PARTNERSHIP ACCOUNTING

LECTURES FROM YT: ACCTG LESSONS W BCV

PARTNERSHIP OPERATIONS
Phases of Partnership Major Consideration RULES OF DIVIDING PROFITS AND LOSSES
FORMATION Accounting for initial PROFIT LOSS
investments to the partnership With agreement
OPERATIONS Division of profits and losses P&L ratio ✓ ✓
DISSOLUTION Admission of a new partner, Profit ratio ✓ If only the share in
retirement/withdrawal/death of a profit has been
partner, and incorporation of a agreed upon, the
partnership share in losses shall
LIQUIDATION Winding-up of affairs be the same ratio
Loss ratio Original capital ✓
PARTNERSHIP FORMATION contributions ratio
Accounting for Partnership: Without Original capital contributions ratio
- Each partner must have his or her own capital and agreement
drawings account
- Pro-forma entry for investment in the partnership: SPECIAL CASES IN DIVISION OF PROFITS AND LOSSES
Asset xx Profit Loss
A, Capital xx Interest on capital ✓ ✓
B, Capital xx Salaries to Partners ✓ ✓
Bonus to Partners ✓/✘ ✘
GUIDELINES ON THE VALUATION OF INVESTMENTS
Forms of Cash Face Value COMPUTATION OF BONUS TO PARTNERS
Investment Non- 1. Agreed value Bonus base
cash 2. Fair Value Market Value Bonus is based on Net Income Net income
Appraised Value before Interest, salaries and bonus
Sound Value Bonus is based on Net Income after Net income –
3. Carrying Value or Cost Interest, salaries and bonus Interest – salaries -
ACCTG FOR BUSINESS LIABILITIES OF A SOLE PROPRIETOR: bonus
GR: Partnership will assume the business liabilities of the sole
proprietor. XPN: Unless otherwise agreed upon by the WEIGHTED AVERAGE CAPITAL BALANCE
partnership. - Takes into consideration how long the capital balance
ACCTG FOR LIABILITIES ATTACHED TO A PROPERTY was at a specific amount during the period.
INVESTED IN THE PARTNERSHIP: (MORTGAGE PAYABLE) - Considers the following:
GR: Partnership will assume the liability. XPN: Unless otherwise  Beginning Capital
agreed upon.  Additional Investments
 Based on the concept of common fund stating that  Permanent Withdrawals
any property invested by each partner becomes the TYPES OF WITHDRAWALS
property of the partnership. Hence, the partnership Permanent (-) Capital Return OF Investment
becomes the owner of all the properties invested. Temporary (+) Drawings Withdrawals in
FINAL ACCTG FOR INITIAL CAPITAL BALANCES anticipation of
1. NET INVESTMENT Initial capital interest = Net Partnership’s profit
METHOD capital contribution
2. TRANSFER OF There will be transfer of PARTNERSHIP DISSOLUTION
CAPITAL (BONUS) capital among partners Nature of dissolution
METHOD - Termination of the life of an existing partnership
3. INVEST/WITHDRAW One of the partners' capital - A partnership is automatically dissolved whenever
METHOD contribution will become the there is a change in the ownership structure of the
basis for the total partnership
partnership.
capital and the other partner
- Only the partnership contract is dissolved, not the
will invest additional assets (or
withdraw assets) to (or from) business itself.
the partnership to conform to - Causes:
their agreement.  Admission of a new partner
Req’d > Adjusted Capital Addt’l Investment  Retirement, withdrawal, or death of a partner
Req’d < Adjusted Capital Withdrawal  Incorporation of a partnership
ADMISSION OF A PARTNER BY PURCHASE OF INTEREST
Asset = Liabilities + Equity  The new partner(s) purchases a certain percentage of
  Direct the total equity of the selling partner(s) or of the
  relationship partnership to have an ownership interest.
  Inverse  Personal transaction between the new partner and
  relationship the selling partner.
 No cash and gain/loss will be recognized in the
partnership books.
PARTNERSHIP ACCOUNTING
LECTURES FROM YT: ACCTG LESSONS W BCV
INCORPORATION OF A PARTNERSHIP
Interest purchased = Selling partners’ equity  ownership  Partnership is converted into a corporation.
purchased  Corporation acquires all the assets and assumes the
Interest purchased > cash paid by the new partner liabilities of the partnership in exchange for shares
 New Partner – Personal Gain PROCEDURES:
 Selling partner – Personal Loss 1. Revalue Assets and liabilities prior to incorporation
Interest purchased < cash paid by the new partner 2. Distribute share certificates to the partners.
 New Partner – Personal Loss  Any excess of the fair value of the net assets of
 Selling partner – Personal Gain the partnership over the aggregate par value of
ADMISSION OF A PARTNERBY INVESTMENT OF ASSETS shares issued is credited to share premium.
 The new partner invests assets to the partnership to
have an ownership interest. PARTNERSHIP LIQUIDATION
TERMINOLOGIES: STEPS IN LIQUIDATION PROCESS:
1. Old partners' capital - capital balances prior to 1. Realization of non-cash assets – converting NCA to
(OPC) admission Cash.
2. New partner's investment (NPI) 2. Payment of outside liabilities
3. Total contributed TCC = OPC + NPI 3. Settlement of partner’s interests in the partnership
capital (TCC) GOLDEN RULE: No distribution of assets may be made to
4. Total agreed capital – Total Partnership Capital partners until all outside partnership creditors have been
(TAC) - Considered Final satisfied.
5. Asset /+ Asset Reval TAC > TCC RESULTS OF REALIZATION AND LIQUIDATION PROCESS
revaluation / Asset Reval TAC < TCC
Proceeds from realization Pxx
6. New partner's capital Initial capital of the NP = Less: Carrying Value of the Noncash Asset sold xx
credit (NPCC) TAC x NP% Gain(loss) on realization Pxx
7. Bonus To New Partner/From NPCC > NPI Less: Liquidation Expense (xx)
Old Partner Gain (loss) liquidation Pxx
From New Partner/ NPCC < NPI
Bonus to Old Partner
LUMP-SUM LIQUIDATION
PRO-FORMA:
CAPITAL DEFICIT PARTNER
A B C Total
­ A partner who has a negative capital balance
Total Contributed Capital (TCC) xx xx xx Pxx
­ Can either be:
± Asset Revaluation xx xx zero Pxx
 Solvent Partner
Total Agreed Capital (TAC) xx xx xx *Pxx
Bonus to/(from) xx xx (xx) -  Personal assets > Personal Liabilities
Capital bal. upon admission xx xx **xx Pxx  Can eliminate his capital deficiency
*Considered Final though additional investments in the
**TAC x NP % partnership.
 Insolvent Partner
RETIREMENT/WITHDRAWAL/DEATH OF A PARTNER  Personal assets  Personal Liabilities
PROCEDURES:  Other partners shall absorb his capital
1. Determine the total interest of the retiring or deficiency in order to eliminate the capital
withdrawing partner. deficiency.
Capital Balance xx COMPLEX APPROACH:
Add: Loan from Partners xx ASSETS = Liabilities + EQUITY
Less: Advances to Partners xx Cash Other = Outside + A B C
Total Interest xx assets liabilities
Bal prior to
2. Account for its retirement/withdrawal
liquidation
The interest of the retiring partner or withdrawing Realization
partner may be: Payment of
a. Sold to a new liquidation
partner or outsider Personal expense
b. Sold to remaining Transaction Payment of
outside
partner(s)
liabilities
c. Sold to partnership: Updated
 Cash paid to the retiring partner > adjusted balance
total interest of the retiring partner Settlement of
 Bonus to the retiring partner/Bonus from partner’s
remaining partner interest
 Cash paid to the retiring partner < adjusted SIMPLIFIED APPROACH:
total interest of the retiring partner A B C
Balance prior to liquidation
 Bonus to the remaining partner/Bonus
Realization
from retiring partner
Payment of liquidation expenses
Updated balances
Settlement of Partner’s Interest
PARTNERSHIP ACCOUNTING
LECTURES FROM YT: ACCTG LESSONS W BCV
Jan Feb March
INSTALLMENT LIQUIDATION Cash, beg
Assumptions: Proceeds fr realization
1. All unsold noncash assets are not realizable. Liquidation expenses
2. Any capital deficient partner is insolvent. Liabilities paid
MAXIMUM POSSIBLE LOSS – highest possible loss a CWH for anticipated liquidation
partnership can incur in the future. expenses and unrecorded
Equal to the sum of: liabilities
Carrying Value of unsold Noncash assets Pxx CWH for unpaid liabilities
ADD: Cash withheld for anticipated liquidation Cash available for distribution
expenses and unrecorded liabilities xx
Maximum Possible Loss Pxx

SCHEDULE OF SAFE PAYMENTS

1. All unsold noncash assets are not realizable.
2. Any capital deficient partner is insolvent.
Cash is distributed to partners who have free interest.
 Free interest refers to a positive amount of a
partner's total interest after absorbing his or her share of the
maximum possible loss.
A B C
Total Interest xx xx xx
Less: Maximum Possible Loss (xx) (xx) (xx)
Absorption of possible loss (if any)
Cash to be distributed (free interest) xx xx xx

CASH PRIORITY PROGRAM

­ Prepared before the commencement of the
liquidation process
PROCEDURES:
1. Compute for the partner’s total interests in the
partnership.
2. Determine each partner’s loss absorption
potential/capacity
LAP/C = Total interest ÷ P&L ratio
3. The partners are ranked based on their loss absorption
loss potential/capacity (LAP/C)
 Partner with highest LAP/C
 Most invulnerable to partnership losses
 Ranked 1st in the Cash Priority Program
 Partner with lowest LAP/C
 Most vulnerable to partnership losses
 Ranked last in the Cash Priority Program
4. The highest LAP/C is reduced to the next highest and
so on until all of the partners have equal loss
absorption balance,
5. Compute the cash distribution requirement of each
partner
Cash distribution requirement = Difference x P&L ratio

SOLUTION GUIDE:
A B C
Total Interest
Divided by: P/L ratio
Loss Absorption Potential

A B C
Capital bal prior to liquidation
Add: Loan to Partnership
Less: Advances fr partnership
Total Interest