PROFE01-ACCOUNTING FOR SPECIAL TRANSACTIONS

Chapter 1 Partnership Formation, Operations, Dissolution

Learning Objectives

Differentiate between the accounting for partnerships, sole proprietorships, and

corporations.

State the valuation of contributions of partners.

Account for the initial investments of the partners to the partnership.

State the peculiar accounts used in a partnership and identify the transactions that affect
these accounts.

State the items that affect the division of a partnership’s profits or losses among the
partners.

Compute for the share of a partner in the partnership’s profit or loss.

Determine the causes of partnership dissolution.

Account for the effects of partnership dissolution on the partnership equity.

Partnership

• A 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.

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Characteristics of a partnership

1. Ease of formation

2. Separate legal personality

3. Mutual agency

4. Co-ownership of property

5. Co-ownership of profits

6. Limited life

7. Transfer of ownership

8. Unlimited liability (this is applicable to a general partnership)

Accounting for partnerships

• The following are the major considerations in the accounting for the equity of a
partnership:

1. Formation – accounting for initial investments to the partnership

2. Operation – division of profits or losses

3. Dissolution – admission of a new partner and withdrawal, retirement or death of a

partner

4. Liquidation – winding-up of affairs

Valuation of contributions of partners

• All assets contributed to (and related liabilities assumed by) the partnership shall be
measured at fair value.

Partners’ ledger accounts

1. Capital accounts

2. Drawing accounts

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3. Receivable from/ Payable to a partner

Bonus on initial investments

• A bonus exists when the capital account of a partner is credited for an amount greater
than or less than the fair value of his contributions.

• The bonus is treated as adjustment to the capital accounts of the other partners.

Partnership Operations

Division of profits and losses

• The partners shall share in the profits or losses of a partnership in accordance with the
partnership agreement.

• If only the share of each partner in the profits has been agreed upon, the share of each
in the losses shall be in the same proportion.

• In the absence of stipulation, the share of each partner in the profits and losses shall be
in proportion to what he may have contributed, but the industrial partner shall not be
liable for the losses. (Art. 1797 of the Philippine Civil Code)

• The designation of losses and profits cannot be entrusted to one of the partners (Art.
1798).

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• A stipulation which excludes one or more partners from any share in the profits or losses
is void (Art. 1799).

Other stipulations that affect division of P/L

1. Salaries – normally, an industrial partner shall receive salary, in addition to his share in
the partnership’s profits, as compensation for his services to the partnership.

2. Bonuses – the partnership agreement may stipulate a bonus to be given to a managing

partner to encourage excellent management performance. Unlike for salaries though, a
partner is entitled to a bonus only if the partnership earns profit.

3. Interest on capital contributions – the partnership agreement may stipulate that each
partner may be entitled to a per annum interest computed on his capital contributions.

• The above-mentioned items are normally provided first to the respective partners and
any remaining amount of the profit or loss is shared based on the stipulated profit or
loss ratio.

Partnership Dissolution

Dissolution

Dissolution is the change in the relation of the partners caused by any partner ceasing to
be associated in the carrying on of the business.

Causes of partnership dissolution

1. Admission of a partner

2. Withdrawal, retirement or death of a partner

3. Incorporation of a partnership

Admission of partner

• The admission of a new partner may be effected either through:

1. Purchase of interest in the partnership, or

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2. Investment in the partnership

Purchase of interest

• A personal transaction between and among the partners

• Any consideration paid or received is not recorded in the partnership books

• Only a transfer within equity is made to establish the capital account of the new partner
and decrease the capital account(s) of the selling partner(s).

• No gain or loss shall is recognized in the partnership books.

Revaluation of assets

• When a partnership is dissolved but not liquidated, a new partnership is created. The
assets and liabilities carried over to the new partnership are restated to fair values.

• Any adjustment to the assets and liabilities is allocated first to the existing partners
before recording the admission of the new partner.

Investment in the partnership

• The incoming partner invests directly to the partnership instead of purchasing interest
from an existing partner(s).

• This is a transaction between the new partner and the partnership. Any consideration
paid by the incoming partner is recorded in the partnership books.

• No gain or loss shall be recognized

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Withdrawal, retirement or death of a partner

• When a partner withdraws, retires or dies, his interest may be purchased (a) by one or
all of the remaining partners or (b) by the partnership.

• The interest of the withdrawing, retiring, or deceased partner shall be adjusted for the
following:

a. his share of any profit or loss during the period up to the date of his withdrawal,
retirement or death; and

b. His share of any revaluation gains or losses as at the date of his withdrawal,
retirement, or death.

• Purchase by one or all of the remaining partners

This is a transaction between and among the partners (or deceased partner’s estate). As
such, the settlement amount is not recorded in the books. The only entry to be made in the
partnership books is a transfer within equity.

• Purchase by the partnership

This is a transaction between the retiring or withdrawing partner (or deceased partner’s
estate) and the partnership. As such, the settlement amount is recorded in the books.

Incorporation of a partnership

• On date of incorporation:

a. The partners’ capital balances are adjusted for their respective shares in any
profit or loss and revaluation gains or losses as at the date of incorporation. The
adjusted capital balances may be used in determining the number of shares to
be issued to each partner.

b. Normally, the books of the partnership are closed and new books are set-up for
the corporation.

To know more information about – Chapter 1- Partnership

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PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=NvSqhVNX97A

To know more information about – Chapter 1- Partnership Dissolution

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=EcUWQb3YFH8

Reference:

TEXTBOOK-Millan, Accounting for Special Transactions (2018), Philippines: Bandolin

Enterprise

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