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PARTNERSHIP FORMATION

1. Starting a Business (the partners would be engaging in business for the first time)

Illustration: On January 2 201X, Caroline, Mariane, & Corienna formed a partnership business with the following contributions: Caroline (a General Partner) contributed cash of P50, 000 and shares a profit of 40%. Mariane (Limited Partner) contributed a brand new computer set costing P25, 000 in which her liability of P5, 000 from TechnoMart will be assumed by the partnership and shares a profit of P40%. Coriennas contribution will be her personal services and shares a profit of P20% (an Industrial Partner)

An opening journal entry must be made in the books of the partnership. SIMPLE JOURNAL ENTRY January 2, 201x Cash Caroline, Capital Initial Investment of Caroline Equipment Accounts Payable Mariane, Capital Initial Investment of Mariane P 50, 000 P 50, 000

25, 000 5, 000 20, 000

Corienna was admitted in the partnership as an industrial partner with a 20% share in profit. Signed: Caroline Mariane Corienna

COMPOUND JOURNAL ENTRY January 2, 201x Cash Equipment Accounts Payable Caroline, Capital Marianes Capital Initial Investments of Caroline & Mariane with assumption of liability P 50, 000 25, 000 P 5, 000 50, 000 20, 000

Corienna was admitted in the partnership as an industrial partner with a 20% share in profit. Signed: Caroline Mariane Corienna Cash Jan. 2 P 50, 000 Equipment Jan. 2 P 25, 000

Accounts Payable Jan. 2 P 5, 000

Caroline, Capital (40%) Jan. 2 P 50, 000

Corienna, Capital (20%) Corienna was admitted in the partnership as an industrial partner with 20% share in profit.

Mariane, Capital (40%) Jan. 2 P 20, 000

2. -

Sole proprietorship business converted into a partnership Adjustments are necessary in order to establish correctly their respective capital balances because these will represent as their initial investments in the partnership which might greatly affect their agreement on how profit and loss is divided.

Illustration: (Lets assume the Balance Sheet of the two prospective partners are already adjusted as of the date they have formed the partnership) Caroline and Mariane are sole proprietors. They have agreed to combine all their business resources and and decided to form a partnership business named Pink & Purple Fashion Boutique. Their respective balance sheets as of May 31, 201x, are presented below. Their partnership will commence on July 1, 201x

Chic Pink Boutique Balance Sheet As of May 31, 201x Assets Cash Merchandise Inventory Equipment Acc. Depreciation Total Assets P 50, 000 23, 000 P17, 000 1, 000 16, 000 P 89, 000

Fashion Purple Boutique Balance Sheet As of May 31, 201x Assets Cash Accounts Receivable Allowance for Bad Debts Merchandise Inventory Total Assets P 43, 000 P 12, 000 2, 000 10, 000 15, 000 P 68, 000

Liabilities & Owners Equity Liability Accounts Payable Notes Payable Total Liabilities Owners Equity Caroline, T., Capital Total Liabilities & Owners Equity P 55, 500 P 89, 000 P 21, 000 12, 500 P 33, 500 Accounts Payable

Liabilities & Owners Equity Liability P 15, 000

Owners Equity Mariane, R., Capital Total Liabilities & Owners Equity

P 53, 000 P 68, 000

The opening journal entries (simple or compound) in the partnership books of Pink & Purple Fashion Boutique would be: July 1, 201x Cash P 50, 000 Merchandise Inventory 23, 000 Equipment* 16, 000 Accounts Payable Notes Payable Caroline, T. Capital Initial investment of Caroline T. in Pink & Purple Fashion Boutique

P 21, 000 12, 500 55, 500

Cash P 43, 000 Accounts receivable** 12, 000 Merchandise Inventory 15, 000 Allowance for Bad Debts** Accounts Payable Mariane, T., Capital Initial investments of Mariane T. in Pink & Purple Fashion Boutique

P 2, 000 15, 000 53, 000

Important Notes: *The amount of the equipment is the new book value, because this is considered as the acquisition cost of the partnership. So, the new book value of properties, plants, and equipment should be the amount in the opening and assuming of assets in the partnership. ** Accounts receivable is shown at the gross amount together with the Allowance for Bad Debts account in the credit. This is because there is still a hope of collection in this account. The merged balance sheet of Chic Pink Boutique & Fashion Purple Boutique as named as Pink & Purple Fashion Boutique: Pink & Purple Fashion Boutique Balance Sheet As of July 1, 201x Assets Cash Accounts Receivable Allowance for Bad Debts Merchandise Inventory Equipment Total Assets P 93, 000 P 12, 000 2, 000 10, 000 38, 000 16, 000 P157, 000 Accounts Payable Notes Payable Owners Equity Caroline, T., Capital Mariane, R., Capital Total Liabilities & Owners Equity Liabilities & Owners Equity Liability P 36, 000 12, 500 P 55, 500 53, 000 P 157, 000