Partnership

Formation
Accounting for Partnerships and Corporations
RCA 2022
Points to be discussed
01. Definition 02. Characteristics

What is a Partnership? What are the characteristics

that a Partnership has?

03. Kinds of Partners 04. Kinds of 05. Partnership

Partnership Formations
Who can be the Partners in a What kinds of Partnership In what ways can a
Partnership? can be formed? Partnership be formed?

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Definition

Partnership can be defined as:

A partnership is an association where two or more
persons bind themselves to contribute money, property
or industry into a common fund with the intention of
dividing profits among themselves.
(New Civil Code, Article 1767)

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Characteristics
• Voluntary Agreement
• Mutual Contribution to a Common Fund
• Co-Ownership of Property
• Mutual Agency
• Unlimited Liability of Partners
• Distribution of Profits to Partners

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Kinds of Partners

As to Nature of Contributions As to Liabilities to Third Persons

• Capitalist Partner • General Partner
• Industrial Partner • Limited Partner
• Capitalist-Industrial Partner

As to their interest/obligations to business

• Managing Partner
• Secret Partner
• Silent Partner
• Ostensible Partner

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Kinds of Partnership

As to liability of the partners As to Duration

• General Partnership • Partnership at Will
• Limited Partnership • Partnership with a Fixed Term

As to either universal or particular As to Purpose

• Universal Partnership of all Present Property • Commercial Partnership
• Universal Partnership of Profits • Professional Partnership
• Particular Partnership

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Partnership Formation
Partners investing money, property or A Partner investing his/her business Both Partners investing businesses
industry
Money Cash 200,000 Cash 200,000
Cash 100,000 Inventory 300,000 Inventory 300,000
A, Capital 100,000 Equipment 180,000 Equipment 180,000
Accounts Payable 50,000 Accounts Payable 50,000
Property A, Capital 630,000 A, Capital 630,000
Equipment 100,000
B, Capital 100,000

Industry Cash 630,000 Cash 50,000

Memo: C was admitted as a B, Capital 630,000 Merchandise 100,000
managing partner Equipment 730,000
Accounts Payable 250,000
B, Capital 630,000

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Illustration No. 1

INDIVIDUALS WITH NO EXISTING BUSINESS FORM A PARTNERSHIP

On July 1, 2020, Zenaida Rivadelo and Galicano Del Mundo agreed to form a Partnership. The
partnership agreement specified that Rivadelo is to invest cash of P350,000 and Del Mundo is to
Contribute Land with a Fair Market Value of P650,000 with mortgage of Php 150,000 to be
assumed by the partnership.

Required: Prepare journal entries to record above partnership formation.

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Illustration No. 1
Journal Entry:

Cash 350,000
Land 650,000
Mortgage Payable 150,000
Rivadelo, Capital 350,000
Del Mundo, Capital 500,000
To record the initial investments
of Rivadelo and Del Mundo

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Illustration No. 1
After the formation, the statement of financial position of the newly formed partnership is:
Rivadelo and Del Mundo
Statement of Financial Position
July 1, 2020

Assets
Cash 350,000
Land 650,000
Total Assets 1,000,000

Liabilities and Equity

Mortgage Payable 150,000
Rivadelo, Capital 350,000
Del Mundo, Capital 500,000
10 Total Liabilities and Equity 1,000,000
Illustration No. 1

Suppose that Rivadelo and Del Mundo formed another partnership with Lalaine Mendoza.
Rivadelo and Del Mundo considered Mendoza who has a vast business network in Mindanao as an
industrial partner.

The partnership did not receive any asset from Mendoza. In this case, only a memorandum entry in
the books will be made.

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 Edgar Detoya

Illustration No. 2
Statement of Financial Position
October 1, 2020

Assets
Cash 60,000
Notes Receivable 30,000
A SOLE PROPRIETOR AND ANOTHER Accounts Receivable 240,000
INDIVIDUAL FORM A PARTNERSHIP Less: Allowance for Doubtful Accounts 10,000 230,000
Merchandise Inventory 80,000
The statement of financial position of Edgar Furniture and Fixtures 60,000
Less: Accumulated Depreciation 6,000 54,000
Detoya on October 1, 2020, before accepting Total Assets 454,000
Susan Chung as partner is shown as follows:
Liabilities and Equity
Notes Payable 40,000
Accounts Payable 100,000
Detoya, Capital 314,000
Total Liabilities and Equity 454,000

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 Illustration No. 2
Susan Chung offered to invest cash to give her a capital credit equal to one-half of Edgar Detoya’s capital
after giving effect to the adjustments below. Detoya 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 April 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.

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 Illustration No. 2
Required: Prepare journal entries to record partnership formation.

The following procedures may be used in recording the formation of the partnership:

Books of Edgar Detoya:

1. Adjust the assets and liabilities of Edgar Detoya in accordance with the agreement. Adjustments are to
be made to his capital account.
2. Close the books.

Books of the Partnership:

3. Record the Investment of Edgar Detoya
4. Record the Investment of Susan Chung

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 Illustration No. 2
The merchandise is to be valued at P74,000. The accounts receivable is estimated to be 95% collectible.

Merchandise Inventory, per books 80,000 Accounts Receivable, net per books 230,000
Merchandise Inventory, as agreed74,000 Accounts Receivable, net as agreed 228,000
Decrease in Merchandise Inventory 6,000 (240,000 x 95%)
Increase in Allowance for Doubtful Accounts 2,000
Adjusting Entry:
Adjusting Entry:
Detoya, Capital 6,000
Merchandise Inventory 6,000 Detoya, Capital 2,000
To adjust capital for the decrease in inventory Allowance for Uncollectible Accounts 2,000
To adjust capital for the increase in allowances
for doubtful accounts

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 Illustration No. 2
Interest accrued on the notes receivable will be recognized: Interest on notes payable to be accrued at 14% annually from
P10,000, 12% dated July 1, 2020 and P20,000, 12% dated April 1, 2020.
August 1, 2020.
Interest Accrued on Notes Payable:
Interest accrued on Notes Receivable:
Interest = Principal x Rate x Time On P40,000: P40,000 x 14% x 6/122,800

On P10,000: P10,000 x 12% x 3/12300 Adjusting Entry:

On P20,000: P20,000 x 12% x 2/12400
Total Interest Accrued 700 Detoya, Capital 2,800
Interest Payable 2,800
Adjusting Entry: To adjust capital for the interest expense accrued

Interest Receivable 700

Detoya, Capital 700
To adjust capital for the interest income accrued

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 Illustration No. 2
The furniture and fixtures are to be valued at P46,000. Office supplies on hand that have been charged to expense in the
past amounted to P4,000. These will be used by the partnership.
Furniture and Fixtures, per books 54,000
Furniture and Fixtures, as agreed 46,000 Adjusting Entry:
Impairment of Furniture and Fixtures 6,000
Office Supplies 4,000
Adjusting Entry: Detoya, Capital 4,000
To adjust capital for the reversal of
Detoya, Capital 6,000 office supplies to asset account
Accumulated Depreciation 6,000
To adjust capital for the impairment of
Furniture and Fixtures

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 Illustration No. 2
Net effect on adjustments on Capital: Computation of Detoya’s Capital After Adjustment and Cash
Investment of Susan Chung:
Decrease in Merchandise Inventory (6,000)
Increase in Allowance for Doubtful Accounts (2,000) Detoya, capital before adj. 314,000
Increase in Interest Receivable 700 Net Adjustments to Capital (14,100)
Increase in Interest Payable (2,800) Detoya, capital after adj. 299,900
Increase in Accumulated Depreciation (8,000) Agreed Capital Credit for Chung 50%
Increase in Office Supplies 4,000 Cash Investment of Susan Chung 149,950

Decrease in Capital (14,100)

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 Illustration No. 2
Journal Entry: Notes Payable 40,000
Accounts Payable 100,000
Books of Detoya Interest Payable 2,800
Allowance for Uncollectible Accounts 12,000
Detoya, Capital 14,100 Accumulated Depreciation 14,000
Office Supplies 4,000 Detoya, Capital 299,900
Interest Receivable 700 Cash 60,000
Merchandise Inventory 6,000 Notes Receivable 30,000
Allowance for uncollectible accounts 2,000 Accounts Receivable 240,000
Interest Payable 2,800 Interest Receivable 700
Accumulated Depreciation 8,000 Merchandise Inventory 74,000
To record adjustments to Detoya’s capital Office Supplies 4,000
Furniture and Fixtures 60,000
To close the books of Detoya

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 Illustration No. 2
Journal Entry: Cash 149,950
Shung, Capital 149,950
Books of Partnership To record investment of Shung

Cash 60,000
Notes Receivable 30,000
Accounts Receivable 240,000
Interest Receivable 700
Merchandise Inventory 74,000
Office Supplies 4,000
Furnitures and Fixtures 46,000
Notes Payable 40,000
Accounts Payable 100,000
Interest Payable 2,800
Allowance for Doubtful Accounts 12,000
Detoya, Capital 299,900
To record investment of Detoya
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 Illustration No. 3
TWO OR MORE SOLE PROPRIETORS FORM A PARTNERSHIP

On June 30, 2020, Challoner Matero and Marichu Fornolles, fierce competitors
in a certain line of business, decided to combine their talents and capital to form a
partnership. Their statements of financial position are as follows:

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 Illustration No. 3
Challoner Matero Marichu Fornolles
Statement of Financial Position Statement of Financial Position
June 30, 2020 June 30, 2020

Assets Assets
Cash 50,000 Cash 40,000
Accounts Receivable 100,000 Accounts Receivable 80,000
Merchandise Inventory 80,000 Merchandise Inventory 100,000
Furniture and Fixtures 60,000 Delivery Equipment 90,000
Total Assets 290,000 Total Assets 310,000

Liabilities and Equity Liabilities and Equity

Accounts Payable 30,000 Accounts Payable 60,000
Detoya, Capital 260,000 Detoya, Capital 250,000
Total Liabilities and Equity 290,000 Total Liabilities and Equity 310,000

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 Illustration No. 3
The conditions and adjustments agreed upon by the partners for purposes of determining their interests in
the partnership are:

1. Actual count and bank reconciliation on Matero proprietorship’s cash account revealed cash short and
unrecorded expenses of P3,500.
2. Establishment of a 10% allowance for uncollectible accounts in each book.
3. The merchandise inventory of Fornolles is to be increased by P10,000.
4. The furniture and fixtures of Matero are to be depreciated by P6,000.
5. The delivery equipment of Fornolles is to be depreciated by P9,000.

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 Illustration No. 3
Books of Challoner Matero and Marichu Fornolles:
1. Adjust the accounts of both parties in accordance with the agreement. Adjustments are to be made to
their respective capital accounts.
2. Close the books.

Books of the Partnership:

3. Record the Investment of Matero.
4. Record the Investment of Fornolles.

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 Illustration No. 3
Books of Matero Books of Fornolles

Matero, Capital 19,500 Merchandise Inventory 10,000

Cash 3,500 Fornolles, Capital 7,000
Allowance for uncollectible accounts 10,000 Allow. For Uncollectible Accts. 8,000
Accumulated Depreciation 6,000 Accumulated Depreciation 9,000
To record adjustments to Matero’s capital To record adjustments to Fornolles, Capital

Accounts Payable 30,000 Accounts Payable 60,000

Allow. For Uncollectible Accts. 10,000 Allow. For Uncollectible Accts. 8,000
Accum. Depreciation 6,000 Accumulated Depreciation 9,000
Matero, Capital 240,500 Fornolles, Capital 243,000
Cash 46,500 Cash 40,000
Accounts Receivable 100,000 Accounts Receivable 80,000
Merchandise Inventory 80,000 Merchandise Inventory 110,000
Furniture and Fixtures 60,000 Delivery Equipment 90,000
To close the book of Matero To close the books of Fornolles
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 Illustration No. 3
Books of Partnership Cash 40,000
Accounts Receivable 80,000
Cash 46,500 Merchandise Inventory 110,000
Accounts Receivable 100,000 Delivery Equipment 81,000
Merchandise Inventory 80,000 Accounts Payable 60,000
Furniture and Fixture 54,000 Allow. For Uncollectible Accts. 8,000
Accounts Payable 30,000 Fornolles, Capital 243,000
Allow. For Uncollectible Accts. 10,000 To record the investment of Fornolles
Matero, Capital 240,500
To record the investment of Matero

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Illustration No. 3
Matero and Fornolles
Statement of Financial Position
June 30, 2020

Assets
Cash 86,500
Accounts Receivable 180,000
Less: Allowance for Doubtful Accounts 18,000 162,000
Merchandise Inventory 190,000
Furniture and Fixtures, Net 54,000
Delivery Equipment, Net 81,000
Total Assets 573,500

Liabilities and Equity

Accounts Payable 90,000
Matero, Capital 240,500
Fornolles, Capital 243,000
Total Liabilities and Equity 573,500

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End of Lesson
Thank you.

RCA 2022