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Partnership
FORMATION

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
PARTNERSHIP.
Dahil
yan
sa
SEPARATE LEGAL PERSONALITY ng
Partnership.

Major
Considerations
in
the
accounting for the equity of
partnership
1.
2.
3.
4.

Formation

Creation
of
the
partnership
Operation Division of profit or loss
(P/L)
Dissolution Admission/withdrawal of
partner
Liquidation- winding-up of affairs

Formation
Valuation

of contributions of partnership

All assets contributed to (liabilities

assumed by) the partnership shall be
measured at Fair Value FV.

Kapag
Kapag nag
nag form
form ng
ng Partnership
Partnership ang
ang dalawang
dalawang Sole
Sole
Proprietorship
Proprietorship business
business dito
dito tayo
tayo magkakaroon
magkakaroon ng
ng
accounting
accounting problem.
problem. First
First we
we should
should adjust
adjust the
the books
books of
of
sole
sole proprietors
proprietors (SP)
(SP) into
into their
their Fair
Fair Market
Market Value
Value or
or (FV).
(FV).
After
After adjusting,
adjusting, we
we should
should close
close the
the nominal
nominal accounts
accounts of
of
the
the SP..
SP.. (Ung
(Ung parang
parang closing
closing entries
entries lang
lang sa
sa basic
basic
accounting).
accounting). Now
Now after
after closing
closing the
the nominal
nominal accounts,
accounts, we
we
transfer
transfer the
the permanent
permanent accounts
accounts like
like Cash,
Cash, Inventories,
Inventories, PPE
PPE
and
and liabilities
liabilities carried
carried at
at their
their Fair
Fair Market
Market Value
Value to
to the
the books
books
of
of the
the Partnership..
Partnership.. Gets?
Gets? And
And ang
ang total
total ng
ng mga
mga yan
yan ay
ay ang
ang
Net,
Net, Contriubtion
Contriubtion ng
ng partner..
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 mo
proper way to distribute the P/L

Type of contribution
Cash
and
Equivalents

Fair Value

Cash Face amount of cash or cash equivalent

contributed.

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
available

Financial
Instruments Order of Priority:
(Financial
assets
and a) Quoted price in an active market
financial liabilities)
b) Fair Value based on observable data
c) Estimate based on best information
available

Example
A and B formed a partnership. The following are their contributions:
A
Cash

B
100000

Accounts Recievable

75000

Inventory

80000

Land
Building
Total

10000

50000
130000
255000 190000

Requirement:
Note Payable
70000
1. Compute for the adjusted balances
on partners' capital accounts.
A, capital
185000
2. Journal Entry.
B, Capital
Total

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
A, Cap
170,000
B, Cap
195,000

190000
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

partnership.

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.

Partners
ADJUSTED BALANCES
A
B
hip
Cash
100000 10000 110000
Accounts Receivable (75-30)

45000

45000

Inventory (No adjustment)

80000

80000

Land (No adjustment)

Building (130+10)
Total

50000 50000

140000 140000
225000 200000 425000

5,000

Note patable (70-15)

Mortgage Payable-bldg (Assumed by
the partnership)
A, capital

55000

55000
5000

170000

5000
170000

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
Union
Christian
Total

Percentage
100000
140000

Bonus
Total
50%
20000 120000
50%
-20000 120000
240000

Dapat
Dapat ang
ang capital
capital ni
ni Union
Union is
is 50%
50% of
of the
the total
total contributions.
contributions. At
At
para
para mangyari
mangyari iyon,
iyon, mababawasan
mababawasan ang
ang capital
capital ni
ni Christian
Christian nang
nang
sa
sa gayon
gayon ay
ay ma
ma kumpleto
kumpleto ang
ang 50%
50% ni
ni Union.
Union. Bakin
Bakin nga
nga ba
ba
gugustuhin
gugustuhin ni
ni Christian
Christian na
na magbigay
magbigay ng
ng capital
capital kay
kay Union??
Union??
Simple,
Simple, kasi
kasi si
si Union
Union ang
ang may
may EXPERTISE.
EXPERTISE. Meaning
Meaning si
si Union
Union ang
ang
magbibigay
buhay
sa
kanilang
partnership..
Hope
gets
mo?
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
Initial Investment

C
100000

Partnershi
p
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.
U
Initial Investment

C
85000

Partnershi
p
85000
170000

Cash170000
U,cap
C,cap

Cash170000
U,cap
C,cap

100000
70000

85000
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.

Other ways to make the initial

investments equalize.
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.
E
D

initial contribution
40000
60000

Additional(withdraw) Required Cap

5000
45000
(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.
2.
3.

Partners agree to share profits equally.

Partners agreed to have equal interest on the initial
investment.
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 recommended.
Madali lang ang FORMATION.! Antabayanan ang susunud na kabanata!
GOD BLESS YOU!

Reference: Advance Accounting 1

Author1
Zeus Vernon B. Millan 2014
Author2
P. Guerrero and J. Peralta