Learning Outcomes At the end of this chapter, students will be able to: j 1. define partnership; : 2. determine the characteristics of a partnership; 3. describe the advantages and disadvantages of a partnership; and 4. identify the classification of partners and partnerships. EAN AE RET Nature and Concept Various organizations are erated or formed almost every day in different 1 parts of the country or ofthe word. These organization re classified in many ways according to their purpose, nature, ownership, formation, capital base, geographic coverage, or the type of industry they belong to, Organizationsare further classified a: or SORUBUSINERS, STOHEOP 5 small or multi-national; Partnership, ox corporation; orservice, merchandising, Regardless of their classification, common characteristics, to business organizations haye two 1, All organizations consist of. People. 2. The people com, posing the orga legal personalit ity from the Organization, For example, a Parent-teac| an. Organization, and the are the parents nization have a distinct her association (PTA) is '€ people composing it and teachers, | Scanned with CamScanneristinct from that of the association, .guel Corporation isan organization. It isa corporation Primal ‘ed by the stockholders. The personality of the st ers, San Miguel Corporation. ness entity can be a ‘The personality of the parents and teachers is different and di In the same manner, San Mi: intended for profit and organiz ; however, is separate and distinct from the personality o| Based on ownership as the means of classifying an organization, busi sole proprietorship, a partnership, ora corporation. | a prmershipisovmed by te or more persons 2nd ‘a corporation i stockholders. ‘The accounting procedures for a sole proprietorship on service entities an concerns are discussed thoroughly in the basic introductory accounting. This book examines accounting procedures applicable to partnerships and corporations. of d merchandising Definition Article 1767 of the Civil Code of the Philippines defines partnership as follows: By the contract of partnership, (UOBEMIGHPESORSbind themselves tACOREHBULE 0a common fund with theditenuomordividingithe The keywords in the definition of a partnership are: 1. Grtaee 2. PESOM 3+ money, property, or industry 4- Commonyfandyp 5. division of profit) Contract A contract isan SReenieneBeWCEN WOON Bele : that i @RfSRSEABIEISPINW. I can be An oral agreement will suffice to createa Ppartnershi a written agreement is preferable. A inoy . Howeve It is emphasized that a instrument. no other formalities require ners. There an ‘ora partnership to acquire a legal Personality. However, the fellowing instances require that the a a tained in : mmission (SEC): when the partnership's capital is 3,000 or mor ‘More; or 2. when an ii A uted bya partney, Scanned with CamScannersettled, oF is only orally sett! When the contributed capital is 3,000 or more and the agreement is ony 3 with the when the partnership's agreement is put in writing but SEC, the following conditions apply: . he TTD. 2 The partnership UR jUFgicl Personality. 3. The liability to the third person is not affected. is > On the other hand, when an immovable property is contributed and se EET see ions made, or , the followin{ apply: 1. The partnership contract is void. 2. The partnership SESS Sapa ESTED The written contract of partners is called the ARHGISS(SRICSzRartHership and should include, among others, the following: | SPI AWA 5 Person 2 Another keyword:in the definition of partnership in Aticleny67jofitheyGivils@ode of the ‘Philippines is ‘person Partnership ‘nel gw ore eres sting aaa saial caso 2 In the definition of partnership, what does person refer to’ A person can be either a natural person ora juridical 0 A natural or human person ig created according to the image and likeness of God as sd by a biblical context while a juridical person is created by the operation of law. Forexample, Rolly Salcedo isa natural re 0) if k and. Trust son while Metro Ban ompany (Nt nd has acquir BTC) is.a juridical person, As a natural person, Rolly was born Savired a legal Personality eee Lt Partnonetss Scanned with CamScannerupon reaching the MBTC, however, is a juridical Laps created by the operation of Philippine laws. It acquires legal existence once the concerned government agency approves of its formation in accord with applicable laws. Apartnershipis considered ajuridical person. Itiscreated by the mere agreement of partners, To illustrate further, Hyzel, Angel, Princess, and zy decided to form a business partnership with the trade name HAPI Partnership. The partners composing the partnership are human persoris while the HAPI Partnership is a juridical person. ? Likewise, can a Can an existing partnership become a partner in another partnershi corporation become a partner? Ideally, the term “person” in the definition of partnership should féfer only tojaniindividifa) ‘tinan ig Jeg ME BAGS ofc nical pereos ka corporation Parteretp and In other words, a partnership or corporation cannot becomea partner in another partnership. It is the concept oftialimsited abilithatidisallows a Partietshiplor a/Compotation from matter: 1. Whatisthe extent ofa corporation's liability asa partner in a partnership to the creditors? 2. What is the extent of a partnership's liability as a partner in another partnership to the creditors? For example, ABC Company is an existing partnership with partners A, B, and C. DEF Company is created as a partnership with partners D, E, and ABC Company. This case indicates that partners A, B, and C of ABC Company become partners also in the DEF Company. It then complicates the unlimited liability of DEF Company by extending the liability provisions to partners A, B, and C. The situation becomes worse when partners A and B in ABC Company are limited partners. Another possible reason that prohibitsa partnership or corporation from. becoming a partner in another partnership is th . Money, Property, or Industry A partner may contribute the following to the Partnership: 1. GaGneyD 2. 3. Scanned with CamScanner(MGR may include GillSAHAIEGHMS that are considered asilegaljtenderandyinicirculation, It may also include money substitutes like @H@cksyereasury billsyand warrants. PROPER may include ASSAS WHOSE Usefl life extends beyondoneyear and which are subject to depreciation except lands. Some examples are merchandise inventory, buildings, machinery, tools, or equipment. (GHAWEFPrefers to the services provided bya partner ina partnership. It may ‘include rendering consultancy services or managing the affairs of the partnership. ‘Money and property are usually contributed by a capitalist partner while industry or service is usually provided by andiidustral parte Furthermore, ageneraliparines can éSfisibitelmioneyjpropertyvonindustry while limited) _ partner is allowed to contribute either money or property only Common Fund ‘The concept of CORUMORIfuRIdlin dicates that the contributions of individual partners become properties of the partnership. The individual distinction and ownership of the properties are removed once the contributions become properties of the partnership. (Allpartiiers Become ownersofithe properties. As owners, they can operate the properties and use them to carry out activities for the interest of the partnership. ‘fidefers tofnvestment and fotneSesatlytommoneyelp others words, common funds can beequated with the concept of epmnmon investment orcommon,properties (Commonfundsuggests that ll the partnersare vested with ial ightSOnESAMEFOPER ‘The use of the properties of the partnership by a partner is intended to promote the profit- making activities of the organization and not to personally enrich himself/herself. 3 Division of Profit The definition of partnership is construed as a profit-oriented, not a service-oriented, organization, Ina partnership, th jon arédivided amongitheypartners, It nd i ion. The definition of partnership in Article 1767 of the Civil Code does not include any provision on loss distribution among the partners. This is based on the idea that partnership is created to . However, in the event that losses cannot be avoided, the Samewill also be divided among the partners in accordance with their agreement. Theconcept of profit distribution among partners is lengthily discussed in Chapter 3. Scanned with CamScannerCharacteristics of a Partnership ; | ‘The following are the principal characteristics of a partnership: lL ‘il i | Yaya ywr is and : ibuti artner are acceptable in formsconeition It is assumed that the contributions of a pi the own volition of a partner. The @aluationpto other partners and that they come from on ts by the contribution must not be the fesulljofiforceyorjcoercion imposed A partner may contribute money; property, or industry. Withouitlal partners !OntnibUtion) there can be q6lparthershipBince there isHOthingtOaprecupon. = Mutual Agency aimeebiabiy pepriiviciery s, therefore, can act asagent of the partnership. A partner can enter into a contract for and in behalf of the parti ip, and the contract becomes binding between the contracting party and the partnership, Co-ownership of Contributed Property The mmon property once The specific individual right of a partner on the contributed property effectively ceases, All part i aa eer i eae of thecontributed Properties with equal rights and obligations. z ers are obliged to protect and Preserve the properties of the partnership. Participation in the Profits Partners@aninot ‘ot regularlyperform partnership functions just because the latter does a Scanned with CamScannerAlthough on obligated to parti however, 'y implicitly mentioned in the definition of partnership, all partners are ribution of losses based.on their agreement. r, ip has moyobligations on the Limited Life Atpabthieiship lias limited life. Its legal existence is vulnerable to dissolution. The common factors dissolving a partnership are as follows: L r i 2. withdrawal of a partner 3. death of one of the partners 4. insolvencyofajpartner or the partnership 5. €Xpiratiomof the term specified in the agreement Unlimited Liability The liability ofa partnership extends tothe personal property ofthe partners. In the event that a aithtership leannot fully settle its/financialyobligations Uiting, che (gts SREeREEh eedlnrs mer Tanroneste ane oma BSroCeS RIOR ® of the iidividual partners, The concept of unlimited liability does not, however, apply to a limited partner. ‘The satisfaction of the partnership's creditors from the personal properties of a partner shall not prejudice the rights of the personal creditors of a partner. Subject to Tax General business partnership is i m the point of view of taxation. The income is, therefore, subject to a in line with the amendments on the National Internal Revenue Code of 1997. The corporate tax rate may change from time to time depending on the legislative action of the Congress of the Philippines, On the other hand, the net income of a general professional partnership is exempt from taxes, @avantages of a Partnership ‘The advantages of a partnership are as follows: 1. Compared with a corporation, a Partnership is e; reement am indi i 7 rae ae a Ria pied rare is eae in the articles of, co-partnership plies cane a partner: i Eertifcate of incorporation ae ‘ship. A corporation, on the other hand, needs the I ed oe before itcan acquire a legal ennai Securities and Exchange Commission (SEC) Scanned with CamScanner2. Ie(HaSIaWIGERCApital Base compared witha . The combined resources of two or more persons are usually more than the total resources of only one person, 3 Ithasa a ‘compared witha sole proprietorship. Thecombineq management skills and expertise of several partners provide'a better edge than that of a single owner who solely carries all the management responsibilities. 4. Creditors consider the wmlifiit@a@liabilif of partners beneficial to financial credit extended to the Partnership. 5. Itis issues that need immediate actions. Disadvantages of a Partnership The disadvantages of a partnership are as follows: 1. Compared with a corporation, a partnership has fimnited life showing a generabiinstabilitysyy Creditors in this case may be hesitant to provide more funds. 2. The because all the partners have equal authority in the management of affairs, unless the scope of authorities and responsibilities have been clearly delineated. 3. It has a sqialléf@apitalibase compared with a corporation resulting in limited operating activities. partners can easily and immediately resolve pressing Classification of Partners There is ino clear-cut classification of partners. They are usually classified based on their capital contribution, extent of liability, or other distinguishing features. Usually, a modifier is used to identify partners. A partner may be classified as follows: 1. A gefieallpaFEAer is the one whoseiliability inet partierShiplGMERASHGUnITR 2. A limited;partner is the one whoseliability inthe partnership iS OBIVIAMEAS HIG hee contributionfand not allowed to contribute services. 3. A c@pitalist PREP the one who GOHEtIbHESMORSPOR POPS. 4 Anindustrialpartner is the one 5. Amanagingpartner isthe one preted Partner is the one who winds up the dissolution and liquidation of a 7. A silent PaPtHG? isthe one whothaSlieRiCd PUIG PON a he Cal) elles of the partnership but jf Scanned with CamScanner8. A eRe paler is the one (ROPERS Nhe PN ee but i@not known to the public asa partner. 9 A is the one who does fidBhavelNetWelparbicipauien in the business and i othe publicasa partner. 10. A er is the one who does not have active participation since he/her is not an actual partner but is publicly considered as one. Classification of a Partnership The broad classifications of partnerships are based on the following: L 2 3 @ Partnerships can be classified as to the object as follows: : "4 2. The universal partnerships are further classified as follows: u Ina the property which ‘propertyofithepartners, as well as ll the profits which they may acquire therewith, 2. Ina dihiversal partnership Of profits, the ) All movable or immovable properties which each of the partners may possess at the time of the celebration of the contract will continue to pertain exclusively to each, with only the usufruct passing to the partnership. According to Article 1783 of the Civil Code of the Philippines, “A Ss issn ” In others words, a particular partnership hasa defined specific purpose, As to the Liability of the Partners Partnerships can be classified in terms of liability ofthe partners as follows: » is a partnership created and operating with a general partner. is one whose financial liabilities or obligations are not limited only to K Scanned with CamScanneris a partnership ‘A partner is considered limited when capital contributions. ler: As to Taxation ips in relation to taxation are classified as follows: d for the purpose of exercising ip i hip mi 1. @eiialprofessionalpartnership is2 Par is der gaging jatradé ae neis derived from engaging in trade oy omimionpprofession. No part of incom to income tax. This type of The partnershi forme the partners’ rtof business and, therefore, the partnership is partnership is also classified as non-trading. oF i i for the purpose of ObtainingiprofitS 2. (GemeraLeorparnership is partnership center Fo nis trade or busines ie conucr of adeor nena? i i ding. subject to income tax. This type o! Stnership isalso classified as trading Accounting for Partnership The partnership accounting shall focus on these major topics: not sul 1. partnership formation discussed in Chapter 2 2. partnership operation discussed in Chapter 3 3. partnership dissolution discussed in Chapter 4 4. partnership liquidation discussed in Chapter 5 Each topic is considered distinct from each other. Hence, separate chapters are allotted to focus on the majorareas mentioned. This implies that the day-to-day activities carried out by the partnership are not discussed in depth in partnership accounting. It does not mean, however, that the daily transactions of the partnership are not recorded in the books of accounts. It must be noted that all business transactions of the partnership must be given accounting recognition, and hence, must be recorded in the journal and ledger. However, if the different accounting procedures and principles discussed. in sole proprietorship accounting, which is assumed to be the subject matter of a previous course, are still discussed in wm accounting, they will merely be a course refresher. : A partnership, just like a sole proprietorshi tat day-to-day busineos detivitiess PP *tOTShiP oF a corporation, is engaged in the following 1. buying and selling of goods on cash or on account 2, rendering services on cash or on account collection of receivables } payment of expenses and liabilities Purchase of property plant, and equipm, . other routine business activities is avayw Scanned with CamScannerThe appropriate accounting procedures and principles in recording the given business transactions have been thoroughly discussed in accounting for sole proprietorship. It is, therefore, assumed that the student is already familiar with the applicable accounting principles and procedures for the given types of transactions. The year-end accounting procedures of a sole proprietorship are also performed in partnership and corporation accounting, These year-end activities include the preparation of the following: 1. adjusting entries 2. worksheet 3. financial statements 4. closing and reversing entries The appropriate accounting principles and procedures for the year-end activities are likewise not covered in this book, although some concepts are frequently mentioned. Therefore, reviewing the differentaccounting principles covered in the accounting cycle is highly suggested. Capital Accounts In sole proprietorship and partnership, the usual capital accounts affected in the operations are the following: 1. equity account of the owner 2, Ina sole proprietorship, there is only one owner and thus, only one capital account. In a partnership, the number of capital accounts depends on the number of partners, Hence, there are three capital accounts if there are three partners in the partnership. Acorporation, however, has different capital accounts which are distinct from the operations of sole proprietorship and partnership. For example, one account in the stockholders’ equity section is the retained earnings which is not used in sole proprietorship and partnership accounting, Another one is the reserve account. ‘The capital account of a partner is debited by the following transactions: 1. permanent Withdrawal of capital 2. QOSingOFaCBIE Dane of the drawing account oO . n the other hand, the capital account of a partner is credited by the following transactions: a > closing of the credit balance of the drawing account Scanned with CamScannerDrawing or Withdrawal Account. Similai . " 3 Proprietorship, “quity account of the owner, there is only one drawing account in a sole Ina partnershi s ‘numberof inership, the number of withdrawal accounts depends on the number of partners Apartnership with four partners also maintaine frag ‘drawing accounts in the books of accounts In a corporation, there is no withdrawal account that appears in the stockholders’ equity section of the statement of f inancial position. The ASSERTS RRS SAM, ce folowing transactions: 2% temporary withdrawal of capital b. sharein thelosses The drawing account, however, is credited by the share in profits. The partners must have a clear-cut agreement covering, among others, the following: L 2. 3- . ‘The allowable amount to be withdrawn by a partner must be clearly indicated to avoid subsequent misunderstanding and confusion. ' Forexample, the maximum amount that a partner may withdraw during the year is 50,000, and any excess withdrawal will be treated as permanent. ‘Withdrawals made by the partners can be handled as either: 1. - permanent withdrawal 2. temporary withdrawal A permanent withdrawal indicates that a partner intends to decrease his/h ibution i the partnership. This type of withdrawal is rel ease his/her contribution in flected as debit in the capital account of the partner. A temporary withdrawal, on the other hand, is made in anticipati ) , , icipation of th ected profit. The drawing account of the partner is debited for this type of withdrawal. ete At i i ga! ifs ne ert accounting Period, the profit or loss from the operation can either be closed ra unt or the equity account of the Partners depending on their intentions. e + a : i Partners intend to consider the Profit or loss as an ele: direct] i i capital account balances, then both can be ne contrast, ifthe partners agree that their oki a fins Partner’ capital account. In investment and it Ccounts are affected onl iti . Permanent withdrawal, then the profit or loss is closed to the Hl i ee it must be noted that the partnership e drawing account agreement of partners, “ccounting gives important consideration to the Scanned with CamScanner