PARTNERSHIP

Definition, Nature and Formation

Definition

 Partnership 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.
 Two or more persons may also form a partnership for the exercise of
profession. (General Professional Partnership)
 The partnership has a juridical personality separate and distinct from that of
each of the partners.
Characteristics of a Partnership

 Mutual Contribution – There cannot be a partnership without the

contribution of money, property or industry to a common fund.
 Division of Profits and Losses – The essence of partnership is that each
partner must share in the profits and losses of the venture.
 Co-Ownership of Contributed Assets – All assets contributed into the
partnership are owned by the partnership by virtue of its separate and
distinct juridical personality.
 Mutual Agency – any partner can bind the other partners to a contract if he is
acting within his express or implied authority.
 Limited Life – a partnership has a limited life.
 Unlimited Liability – all partners (except limited partners), are personally
liable for all debts incurred by the partnership.
 Income Taxes – Partnerships, except GPP are taxed liked a corporation.
Advantages and Disadvantages of a
Partnership
Advantages versus Proprietorships
 Brings greater financial capability to the business
 Combines special skills, expertise and experience of the partners
 Offers relative freedom and flexibility of action in decision making
Advantages versus Corporations
 Easier and less expensive to organize
 More personal and informal
Disadvantages
 Easily dissolved and thus unstable compared to corporation
 Mutual agency and unlimited liability may create personal obligation to partners
 Less effective than corporation in raising large amounts of capital
Classification of Partnerships
 According to object
1. Universal partnership of all present property
2. Universal partnerships of profits
3. Particular Partnership
 According to liability
1. General
2. Limited
 According to duration
1. Partnership with a fixed term or for a particular undertaking
2. Partnership at will
 According to Purpose
1. Commercial or Trading Partnership
2. Professional or Non-trading Partnership
 According to legality of existence
1. De jure partnership
2. 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/Partner by Estoppel
Accounting for Partnerships

 Owner’s Equity Accounts

Partner’s Capital Account Partner’s Drawing Account

1. Permanent Withdrawals 1. Original Investment 1. Temporary Withdrawals 1. Share in profit (this

may be directly
2. Debit balance of the 2. Additional Investment 2. Share in loss (this may credited to capital)
drawing account at be directly debited to
the end of the period 3. Debit balance of the capital)
drawing account at the end
of the period

 Loans Receivable From or Payable To Partners

1. If a partner withdraws a substantial amount of money with the intention of repaying it, the debit
should be to Loans Receivable – Partner account instead of the Partner’s Drawing account
2. A partner may lend amounts to the partnership in excess of his intended investment. These advances
should be credited to the Loans Payable – Partner account and not to Partner’s Capital Account
Partnership Formation

 The books of partnership are opened with entries reflecting the net
contributions of the partners. Asset accounts are debited for assets
contributed to the partnership, liability accounts are credited for liabilities
assumed by the partnership and separate capital account are credited for the
amount of each partner’s net investment.
 Pro-forma Journal entry:
Asset Accounts xxx
Liability Accounts xxx
Partner’s Capital xxx
Partnership Formation

 Partner’s may invest cash or non-cash assets in the partnership. When a

partner invests non-cash assets, they are to be recorded at:
1. Values agreed upon by the partners
2. Fair Market Value at the date of transfer to the partnership
 In cases when the prospective partners have existing businesses, their
respective books will have to be adjusted to reflect the FMV of their assets or
to correct misstatements in the accounts.
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 to a partnership
a. A sole proprietor and an individual without an existing business form a
partnership
b. Two or more sole proprietors form a partnership
3. Admission or retirement of a partner ( to be discussed later)
Individuals with no Existing Business
Form a Partnership
 Illustration. On July 1, 2020, A and B agreed to form a partnership. The partnership
agreement specified that A is to invest cash of P350,000 and B is to contribute land
with a fair market value of P650,000 with a P150,000 mortgage to be assumed by
the partnership.
 The entries are as follows:
Cash 350,000
Land 650,000
Mortgage Payable 150,000
A, Capital 350,000
B, Capital 500,000
To record the initial investments of A and B.
A Sole Proprietor and Another Individual
Form a Partnership
Illustration. The statement of financial position of A on Oct. 1, 2020 before
accepting B as a partner is shown below:
B offered to invest cash to give her a capital credit equal to one-half of A’s
capital after giving effect to the adjustments below. A accepted the offer.
1. The merchandise is to be valued at P74,000.
2. The accounts receivable is estimated to be 95% collectible.
3. Interest accrued on the notes receivable will be recognized: P10,000, 12% dated
July 1, 2020 and P20,000, 12% dated August 1, 2020.
4. Interest on notes payable to be accrued at 14% annually from Apr. 1, 2020.
5. The furniture and fixtures are to be valued at P46,000.
6. Office supplies on hand that have been charged to expense in the past amounted to
P4,000. These will be used by the partnership.
Computations:
Merchandise Inventory, per ledger P80,000
Merchandise Inventory, as agreed 74,000
Decrease in Merchandise Inventory P6,000
Accounts Receivable, net per ledger P230,000
Accounts Receivable, as agreed (P240,000 x 0.95) 228,000
Increase in Allowance P2,000
Interest Accrued on Notes Receivable
On P10,000: (P10,000 x 0.12 x 3/12) P300
On P20,000: (P20,000 x 0.12 x 2/12) P400
Total P700
Interest Accrued on Notes Payable
On P40,000: (P40,000 x 0.14 x 6/12) P2,800
Furniture and Fixtures, net per ledger P54,000
Furniture and Fixtures, net as agreed 46,000
Increase in Accumulated Depreciation P8,000

Net effect of adjustments in Capital:

Decrease in Inventory P (6,000)
Increase in Allowance for Uncollectibles (2,000)
Increase in Interest Receivable 700
Increase in Interest Payable (2,800)
Increase in Accumulated Depreciation (8,000)
Increase in Office Supplies 4,000
Decrease in Capital 14,100

A, Capital before adjustment P314,000

Net Adjustments to Capital (14,100)
A, Capital after adjustment 299,900
Cash Investment of B (299,900 x 0.5) 149,950
Entries on A’s Book

A, Capital 14,100
Office Supplies 4,000
Interest Receivable 700
Merchandise Inventory 6,000
Allowance for Uncollectible Accounts 2,000
Interest Payable 2,800
Accumulated Depreciation 8,000
To record adjustments to restate A’s Capital
Entries on A’s Book
Notes Payable 40,000
Accounts Payable 100,000
Interest Payable 2,800
Allowance for Uncollectible Accts. 12,000
Accumulated Depreciation 14,000
A, Capital 299,900
Cash 60,000
Notes Receivable 30,000
Accounts Receivable 240,000
Interest Receivable 700
Merchandise Inventory 74,000
Office Supplies 4,000
Furniture and Fixtures 60,000
To close the books of A.
Entries on Partnership’s Book
Cash 60,000
Notes Receivable 30,000
Accounts Receivable 240,000
Interest Receivable 700
Merchandise Inventory 74,000
Office Supplies 4,000
Furniture and Fixtures 46,000
Notes Payable 40,000
Accounts Payable 100,000
Interest Payable 2,800
Allowance for Uncollectible Accts. 12,000
A, Capital 299,900
To record the investment of A.
Entries on Partnership’s Book

Cash 149,950
B, Capital 149,950
To record the investment of B.