ACCOUNTING FOR SPECIAL

TRANSACTIONS

1
“ PARTNERSHIP FORMATION

MR. RUSSEL BARROS

 NO.1
ACCOUNTING FOR SPECIAL TRANSACTIONS

Characteristics of Partnership, Accounting

for Patnership, Formation, Partner’s ledger
accounts

• Differentiate between the accounting of partnership, sole

proproetorship and corporations.

• State the valuation of contributions of partners.

• Account for the initial investment of the partners to the partnership

 NO 1.
ACCOUNTING FOR SPECIAL TRANSACTIONS

Partnership is a form of business organization wherein

2 or more persons bind themselves together to contribute

money, property and industry to a common fund thereby

dividing the profits among themselves.

 NO.
VALUATION CONCEPTS AND METHODS

CHARACERISTICS OF PARTNERSHIP
a. ease of formation
b. separate legal personality
c. mutual agency
d. co-ownership of property
e. co ownership of profits
f. unlimited liability
g. limited life- a partnership is easily dissolved by
* death of a partner
* wihdrawal
* insolvency and incapacity
* admission of a new partner
Accounting for partnership formation

When partners introduce cash or any other asset, cash or the

other asset account is debited at the value agreed by the
partners and the corresponding partner's capital account is
credited by the same amount.
  

Cash Invested by Partners

When partners invested cash in a partnership business. In this case, cash account is debited and individuals partner’s capital account is credited.

• Example # 1:
•
On May 1st, 2019, Sameed and Saud agreed to
form a partnership business, for this venture
Sameed invested P 140,000 and Saud
contributed P 110,000.
•
 Required: Pass General Journal Entries and
prepare Balance Sheet
           
• 2) Non-Cash Assets Invested by Partners
• When partners invested assets other than cash in a
partnership business, like machinery, furniture etc. In
this case, asset account is debited and individual
partner’s capital account is credited.
• 
• Example # 2:
• On 1st June 2019, Salman and Said agreed to form a
partnership venture. For this Salman contributed p.
50,000 in cash, machinery worth P. 25,000 and Furniture
P. 15,000. Mr. Said invested cash P. 30,000, Land P.
130,000 and a computer worth P. 10,000.

•  Required: Pass General Journal Entries and prepare

Balance Sheet. 
 
 
• (c) Partner invested their Personal Business

• In the few cases, partnership is established by the

combination of two or more personal businesses of similar
nature and form a new business partnership. This is done
to avoid the competition and also to strengthen the
financial position of the business. In this case the assets of
the existing business are debited in the partnership books
and liabilities are credited. Difference between assets and
liabilities are recorded in partners’ capital account.

• Example # 3:
• On 1st July 2019, Amna and Eman carrying on separate
business of similar nature, agreed to merge their
businesses and form a new partnership business.
Following are individual businesses balance sheets:
• Additional Partnership Formation Activities

• In addition to the partnership agreement, the partners must

engage in a number of other formation activities that are
common to all types of businesses. These actions include:

• Register the business name

• Obtain an employer identification number
• Obtain any licenses required by governments where the
partnership plans to operate, such as a sales tax license
• Open a bank account in the name of the partnership
• File an annual informational return with the Internal
Revenue Service
NO.
VALUATION CONCEPTS AND METHODS

Q1
Quiz 1- face to face

Pen & Test Paper

none
Quiz 2 - Unit I – Partnership
Formation and Operation
•
3True or False: On your answer sheet, write “ True” if the statement
is correct and if the statement is false, write false.

•1.An industrial partner shares in profits as well as in losses.

•2.A net loss results when the salary and interest allocations for the
partners exceed net income for the period.
•3. Bonus is allowed only when there is sufficient net income.
•4. A credit balance in Income and Expense Summary account means
net income.
•5. If only the division of profits is agreed upon, but the results of
operation is a net loss, the division of net loss will follow the
division of profits.
•6. The partnership profit and loss ratio is always the same as the
partner’s capital contribution ratio.
• 7. In the absence of the loss agreement, losses shall not be divided
among the partners.
• 8. No bonus is allocated to any partner when the partnership
incurred loss during the period.
• 9. As a rule, partner’s salary and interest on capital are treated as
ordinary operating expense.
• 10. A professional partnership would be entitled to tax exemption
only if it engage purely in the practice of profession.
• 11. An industrial partner is not exempted from sharing in the loss of
the partnership if he is also a capitalist partner.
• 12. All partnerships are taxed on their income as corporations.
• 13.If part of the agreed profit and loss distribution is the allocation
of bonus to the managing partner, such allocation shall be given in
spite of the insufficiency of the partnership net income.
• 14. A general partner has unlimited liability up to the extent of his
own personal property.
• 15. The cost of the property invested will be used to record it.
 NO. 1

“Don’t let what you cannot do interfere with what

you can do.”

– John Wooden