INTRODUCTION TO PARTNERSHIP ACCOUNTING

Partnership – a contract (may be oral or written) whereby two or more persons bind
themselves to contribute money, property or industry into a common fund
with the intention of dividing the profit among themselves (Article 1767 of
the Civil Code of the Philippines). The persons are usually individuals. Any
natural person who possesses the right to enter into a contract can become a
partner. Partnerships must attempt to make a profit. Non-profit
organizations may not be partnerships.
– Securities and Exchange Commission (SEC) is the governing body that
is in charge of partnerships in the Philippines while the Department of
Trade and Industry (DTI) is the governing body in charge of sole
proprietorships.
– also defined as an association of two or more persons who co-own a
business for profit.

Characteristics of a Partnership
1. Mutual agency – any partner may act as an agent of the partnership in conducting
its affairs. Each partner has an equal right to act for the partnership and to enter into
contracts binding upon it, as long as he acts within the normal scope of business
operations.
2. Limited life – a partnership may be dissolved at any time by action of the partners
or by operation of law. The withdrawal, death, retirement, bankruptcy, incapacity of
a partner and the admission of a new partner dissolves the partnership.
3. Unlimited liability – the personal assets of a general partner may be used to satisfy
the claims of the creditors of the partnership if the partnership assets are not enough
to settle the liabilities to outsiders upon liquidation. [General Partners are the only
ones liable]
4. Co-ownership of property – properties contributed to the partnership are owned by
the partnership. Properties invested by a partner cease to be his own personal
property.
5. Co-ownership of profit – a partner has the right to share in partnership profits. The
partners are entitled to share in the firm’s profits as a return on their investment.
6. Legal entity – a partnership has a legal personality separate and distinct from that of
each of the partners. A partnership may, therefore, acquire property in its own name
and may enter into contracts.

Advantages of a Partnership
1. It is easy to form and to dissolve. A partnership is ended whenever there are
changes in the ownership structure such as withdrawal of a partner or admission of a
new partner.
2. Greater amount of capital may be raised compared to a sole proprietorship. The
source of capital investment comes from 2 or more persons.
3. There is relative freedom and flexibility in decision-making compared to a
corporation. Decisions are effected simply by agreement among the partners
without the formalities necessary under a corporation.
 4. It is better managed because business affairs are supervised by more than one
person. Better management results from the combined experience and ability of
several individuals.
5. The unlimited liability of a general partner makes it reliable from the point of view
of creditors.

Disadvantages of a Partnership
1. The unlimited liability of a partnership deters many from investing in a partnership.
2. There is lack of business continuity because it can be easily dissolved.
3. There is difficulty in transferring ownership interest because ownership interest in
the partnership cannot be transferred without the consent of all the partners.
4. Limited amount of capital may be raised compared to a corporation.
5. There is likelihood of dissension and disagreement when each of the partners has the
same authority in the management of the firm.

Kinds of Partnerships
1. According to activity
a. Service – main activity is the rendering of services
b. Merchandising or Trading – main activity is the purchase or sale of goods
c. Manufacturing – main activity is the production of goods
2. According to liability
a. General – one consisting of general partners who are liable prorata and
sometimes solidarily with their separate property for partnership liabilities.
b. Limited – one consisting of one or more general partners and one or more
limited partners. “LTD” is added to the name of the partnership.
3. According to object
a. Universal partnership of all present property – one in which the partners
contribute all the property which actually belong to each of them, at the time
of the constitution of the partnership, to a common fund with the intention of
dividing the same among them as well as the profits which they may acquire
therewith. All assets contributed to the partnership and subsequent
acquisitions become common partnership assets.
b. Universal partnership of profits – one which comprises all that the partners
may acquire by their industry or work during the existence of the partnership
and the usufruct of movable or immovable property which each of the
partners may possess at the time of the institution of the contract. The
original movable or immovable property contributed do not become
common partnership assets.
c. Particular partnership – one which has for its object determinate things, their
use or fruits or a specific undertaking or the exercise of a profession of
vocation.

Kinds of Partners
a. According to Investment
1. Capitalist – one who contributes capital in money or property.
2. Industrial – one who contributes industry, labor, skill or service.
3. Capitalist-Industrial – one who contributes money, property and industry
 b. According to Liability
1. General – one whose liability to third persons extends to his private property
2. Limited – one whose liability to third persons is limited only to the extent of his
capital contribution to the partnership.
c. According to Participation
1. Nominal – a partner in name only.
2. Secret – one who takes active part in the business but whose connection with the
partnership is concealed or unknown to the public.
3. Silent – one who does not participate actively in the management of partnership
affairs.
4. Managing Partner – one who manages actively the business of the partnership

Articles of Co-Partnership – agreement in writing among the partners governing the

nature and terms of the partnership contract. This agreement is the framework within which
the partners are to operate or conduct partnership business – from formation to operations
then to the eventual dissolution and liquidation of the partnership. Observations of these
details will help minimize, if not eliminate, the confusion and disputes that may arise
between or among the partners.

The written agreement among the partners governs the formation, operation and dissolution
of the partnership and is required to be registered with SEC. It contains the following
information:
1. The name of the partnership;
2. The names, addresses of the partners, classes of partners stating whether the partner
is a general or a limited partner;
3. The effective date of the contract;
4. The purpose and principal place of business of the business;
5. The capital of the partnership stating the contributions of each of the partners;
6. The rights and duties of each of the partners;
7. The manner of dividing profit or loss among the partners;
8. The conditions under which the partners may withdraw money or other assets;
9. The manner of keeping the books of accounts;
10. The causes for dissolution and the provision for arbitration in settling disputes.

Features of Partnership Accounting

1. Plurality of capital and drawing accounts – there will be as many capital accounts
and as many drawing accounts as there are partners
2. Partner’s loans – partners may advance money to the partnership in the form of
loans when the business is in need of additional funds.
3. Partner’s borrowings – the partnership may advance money to partners other than
withdrawals in the form of loans.
4. Partner’s salaries – partners are paid salaries for services rendered in the conduct of
partnership business.
5. Interest on investment – interest is allowed to earn on the asset investment of the
partners.
6. Division of profit and losses – net profit or net loss is to be divided among the
partners based on their agreement.
PARTNERSHIP FORMATION
Accounting entries to record the formation of a partnership will depend upon how the
partnership is formed. A partnership may be formed in the following ways, namely:
1. Formation of a partnership for the first time by individuals.
2. Conversion of a sole proprietorship to a partnership
a. A sole proprietor allows another individual who has no business of his own
to join the business.
b. Two or more sole proprietors form a partnership.

General Guidelines
1. Cash investments are recorded using their face values.
2. Non-cash asset investment is recorded at the current fair value of the property at
the time of investment. Independent professional appraisals should be made to
determine the fair value. Fair market value is the amount to be obtained when the
asset is sold at the present time in its present condition.
3. Accounts receivable are recorded in the books of the partnership at gross amount.
Allowance for bad debts is carried forward to the partnership.
4. Depreciable property assets are recorded in the books of the partnership at
carrying value. Accumulated depreciation is not carried forward to the partnership.
5. When a sole proprietorship is converted into a partnership, the following books may
be used:
a. Books of the sole proprietorship may be used as books of the partnership.
b. Books of the sole proprietorship will be closed and a new set of books will
be used for the partnership.

Two Kinds of Partnership Formation

1. Formed by individuals
Cash Cash xxx
investment X, Capital xxx

Non-cash Asset xxx

asset X, Capital xxx
 investment
Note: Use the fair value of the asset.

Non-cash Asset xxx

asset Liability xxx
investment X, Capital xxx
with assumption
of liability
Note: Debit the asset account using its fair value; credit
the liability account using the loan balance to be
assumed by the partnership; and credit the capital
account of the partner using the net amount.

Service or Memo Entry

Industry Mr. X is admitted as an industrial
partner with a ____ share in profits.
2. Sole proprietorship(s) converted into a partnership – accounting procedures are
as follows:
a. Adjust the books of the sole proprietorship(s).
Increase in value Asset xxx
of an asset X, Capital xxx
without a contra-
asset account

Decrease in value X, Capital xxx

of an asset Asset xxx
without a contra
asset account

Increase in value Contra- asset xxx

of an asset X, Capital xxx
with a contra
asset account

Decrease in value X, Capital xxx

of an asset Contra- asset xxx
with a contra
asset account

Increase in value X, Capital xxx

of a liability Liability xxx

Decrease in value Liability xxx

of a liability X, Capital xxx

Note: These adjustments are similar to the year-end

adjusting entries. Only, replace the nominal accounts
 with the Owner, Capital account.

EXAMPLES
A. Formation for the first time
Journal Entries
Cash 200,000
Matthew, Capital 200,000
To record Matthew’s investment

Cash 200,000
Merchandise Inventory 70,000
Land 100,000
Building 500,000
Furniture & Equipment 30,000
Luke, Capital 900,000
To record Luke’s investment

Cash 200,000
Merchandise Inventory 70,000
Mark, Capital 270,000
To record Mark’s investment

Industrial Partner
Memo Entry: John is admitted into the partnership as an industrial partner to share 10% in the
partnership profit.

B. Conversion of sole proprietorship to partnership

Books of Sole Proprietorship
1. Adjust or revalue the assets of the sole proprietorship according to the agreement.
Adjustments are made to the Proprietor’s Capital account.
 For every increase in asset value, there is corresponding increase in the
proprietor’s capital account.
 For every decrease in asset value, there is corresponding decrease in the
proprietor’s capital account.
 For every increase in liability, there is corresponding decrease in the
proprietor’s capital account.
2. Close the proprietor’s books (at adjusted amounts)

Books of the Partnership

1. Record the investments of the Sole Proprietor. ( at adjusted amounts)
 Non-current assets are recorded at their carrying/fair values
2. Record the investments of other partners.

EXAMPLES OF ADJUSTMENT/REVALUATION OF ASSETS

1. Adjustment of all assets without contra account are debited/credited directly to such
asset account with corresponding debit/credit to proprietor’s account.
Example
 a. Equipment per ledger P 100,000
Agreed Valuation 120,000

Adjustment
Equipment 20,000
Proprietor Capital 20,000
To revalue the equipment.

b. Equipment per ledger P100,000

Agreed Valuation 80,000

Adjustment
Proprietor Capital 20,000
Equipment 20,000
To revalue the equipment.

2. Adjustment of all assets without contra account are debited/credited to the related
contra account with corresponding debit/credit to proprietor’s account.
Example
a. Equipment per ledger P 140,000
Accumulated Depreciation per ledger 10,000
Agreed Valuation 120,000

Adjustment
Proprietor capital 10,000
Accumulated Depreciation-Equipment 10,000
To revalue the equipment.

b. Equipment per ledger P 140,000

Accumulated Depreciation per ledger 30,000
Agreed Valuation 120,000

Adjustment
Accumulated Depreciation-Equipment 10,000
Proprietor capital 10,000
To revalue the equipment.

3. Adjustment of Accounts Receivable with/without contra account are debited/credited

to the related contra account with corresponding debit/credit to proprietor’s account.
Example
 a. Accounts Receivable per ledger P 140,000
Agreed Valuation 120,000

Adjustment
Proprietor capital 20,000
Allowance for Doubtful Account 20,000
To decrease the realizable value of accounts receivable

b. Accounts Receivable per ledger P 140,000

Allowance for Doubtful Accounts 30,000
Agreed Valuation 120,000

Adjustment
Allowance for Doubtful Account 10,000
Proprietor capital 10,000
To increase the realizable value of accounts receivable

SAMPLE PROBLEM:
Nadine, a sole proprietor invited Mark and Lark to form a trading partnership. Nadine will
invest her existing business while Mark and Lark will both invest cash and non-cash assets.
The Statement of Financial Position of Nadine Trading on September 15, 2010 showed
the following:
Cash 50,000
Accounts Receivable 220,000
Allowance for Bad Debts 15,000
Merchandise Inventory 575,000
Office Equipment 150,000
Accumulated Depreciation-Office Equipment 50,000
Furniture and Fixture 100,000
Accounts Payable 60,000
Notes Payable 270,000
Nadine, Capital 700,000
The partners agreed that the following adjustments be made in the books of Nadine:
 Merchandise Inventory is to be recorded at its fair value of P550,000.
 10% of the Accounts Receivable is estimated to be uncollectible.
 The office equipment was estimated to have remaining value of P110,000
 The market value of the furniture amount to P120,000.
 Accrued interest on notes of P13,500 should be set up.
Required: 1. Adjust and close the books of Nadine
2. Open the books of the partnership
3. Prepare a statement of financial position

1. ADJUSTMENTS/REVALUATION OF ASSETS
a. Adjustment: Merchandise Inventory is to be recorded at its fair value of P550,000.
Adjusting Entry:
Nadine, Capital 25,000
Merchandise Inventory 25,000
To revalue the merchandise inventory.
b. Adjustment: 10% of the Accounts Receivable is estimated to be uncollectible.
Adjusting Entry:
Nadine, Capital 7,000
Allowance for Bad Debts 7,000
To adjust bad debts allowance
c. Adjustment: The office equipment was estimated to have remaining value of P110,000
Adjusting Entry:
Accumulated Depreciation 10,000
Nadine, Capital 10,000
To revalue the office equipment
d. Adjustment: The market value of the furniture amount to P120,000.
Adjusting Entry:
Furniture and Fixtures 20,000
Nadine Capital 20,000
To revalue the furniture
e. Adjustment: Accrued interest on notes of P13,500 should be set up.
Adjusting Entry:
Nadine, Capital 13,500
Interest Payable 13,500
To record accrued interest.

2. CLOSING THE BOOKS OF NADINE

Allowance for Bad Debts 22,000
Accumulated Depreciation-Office Equipment 40,000
Accounts Payable 60,000
Notes Payable 270,000
Interest Payable 13,500
Nadine, Capital 684,500
Cash 50,000
Accounts Receivable 220,000
Merchandise Inventory 550,000
Office Equipment 150,000
Furniture and Fixtures 120,000
To close Nadine’s books

3. OPEN A NEW SET OF BOOKS FOR THE PARTNERSHIP

A. RECORD THE INVESTMENT OF THE SOLE PROPRIETOR
Cash 50,000
Accounts Receivable 220,000
Merchandise Inventory 550,000
Office Equipment 110,000
 Furniture and Fixtures 120,000
Allowance for Bad Debts 22,000
Accounts Payable 60,000
Notes Payable 270,000
Interest Payable 13,500
Nadine, Capital 684,500
To record Nadine’s investment.

B. RECORD THE INVESTMENTS OF OTHER PARTNERS

Cash 100,000
Merchandise Inventory 100,000
Mark, Capital 200,000
To record Marie’s investment

Cash 100,000
Land 100,000
Building 700,000
Lark, Capital 900,000
To record Lark’s investment

LMN Partnership
Statement of Financial Position
September 15,2012

Assets
Note
Current Assets
Cash P250,000
Trade and Other Receivables 1 198,000
Merchandise Inventory 650,000
P1,098,000

Non-Current Assets
Property, Plant and Equipment 2
1,030,000
Total Assets
P2,128,000

Liabilities and Partners’ Equity

Current Liabilities
Trade and Other Payables 3 P
343,500

Partners’ Equity
Lark, Capital P 900,000
Mark, Capital 200,000
 Nadine Capital 684,500
1,784,500
Total Liabilities and Partners’ Equity P
2,128,000

Notes to Financial Statements

Note 1 Trade and other Receivables
Accounts Receivable P 220,000
Less: Allowance for Bad Debts 22,000
Net Realizable Value P 198,000

Note 2 Property, Plant and Equipment

Land P 100,000
Building 700,000
Office Equipment 110,000
Furniture and Fixtures 120,000
Total P1,030,000

Note 3 Trade and other Payables

Accounts Payable P 60,000
Notes Payable 270,000
Interest Payable 13,500
Total P 343,500

TWO KINDS OF PARTNERSHIP FORMATION

1. Formed by individuals
Cash Cash xxx
investment X, Capital xxx

Non-cash Asset xxx

asset X, Capital xxx
investment
Note: Use the fair value of the asset.

Non-cash asset Asset xxx

investment with Liability xxx
assumption of X, Capital xxx
liability

Note: Debit the asset account using its fair value; credit the liability account using the loan
balance to be
assumed by the partnership; and credit the capital account of the partner using the net
amount.
 Service or Memo Entry
Industry Mr. X is admitted as an industrial partner with a ____
share in profits.

2. Sole proprietorship(s) converted into a partnership – accounting procedures are as follows:

a. Adjust the books of the sole proprietorship(s).
Increase in value of Asset xxx
an
asset without a X, Capital xxx
contra-
asset account

Decrease in value of X, Capital xxx

an
asset without a Asset xxx
contra-
asset account

Increase in value of Contra- asset xxx

an
asset with a contra- X, Capital xxx
asset account

Decrease in value of X, Capital xxx

an
asset with a contra- Contra- asset xxx
asset account

Increase in value X, Capital xxx

of a liability Liability xxx

Decrease in value Liability xxx

of a liability X, Capital xxx

Note: These adjustments are similar to the year-end

adjusting entries. Only replace the nominal accounts
with the Owner, Capital account.

b. Close the books of the sole proprietorship(s).

Closing entry Contra-asset xxx
Liabilities xxx
 X, Capital xxx
Assets xxx
c. Record the investment of the partners in the books of the partnership – assume new set of books.
Opening entry Assets xx
x
to record Allowance for Bad Debts xxx
investment of Liabilities xxx
sole proprietor X, Capital xxx

Notes:
1. Accounts receivable is taken at gross amount; allowance for bad debts is carried over in
the books of the partnership.
2. Depreciable property assets are recorded at carrying value; accumulated depreciation is
not carried over in the books of the partnership.

CLASSROOM EXERCISES – PARTNERSHIP FORMATION

1. A partnership is formed by four (4) individuals who make the following investments:
Allan Cash of P100,000
Bob Land costing P150,000 with a fair market value of P200,000
Carl Delivery van costing P350,000 on which there is an outstanding liability of P50,000 to
be assumed by the new business.
Dan Labor/skills with a 10% share in profits.
Prepare journal entries to record the investment of the partners.
May Cash 100,000
25
Allan, Capital 100,000
To record Allan’s investment.

25 Land 200,000
Bob, Capital 200,000
To record Bob’s investment.

25 Delivery equipment 350,000

Accounts payable 50,000
Carl, Capital 300,000
To record Carl’s investment.

25 Memorandum Entry: Dan was admitted as industrial

partner with 10% share in the partnership profits.

2. Jowie is operating an ice cream parlor. She admits Gloria as a partner in her business. Accounts
in the ledgers of
Jowie’s business as of December 31, 2015 show the following balances:
 Cash P 6,000
Accounts receivable 120,000
Merchandise Inventory 180,000
Office equipment 30,000
Accumulated depreciation 10,000
Total assets P326,000

Accounts Payable P32,000

Notes Payable 30,000
Jowie, Capital 264,000
Total liabilities and owner’s P326,000
equity
For purposes of establishing the interest of Gloria, the following adjustments in the books of Jowie
are agreed upon.
a. An allowance for bad debts of 2% of accounts receivable is to be set up.
b. The merchandise inventory is to be valued at P202,000.
c. Office equipment is to be depreciated by 10% of its cost.
d. Prepaid expense of P6,500 and accrued expenses of P4,000 are to be recognized.
Gloria will invest cash to give her a 1/3 interest in the partnership. Prepare all necessary journal
entries in the books of Jowie. Prepare all necessary entries in the books of the partnership.
Assume new set of books.

I. BOOKS OF JOWIE
A. Adjusting Entries/Revaluation of Assets
Dec Jowie, Capital 2,400
31
Allowance for Doubtful Accounts 2400
To set up 2% doubtful accounts.

31 Merchandise inventory 22,000

Jowie, Capital 22,000
To revalue the inventories.

31 Accumulated depreciation-Equipment 7,000

Jowie, Capital 7,000
To revalue the equipment.

31 Prepaid expenses 6,500

Accrued expenses 4,000
Jowie, Capital 2,500
To record prepaid and accrued expenses.

B. Closing entries
 Dec Allowance for doubtful accounts 2,400
31
Accumulated depreciation 3,000
Accounts payable 32,000
Notes payable 30,000
Accrued expenses 4,000
Jowie, Capital 293,100
Cash 6,000
Accounts receivable 120,000
Merchandise Inventory 202,000
Prepaid expenses 6,500
Office equipment 30,000
To close Jowie’s books.

II. BOOKS OF PARTNERSHIP

Opening Entries
Dec Cash 6,000
31
Accounts receivable 120,000
Merchandise Inventory 202,000
Prepaid expenses 6,500
Office equipment* 27,000
Allowance for doubtful accounts 2,400
Accounts payable 32,000
Notes payable 30,000
Accrued expenses 4,000
Jowie, Capital 293,100
To record Jowie’s investment.

Dec Cash 146,550

31
Gloria, Capital** 146,550
To record Gloria’s investment.

Note: *Equipment was recorded in the books of the partnership at carrying value.
**Computation of Gloria’s capital:
Total Partners’ Equity (293,100/ P439,650
2/3)
X Gloria’ interest 1/3
Gloria’s cash investment P146,550

III. STATEMENT OF FINANCIAL POSITION

 Jowie and Gloria Company
Statement of Financial Position
December 31,2015

ASSETS
Current Assets:
Cash 152,550
Trade and other receivables 117,600
Merchandise Inventory 202,000
Prepaid expenses 6,500
478,650
Non-Current Assets
Property, Plant and Equipment
27,000
TOTAL ASSETS
505,650
LIABILITIES AND PARTNERS’ EQUITY

Current Liabilities
Trade and other payables
66,000
Partners’ Equity
Jowie, Capital 293,100
Gloria, Capital 146,550
439,650
TOTAL LIABILITIES AND PARTNERS’ EQUITY
505,650