual agency - partners are agents of partnership
4. Co-ownership of property
5. Limited life - easily dissolve (express, termination of term, specific thing is not
contributed, death, insolvency, or civil interdiction of partner)
6. Transfer of ownership - requires approval of the remaining partners
7. Unlimited liability

● Partnership Formation

Contributed Valuation/Initial
Measurement

Cash Face value (PAS 7)

Inventories Lower of Cost and Net

Realizable Value (PAS
2)

Land, PPE, Other

NonCurrent Assets

Agreed Value

Fair Value

Appraised Value

Carrying/Book Value

Capital Bonus Method (If the There would be transfer of capital

problem is silent)

There is no recognition of goodwill

Total assets and capital remains

unchanged

Investment/Withdrawal Agreed Capital is greater than

Unadjusted Capital = Investment

Agreed Capital is less than to

Unadjusted Capital = Withdrawal
Note: The capital to be credited to each partner upon formation may not be the
amount actually contributed by each partner.
 ● Partnership Operations

Scenario Treatment

Both P&L agreement are given Follow the Agreement

There is profit agreement but none as to Follow also the agreement for both profit and
loss loss

There is loss agreement but none as to For profit, use original capital contribution
profit

For loss, follow the agreement

No P&L agreement Use the original capital contribution

Profit or loss is allocated as follows:

1. Salaries
2. Interests
3. Bonus
4. Balance/remaining amount - based on P/L ratio
*Salaries, interest, and bonus - allocated only if there is profit

Salaries, Interests and Bonus

Net Income before salaries, Interest and Bonus (if the problem is silent)
Net Income before salaries, interests but after bonus
Net Income after salaries, interests but before bonus
Net Income after salaries, interets, and bonus

● Salaries and interests are provided regardless of results of operations

● Salaries and interests are not treated as expense
● Salaries and interests may not be provided in full amount if the problem says that
the amount to be distributed is up to the extent of the income or based on the
order of priority.

Bonus should only be given if there is profit and the basis depends on partners
agreement.

Formulae:

Net Income before salaries, Interest and Bonus (if the problem is silent)
B= Net Income x Bonus Rate

Net Income before salaries, interests but after bonus

B= (Net Income x Bonus Rate) / (1 + Bonus Rate)

Net Income after salaries, interests but before bonus

B= (Net Income - Salaries - Interests) x Bonus Rate
Net Income after salaries, interets, and bonus
B= ( Net Income - Salaries - Interest) x Bonus Rate / (1 + Bonus Rate)

Absence of agreement as to distribution of profit

The industrial partner shall first receive his share and the remaining shall be distributed
to the capitalist partners.

Absence of agreement as to distribution of loss

The industrial partner shall be exempted from the partnership loss and will be distributed
to the capitalist partners only in accordance with the profit agreement ratio.

● Partnership Dissolution

A. Admission

Purchase of Interest WIth revaluation of assets

● Any considerations paid by the - Adjustments first to the capital of old
partners is not recorded in the partners (P/L ratio).
partnership books Total Agreed Capital greater than Total capital
● Only transfer within the equity contribution = Undervalued
● No Gain/Loss recognized
Without revaluation of assets
TAC=TCC

Investment = Capital credit

Dr. Asset
Cr. Capital - New partner
Investment
Investment greater than Capital credit
● Consideration paid is
Dr. Asset
recorded
Cr. Capital- Old partners
●
Cr. Capital- New partner
● Increases the total partnership
capital Investment less than Capital credit
● No gain/Loss recognized ● Bonus to new partner
Dr. Asset
Dr. Capital - Old partners
Cr. Capital - New partner

B. Withdrawal, retirement or death of a partner

Compare Capital vs. Settlement Price
Consider/adjust first for the ff.
● Capital
● Income/Loss
● Drawings
● Revaluation
● Loan to/from of withdrawal partner
● Condonation
 ● Additional investment
If the capital is greater than settlement price, bonus to remaining partners
If the capital is less than settlement, bonus to retired partner.

Accounting for Corporate Liquidation

● Liquidation is the termination of business operations or the winding up of affairs.
● Measurement basis - realizable values (estimated selling price less cost of
disposal)
Financial reports
1. Statement of Affairs - shows SFP - assets available for sale, claims of creditors,
and claims of the owners.
2. Statement of Realization and liquidation (T-account)- shows the progress of
liquidation process

Debit Credit

Assets to be realized (beg. BV) Assets realized (Actual net proceed na

binentang assets)

Assets acquired (additional assets such Assets not realized (unsold assets at BV;
as interest receivable, sale on account) NCA, end)

Liabilities liquidated (net settlement, mga Liabilities to be liquidated (Liab, beg. BV)
na sattle na)

Liabilities not liquidated (Total liabilities, Liabilities assumed (additional liabilities

end) accrued expenses, purchases on
account)

Supplementary expense (COS, accrued Supplementary income (sales, accrued

expenses) income)
****If Debit is less than Credit, Income