PARTNERSHIP FORMATION

• INTRODUCTION TO PARTNERSHIP BUSINESS

• ACCOUNTING FOR PARTNESHIP FORMATION
• LEDGER ACCOUNTS FOR PARTNER’S EQUITY
• BONUS METOD FOR INITIAL INVESTMENTS
 DEFINITION OF PARTNERSHIP
• By the contract of partnership, two or more persons bind themselves
to contribute money, property, or industry to a common fund with
the intention of dividing the profit among themselves. Two or more
persons may also form a partnership for the exercise of a profession.
• Has a juridical personality, separate and distinct from that of each
partner.
• A joint undertaking to share in profit and loss.
• An association of two or more persons to carry on as co-owners of a
business for profit.
MAJOR CHARACTERISTICS OF A PARTNERSHIP
 Based on contract – relation of partners arises from contract and not from
statute, operation of law or inheritance. Agreement can be in oral or writing –
binds all the partners. Except when partners contributed immovable
property/real rights and partnership capital exceeds 3,000.
 Voluntary Association of Individuals – formed based on the “trust and
confidence” of the individuals to each other. All partners are liable solidarily
with partnership for everything chargeable to the partnership.
 Ease of formation – partnership is perfected by the mere consent of the
parties.
 Co-ownership of partnership property – a partner has an equal right with his
partners to possess specific partnership property for partnership purposes;
but he has no right to possess such party for any other purposes without the
consent of his partners.
 Assignment of partner’s interest – a partner can assign his interest to
an assignee.
 Mutual Agency – every partner is an agent of the partnership for the
purposes of its business, unless the partner so acting has no authority.
 Income participation – all partners have the right to share in the
income of the partnership. Any stipulation of partnership contract
excluding one partner is null and void.
 Unlimited liability – a partnership is not considered a separate entity
from the partners when it involves debts to third party creditor
 General Partner
 Industrial Partner
 Limited Partner

 Limited Life – Automatically dissolve when there is a change in the

relationship between or among the partners as this this condition
terminates partnership contract
ENTITY CONCEPT VS AGGREGATE CONCEPT
 Assumes partnership business is a
legal entity, separate and distinct
from the individual partners
compose the ownership group.
 Perceived as being nothing more
than a collection of the rights and
responsibilities of the individual
partners.
Requisites of a Partnership
 A voluntary and valid agreement among the parties;
 A lawful purpose for which the partnership is organized;
 Contribution of money, property or industry;
 An association for a profit to be divided among the partners;
 Mutual agency among the partners;
 A practice of transparency on the records and transactions of the partnership.
Kinds of Partnerships
1. As to nature of business
 Trading Partnership
 Non Trading Partnership

2. As to purpose
 Commercial Partnership
 General Professional Partnership

3. As to object
 Universal Partnership
* Of all present property
* Of profits
 Particular Partnership

4. As to liability
 General Partnership
 Limited Partnership

5. As to duration
 Partnership at will
 Partnership with a fixed term

6. As to legality of existence
 De Jure Partnership
 De Facto Partnership
Kinds of Partners
1. As to Contribution
 Capitalist Partner
 Industrial Partner
 Capitalist – Industrial Partner

2. As to Liability
 General Partner
 Limited Partner

3. As to Participation
 Managing Partner
 Silent Partner
 Liquidating Partner

4. As to Third person
 Secret Partner
 Dormant Partner
 Nominal partner or Ostensible
partner
Advantage and Disadvantages of
Partnership
Advantages Disadvantages
 Easy formation  Unlimited Liability
 Joint resources  Mutual agency
 Tax Exemption  Consensual
 Less Government Supervision  Limited life
 C
Sole Proprietorship Partnership
Formation
Very Easy because only one decides Easy because a mere oral agreement O
Capital and Withdrawal Accounts
Only one Several M
Capitalization
P
Limited Depends on the agreed investment
Agency A
Simple
Owner’s Legal Liability
Mutual
R
Unlimited to the sole proprietor Unlimited to the general partner I
Taxation

Owner is taxed Depends on the kind of partnership

S
Life Expectancy O
Limited within the desire or death Limited within the desire of partners or by
the death of any N
 C
Partnership Co-Ownership
O
Purpose of Creation
Primarily for profit Primarily preservation of property
M
Personality P
Separate and distinct from partners No personality
A
Disposition of Interest

Requires consent from all of the partners Not consensual

R
Succession I
Right of partner is non transferrable Transferrable to heirs S
Profits

Created primarily for profit which will be Formed to recognize one’s ownership
O
divided among the partners rights over a particular property
N
 Partnership Corporation
Formation
C
By voluntary agreement and mutual
consent
By operation of law O
Power of Succession M
No power of succession It has the power of succession
Ability to bind the organization P
Due to Mutual Agency Stockholders cannot bind the corporation
only the Board of Directors
A
Owner’s Legal Liability R
Legally liable for all business debts to the Stockholders are liable only to the extent
extent of their personal asset (except
limited partners)
of their subscription I
Length of Existence S
Limited within the desire of the partners
or until death, acceptance, withdrawal,
A corporation shall exist for a period not
exceeding 50 years, extendable O
bankruptcy of any of the partners
N
Partnership Accounts Permanent
1. Partners’ Capital and Drawing accounts Account

XXX, Capital
Dr Cr Partner’s Deficit –
Permanent withdrawal Original Investment withdrawals and share in
Closing of the net debit balance of Additional Investment losses exceeds share in
Drawing account income capital
contribution
Share in the net loss from operation Share in the net income from
operation

XXX, Drawing
Dr Cr
Temporary withdrawal Periodic partner’s Salary
Personal debts paid or assumed by Partnership debts assumed or paid by
the partnership the partner
Funds/Claims of partnership Personal fund/claims of partners
collected and retained by the partner collected and retained by the
partnership
Share in partnership losses Share in partnership profit
2. Loans Receivable from Partners
- “loans to partner” or “due from Partner”
- Represent substantial the amount borrowed by a partner from the
partnership
- Creditor-debtor Relationship (Debtor – Partner, Creditor – Partnership)

3. Loans Payable to Partners

- ”Loans from partner” or “due to partner”
- Represent substantial amount lent to the partnership by the partner which
the partnership is obliged to pay
- Creditor-debtor Relationship (Debtor – Partnership, Creditor – Partner)

*** Loans to and from partners Loans to and from Partners

- Combination of loans receivable from partners and loans payable to
Dr Cr
partners
- If loans Receivable has a credit balance – partnership becomes the XXX XXX
debtor
- If loans payable has a debit balance – partnership becomes the creditor ASSET LIABILITY
PARTNERSHIP FORMATION
When a partnership is formed, partners commonly observe the following
to ensure fair and honest business:
1. Execution of Partners’ Agreement
2. Valuation of Partners’ investments – (Non Cash Investment)
First – Based on Agreement
Second – In the absence of agreement, Fair Value of the property

3. Adjustments of Accounts
If there is an existing sole proprietors’ business that would be converted as
partnership, all accounts that are being revalued according to the partnership
agreement would increase or decrease the contributing partner’s capital.
 HOW MUCH THE CONTRIBUTION TO BE MADE?
INITIAL INVESTMENT
WHAT AMOUNT THE CAPITAL CONTRIBUTION SHALL BE RECOGNIZED?

1. Amount of Contribution – based on the partners’ agreement, in the absence of any

agreement, it shall be contributed equally.
Example W/ Agreement: X and Y form a partnership with total agreed capitalization of 100,000 to be
contributed in cash of 60% and 40% by X and Y, respectively.
Book of the partnership:
Cash 60,000
X, Capital 60,000
Cash 40,000
Y, Capital 40,000
Example W/out Agreement: X and Y form a partnership with total agreed capitalization of 100,000 to be
contributed in cash .Book of the partnership:
Cash 50,000
X, Capital 50,000
Cash 50,000
Y, Capital 50,000

2. Valuation of Partners’ Contribution

Cash – At Face value
VALUATION OF
PARTNERS’
Is it cash
contribution?

CONTRIBUTION
NO YES

To be valued at
Is it
Property? FACE VALUE of
cash contributed

NO YES To be recorded at agreed value,

otherwise at fair value at the time of
transfer to partnership
Ledger
account is
used
Industry (skill
or labor) Recorded in memorandum entry form
Asset Contribution with Liabilities Assumed
 The partner’s capital to be credited is the value of assets reduced by
the value of liabilities assumed by the partnership
Example: Rosito and Rossie Partnership accepted Rosita in the
partnership. Rosita contributed assets and liabilities agreed to be
assumed by the partnership, as follows:
COST AGREED VALUE FAIR VALUE

Machine 200,000 180,000

Furniture & Fixture 100,000 140,000

Notes Payable 50,000 50,000

Interest on notes 5,000 5,000

payable

MACHINE 180,000
FURNITURE & FIXTURES 140,000
NOTES PAYABLE 50,000
INTEREST ON NP 5,000
ROSITA, CAPITAL 265,000
Stages from which Partnerships are formed
1. First time in business – individual persons without existing business
form a partnership. (problem 3-7)
2. Conversion of single proprietorship to a partnership.
a. Sole proprietor admits into his business another individual who has no
business of his own.
b. Two or more sole proprietorship converted into a partnership.
3. Admission of a new partner to an existing partnership.
- Dissolution, formation of new partnership.
Conversion of a Single Proprietorship to a Partnership

1. Close the nominal accounts of the sole proprietorship business

2. Record the adjustments (based on the agreed valuation or fair value)
of the assets and liabilities directly to the sole proprietor’s account.
3. Close the books of sole proprietorship.
4. Open the new set of partnership books by recording the partners’
contributions.

*** partnership shall acquire its own Tax Identification number – legal entity.
*** books of the sole proprietorship are not applicable to be used by the
newly formed partnership.
Actual Investment Method
 When the agreed partner’s capital are credited with the same value
as their actual net contributed tangible assets, the approach of initial
investment used is called “Actual Investment Method”
Example: Milette and Markneil decided to form MM partnership with an
agreed capital contribution of 90,000 and 70,000, respectively. The journal
entry would be:
Cash 160,000
Milette, Capital 90,000
Markneil, Capital 70,000
Bonus Method
- When the actual contribution of the individual partner is not the same as
the agreed capital credit to him as recorded in the partnership books, the
partners’ capital accounts shall be adjusted in the books of the partnership
upon formation by using a bonus method.
- There is a bonus to a partner when his capital credit is more than his
actual contribution, and the total net assets contributed by partners are
equal to total capital of the partnership. No recording of intangible asset.

PARTNERSHIP’S TOTAL AGREED CAPITAL (TAC) = PARTNER’S TOTAL CONTRIBUTED CAPITAL (TCC)
EXAMPLE
Kenneth, a sole proprietor, allows Kae to join his business to form a partnership, provided
that the latter would contribute cash amounting to 70,000. Kenneth contributions comprised
the following: 10,000 cash, 30,000 accounts receivable, 20,000 merchandise inventory and
accounts payable of 8,000 to be assumed by the partnership.
They agreed that their initial capital balances would be o equal amount upon formation of the
partnership.
Assume that Kenneth and Kae agreed that the partnership capital would be 122,000.
TAC = 122,000
TCC = 122,000
 KENNETH KAE TOTAL
Total tangible assets contributed 60,000 70,000 130,000
Less: liabilities assumed (8,000) (8,000)
Net asset contributed 52,000 70,000 122,000
Capital credit equally 61,000 61,000 122,000
Bonus from Kae to Kenneth 9,000 (9,000) 0

Cash 10,000
Accounts receivable 30,000
Merchandise Inventory 20,000
Accounts payable 8,000
Kenneth, Capital 52,000

Cash 70,000
Kae, Capital 70,000

Kae, Capital 9,000

Kenneth, Capital 9,000