PARTNERSHIP

Basic Consideration and Formation

“Learning is the only thing the mind never exhausts, never fears,
and never regrets.” – Leonardo da Vinci, inventor and polymath.
Partnership: Basic Consideration and Formation
Learning Objectives:

• To be able to define partnership and identify its essential

characteristics.

• To de able to identify the different classifications of partnerships and

the different kinds of partners.

• To be able to differentiate between the accounting for partnership, sole

proprietorship and corporation.

• To be able to account the initial investments of the partners

• To be able to prepare and explain the entries for partnership formation.

Image source: https://encrypted-tbn0.gstatic.com/i
Let’s review! Fill in the blanks!

In a contract of partnership, two or ____________ persons

bind themselves to contribute money, _____________, or
__________ to a common fund, with the intention of dividing
the __________ among themselves.
Two or more persons may also form a partnership for the
exercise of a profession. (Civil code of the Philippines, Article
1767)

Question to ponder:
Does a partnership has its own personality?
1. Ease of formation
2. Mutual contribution
3. Mutual agency
4. Co-ownership of property
5. Division of profits or losses
6. Limited life
7. Unlimited liability
8. Income taxes
9. Partner’s equity account
 Classification of Partnerships

a. Universal partnership of all present property

b. Universal partnership of profits
c. Particular partnership

a. General
b. Limited

a. Partnership with a fixed term

b. Partnership at will
 Classification of Partnerships

a. Commercial or trading
b. Professional

a. De jure partnership
b. De facto partnership
 Kinds of Partners
1. General partner
2. Limited partner
3. Capitalist partner
4. Industrial partner
5. Managing partner
6. Liquidating partner
7. Dormant partner
8. Silent partner
9. Secret partner
10. Nominal partner
 Accounting for Partnership
The accounting for assets and liabilities remains the same
regardless of the form of a business organization.
What changes is the accounting for equity.
The following are the major considerations in the accounting
for the equity of a partnership:
1. Formation – accounting for the initial investments to the
partnership
2. Operation – division of profits or losses
3. Dissolution – admission of a new partner and
withdrawal, retirement or death of a partner
4. Liquidation – winding up of affairs of the partnership.
 Accounting for Partnership
Partner’s Capital Account
Debit Credit
1. Permanent Withdrawals 1. Initial investment of the owner
2. Share in losses 2. Additional investments
3. Debit balance of drawing 3. Share in profits
accounts
 Accounting for Partnership
Partner’s Drawing Account
Debit Credit
1. Temporary Withdrawals 1. Share in profit( this may be directly
2. Share in losses ( this may credited to capital)
be debited directly to capital)
 Accounting for Partnership
Loan Receivable from a Partner – account used
when a loan is extended by the partnership to a
partner.

Loan Payable to a Partner – account used when

a loan is obtained by the partnership from a
partner
 Partnership Formation
Valuation of contributions of partners:
Measurement

Cash and cash equivalents Face amount of cash and cash equivalents
contributed (PAS 7)
Non cash assets At values agreed upon by the partners which
generally are the assets’ fair market values
at the time of the contribution.
Notes:
• Fair market value – is the price at which an asset or liability could be
exchanged in a current transaction between knowledgeable, unrelated
willing parties.
• The admission of an industrial partner is recorded through a memorandum
entry.
• Any obligation assumed by the partnership is credited to the specific
liability account involved.
 Partnership Formation
A partnership may be formed in any of the following ways:

1. Individuals with no existing business form a partnership.

2. Conversion of a sole proprietorship into a partnership:
a. A sole proprietor and an individual with no
existing business form a partnership.
b. Two or more sole proprietors form a partnership.
3. Admission or retirement of a partner. (To be discussed
under dissolution)
Illustrative Problem 1: Individuals with no
existing business form a partnership

Ana, Bea, Candy organized a partnership. Their agreement

consist of the following:
 Ana is to invest cash of P500,000
 Bea is to contribute equipment originally costing
P600,000 and with accumulated depreciation of
P140,000. They agreed to a fair valuation of this
equipment at P480,000.
 Candy is admitted as an industrial partner, with a 20%
share in partnership profits.
The entries to record the investment of each partner are as
follows:

Debit Credit
Cash P 500,000
Equipment 480,000
Ana, Capital P 500,000
Bea, Capital 480,000

Memorandum Entry:
Candy is admitted as an industrial partner with a 20% share in
profits.
Illustrative Problem 2 : A sole proprietor and an individual
without an existing business form a partnership

Under this type of formation, the assets and liabilities of

the proprietorship will be transferred to the newly formed
partnership at values agreed upon by all the partners or
at their current fair values.

 Ann Cruz and Bing David agreed to form a partnership.

Ann Cruz is to contribute her existing business to the
partnership while Bing David is to invest cash after
giving effect on the conditions agreed upon.
Illustrative Problem 2: A sole proprietor and an individual
without an existing business form a partnership. Cont.

Ann Cruz has the following account balances in her books:

Cash P 200,000
Accounts Receivable 120,000
Allowance for Doubtful Accounts ( 30,000)
Inventories 140,000
Furniture & Fixtures 80,000
Accumulated Depreciation ( 20,000)
Total Assets P 490,000
Accounts Payable P 120,000
Cruz, Capital 370,000
Total Liabilities and Capital P 490,000
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership Cont.

The following conditions were agreed upon by Ann Cruz and

Bing David:
1. Assets of Cruz would be taken over under the following
valuation:
Accounts Receivable P 80,000
Inventories 130,000
Furniture & Fixtures 75,000
2. Additional accrued expenses of P25,000 in the books of
Cruz are to be recognized.
3. Liabilities would be assumed by the partnership.
4. The partners would contribute or withdraw cash to make
their capital equal to P 300,000 each.
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership Cont.

The following are the accounting procedures to be taken up:

 In the books of Ann Cruz:
1. Adjust the assets and liabilities of Ann Cruz, charging or
crediting directly to her capital accounts.
2. Close all accounts at their adjusted balances.
 In the new set of books of the partnership:
1. Record the assets and liabilities received from Ann Cruz. The
furniture and fixture account is taken up at the agreed value
without transferring to the books of the partnership the
related accumulated depreciation.
2. Record the additional investment or withdrawal to bring their
respective capital investment to the agreed amount of
P300,000 each.
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership Cont.
In the books of Ann Cruz, the following adjusting and closing
entries should be made:

Debit Credit

Adjusting Entries:
Ann Cruz Capital 30,000
Accumulated Depreciation- F & F 15,000
Allowance for Doubtful Accounts 10,000
Inventories 10,000
Accrued Expenses 25,000
Illustrative Problem 2: A sole proprietor and an individuals without
an existing business form a partnership. Cont.

Accounts affected Agreed Book Adjustment

valuation Value

Accounts Receivable, net of P 80,000 P 90,000 Decrease of P10,000

Allowance for Doubtful
Accounts

Inventories 130,000 140,000 Decrease of P10,000

Furniture & Fixtures 75,000 60,000 Increase of P15,000

Accrued Expenses 25,000 -0- Increase of P25,000

Ann Cruz, Capital Net effect of

adjustment to
capital – decrease of
P30,000
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership. Cont.

Note:
 Adjustment to Accounts Receivable and Furniture & Fixtures
are made through their related valuation accounts such as
allowance for doubtful accounts and accumulated depreciation
respectively.
 Hence, to decrease the net realizable value of accounts
receivable, the allowance account is increased, hence credited.
 To increase the book value of the furniture & fixture, the related
accumulated depreciation account is debited or decreased.
 In cases where the fair value of the property or equipment
exceeds the original cost, the existing accumulated depreciation
account is debited to the extent only of its balance, with the
excess being charged directly to the asset account.
 The net effect of adjustments decreased Cruz, Capital to
P 340,000.
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership. Cont.
Debit Credit
Closing Entries:
Allowance for Doubtful Accounts 40,000
Accumulated Depreciation- F & F 5,000
Accrued Expenses 25,000
Accounts Payable 120,000
Ann Cruz Capital 340,000
Cash 200,000
Accounts Receivable 120,000
Inventories 130,000
Furniture & Fixtures 80,000
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership. Cont.

New Books of the Partnership:

Debit Credit
Cash 200,000
Accounts Receivable 120,000
Inventories 130,000
Furniture & Fixtures 75,000
Allowance for Doubtful Accounts 40,000
Accrued Expenses 25,000
Accounts Payable 120,000
Ann Cruz Capital 340,000
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership. Cont.

Debit Credit
Ann Cruz, Capital P 40,000
Cash P 40,000
Cash withdrawal of Cruz to bring
her capital to P300,000

Cash 300,000
Bing David, Capital 300,000
 Cruz and David
Statement of Financial Position
June 1, 2020
Assets
Cash P 460,000
Accounts Receivable P 120,000
Less: Allowance for Doubtful Accounts 40,000 80,000
Inventories 130,000
Furniture & Fixtures 75,000
Total Assets P 745,000
Liabilities & Owner’s Equity
Accounts Payable P120,000
Accrued Expenses 25,000
Cruz, Capital 300,000
David, Capital 300,000
Total Liabilities & Owners’ Capital P 745,000
 End of Presentation

GOD BLESS YOU!

References:
Ballada, Win (2020) Basic Financial Accounting and Reporting/ Domdane Publishers (prescribed textbook)
Manuel, Zenaida Vera Cruz, 21st Century Partnership and Corporation Accounting/ Zenaida Vera Cruz manuel