PARTNERSHIP

ACCOUNTING
Cristopherson A. Perez
Alumnus of BS in Accountancy
 STAGES OF A LIFE OF A PARTNERSHIP

• Formation
• Operations
• Dissolution
• Liquidation
 What is a Partnership?
• Contract/Agreement/Association
• Two or more persons contribute money, property, or industry to a common
fund with the intention of dividing the profits among themselves
 Features of General Partnership
• Ease of Formation
• Limited Life
• Assignment of Partner’s Interest
• Unlimited Liability
• Mutual Agency
• Separate Legal Personality (Proprietary vs Entity Theory)
• Profit/Loss sharing
 Basis of Accounting for Partnerships
• Full PFRS
• PFRS for SMEs
• Other acceptable basis of accounting
 Accounting for Partnership Affairs
• Capital Accounts
• Drawings or personal accounts
• Loan accounts
 Formation
• CAPITAL INTEREST VS. PROFIT INTEREST
• TOTAL AGREED CAPITAL VS. TOTAL CONTRIBUTED CAPITAL
• CASH INVESTMENTS VS. NON-CASH INVESTMENT
• LIABILITIES?
 Ways to form a partnership
• Individual vs Individual
• Individual vs Sole Proprietor (Sole retains books vs. New set of books)
• Sole Proprietor vs. Sole Proprietor (Sole retains books vs. New set of books)
• Partnership vs. Sole Proprietor (Partnership retains vs. New set of books)
• Partnership vs. Partnership (One partnership retains vs. New set of books)
 Bonus vs. Revaluation Method
• Bonus Method: Transfers of Capital amounts
• Revaluation Method: Also called Goodwill approach, recognize increases in
assets and capital
SOME EXAMPLES
 Operations
• Operations of partnership pertain to methods to allocate net income/net
loss
• Net income = Revenue/Sales – Operating expenses – Taxes
• Various ways to allocate net income (what Civil Code says? Capitalist vs
Industrialist vs Capitalist-Industrialist)
 Ways to allocate net income/net loss
• Equally;
• Arbitrary ratio;
• In ratio of capital balances:
• Original capital balances
• Beginning capital
• Average capital (Simple average, Weighted average: peso-day or peso-month)
• Interest on partners’ capital accounts and dividing the balance on agreed ratio;
• Salaries to partners and dividing the balance on agreed ratio;
• Bonus to partners and dividing the balance on agreed ratio;
• Interest on capital balances, salaries and bonus to partners, and dividing the balance to agreed rstio
Some examples
 Dissolution
• Change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up of the
business
• Effected through any of the following means:
• Admission
• Withdrawal/Retirement
• Death or Incapacity
• Incorporation
 Admission of a New Partner
• Admission by Purchase of Interest (no change in total contributed capital)
• Admission by Investment (changes total contributed capital)
• Reminders before admission:
• Adjust partnership books for any accounting errors in prior periods
• Recognition of profit or loss from beginning of period till admission
• Closing of partnership books
• Recognition of net asset valuations (if agreed upon or revaluation approach is used)
 Admission by Purchase of Interest
• Given that the operations of the partnership and all adjustments have been
accounted for, CP partnership has total capital of PhP 200,000, with
corresponding profit/loss ratios as described below:
PARTNERS CAPITAL BALANCES PROFIT/LOSS
PERCENTAGE
PARTNER C PhP 120,000 60%

PARTNER P 80,000 40%

TOTAL PhP 200,000 100%

• Case 1: Purchase of Interest from One Partner: Partner A paid PhP 34,000 to
Partner C for ¼ of the latter’s interest.
• Case 2 Purchase of Interest from All Partners:
• Partner A purchased 30% interest in the firm at book value.
• Partner A purchased 30% interest in the firm for PhP 66,000 (Bonus vs. Revaluation
method).
• Partner A purchased 30% interest in the firm for PhP 57,000 (Bonus vs. Revaluation
method).
 Admission by Investment
• A new partner engages himself/herself by investing something of value to
the partnership
• Two-step method also applies:
• Compare TOTAL AGREED CAPITAL to TOTAL CONTRIBUTED CAPITAL
• Compare INDIVIDUAL AGREED CAPITAL to INDIVIDUAL CONTRIBUTED
CAPITAL
 Admission by Investment
• Supposed CP partnership (sharing P/L, 3:2), after the necessary adjustments for operations,
withdrawals, and closing entries, has the following balance sheet

ASSETS LIABILITIES & CAPITAL

Cash PhP 335,000 Liabilities PhP 225,000
Non-cash assets 467,000 H, loan 10,000
C, loan 33,000 C, capital 400,000
P, capital 200,000
Total Assets PhP 835,000 Total Liab. & PhP 835,000
Capital
• Case 1: No Bonus or Revaluation. Partner A invests 300,000 for a 1/3 interest
in the firm. Total capital as agreed will be 900,000.
• Case 2: Bonus to New Partner. Partner A invests 300,000 for a 40% interest in
the firm. Total capital after admission will be 900,000.
• Case 3: Revaluation (Goodwill) to New Partner. Partner A invests 300,000 for
a 40% interest in the firm and is allowed a credit of 400,000.
• Case 4: Bonus to Old Partners. Partner A invests tangible assets with fair value of 275,000 with
mortgage of 75,000 to be assumed by the partnership in exchange for a 20% interest in capital. He
will also be given an interest in the P/L of 30%. No agreement was made to revalue the assets.
• Case 5: Revaluation (Goodwill) to Old Partners. Partner A will invest 375,000 cash to obtain a
37.5% interest in the firm, with a total agreed capital of 1 million. Included in the consideration of
determining the agreed capital is an equipment, which is understated by 8,000.
• Case 6: Bonus and Revaluation (Goodwill) to New Partner. Partner A invests 300,000 for a 45%
interest in a firm, given that the total agreed capital after admission will be 1 million.
• Case 7: Bonus and Revaluation to Old Partners. Partner A invests 300,000 to the
partnership for a 25% interest in the firm. Total agreed capital after admission will be 1 million.
• Case 8: Revaluation (Goodwill) to New and Old partners. Partner A invests 300,000 to the
partnership for a 35% interest in the firm. Total agreed capital after admission will be 1 million.
• Case 9: Bonus to Old partners with Bonus amount given. Partner A invests 150,000 in the
firm, with 50,000 considered as bonus to be given to partners.
• Case 10: Bonus to New Partner with an Indication of Bonus. Partner A invests 300,000 for
40% interest in the partnership. C and P will have some parts of their capital transferred to A.
Before admission, an equipment with a book value of 125,000 only has fair value of 75,000.
• Case 11: Revaluation (Goodwill) to Old Partners with an Indication of a Revaluation
(Goodwill). Partner A invests 150,000 for 18.75% interest in the partnership. CP partnership’s non-
cash assets are undervalued by 20,000. Revaluation is to be recorded, as agreed by the partners.
• Case 12: Revaluation (Goodwill) to New Partner with Revaluation Amount Given. Partner A
invests 200,000 in the partnership. He will be allowed a credit of 20,000 for revaluation.
• Case 13: Withdrawals Instead of Revaluation. Partner A invest 300,000 for a 37.5% interest in
the firm. Total firm capital will be 800,000. C and P will withdraw amounts in order to eventually
obtain capital balances, proportional to their new profit/loss ratio.
 Withdrawal/Retirement of a Partner
• Partnership agreement ordinarily provides guidelines to procedures on withdrawal
or retirement. Provisions of the Civil Code will also apply.
• Before accounting for a partner’s withdrawal or retirement, some considerations
shall include:
• Capital balance have been updated (withdrawals and investments)
• Recognition of errors in prior periods
• Recognition of profit/loss from beginning of period till day of withdrawal/retirement
• Loans and advances to/from the partnership
• Recognition of net asset revaluation, if agreed upon or revaluation approach is used.
Assuming CAP partnership has the following condensed
balance sheet, as of December 31, 2019:

Assets Liabilities and Capital

Cash 560,000 Liabilities 250,000

Non-cash assets 650,000 C, capital (30%) 350,000

Loan receivable-C 40,000 A, capital (50%) 450,000

P, capital (20%) 200,000

Total 1,250,000 Total 1,250,000

 Assets Liabilities and Capital

Cash 560,000 Liabilities 250,000

Non-cash assets 650,000 C, capital (30%) 350,000

Loan receivable-C 40,000 A, capital (50%) 450,000

P, capital (20%) 200,000

Total 1,250,000 Total 1,250,000

On November 1, 2019, C retired from the partnership. The

partnership’s profit for the whole year is 120,000. The partnership paid
C by cash on the retirement date.
Case 1: The partnership paid C, 340,000.
Case 2: The partnership paid C, 360,000.
• Bonus method
• Partial Goodwill
• Full Goodwill
Case 3: The partnership paid C, 310,000 (Bonus method, Partial Goodwill, Full Goodwill).
 Incorporation of a Partnership
• It can be accomplished through the following means:
• Partnership Books are retained
• New set of books is opened for the corporation
EXAMPLE FOR INCORPORATION OF
PARTNERSHIP
 Introduction to Liquidation
• Procedures normally include:
• Sharing of gains/losses
• Advance planning
• Rules on Set-off (receivables or payables from/to partners)
• Liquidation expenses
• Marshalling of assets
• Distribution of cash to creditors and partners
 Two Types of Liquidation
• Lump-sum liquidation: no distribution to partners is made unless all assets
are converted into cash and realization gains/losses have finally been
determined.
• Installment liquidation: distributions are made as cash is available. It can be
expediently accomplished through any of the following means:
• Safe-payments schedule (created every time cash is to be distributed to partners)
• Cash Priority Program (created once to cover all safe payments to partners)
 Procedures for Lump-sum liquidation
• Realization and distribution of gains/losses to partners on the basis of P/L
ratio
• Payment of liquidation expenses
• Payment of liabilities to third persons
• Elimination of capital deficiencies (right of offset then additional investment
then absorbed by other partners)
• Payment to partners (loans then capital)
 SOME EXAMPLES ON LUMP-SUM
AND INSTALLMENT LIQUIDATION
 References:
• Dayag, A. J. (2017). Advanced Financial Accounting (Vol. 1). Manila:
LajaraPublishing House.
• Suarez, C. B., & Suarez, A. B. (2019). Pointers in Business Law For CPA Reviewees
(Vol. 2). Manila: GIC Enterprises & Co., Inc.