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Review: Partnership
What is partnership?
Partnership is an unincorporated association of two or
more individuals to carry on, as co-owners, a
business, with the intention of dividing the profits
among themselves.

Ibig sabihin:

Ito ay isang Negosyo na
pinapatakbo ng dalawa o
higit pang indibidwal. Maari
silang mag contribute ng
Pera(Capital), Industriya(Skills),
o Mga Kagamitan na hindi
Pera (Non-Cash Asset).

Nasa Basic accounting lang
po iyan.
Take note:

For example, Partner B contributes a
building.. Once na narecord sa book of
partnership ung contribution ni B, wala
na syang karapatan sa Building na iyon..
Dahil automatic pagaari na ito ng
Major Considerations in the accounting
for the equity of partnership
1. Formation Creation of the partnership
2. Operation Division of profit or loss (P/L)
3. Dissolution Admission/withdrawal of
4. Liquidation- winding-up of affairs
Valuation of contributions of partnership
All assets contributed to (liabilities assumed
by) the partnership shall be measured at
Fair Value FV.

Kapag nag form ng Partnership ang dalawang Sole
Proprietorship business dito tayo magkakaroon ng
accounting problem. First we should adjust the books of sole
proprietors (SP) into their Fair Market Value or (FV). After
adjusting, we should close the nominal accounts of the SP..
(Ung parang closing entries lang sa basic accounting). Now
after closing the nominal accounts, we transfer the
permanent accounts like Cash, Inventories, PPE and liabilities
carried at their Fair Market Value to the books of the
Partnership.. Gets? And ang total ng mga yan ay ang Net,
Contriubtion ng partner..
Profit and loss is based on the agreement of the partners.
However, If the problem is silent about the P/L ratio, Equity ratio is the most
proper way to distribute the P/L
Type of contribution Fair Value
Cash and Cash Equivalents Face amount of cash or cash equivalent
Inventory Net Realizable Value (Estimated selling price
less cost to sell), If and only if it is lower than
the COST.
Fixed asset Order of Priority:
a) Price in a binding sale agreement
b) Quoted price in an active market
c) Estimate based on best information
Financial Instruments
(Financial assets and
financial liabilities)
Order of Priority:
a) Quoted price in an active market
b) Fair Value based on observable data
c) Estimate based on best information
A and B formed a partnership. The following are their contributions:
Cash 100000 10000
Accounts Recievable 75000
Inventory 80000
Land 50000
Building 130000
Total 255000 190000
Note Payable 70000
A, capital 185000
B, Capital 190000
Total 255000 190000
Additional Information:
Included in accounts receivable is an account amounting to 30,000
which is deemed uncollectible.
The inventory has an estimated selling price of 120,000 and 15,000
cost to sell.
Unpaid mortgage in Land of 10,000 is not assumed by the
Unpaid mortgage in Building of 5,000 is assumed by the partnership.
The building is over-depreciated by 10,000.
The Note Payable is stated at face amount. A proper valuation
requires recognition of a 15,000 discount on note payable.
A and B shares P/L 50% and 50% respectively.
1. Compute for the adjusted balances
on partners' capital accounts.
2. Journal Entry.
Cash 100000 10000 110000
Accounts Receivable (75-30) 45000 45000
Inventory (No adjustment) 80000 80000
Land (No adjustment) 50000 50000
Building (130+10) 140000 140000
Total 225000 200000 425000
Note patable (70-15) 55000 55000
Mortgage Payable-bldg (Assumed by
the partnership) 5000 5000
A, capital 170000 170000
B, Capital 195000 195000
Total 225000 200000 425000
Cash 110,000
A/R 45,000
Inventory 80,000
Land 50,000
Building 140,000
Discount on Note 15,000
N/P 70,000
Mortgage 5,000
A, Cap 170,000
B, Cap 195,000
Bonus method
Bonus on initial investment: An accounting exists when the capital account of a partner is
credited for an amount greater than the fair value of his contribution.

Hirap iexplain pero eto ang example:
Union and Christian agreed to form a partnership. Union shall contribute 100,000 cash while Christian shall
contribute 140,000 cash. However due to the expertise of Union , the partners agreed that they should
initially have equal interest in the partnership capital.
Actual Contribution Percentage Bonus Total
Union 100000 50% 20000 120000
Christian 140000 50% -20000 120000
Total 240000
Dapat ang capital ni Union is 50% of the total contributions. At para
mangyari iyon, mababawasan ang capital ni Christian nang sa
gayon ay ma kumpleto ang 50% ni Union. Bakin nga ba gugustuhin
ni Christian na magbigay ng capital kay Union?? Simple, kasi si
Union ang may EXPERTISE. Meaning si Union ang magbibigay buhay
sa kanilang partnership.. Hope gets mo?
Other ways to make the initial
investments equalize.
1. Cash Settlement between partners
Cash settlement outside the partnership is one way of buying
the equity of the other partner.

For example U invested 100k while C invested 70k.
U C Partnership
Initial Investment 100000 70000 170000
Now, to equalize their capitals instead of making additional
investment to the partnership, C can ask U to buy 15k of his equity
so that the initial investment would 170k, 85 for U and 85 for C.
Cash 170000
U,cap 100000
C,cap 70000
U C Partnership
Initial Investment 85000 85000 170000
Cash 170000
U,cap 85000
C,cap 85000
Partner U received 15000 pesos from C. This transaction is not recognized anymore by the
partnerships book because it is made under the table. And we can see that the Total
cash contributed remains at 170,000. Lets compare the values if C decided to make
additional investment to the partnership.. The capital of U is 100k, meaning C should meet
this amount.. C would have invested an additional (100k-70k) 30k pesos. Times two than of
paying U for an additional 15k. GETS?

Mejo baluktot na english pasensya naman daw.
2. Additional investment (Withdrawal of investment)
Additional investment or withdrawal of investment
can be one alternative to equalize the partners capital.

For example Initial investment is 100k . P/L sharing is 45%
and 55% for E and D respectively.
D contributed 60k while 40k for E.
Other ways to make the initial
investments equalize.
initial contribution Additional(withdraw) Required Cap
E 40000 5000 45000
D 60000 (5000) 55000
Practice question
PP, RR, and SS are new CPAs and are to form a partnership. PP is
to contribute cash of 50,000 and a computer originally costing
60,000 but has a second hand value of 25,000. RR is to contribute
cash of 80,000. SS, whose family is selling computers, is to
contribute cash of 25,000 and a brand new computer with a
regular selling price of 60,000 but which cost is 50,000.
Required: what would be the capital balances upon formation
are? PP,RR,SS. Using the 3 independent situations.

1. Partners agree to share profits equally.
2. Partners agreed to have equal interest on the initial
3. Partners agreed to share profits 20%, 20%, 60% for PP, RR, SS
respectively. All partners are willing to make additional
investment if ever.
Test your brain. Dont scan any notes you have with you right now! AJA!
Nga mahahalagang
pakakatandaan sa Formation.
Sa partnership kahit nd pareho ang Contributed Capitals ninyo ai pwede paring Equal
ang P/L sharing. Depende kasi yan sa Agreement.

It is very important to make either written, orally or implied agreement between partners
before the inception of the partnership. This may minimize if not eliminate the confusion
and disputes that may arise between or among partners.. Written agreement is

Madali lang ang FORMATION.! Antabayanan ang susunud na kabanata!


Reference: Advance Accounting 1
Author1 Zeus Vernon B. Millan 2014
Author2 P. Guerrero and J. Peralta