Partnership- an organization where two or more
Industrial Partner – one who contributes
persons bind themselves to contribute money,
property, or industry into a common fund with the
intention of dividing the profits among themselves.
Features of a partnership:
1. Voluntary Association – by their own free will
2. Legal Entity – has a juridical personality separate
and distinct from its’ owner
3. Co-ownership of Property – jointly owned by the
partners; partners have a claim on all partnership
assets based on their capital accounts and share in
partnership earnings
4. Taxable Entity – taxable at a rate of 30%; GPP is
exempted
5. Mutual Agency – each partner is a fully
authorized agent of the partnership
6. Limited Life – can be easily dissolved
7. Unlimited liability – each partner is personally
and individually liable for all partnership liabilities
Elements of a partnership:
1. Must be a valid contract
2. Persons shall have legal capacity to contract
3. Contributions must be made in the form of
money, property and industry
4. Purpose of the business is to divide the profit
among them
*maybe in written or oral except when immovable
property is involved
*NOTES*
a. Onerous Contract
b. Mutual Agency
c. Common Fund
d. Profit Sharing
e. Partners
f. Unlimited Liability
g. Limited Life
Classes of Partners:
1. Capitalist Partner – one who contributes
money or property*
2.
service only; also, a general partner*
3. Capitalist – Industrial Partner*
4. Managing Partner – one who manages the
partnership affairs; he may be appointed;
general or real partner*
5. Liquidating Partner – one who takes charge
of the winding up of partnership affairs
upon dissolution*
6. Limited Partner – one who invests cash or
property; has no unlimited liability and has
no active role in the management of the
partnership*
7. General Partner – one who manages the
partnership, contributes property or service
and has unlimited liability assuming risk of
loss of personal property*
8. Secret Partner – one who takes active part
but not known to be a partner by outside
parties*
9. Silent Partner – does not take active part
although he may be known*
10. Dormant Partner – does not take active part
in the partnership and is not known;
sleeping partner*
11. Partner by estoppel – not really a partner;
liable as a partner; nominal partner*
12. Real partner – actual partner
13. Ostensible Partner – known to the public
and takes active part; whether or not he has
an actual interest in the partnership
14. Universal Partner – partnership extends to
the entire business
15. Particular Partner – participation is limited to
a unit or part of a business
*NOTES*
A. Partnership Term
 Partnership at will: no time is specified and is
not formed for a particular undertaking; can
be terminated anytime
 Partnership with a fixed term
B. According to objects
 Partnership to all present objects
 Universal Partnership
 Partnership to all profits
C. According to purpose
 Merchandising or trading
 GPP (General Professional Partnership)
D. According to legality
 De jure – complied with all the legal
requirements
 De facto – exist only in fact
Kinds of Partnership:
1. As to liability
a. General Partnership – all partners are general
with unlimited liability
b. Limited Partnership – at least one general partner
2. As to property
a. Universal Partnership of Property – all the
partners contribute all their properties
b. Universal Partnership of Profits – partners
contribute all what they will receive as a result of
their work or service; partners retain ownership
over their present or future property
Business Entity Concept – partnership should be
treated as distinct and separate from the owner
Partners’ Equity – the main difference lies in
accounting for equity; right of a partner over the
net assets of the business
Partner’s Capital Account – represents the original
investment; permanent or fixed interest; can
change if additional investment is made or when
non-current assets are revalued
Partner’s Drawing Account – used to reflect
temporary interest; share in net profit(credited) or
share in net loss(debited); Personal
Drawings(salaries); closed to the capital account
Loan Payable to a partner – a liability
Loan Receivable from a partner – asset; not
considered in determining partners’ equity
*first entries in the book of the partnership pertains
to the contributions
In the form of property=current fair market
value/appraised value
Fair market value – amount for which an asset
could be exchanged
Service=memorandum entry
Goodwill – an intangible asset representing ability
to generate earnings more than what is normal
Income Statement – presents the revenues earned
and the expenses incurred
*revenues and expenses closed to the Income
Summary account which in turn is closed to the
Drawing Account
Statement of Changes in Partners’ Equity –
summarizes the changing affecting each partner’s
equity; capital statement
Statement of Comprehensive Income – all changes
in equity excluding investments and withdrawals
*absence of agreement on how to distribute profit
or loss = based on the partner’s contribution
*industrial partner - has priority in the profit
distribution; does not share in the loss
*salary, bonus or interest should not be considered
as business expense
*profit and loss ratio is totally independent of the
partners’ ownership interests
*recognition of goodwill on admission of partner is
not considered in accordance with GAAP
Methods of Dividing Profit and Loss
1. Arbitrary Ratio (any agreed ratio)
-often based on the amount of contribution
2. Capital Ration
a. Initial or original capital
b. Beginning yearly capital
c. Ending yearly capital
d. Average capital (most equitable method)
3. Interest based on contributions made, residual
profit in an agreed ratio
4. Salaries to partners for service rendered, residual
profit based on contributions
5. Interest on contributions, salaries to partners,
residual profit in an agreed ratio
6. Interest on contributions, salaries to partners,
bonus to managing partner, and residual profit in
an agreed ratio. Where bonus is expressed as:
a. a distribution of profit (a certain percent of net
income)
b. an expense (a certain percent of net income after
bonus)
Bonus – special compensation in recognition of the
partner’s ability; not applicable in net loss
Return on Partners’ Equity – represents the ability of
the business to earn adequate profits for the
partners;
𝑃𝑟𝑜𝑓𝑖𝑡
𝑥 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑎𝑟𝑡𝑛𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦
Dissolution – occurs when ownership changes;
does not necessarily terminate the operation
1. by acts of the partners / by mutual agreement
2. by operation of law / by civil interdiction
3. by judicial decree / by commission of fraud
Change of ownership:
1. Admission of partner – cannot admit without the
consent of all partners
a. by purchase
-capital account is set up for the new partner; (a)
personal transaction between the existing partner
and the new partner; (b) partnership asset will not
change; (c) total partners’ equity will not change
*gain or loss is not recognized in the partnership
books
*Asset revaluation – requirement to update capital
accounts of partners before admitting a new
partner
*Asset impairment – current fair value of asset is
lower than their book values; downward
adjustment
b. by investment – (a) the transaction is between
the new partner and the partnership; (b)
contribution increases the partnership assets and
the partners’ equity
*if the contributed capital is not equal to total
agreed equity = asset revaluation
2. Retirement / withdrawal – (a) capital balance of
the retiring partner must be updated; (b) drawing
account of the retiring partner must also be closed
against the capital account
3. Death or Incapacity of a partner -similar to the
admission of partner by purchase
*Payable to Partner’s Estate
4. Incorporation – using the partnership assets as its
starting capital
*Appropriation Account – allocating gain or loss,
profits or losses, adjustments to the partners’
capital; to reduce computation
*Liquidation is always preceded by dissolution
Delectus Personae – consent of all continuing
partners
Liquidation – process of winding up the affairs of
the business towards its termination
Legal Provisions:
Partnership Liability (order of priority)
1. Partnership liabilities (outside creditors)
2. Partner’s Interest (other than their capital
balance) – inside creditors
3. Partner’s Capital balance
4. Share in profit
Marshalling Personal Assets
1. Personal Creditors
2. Partnership Creditors
3. Those due to the Partner’s resulting from capital
deficiency
*when partnership involves an industrial partner,
will also be held liable in the partnership liability
*deficient partner may apply right to offset loan
balance against his capital deficiency
*cash withheld, when creditors cannot be fund, it
shall not be distributed
*if problem’s silent, others partners will absorb
partner’s capital debit balance
Terminologies:
 a. Realization – process of selling or converting
assets into cash
b. Gain or loss on realization – difference
between the cash proceeds and the book
value of the assets sold
c. Capital Deficiency – share in the partnership
losses is higher than his or her capital
balance
d. Right of Offset – legal right to apply a part
or all of the amount owing to a partner
against his or her capital deficiency
e. Partner’s Interest – sum of the loan payable
f. Partner’s free interest – partner’s interest
that can be paid out
g. Partner’s restricted interest – interest that
cannot be paid out
h. Solvent partners – partners with sufficient
remaining personal assets
i. Theoretical loss – possible or potential
future loss
Types of partnership liquidation:
1. by lump sum
(a) non-cash assets are sold before any cash is
disbursed

2. by installment
(a) schedule of safe payment
(b) cash priority program