Partnership – a contract whereby two or more persons OPENING ENTRIES

bind themselves to contribute money, property, or Partners may contribute cash, property, or industry to
industry into a common fund with the intention of the partnership.
dividing profits among themselves. Cash – recorded at face value
Non Cash – agreed value or fair market value in the
CHARACTERISTICS OF A PARTNERSHIP
absence of agreement.
1. Mutual agency. Any partner may act as an Industry – a memorandum entry is prepared
agent of the partnership in conducting its
PARTNERSHIP FORMATION
affairs.
2. Unlimited liability. The personal assets of any Formation A: Two or more persons form a partnership
partner may be used to satisfy the partnership for the first time. All partners are new in the business.
creditors’ claims upon liquidation, if partnership
1. Cash Contributions Only (Capitalist Partners)
assets are not enough to settle the liabilities to
outsiders. A and B agreed to form a partnership by contributing
3. Limited life. A partnership may be dissolved at 600,00 cash each.
any time by action of the partners or by
operation of law. JE Cash 1,200,000
4. Mutual participation in profits. A partner has A, Capital 600,000
the right to share in the partnership profits. B, Capital 600,000
5. Legal entity. A partnership has legal personality 2. Cash and Non-cash contributions (Capitalist
separate and distinct from that of each of the Partners)

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partners.

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6. Co-ownership of contributed assets. Property A and B made the following contributions in the

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contributed to the partnership are owned by partnership:
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the partnership by virtue of its separate legal A B

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personality. Cash 600,000 200,000
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7. Income tax. Partnerships, except general Inventories 300,000
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professional partnership, are subject to the 30% Equipment 500,000

income tax.
JE Cash 800,000
Accounting for Partnerships
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Inventories 300,000
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Plurality of Capital and Drawing Accounts. In a Equipment 500,000

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partnership, there should be as many capital accounts A, Capital 900,000

and as many drawing accounts as there are partners. B, Capital 700,000
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CAPITAL ACCOUNT 3. Contributions in the form of Cash, Non-cash,

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and Industry (Capitalist and Industrial Partners)

Permanent withdrawal Original investment by
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of capital a partner A, B, and C formed a partnership. A contributed 600,000

cash, B contributed 300,000 cash and equipment valued
Share in partnership Additional investment at 450,000. C is an industrial partner to contribute her
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loss from operation by a partner special skills and talents to the partnership. Profit or loss
is to be shared equally among the partners.
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Debit balance of drawing Share in partnership

account closed to profits from operations JE Cash 900,000
capital to be added to capital Equipment 450,000
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DRAWING ACCOUNT
Personal withdrawal by a
Partner
Share in Partnership loss
from operations (this may
be debited directly to the
partner’s capital account)
Share in partnership
profits from operations
(this may be credited
directly to the partner’s
capital account)
A, Capital 600,000
B, Capital 700,000
Memo entry:
C is admitted into the partnership as an
industrial partner to share 1/3 in the partnership profit.
Formation B: A sole proprietor and an individual form a
partnership.
Problem A: A and B formed a partnership wherein A is
to contribute cash while B is to transfer the assets and
liabilities (net assets) of his business. Account balances
on the book of B are as follows:

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 Debit Credit JE 2 Inventories 30,000
Cash 300,000 B, Capital 30,000
A/R 450,000 JE 3 Prepaid Expenses 12,000
Inventories 240,000 Expenses Payable 5,000
A/P 90,000 B, Capital 7,000
B, Capital 900,000 JE 4 Allowance for Uncollectible 22,000
A/P 90,000
The partners agreed on the following conditions:
Expenses Payable 5,000
1. An allowance for uncollectible accounts of
B, Capital 915,000
22,000 is to be established.
Cash 300,000
2. The inventories are to be valued at their current
A/R 450,000
replacement cost of 270,000.
Inventories 270,000
3. Prepaid expenses 12,000 and accrued expenses
Prepaid Expense 12,000
of 5,000 are to be recognized.
Formation C: Two or more sole proprietors form a
4. B is to credited for an amount equal to the net
partnership.
assets transferred.
5. A is to contribute sufficient cash to have an Problem A: A, owner of A Variety store, and B, owner of
equal interest in the partnership. B Trading decided to combine their business on July 1,
2019. Each is to transfer business assets and liabilities
Assumption 1: The partnership will use the books of the
(net assets) at agreed values. Statements of Financial
sole proprietor
Position for the two proprietors are presented below.
Step 1: Adjust the books of the sole proprietor to bring

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A Variety Store

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account balances to agreed values.
Statement of Financial Position

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Note: Adjusting entries necessary upon partnership
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formation are recorded through capital accounts.

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Assets
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JE 1 B, Capital 22,000 Cash 120,000
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Allowance for Uncollectible 22,000 A/R 72,000

JE 2 Inventories 30,000 Allowance for Uncollectible (6,000)
B, Capital 30,000 Inventory 330,000
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JE 3 Prepaid Expenses 12,000 Equipment 600,000

Expenses Payable 5,000
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Accum Depr (30,000)

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B, Capital 7,000 Total Assets 1,086,000

Step 2: Record the investment of the other partner, A Liabilities and Capital
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A/P 132,000
JE Cash 915,000 A, Capital 954,000
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A, Capital 915,000 Total Liabilities and Capital 1,086,000

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Assumption 2: The partnership will open a new set of

books. B Trading
Statement of Financial Position
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 To record the investment of B July 1, 2019

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JE Cash 300,000
Assets
A/R 450,000
Cash 30,000
Inventories 270,000
A/R 300,000
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Prepaid Expense 12,000

Allowance for Uncollectible (21,000)
Allowance for Uncollectible 22,000
Inventory 1,260,000
A/P 90,000
Equipment 480,000
Expenses Payable 5,000
Accum Depr (6,000)
B, Capital 915,000
Total Assets 2,043,000
 To record the investment of A Liabilities and Capital
A/P 333,000
JE Cash 915,000
A, Capital 1,710,000
A, Capital 915,000
Total Liabilities and Capital 2,043,000
 To adjust and close in the separate books of the
sole proprietor. The partners agreed on the following conditions:
1. Partner’s capital in the partnership shall be
JE 1 B, Capital 22,000 equal to the adjusted net assets transferred.
Allowance for Uncollectible 22,000 on 04-19-2021 12:09:42
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 a. Allowance for uncollectible shall be 7,200 and
30,000 respectively.
b. Inventories are to be valued at 120% of their
recorded values.
c. Both equipments are 5% depreciated.
Assumption 1: The partnership will use the books of one
of the sole proprietors
 Assuming the books of B trading will be used by
the partnership.
Key Points. In the opening entry, the plant assets are
recorded net of depreciation. The account accumulated
depreciation is not carried on the partnership books.
The net amount, being the agreed value, represents the
cost of the plant assets to the partnership and such
amount becomes the basis for future depreciation by
the partnership.

Step 1: Adjust the books of B Trading

JE a: B, Capital 9,000
Allowance for Uncollectible 9,000
JE b: Inventory 252,000
B, Capital 252,000
JE c: B, Capital 18,000
Accum. Depr. 6,000
Equipment 24,000

Step 2: Record the investment of A.

JE Cash 120,000

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A/R 72,000
Inventory 396,000

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Equipment 570,000
Allowance for Uncollectible
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7,200

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A/P 132,000
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A, Capital 1,018,800

 To adjust and close the books of A Variety store:

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JE a: A, Capial 1,200
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Allowance for Uncollectible 1,200

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JE b: Inventory 66,000
A, Capital 66,000
CE: Allowance for Uncollectible 7,200
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Accum. Depr. 30,000

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A/P 132,000
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A, Capital 1,018,800
Cash 120,000
A/R 72,000
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Inventory 396,000
Equipment 600,000
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Assumption 2: The partnership will open a new set of

books.
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JE 1: Cash 120,000
A/R 72,000
Inventory 396,000
Equipment 570,000
Allowance for Uncollectible 7,200
A/P 132,000
A, Capital 1,018,800

JE 2: Cash 30,000
A/R 300,000
Inventory 396,000
Equipment 570,000
Allowance for Uncollectible 7,200
A/P 132,000
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B, Capital 1,018,800
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n October 1, 2023, M. Keanna and J. Taka decided to pool
their assets and form a partnership. They allocate
profits and losses in the ratio of 44:56 for Keanna Accounts payable 159,600 120,000
and Taka, respectively. The firm is to take over Notes payable 60,000 -
business assets and assume business liabilities,
and capitals are to be based on net assets Capital 372,000 432,000
transferred after the following adjustments:
Total liabilities and capital 591,600 552,000

Required:
a. Keanna’s inventory amounting to P12,000 is
worthless while Taka’s agreed value of inventory a. Net debit or credit adjustments in the books of
amounted to P150,000. Keanna and Taka

b. Uncollectible accounts of P7,200 for Keanna b. Adjusted capital balance of Keanna and Taka
are to be written-off; a 5% allowance is to be before cash investments by Taka
recognized in the books of Taka. c. Additional investment of Taka
c. Accured rent income of P12,000 on Keanna, d. Total assets of the partnership
and accrued salaries of P9,600 on Taka should be
recognized on their respective books. e. Total liabilities of the partnership

d. Interest at 16% on Notes Receivable dated f. Total equity of the partnership

August 17, 2023 should be accrued.

e. The office supplies unused amounted to 2. Vina and Terko are partners sharing profits in this
P60,000. proportion - 60:40. A statement of financial

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position prepared for the partners on April 1,

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f. The equipment’s agreed value amounted to
2024 shows the following:
P60,000.

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g. The furniture and fixtures has a fair market
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value of P108,000. Cash 48,000 Accounts 89,000
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Payable
h. Interest at 12% on Notes Payable dated July 1,
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2023 should be accrued. Accounts 92,000 Vina 133,000

receivable
i. Taka has an unrecorded patent amounting to
P48,000 and is to invest the additional cash Inventories 165,000 Terko 108,000
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necessary to have a 60% interest in the new firm.

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Equipment 70,000
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Accumulated (45,000
360 day-year basis is used in the computations Depreciation )
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Total Assets 330,000 330,000

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Statement of Financial Position for Keanna and

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Taka on October 1, 2023 before adjustments are

On this date, the partners agree that Sia would be
given below:
admitted as a partner. The terms of the
agreement are summarized below:
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Accounts Keanna Taka * An allowance for possible uncollectible of

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P4,500 is to be established.
Cash 90,000 54,000
* Inventories are to be restated at their present
Accounts Receivable 216,000 180,000
replacement value of P170,000
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Allowance for bad debts (4,800) (6,000)

* Accrued expenses of P4,000 are to be
Notes receivable - 60,000 recognized
Inventory 192,000 144,000 Vina, Terko, and Sia will divide profits in the ratio
of 5:3:2. Capital balances of the partners after
Office supplies 32,400 -
the formation of the new parthnership are to be
Equipment 120,000 - in the aforementioned ratio, with Vina and Terko
making cash settlement between them outside of
Accumulated depreciation - (54,000) - the partnership to adjust their capitals, and Sia
Eq investing cash in the partnership for his interest
Furniture and fixtures 144,000
Accumulated depreciation - (24,000)
Compute the following:
FF
a. The cash to be invested by Sia is
Total assets 591,600 552,000
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 b. The total capital of the partnership after the
admission of Sia is
ALLOWANCE FOR DA (3,200) (2,500)
c. Cash settlement between Vina and Terko
INVENTORY 50,000 69,000
d. The total assets of the new partnership
SUPPLIES 7,600 7,000
e. The total liabilities of the new partnership
FURNITURE AND FIXTURE 85,000
AD - FF (5,000)
3. Hailey admits Muyach for partnership interest in
his business. The statement of financial position COMPUTER EQUIPMENT 70,000
of Hailey on November 30, 2024 prior to AD - COMP (4,900)
admission of Muyach are as follows:
OFFICE EQUIPMENT 60,000
Debits Credits
AD - OE (8,800)
Cash ?
Accounts receivable 96,000
The partners agreed to effect the following
Inventory 144,000 adjustments in their respective books:
Accounts payable 49,600 I. The receivables should have an allowance of
Hailey, Capital ? 5% for SANTINO and 4% for PHAK.

II. Inventory of SANTINO is overstated by P4,000

and PHAK’s is understated by P1,000.

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It is agreed that for purposes of establishing

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Hailey’s interest, the following adjustments III. Supplies have a balance of P7,000 and P5,000
should be made: for SANTINO and PHAK, respectively.

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* An allowance for bad debts of 2% of accounts
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should be 25% depreciated with a residual value

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receivable is to be established
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of 10%.
* Inventory is to be valued at P160,000
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* Prepaid expenses of P5,200 and accrued

expenses of P3,200 are to be recognized SANTINO and PHAK have liabilities amounting to
P25,100 and P14,440, respectively, but the
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partners agreed that the partneship shall absorb

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only half of these payables.

Muyach is to invest cash of P113,640 to give him
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a one-third interest in the firm

As part of the Articles of Partnership, PHAK should

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have a 60% interest in their company and will

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Compute the following:

invest additional cash, if necessary, to conform
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a. Agreed capital of Muyach after the formation with the said provision.

b. Agreed capital of Hailey after the formation

c. Net debit or credit adjustments to the capital of Determine the following:

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Hailey
I. Unadjusted capital of SANTINO and PHAK
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d. The balance of the capital of Hailey before the

II. Adjusting entries in the books of each partner
adjustments
III. Capital of SANTINO and PHAK after
e. Cash balance of Hailey before the adjustments
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adjustments
f. The total assets of the partnership after the
IV. Additional cash investment of PHAK
formation
V. Balances of the following accounts of the
g. The total capital of the partnership after
partnership:
formation
a CASH g AD - FF
1. PARTNERSHIP FORMATION
b ACCOUNTS h COMPUTER
ANTHONY SANTINO and TERESA PHAK decided to
RECEIVABLE EQUIPMENT
form a partnership on November 10, 2014. The
following are the resources invested by each c ALLOWANCE FOR DA i AD - COMP
partner:
d INVENTORY j OFFICE EQUIPMENT
SANTINO PHAK
e SUPPLIES k AD - OE
CASH 35,000
f FURNITURE AND l Total assets
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ACCOUNTS RECEIVABLE 74,000 57,000

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 FIXTURE  A and B shall share in profits and
VI. Total agreed capital of the partnership losses 40% and 60%, respectively.

1. How much are the adjusted capital

balances of A and B, respectively?
A B A
Formation of partnership – Valuation B
of capital a. 200,000 600,000 c.
A and B formed a partnership. The 230,00 480,000
following are their contributions: b. 200,000 1,030,000 d.
A B 230,000 600,000

200,00 2. Assume that a partner’s capital shall

Cash 0 - be increased accordingly by
contributing additional cash to bring
Accounts 150,00 the partners’ capital balances
receivable 0 - proportionate to their profit or loss
ratio. Which partner should provide
100,00 additional cash and how much is the
Inventory 0 - additional cash contribution?
a. Partner A should provide additional
500,00 capital of ₱150,000.
Land 0 b. Partner A should provide additional

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capital of ₱200,000.
620,00

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Building 0 of ₱300,000.
d. Partner B should provide capital of

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450,00 1,120,0
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₱300,000.
Total 0 00
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Bonus method
220,00 3. A and B agreed to form a partnership.
Note payable 0 A shall contribute ₱60,000 cash while
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B shall contribute ₱120,000 cash.

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230,00 However due to the expertise that A

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A, capital 0 will be bringing to the partnership, the

1,120,0 partners agreed that they should
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B, capital 00 initially have an equal interest in the

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partnership capital. Under the bonus

450,00 1,120,0
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method, how much is the adjusted

Total 0 00 capital balance of B immediately after
the formation of the partnership?
Additional information: a. 60,000 b. 90,000 c.
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 The accounts receivable has a 120,000 d. none of these

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recoverable amount of ₱120,000.

 The inventory has an estimated selling Cash settlement between partners
price of ₱110,000 and estimated costs 4. A, B and C formed a partnership. Their
to sell of ₱20,000. contributions are as follows:
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 The land has a fair value of ₱500,000 A B C

an unpaid mortgage of ₱120,000. The Cash 50,000 40,000 140,00
partners agreed that B shall settle the 0
mortgage using his personal funds. Equipment 150,0
 The building is overdepreciated by 00
₱30,000. Totals 50,000 190,0 140,00
 The building also has an unpaid 00 0
mortgage amounting to ₱550,000.
The partners agreed that the Additional information:
partnership shall assume repayment  Although C has contributed the most
of the mortgage. cash to the partnership, he did not
 The note payable has a fair value of have the full amount of ₱140,000
₱210,000. available and was forced to borrow
₱40,000.
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 half of the amount borrowed shall be
assumed by the partnership.
 The equipment contributed by B has
an unpaid mortgage of ₱20,000, the
repayment of which is not assumed by
the partnership.
 The partners agreed to equalize their
interest. Cash settlements among
the partners are to be made
outside the partnership.

Which partner(s) shall receive cash

payment from the other partner(s)?
a. B shall receive ₱70,000 from C c. A
shall receive ₱70,000 from A
b. C shall pay ₱70,000 to A d. A shall
pay ₱70,000 to B

Additional investment (Withdrawal

of investment)
5. A and B agreed to form a partnership.
The partnership agreement stipulates
the following:

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 Initial capital of ₱300,000.

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 A 25:75 interest in the equity of the eH w
partnership.

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A contributed ₱100,000 cash while B
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contributed ₱200,000 cash.

Which partner should provide additional

investment (or withdraw part of his
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investment) in order to bring the

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partners’ capital credits equal to their

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respective interests in the equity of the

partnership?
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a. A shall provide additional capital of

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₱25,000.
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b. B shall withdraw capital of ₱25,000.

c. B shall make an additional
investment of ₱25,000.
d. No additional contribution or
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withdrawal shall be made.

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