Republic of the Philippines

CAMARINES NORTE STATE COLLEGE

F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

BSA 102 – LM 2

ACCOUNTING FOR PARTNERSHIPS – BASIC CONSIDERATIONS

At the end of this topic, students should be able to

1. Distinguish partnership from other forms of business organization.

2. Discuss the advantages and disadvantages of a partnership form of business organization
3. Classify partners and partnerships.

Discussion:

PARTNERSHIP DEFINED

In a contract of partnership, two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profit among themselves. Two or more
persons may also form a partnership for the exercise of a profession (Civil Code of the Philippines,
Article 1767).

An association of two or more persons to carry on, as co-owners, a business for profit (Uniform
Partnership Act, Section 6)

A partnership exists where to or more individuals combine their capital, property, skill or
labor, or all of these, for the transaction of a lawful business for gain, upon an
understanding that profits or losses shall be shared or borne by them in certain
proportions (Securities and Exchange Commission, Frequently Asked Questions).

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.

Partnerships resemble sole proprietorships, except that there are two or more owners of the business.
Each owner is called a partner. Partnerships are often formed to bring together various talents and
knowledge. Partnerships provide a means of obtaining more equity capital than a single individual can
obtain and allow the sharing of risks for rapidly growing businesses.

CHARACERISTICS OF A PARTNERHSIP

1. Mutual Contribution – There cannot be a partnership without contribution of money, property

or industry (i.e. work or services which may either be personal manual efforts or intellectual) to
a common fund.
2. Unlimited Liability – All partners (except limited partners), including industrial partners, are
personally liable for all debts incurred by the partnership. If the partnership can not settle its
obligations, creditors’ claims will be satisfied from the personal assets of the partners without
prejudice to the rights of the separate creditors of the partners.
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

3. Limited Life – A partnership is easily dissolved by the express will of any partner; by the
termination of a definite term stipulated in the contract; by any event which makes it unlawful
to carry out the partnership; when a specific thing which a partner has promised to contribute
to the partnership perishes before the delivery [Art. 1830(4)]; expulsion, death, insolvency or
civil interdiction of a partner; admission of a new partner.
4. Separate Legal Personality – A partnership has a juridical personality separate and distinct from
that of each of the partners (Civil Code of the Philippines, Article 1768). The partnership can
transact and acquire properties in its name.
5. Mutual Agency – The partners are agents of the partnership for the purpose of its business. As
such, a partner may legally bind the partnership to a contract agreement that is in line with the
partnership’s operations.
6. Co-ownership of Contributed Property – All assets contributed into the partnership are owned
by the partnership by virtue of its separate and distinct juridical personality. If one partner
contributes an asset to the business, all partners jointly own it in a special sense. However, a
partner has no right to possess a partnership property for any other purpose without the
consent of his partners.
7. Co-ownership of Profits – A partnership is created as a business (profit-oriented entity), as such,
each partner is entitled to his share in the partnership profit. A stipulation which excludes one
or more partners from any share in the profits or losses is void (Civil Code of the Philippines,
Article 1799).
8. Transfer of Ownership – In case of dissolution, the transfer of ownership, whether to a new or
existing partner, requires the approval of the remaining partners.
9. Ease of Formation – As compared to corporations, the formation of a partnership requires less
formality.
10. Partners’ Equity Accounts – Accounting for partnerships are much like accounting for sole
proprietorships. The difference lies in the number of partners’ equity accounts. Each partner
has a capital account and a withdrawal account that serves similar functions as the related
accounts for sole proprietorships.

ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP

Advantage
• Ease of Formation
• Shared responsibility of running the
business
• Flexibility in decision making
• Greater capital compared to sole
proprietorship
• Relative lack of regulation by the
government as compared to corporations
Disadvantage
• Limited life/Easily dissolved
• Limited liability
• Conflict among partners
• Lesser capital compared to a corporation
• A partnership (other than a general
professional partnership) is taxed like a
corporation
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

PARTNERSHIP DISTINGUISHED FROM CORPORATION

1. Manner of Creation – A partnership is created by mere agreement of the partners while a

corporation is created by operation of law.
2. Number of Persons – Two or more persons may form a partnership; in a corporation, at least
five (5) persons, not exceeding fifteen (15).
3. Commencement of Juridical Personality – In a partnership, juridical personality commences
from the execution of the articles of partnership; in a corporation, from the issuance of
certificate of incorporation by the Securities and Exchange Commission.
4. Management – In a partnership, every partner is an agent of the partnership if the partners did
not appoint a managing partner; in a corporation, management is vested on the board of
directors.
5. Extent of Liability – In a partnership, each of the partners except a limited partner is liable to the
extent of his personal assets; in a corporation, stockholders are liable only to the extent of their
interest or investment in the corporation.
6. Right of Succession – In a partnership, there is no right of succession; in a corporation, there is
right of succession. A corporation has the capacity of continued existence regardless of the
death, withdrawal, insolvency or incapacity of its director or stockholders.
7. Terms of Existence – In a partnership, for any period of time stipulated by the partners; in a
corporation, perpetual existence unless its articles of incorporation provides otherwise (RA
11232, Sec. 11. Prior to RA 11232, Batas Pambansa Blg. 68 provides that a corporation shall
exist for a period not exceeding fifty years from the date of incorporation unless sooner
dissolved or unless said period is extended.

CLASSIFICATIONS OF PARTNERSHIPS
1. According to object:
a. Universal partnership of all present property – All contributions become part of the
partnership fund.
b. Universal partnership of profits – All that the partners may acquire by their industry or work
during the existence of the partnership and the use of whatever the partners contributed at
the time of the institution of the contract belong to the partnership. If the articles of
universal partnership did not specify its nature, it will be considered a universal partnership
of profits.
c. Particular partnership – The object of the partnership is determinate – its use or fruit,
specific undertaking, or the exercise of a profession or vocation.
2. According to Liability
a. General – All partners are liable to the extent of their separate properties
b. Limited – The limited partners are liable only to the extent of their personal contributions.
In a limited partnership, the law states that there shall be at least one general partner.
3. According to duration
a. Partnership with a fixed term or for a particular undertaking.
b. Partnership at will – One in which no term is specified and is not formed for any particular
undertaking
4. According to purpose
a. Commercial or trading partnership – One formed for the transaction of business
b. Professional or non-trading partnership – One formed for the exercise of profession
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

5. According to legality of existence

a. De jure partnership – One which has complied with all the legal requirements for its
establishment
b. De facto partnership – One which has failed to comply with all the legal requirements for its
establishment

KINDS OF PARTNERS

1. General partner – one who is liable to the extent of his separate property after the assets of the
partnership are exhausted.
2. Limited partner – One who is liable only to the extent of his capital contribution. He is not
allowed to contribute industry or services only.
3. Capitalist partner – One who contributes money or property to the common fund of the
partnership
4. Industrial partner – One who contributes his knowledge or personal service to the partnership
5. Managing partner – One whom the partners has appointed as manager of the partnership
6. Liquidating partner – One who is designated to wind up or settle the affairs of the partnership
after dissolution
7. Dormant partner – One who does not take active part in the business of the partnership and is
not known as a partner
8. Silent partner – One who does not take active part in the business of the partnership though
may be known as a partner
9. Secret partner – One who takes active part in the business but is not known to be a partner by
outside parties
10. Nominal partner or partner by estoppel – One who is actually not a partner but who represents
himself as one

EXERCISE 1

Multiple Choice

1. Which of the following is not a characteristic of most partnership?

a. Ease of formation c. Mutual agency
b. Limited liability d. Limited life
2. An advantage of the partnership as a form of business organization would be
a. A partnership is bound by the acts of the partners
b. A partnership is created by mere agreement of the partners
c. Partners do not pay income taxes on their share in partnership profit
d. The death or withdrawal of a partner may terminate a partnership
3. Which of the following is a characteristic of most partnerships?
a. Unlimited life c. Limited liability
b. Division of profits only d. Mutual contribution
4. A business would be organized as a limited liability partnership to
a. Reduce regulation of the business
b. Eliminate double taxation
c. Raise additional capital
d. Limit the liability of the owners to their investment
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

5. A partnership
a. Is created by agreement of the partners
b. Has a juridical personality separate and distinct from that of each of the partners
c. May be constituted in any form, except where immovable property or real rights are
contributed, in which the law requires that a public instrument be executed
d. Is dissolved by death of a partner
e. All of the above
6. Unlimited liability means
a. There is no limit on the amount an owner can borrow
b. Creditors will absorb any loss from nonpayment of debt
c. The business can borrow money for any type of purchase
d. The owner is responsible for all business debts
e. Shareholders can borrow money from the business
7. First Statement : Under the partnership form of business, large amounts of capital can be raised
Easily
Second Statement : A public instrument needs to be executed when immovable property or
Real rights are contributed to the partnership

a. True ; True c. False ; True

b. True ; False d. False ; False
8. First Statement : The essence of partnership is that each partner must share in the profits or
losses of the venture
Second Statement : A partnership may be established for charity.

a. True ; True c. False ; True

b. True ; False d. False ; False
9. After Mr. Yam has maximized his standby credit limit from the DDO Bank and still cannot cope
with the working capital needs of his fast growing business, what is his recourse if he wants his
company to continue growing?
a. Obtain a partner or form a corporation to access more funds
b. Hire more employees
c. Continue to plead with the bank for more money
d. Hold a fundraising campaign
10. Ms. Gay’s partnership agreement with two partners was done haphazardly and thus caused
some limitations. One of the concerns was uneven productivity among the partners. The
agreement required each partner to contribute to every aspect of the business to receive an
equal portion of the profits. This agreement did not reflect the idea that
a. Partners need not be “equal” because each bring varied talents and knowledge into the
partnership
b. General partners are required to be active in day-to-day business operations
c. Customers and creditors of a limited partnership need not be protected
d. The Limited Partnership Law requires every general partnership to have at least one
limited partner
e. Each partner may enter into contracts on behalf of all the others
References:
Millan, Zeus Vernon E(2020), Accounting for Special Transactions
Ballada, Win Lu (2016), Accounting for Partnership and Corporation
Securities and Exchange Commission
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines