INTRODUCTI

ON OF
PARTNERSHIP
FORMATION
  A partnership is defined as "a
contract whereby two or
more persons bind
themselves to contribute
WHAT IS money, property, or industry
PARTNERSHIP? into a common fund with the
intention of dividing profits
among themselves" in Article
1767 of the Civil Code of the
Philippines.
 Characteristics of Partnership

 Mutual agency. Any partner may act as agent od the partnership in conducting its
affairs.
 Unlimited Liability. The personal assets of any partner may be used to
satisfy the partnership's creditors claims upon liquidation, if the partnership
assets are not enough to settle the liabilities to outsiders​
 Limited Life. A partnership may be dissolve at any time by action of the partners or
by operation of law
 Mutual participation in profits. A partner has the right to
share in partnership profits.
 CHARACTERISTICS OF PARTNERSHIP

 Legal entity. A partnership has legal personality separate and distinct form that
of each of the partnership.
 Co-ownership of contributed assets. Property contributed to the partnership
are owned by the partnership by virtue of its separate legal personality
 Income tax. Partnerships, except general professional partnerships are
subjects to the 30% income tax.
 TYPES OF PARTNERSHIP
 GENERAL PARTNERSHIP – each partner is personally liable to the partnership’s
creditor if partnership assets are not sufficient to pay such creditors.
- In general partnership, a partner can assign his interest. The one who becomes
the assignee don’t have the right in managing the affairs of the partnership but only
limited in the allocation of P/L and the right to receive the assignor’s interest in the
event of dissolution.
-In general partnership, each partner can represent the partnership. However, acts
beyond the normal scope of business such as obtaining loan by a partner, generally
does not bind the partnership unless there is specific authority has been to that
partner.
 TYPES OF PARTNERSHIP
 LIMITED PARTNERSHIP – only one partner needs to be a general partner and
the remaining partner can be limited, which means that their obligations to
creditors are limited to their capital contributions.
Need to consider in Accounting for Partnership:
1. SHARING of P/L
2. Maintenance of the partner’s ledger accounts which includes Capital accounts,
Drawing accounts, Accounts for loans to and from partners.
 Accounting for a partnership differs from other forms of
business organization with regard to capital accounts. In a
partnership, there should be as many capital accounts and as
many drawing accounts as there are partners.

ACCOUNT  A partnership is formed in any of the following

structure:

ING FOR a. Two or more persons from a partnership for the first

PARTNERS time.
b. A person already in business may invite an individual

HIP to form a partnership.

c. Two or more sole proprietors may form a partnership

CONTENTS 1. Name of the partnerships,
2. The name, addresses of the partners, classes of partners, stating whether
the partners are general or limited

OF 3. The effective date of the contract

4. The purpose/s and principal office of the business
5. The capital of the partnerships, stating the contribution of individual

ARTICLES
partners, their description and agreed values
6. The rights and duties of each partner
7. The manner of dividing net income or loss among the partners including
salary allowance and interest on capital;

OF CO- 8. The conditions under which the partners withdraw money or other assets
for partnership use.
9. The manner of keeping the book of accounts:

PARTNERS
10.The causes of dissolution: and
11.The provision for arbitration in settling disputes Accounting and
Financial Reporting Requirements for Partnership

HIP
  Net Investment Method – the partnership
are credited for the amount of the net assets
invested. This will happen if the contribution
ratio is equal to capital ratio.

METHOD
S
 Bonus Method – partner's capital is credited
based on their agreed ratio which may be
different from their contribution ratio. The
difference between the amount contributed and
amount credited to the capital is bonus.
SOLVING
PROBLEM
On July 1, 2019, XX and YY decided to form a partnership. The firm is to take over business
assets and assume liabilities, and capitals are to be based on net assets transferred after the
following adjustments:

a) XX and YY’s inventory is to be valid at P31,000 and P22,000, respectively.

b) Accounts receivable of P2,000 in XX’s book and P1,000 in YY’s books are
uncollectible.
c) Accrued salaries of P4,000 for XX and P5,000 for YY are still to be recognized in the books.
d) Unused office supplies of XX amounted to P5,000, while that of YY amounted to P1,500.
e) Unrecorded patent of P7,000 and prepaid rent of P4,500 are to be recognized in the books of
XX and YY, respectively.
f) XX is to invest or withdrew cash necessary to have a 40% interest in the firm.
 XX YY

Cash Php 31,000 Php 50,000

Accounts Receivable 26,000 20,000
Inventory 32,000 24,000
Office Supplies 5,000
20,000 24,000
Equipment (9,000) (3,000)
Accumulated Depreciation- Equipment Php 100,000 Php 120,000
Total Assets
Php 28,000.00 Php 20,000.00
Accounts Payable 72,000 100,000
Capitals
Total Liabilities and Capital Php 100,000.00 Php 120,000.00

BALANCE SHEETS FOR XX AND YY ON JULY

1 BEFORE ADJUSTMENTS ARE GIVEN
BELOW:
Determine:

1. The net adjustments – capital in the books of XX and YY:

a. XX, P7,000 net debit; YY, P2,000 net credit
b. XX, P5,000 net debit; YY, P7,000 net credit
c. XX, P7,000 net credit; YY, P2,000 net debit
d. XX, P5,000 net credit; YY, P7,000 net debit

2. The adjusted capital of XX and YY in their respective books.

a. XX – P65,000; YY – P102,000 c. XX – P77,000; YY –
P98,000
b. XX – P63,000; YY – P107,000 d. XX – P77,000; YY –
P93,000

3. The additional investment (withdrawal) made by XX:

a. P(15,000.00) c. P3,000.00
b. P( 6,666.50) d. P8,377.50
. The total assets of the partnership after formation:
a. P235,333.50 c. P220,333.50
b. P230,000.00 d. P212,000.00

5. The total liabilities of the partnership after formation:

a. P57,000.00 c. P54,000.00
b. P48,000.00 d. P51,000.00

6. The total capital of the partnership after formation:

a. P180,000.00 c. P163,333.50
b. P178,333.50 d. P155,000.00

7. The capital balances of XX and YY in the combined balance

sheet:
a. XX, P81,250; YY, P72,000 c. XX, P100,000; YY, P75,000
b. XX, P81,250; YY, P75,000 d. XX, P 62,000; YY, P93,000
On December 1, 2019, AA and BB formed a partnership with contributing the following
assets at fair market values:
 AA BB
Cash ……………………………………… P 9,000 P 18,000
Machinery and equipment ….. 13,500 -
Land ……………………………………… - 90,000
Building ………………………………… - 27,000
Office Furniture ……………………. 13,500 -

The land and building are subject to a mortgage loan of P54,000 that the partnership
will assume. The partnership agreement provides that AA and BB share profits and
losses, 40% and 60%, respectively and partners agreed to bring their capital balances in
proportion to the profit and loss ratio and using the capital balance of BB as the basis.
The additional cash investment made by AA should be:

a. P18,000.00 c. P134,000.00

b. P85,500.00 d. P166,250.00
CC and DD are joining their separate business to form a partnership. Cash and non-cash
assets are to be contributed for a total capital of P150,000. The non-cash assets to be
contributed and liabilities to be assumed are:
 CC DD
 Book Value Fair Value Book Value
Fair Value
Accounts Receivable … P11,250.00 P11,250.00
Inventories ……………….. 11,250.00 16,875.00 P30,000.00
P33,750.00
Equipment ………………… 18,750.00 15,000.00 33,750.00
35,625.00
Accounts Payable …..... 5,637.50 5,625.00 3,750.00
3,750.00

The partner’s capital accounts are to be equal after all contributions of assets and
assumptions of liabilities.
1. The total assets of the partnership.
a. P159,375.00 c. P140,625.00
b. P150,000.00 d. P112,500.00
2. The amount of cash that each partner must contribute:
a. CC – P37,500; DD – P9,375 c. CC – P80,625; DD – P78,750
b. CC – P37,500; DD – P5,625 d. CC – P63,750; DD – P5,625