Accounting for

partnerships

PARTNERSHIP FORM OF
ENTITY

A partnership is defined as
Is a contract whereby 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
2

Characteristics of
partnerships

Characteristics of
partnerships

1. Association of individuals
Voluntary association
May be based on handshake or
written agreement
Partnership not a legal entity, so is
not taxed
Individual partners pay tax on their
share of profit
4

Characteristics of
partnerships
continued

2. Mutual agency
Each partner acts on behalf of the partnership
when engaging in partnership business
Act of any partner is binding on all other
partners

3. Limited life
May be ended voluntarily at any time through
the acceptance of a new partner or withdrawal
of a partner
May be ended by involuntarily by death of
incapacity of a partner
5

Characteristics of
partnerships
continued

4. Unlimited liability
Each partner is personally and individually
liable for all partnership liabilities

5. Co-ownership of property
Partnership assets are owned jointly by the
partners
If partnership is dissolved, assets do not
legally revert to original contributor
Partners have a claim on total assets equal to
the balance in individual capital account
Partnership profit or loss is co-owned
6

Advantages and
disadvantages of partnerships

Advantages
Combining skills and resources
of 2 or more individuals
Ease of formation
Not subject to as much
government regulation as
companies
Ease of decision making
No taxation on partnership
profits

Disadvantages
Mutual agency
Limited life
Unlimited
liability
Partners must
be able to work
together

Kinds of partner
As to contribution
Capitalist partner contributes money or
property
Industrial partner contributes skills,
knowledge, industry or service
Capitalist-industrial partner contributes
money or property and industry

As to liability
General partners have unlimited liability
Limited partners have limited liability
8

Kinds of partnership
General Partnership
Partners are all general partner

Limited Partnership
Composed of one or more general
partner and one or more limited
partner

Articles of Partnership
A written contract made by the partners
specifying such details as

Names and contributions of the partners

Rights and duties of partners
Basis for sharing net income or loss
Provision for withdrawals of assets
Procedures for settling disputes
Procedures for withdrawal or addition of a partner
Rights and duties of surviving partners in the
event of a partners death
10

Review question 1

A.
B.
C.
D.

Which of the following is not a

characteristic of a partnership?
Taxable entity
Co-ownership of property
Mutual agency
Limited life

11

Review question 2

A.
B.
C.
D.

Statement 1: A lawyer and doctor may

formed a partnership as business partners to
practice their profession.
Statement 2: A limited partner must pay first
his personal creditors before paying the
partnership creditors.
Only 1st is true
Only 2nd is true
Both true
Both false
12

BASIC PARTNERSHIP
ACCOUNTING
Major accounting issues in relation to
partnerships are
Forming a partnership
Dividing profit or loss
Preparing financial statements
Dissolution of partnership
Liquidation of partnership

13

Forming a partnership
Initial investment
Rules to be observed:

The amount of contribution shall be based on

the partners agreement. In the absence of
any agreement, it shall be contributed equally.
Sample problem1:

A and B form a partnership with the total agreed

capitalization of P150, 000 to be contributed in cash
of 40% and 60% by A and B, respectively, through
the issuance of their personal checks. The amount
contributed and capital credited to be recorded per
agreement would be:
14

Forming a partnership cont.

Sample problem2
A and B form a partnership with the
total agreed capitalization of P150, 000
to be contributed in cash through the
issuance of their personal checks. The
amount contributed and capital credited
to be recorded per agreement would be

15

Forming a partnership cont.

Valuation of partners contribution
If cash contribution based on face value
If non cash based on agreed value, in the
absence of agreed value it shall be based on fair
value.
*Fair value or fair market value represents the estimated
amount in which the seller and buyer would be willing to
exchange value in an open market.

Once partnership has been formed

Accounting is similar to accounting for transactions of any
other type of business organisation

16

Forming a partnership

continued

Example 1
Carrying amount and fair value of assets
invested
Carrying amt
Fair value
A.Gibson T.Jones A.Gibson T.Jones
Cash
P 8 000 P 9 000
P 8 000 P 9 000
Office equipment
5 000
4 000
Accum. depreciation
(2 000)
Accounts receivable
4 000
4 000
Allow. for doubtful debts
(700)
(1 000)
P11 000 P12 300 P12 000 P12 000

17

Forming a partnership

continued

Journal entries to record investments

Cash
Office Equipment
A. Gibson, Capital
(To record investment of Gibson)

8 000
4 000

Cash
Accounts Receivable
Allowance for Doubtful Debts
T. Jones, Capital
(To record investment of Jones)

9 000
4 000

12 000

1 000
12 000

18

Forming a partnership

continued

Example 2
C, D and E formed a partnership with agreed total
capitalization of P30, 000 which should be contributed
equally by C and D. Meanwhile, E was designated to
manage the operation of the partnership as industrial
partner with a share of 20% from partnership profits. C
and D contribute the following assets:

19

Review question 3

A.
B.
C.
D.

In accounting for the formation of a

partnership, each partners initial
investment is recorded at
the carrying amount of assets invested
the fair value of assets invested
the historical cost of assets invested
the book value of assets invested

20

Dividing profit or loss

Art. 1799 of the New Civil Code provides
that any stipulation that excludes one or
more partners from any share in the
profits or losses is null and void.
Art. 1797 provides the following guidelines
on how partnership profits and losses shall
be distributed among the partners:

21

Dividing profit or loss

As to Capitalist Partner
1. Division of profits
a. In accordance with agreement
b. In the absence of an agreement, in
accordance
with capital contributions.
2. Division of losses
a. In accordance with agreement
b. If only the division of profits is agreed
upon, the
division of losses will be the same as the agreement on
the division of profit
c. In the absence of agreement, based on capital contribution

Dividing profit or loss

II. As to Industrial Partner
1. Division of profits
a. In accordance with agreement
b. In the absence of an agreement,
industrial partner shall
receive a just and
equitable share of the profits.
2. Division of losses
a. In accordance with agreement
b. In the absence of agreement, industrial
partner shall
have no share in the losses

Dividing profit or loss

continued

Closing entries:
1. DR each revenue account for its balance and CR
Profit and Loss Summary for total revenue
2. DR Profit and Loss Summary for total expenses
and CR each expense account for its balance
3. DR (CR) Profit and Loss Summary for its balance
and CR (DR) each partners capital account for
their share of profit (loss)
4. DR each partners capital account for the balance
in that partner's drawing account and CR each
partners drawing account for the same amount
24

Dividing profit or loss

continued

Example
Partnership profit for year is P32 000
Partners share profit and loss equally

Profit and Loss Summary

L. Cooke, Capital (P32 000 x 50%)
D. Kam, Capital (P32 000 x 50%)
(To transfer profit to partners
current accounts)

32 000

L. Cooke, Capital
8 000
D. Kam, Capital
L. Cooke, Drawings
D. Kam, Drawings
(To close drawings
accounts to current
PowerPoint presentation by Dr
accounts) Anne Abraham, University of
Western Sydney

16 000
16 000

6 000
8 000
6 000
25

Dividing profit or loss

continued

Example2:
Assume that Adam and Eve formed a partnership
with original capital contributions of P60,000 and
P30,000 respectively. The profit agreement is
60% and 40% respectively. During the year, the
partnership generated an income of P100,000.
a)Give the closing entry for the above problem.
b)Assuming instead of profit, it was P100,000 loss.
c)Assuming no agreement was made, give the
closing entry under assumption (a) and (b)
26

Dividing profit or loss

continued

Profit-and-loss ratios
Typical profit-and loss ratios include:
1 A specified ratio
expressed as a proportion (6:4), a percentage
(70% and 30%), or a fraction (2/3 and 1/3)

2 A ratio based on either:

capital balances at beginning of year or
ending capital balances

27

Dividing profit or loss

continued

3 Interest on partners capital balances

and the remainder on a agreed ratio
4 Salaries or Bonus allowed for
partners services, the remainder to
be divided in an agreed ratio
5 Multiple base of allocation
Salaries to partners, interest on partners
capitals, and the remainder on a fixed ratio)
28

Dividing profit or loss

continued

Sample Problem :
Assume that Adam and Eve formed a partnership
with original capital contributions of P60,000
and P30,000 respectively. General ledger for
their capital accounts before closing entries are
shown below:

29

Dividing profit or loss

continued

During the year Net Income of P100,000 was earned by the partnership.
They agreed that profit will be divided:

1.60% to Adam and 40% to Eve

2.Based on capital ratio: (a.) Beginning capital (b.) Ending capital
3.10% Interest on beginning capital and the balance will be
distributed equally
4.Salary to Eve for P10,000 and the balance distributed 60% for
Adam and 40% to Eve.
5.10% interest on ending capital, salary to Eve for 10,000, 10%
bonus based on Net Income before salaries and interest for
Adam. The balance will be divided equally.
6.10% interest on ending capital, salary to Eve for 10,000, 10%
bonus based on Net Income after salaries and interest for Adam.
The balance will be divided equally
30

Dividing profit or loss

continued

31

Dividing profit or loss

continued

Insufficient Income
Sample Problem:
M. Kings and S. Lee agree on
Salary allowances of P8400 to Kings and P6000 to
Lee
Interest allowances of 10% on beginning capital
balances
10% Bonus to S. Lee
Remainder shared equally

Beginning capital balances

Kings P28 000 and Lee P24 000
Profit for the year is P5,000
32

Dividing profit or loss

continued

Division of profit
Net Profit to be distributed
Salary allowance
Interest allowance
Kings (P28 000 x 10%)
Lee (P24 000 x 10%)
Balance: (50:50)
Kings (P14,600 x 50%)
Lee (P14,600 x 50%)

Total division of profit

Kings

Running bal.
P 5,000
P 8,400 P 6,000 (9,400)
2,800
(7,300)

Lee

2,400

(12,200)
(14,600)

(7,300)

(7,300)
0

P 3,900 P 1,100

33

Dividing profit or loss

continued

Entry to record division of profit

Profit and Loss Summary
M. Kings, Capital
S. Lee, Capital
(To close profit to partners capital
accounts)

5 000

3 900
1 100

34

Review question 4

A.
B.
C.
D.

NBC reports net income of P60 000. If

partners N, B, and C have an income ratio
of 50%, 30%, and 20%, respectively, Cs
share of net income is
P30 000
P12 000
P18 000
P20 000

35

Review question 5

A.
B.
C.
D.

XYZ reports net loss of P60 000. X initial

contributions amounting to P50,000, Y
contributes P30,000 and Z contributes his time
and service in the business. There is no
agreement on how profit and loss will be
distributed. How much is the share in the loss
of each partner?
P37,500, 22,500, 0
P20,000, 20,000, 20,000
P30,000, 30,000, 0
P27,272, 16,364, 16,364
36

Partnership financial
statements
Income statement
Identical to proprietorship except for division of
profit

Statement of financial position

Identical to proprietorship except for owners
equity section

Partnership statement of changes in equity

Used to explain the changes in each partners
capital account and in total partnership equity
during the year

37

Partnership financial
statements
KINGSLEE
Statement of Changes in Partners Equity
For the year ended 31 December 2013
Max Kings Steven Lee Total
.
Capital, 1 January P 28,000 P 24,000 P 52,000
Add: Share on Profit
12,400
9,600
22,000
Total
40,400
33,600
74,000
Less: Drawings
7,000
5,000
12,000
Capital, 31 December P 33,400
p 28,600
P 62,000
38

Partnership financial
statements
KINGSLEE
Statement of Financial Position (partial)
As at 31 December 2013
Total Liabilities(assumed amount)
P 115,000
Owners Equity
Max Kings, Capital
P 33,400
Steven Lee, Capital
28,600
Total Owners Equity
62,000
TOTAL LIABILITIES AND OWNERS EQUITY
P
177,000
39

Review question 5

A.
B.
C.
D.

Which of the following statements about the

partnership financial statements is not true?
The capital balances of each partner are shown
on the statement of financial position
Changes in each partners capital account is
shown on statement of changes in equity
Each partners drawings is shown on the
statement of financial position
Distribution of profit is shown in income
statement

40

Partnership dissolution

The dissolution of a partnership is

the change in the relation of the
partners caused by any partner
ceasing to be associated in the
carrying on of the business.
The change of partners in the
partnership ends their original
agreement, thus terminating the
partnership.
41

ADMISSION OF A PARTNER
The admission of a new partner results in
legal dissolution of the existing partnership
and the beginning of a new one
To recognise economic effects it is
necessary only to open a capital account
for each new partner
A new partner may be admitted either by:
Purchasing the interest of an existing partner or
Investing assets in a partnership

42

ADMISSION OF A PARTNER
continued

PowerPoint presentation by Dr
Anne Abraham, University of
Western Sydney

43

Purchase of a partners
interest
The admission of a partner by purchase of an
interest in the firm is a personal transaction
between one or more existing partners and the
new partner
Price paid is negotiated and determined by the
individuals involved
The price may be equal to or different from the
capital equity acquired
Any money or other consideration exchanged is
the personal property of the participants and
not the property of the partnership
44

Purchase of a partners
interest
continued

Example
Cox agrees to pay P10 000 cash to
Adler and Barker each for 1/3 of
their interest in the Adler-Barker
partnership
At the time of admission of Cox,
each partner has a P30 000 capital
balance
45

Purchase of a partners
interest
continued

Entry to record admission of Cox

Each partner will give up P10 000
(1/3 x P30 000)
C. Adler, Capital
10 000
D. Barker, Capital
10 000
L. Cox, Capital
20 000
(To record admission of Cox by purchase)

46

Purchase of a partners
interest
continued
Ledger balances after purchase of partners
interest
C. Adler, Capital
10 000
30 000
Bal. 20 000

D. Barker, Capital
10 000
30 000
Bal. 20 000

L. Cox, Capital
20 000

Total partnership capital before and after

admission of Cox is P60,000
47

Purchase of a partners
interest
continued

Sample Problem2:
The capital balances and agreed profit and loss
distribution of Eric and Vincent partnership
prior to dissolution are as follows:
Partners
Capital Balances
P&L Ratio
Vincent
250,000
25%
Eric
750,000
75%
Lally wants to buy 50% of the interest of Eric to
give her interest of 37.5% in the partnerships
asset and in the partnerships profit and loss.
48

Purchase of a partners
interest
continued

Sample Problem2 contd...

Case 1: Purchase at Book Value: Assume that Lally
paid P375,000 directly to Eric.
Case 2: Purchase Lesser than Book Value: Assume
that Lally paid P350,000 directly to Eric.
Case 3: Purchase More than Book Value: Assume that
Lally paid P400,000 directly to Eric.
What is the journal entry for the admission and what is
the new profit and loss ratio of new partnership?
49

Purchase of a partners
interest
continued

Entry to record admission of Lally under case1,2 and 3

Eric will give up 50% of his share
(50% x 750,000)

Eric, Capital
375 000
Lally, Capital
375 000
Note:
(To record admission of Lally by purchase)

1.Gain or loss in the purchase of interest transaction is a

personal gain or loss of the partner/s involved.
2.Total capital before and after admission of Lally is P1,000,000
3.New P&L ratio after admission of Lally: Vincent-25%, Eric37.5%, Lally-37.5%

50

Purchase of a partners
interest
continued

Sample Problem3:
The capital balances and agreed profit and loss
distribution of Pat and Sponge partnership
prior to dissolution are as follows:
Partners
Capital Balances
P&L Ratio
Pat 150,000
30%
Sponge
350,000
70%
Mr. Crab wants to buy 20% of the interest in the
partnerships asset and profit by paying
directly to each of the existing partners.
51

Purchase of a partners
interest
continued

Sample Problem3 contd...

Case 1: Purchase at Book Value: Assume that Mr. Crab
paid P100,000 directly to the partners.
Case 2: Purchase Lesser than Book Value: Assume
that Mr. Crab paid P60,000 directly to the partners.
Case 3: Purchase More than Book Value: Assume that
Mr. Crab paid P150,000 directly to the partners.
What is the journal entry for the admission and what is the
new profit and loss ratio of new partnership?
52

Investment of assets in a
partnership
When a partner is admitted by investment,
both the total assets and the total
partnership capital change
When the new partners investment differs
from the capital equity acquired, the
difference is considered a bonus either to:
1. The existing (old) partners or
2. The new partner

53

Investment of assets in a
partnership continued
Example
Cox invests P30 000 cash in the Adler-Barker
partnership for a 1/3 capital balance
Journal entry to record admission
Cash
30 000
L. Cox, Capital
30 000
(To record admission of Cox by investment)

54

Investment of assets in a
partnership continued
Ledger balances after investment of assets
C. Adler, Capital
30 000

D. Barker, Capital
30 000

L. Cox, Capital
30 000

Total Partnership s Capital

60 000
30 000
Bal. 90 000

55

Investment of assets in a
partnership continued
Bonus to old partners
Results when new partners investment in
the firm is greater than the capital credit on
the date of admittance
Sample Problem 1:
Boyd and Chan with total capital of P120 000
agree to admit Dante to the partnership
Dante acquires a 25% ownership interest by
making a cash investment of P80 000
Current profit sharing ratio is Boyd 60% and
Chan 40%
56

Investment of assets in a
partnership continued
Steps in determining bonus
1 Determine the total contributed capital of the
new partnership
New partners investment + capital of the old
partnership
P120 000 + P80 000 = P200 000

2 Determine the new partners agreed capital

Multiply the total capital of the new partnership by
the new partners ownership interest
P200 000 x 25% = P50 000

57

Investment of assets in a
partnership continued
3 Determine the amount of bonus
Subtract the new partners capital credit from the
new partners investment
P80 000 - P50 000 = P30 000

4 Allocate the bonus to the old partners on the

basis of their original income ratios
Boyd: P30 000 x 60% = P18 000
Chan: P30 000 x 40% = P12 000

58

Investment of assets in a
partnership continued
Entry to record admission of Dante
Cash
80 000
S. Boyd, Capital
18 000
T. Chan, Capital
12 000
L. Dante, Capital
50 000
(To record admission of Dante and bonus
to old partners)

59

Investment of assets in a
partnership continued
Bonus to new partner
Results when the new partners
investment is less than his or her capital
credit in the firm
Capital balances of the old partners are
decreased based on their income ratios
before the admission of the new partner

60

Investment of assets in a
partnership continued
Bonus to new partner
Sample Problem2:
Boyd and Chan with total capital of P120 000
agree to admit Dante to the partnership
Dante acquires a 25% ownership interest by
investing cash of P20 000
Current profit sharing ratio is Boyd 60% and
Chan 40%

61

Investment of assets in a
partnership continued
Entry to record admission of Dante
Cash
20 000
S. Boyd, Capital
9 000
T. Chan, Capital
6 000
L. Dante, Capital
35 000
(To record admission of Dante and bonus)

62

Investment of assets in a
partnership continued
Sample Problem 3:
The capital balances and agreed profit and loss
distribution ratio of the partners before admitting Judy
are as follows:

Job
Capital
Balance
s

120,00
0

John

Jun

Total

240,00 240,00 600,00

0
0
0

Profit &
Loss
Judy
admitted by
investing40%
cash of 40%
P200,000
for 30%
Ratio
20%
100%
interest in the partnership assets and profits

63

Investment of assets in a
partnership continued
Sample Problem 3 contd
Required:
1.) Journalized admission of new partner Judy
2.) What is the new profit and loss sharing of
the partners?
3.) Assume that Judy admitted by investing
cash of P200,000 for 20% interest in the
partnership.

64

Review question 6

A.
B.
C.
D.

Yen purchases 50% of Bahts capital

interest in the Euro-Baht Partnership for
P12 000. If the capital balance of Euro
and Baht are P20 000 and P36 000
respectively, Yens capital balance
following the purchase is
P12 000
P28 000
P10 000
P18 000
65

LIQUIDATION OF A
PARTNERSHIP
The liquidation of a partnership terminates
the business
In a liquidation, it is necessary to:
1 Sell noncash assets for cash and recognise a
gain or loss on realisation
2 Allocate gain/loss on realisation to the partners
based on their profit-and-loss ratios
3 Pay partnership liabilities in cash
4 Distribute remaining cash to partners on the
basis of their capital balances

66

LIQUIDATION OF A
PARTNERSHIP continued
Creditors must be paid before partners
receive any cash distributions
Each step must be recorded by an
accounting entry
No capital deficiency means that all
partners have credit balances in their
capital accounts
Capital deficiency means at least one
partners account has a debit balance
67