Partnership Accounting

Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION

A School of Management and Accountancy Student Government
Partnership
DEFINITION
o A contract whereby two or more persons bind themselves to contribute money, property, or
industry into a common fund with the intention of dividing profit among themselves.
o Partnership should comply with legal requirements (Partnership Law) and partnership
agreement.
HOW PARTNERSHIP DIFFER FROM OTHER TYPES OF ENTITIES:
a. A partnership is owned by two or more individuals while a sole proprietorship is owned by

only one individual.
b. A partnership is created by agreement between the partners while a corporation is created by
the operation of law.
c. A partnership is formed for a business undertaking that is normally of continuing nature
while a joint venture may or may not be formed for an undertaking that is to be continued
over several years.
WHO ARE ELIGIBLE TO FORM A PARTNERSHIP?
Two or more persons may form a partnership I + I = PARTNERSHIP
Two or more sole proprietors may form a partnership. SP + SP = PARTNERSHIP
An individual and a sole proprietor may form a partnership. I + SP = PARTNERSHIP
ADVANTAGES AND DISADVANTAGES

ADVANTAGES DISADVANTAGES
Easy to form Easily dissolved
Shared responsibility of running the business Unlimited liability
Flexibility in decision making Conflict among partners
Greater capital compared to sole Lesser capital compared to corporation

proprietorship
Relative lack of regulation by the gov’t as A partnership (other than general professional
compared to corporation partnership - GPP) is taxed like a corporation
CHARACTERISTICS OF A PARTNERSHIP
1. Easy to form - it requires less formality compared to corporation
2. Separate legal personality - it has a juridical personality separate and distinct from the
partners. The partnership can make a transaction in its name.
3. Mutual agency - the partners are agents of the partnership and may legally bind the
partnership to a contract or agreement for the purpose of its business.
Accountancy Academic Organization Tutorials 2020

PAGE \* Arabic \*
MERGEFORMAT 2
4. Co-ownership of property - each partner is co-owner of the properties invested in the

partnership that has an equal right to possess specific property solely for partnership
purposes.
5. Co-ownership of profits - each partner is entitled to his share in the partnership profit. It is
considered void when a stipulation excludes one or more partners from any share in the
profits or losses.
6. Limited life - the creation of a partnership is basically consensual. Factors may include for a
partnership to be dissolved (which will be discuss on topic III: Dissolution)
7. Transfer of ownership - in case of dissolution, the transfer of ownership, whether to a new
or existing partner, requires the approval of the remaining partner.
8. Unlimited Liability - each partner, including industrial ones, may be held personally liable
for partnership debt after all its assets have been exhausted. If a partner is insolvent, his share
in the partnership debt shall be assumed by other solvent partners.
➢ General partnership - when all partners are individually liable.
➢ Limited partnership - when at least one is personally liable (at least one who maintains
unlimited liability). The others may limit their liability up to the extent of their
contribution to the partnership.
ACCOUNTING FOR PARTNERSHIP

- The Conceptual Framework for Financial Reporting and the PFRS are applicable to all
reporting entities regardless of the type of organization. Thus, most accounting procedures
used for other types of business organization are also applicable to partnership.
The main distinction lies in the accounting for equity. In addition, the accounting for
partnership should also comply with relevant provisions of the Civil Code of the Philippines.
Considerations in accounting for the equity of partnership are the ff:

I. Formation - accounting for initial investments to the partnership.
II. Operations - division of profit and losses.
III. Dissolution - admission of a new partner and withdrawal, retirement, or death of a
partner.
IV. Liquidation - winding-up of affairs.

PAGE \* Arabic \*
MERGEFORMAT 2
I. FORMATION
DEFINITION
o Accounting for initial investment to the partnership.
o A contract of partnership is consensual, which may be created by agreements of the partners
which may be constituted in any form (orally or written).
However, Article 1771 and 1772 of the Philippines Civil Code requires that a partnership
agreement must be made in a public instrument and recorded in SEC when:
● Immovable property or real rights are contributed to the partnership, or
● The partnership has a capital of 3,000 pesos or more.
o Article 1773 of the Civil Code further requires that an inventory of any immovable property
should be made, signed by the parties, and attached to the public instrument. Otherwise, the
partnership shall be deemed VOID.
o A partnership’s legal existence begins from the moment the contract is executed unless it is
otherwise stipulated.
VALUATION OF CONTRIBUTION BY PARTNERS

a. Cash and cash equivalent - at face amount
b. Land, depreciable asset and NCA -
1. Agreed value
2. Fair value
3. Appraisal value
4. Carrying amount or book value
c. Liabilities - are considered assumed if the problem is silent
d. Inventories - measured at NRV or net realizable value (estimated selling price less cost to
complete and sell), if lower than cost.
e. Goods -
1. Partnership stipulation
2. Appraisal value (by experts chosen by the partners)
NET ASSET CONTRIBUTION ≠ CAPITAL CREDIT

A - L @FV based on ownership
Note:
- net contribution is the FV of contribution less any liabilities assumed by the partnership.
-no contribution shall be valued at an amount that exceeds the contribution’s recoverable amount.
- net asset contribution will only be equal to capital credit if there is ownership or capital percentage
SHORTCUT FORMULA:
As asset decreases, equity also decreases.

As asset increases, equity will also increase.
As liability decreases, equity will increase.
As liability increases, equity will decrease.

PAGE \* Arabic \*
MERGEFORMAT 2
PARTNER’S LEDGER ACCOUNTS

Consist of:
a. Capital accounts
b. Drawing accounts
c. Receivable from/payable to a partner
Capital accounts
o Partnership accounting is the same as accounting for a proprietorship except that each
partner has his or her own capital and drawing account. The fundamental accounting
equation (Assets = Liabilities + Owner’s Equity) remains unchanged except that total
owners’ equity is the sum of the partners’ capital accounts. These accounts are equity and are
used to record transactions.
Drawing accounts
o The drawing account is a nominal account that is closed to the related capital account at the
end of the period. This account is a contra equity account and has a normal debit balance.
Receivable from or payable to a partner

o The partnership may enter into a loan transaction with a partner. A loan extended by the
partnership to a partner is recorded as a receivable from the partner while a loan obtained by
the partnership form a partner is recorded as payable to the partner.
ILLUSTRATION (APPLYING THE LONG SOLUTION AND THE SHORTCUT)
Example:
X and Y formed a partnership. The following are their contribution
X Y
Cash P 100,000 -
Accounts receivable 50,000 -
Inventory 80,000 -
Land - 50,000
Building - 120,000
Total P 230,000 P 230,000
Notes payable 60,000 -
X, Capital 170,000
Y, Capital 170,000
Total P 230,000 P 230, 000
Additional information:
PAGE \* Arabic \*
MERGEFORMAT 2
● Included in A/R is an account amounting to P20,000 to which is deemed uncollectible.

● The inventory has an estimated selling price of P100,000 and estimated cost to sell of
P10,000.
● An unpaid mortgage of P10,000 on the land is assumed by the partnership.
● The building is under-depreciated by P25,000.
● The building also has an unpaid mortgage amounting to P15,000, but the mortgage is not
assumed by the partnership. Y agreed to settle the mortgage using his personal funds.
● The note payable is stated at face amount. A proper valuation requires the recognition of
a P15,000 discount on note payable.
● X and Y shall share in profits and losses 60% and 40%, respectively.
Requirement: compute for the adjusted balances of the partners’ capital accounts.
Normal Solution:
X Y PARTNERSHIP
Cash P100,000 - P100,000

A/R (50k-20k) 30,000 - 30,000
Inventory (80k > 90k) 80,000 - 80,000
Land P50,000 50,000
Building (120k-25k) 95,000 95,000
Total 210,000 145,000 355,000

Note payable, net (60k-15k) (45,000) (45,000)
Mortgage payable-land - (10,000) (10,000)
Adjusted capital balances P165,000 P135,000 P300,000
Shortcut:
X Y
Capital P 170,000 P 170,000
A/R (20,000)
Mortgage -land (10,000)
Under Depreciation (25,000)
Discount 15,000
Adj. capital balances P 165,000 P 135,000
Note: When using the shortcut method, focus on the additional information. That is to adjust the
original capital balances of the partners with the adjustments needed found on the additional
information, as you keep in mind the ‘shortcut formula’.
BONUS METHOD
(*The problem is silent)

PAGE \* Arabic \*
MERGEFORMAT 2
1. There would be a transfer of capital from one partner to another.

1. There is no recognition of goodwill
2. Total Agreed Capital (TAC) = Total Contributed Capital (TCC).
A partner’s capital balance is normally credited for the FV of his net contribution to the
partnership.
BONUS - If the capital balance is credited for an amount greater than or less than the fair
value of his net contribution.
Under the bonus method, any increase (or decrease) in the capital credit of a partner is
deducted from (or added to) the capital credits of the other partner.
The total partnership capital remains equal to the FV of the partners’ net contribution to the
partnership.
EXAMPLE (XY PARTNERSHIP)
X and Y agreed to form a partnership. X contributed P 165,000 while Y contributed P 135,000.

The partners agreed to have a 60:40 interest in the partnership capital. Determine who received a
bonus between the two partners.
Solution:
Actual Contribution Capital Credit

X 165,000 180,000 (300,000 x 60%)
Y 135,000 120,000 (300,000 x 40%)
P 300,000 P 300,000
A received a bonus. The bonus given to A, ie. P 15,000 (P180,000 capital credit - P160,000
actual contribution) is treated as a reduction to the capital credit of Y.
After applying the bonus method, the total capital of the partnership is still equal to the fair
value of the partnership contribution. Only the amounts credited to the partners’ capital accounts
have varied.
INVESTMENTS/ WITHDRAWAL
1. Agreed Capital is more than Unadjusted Capital = Investment

2. Agreed Capital is less than Unadjusted Capital = Withdrawal
EXAMPLE:
A and B agreed to form a partnership. The partnership agreements stipulate the ff:
● Initial capital of P 140,000

● A 60:40 interest in the equity of the partnership
A contributed P 100,000 cash while B contributed P40,000 cash.
Requirement: which partner should provide additional investments (or withdraw part of his
investment) to bring the partners’ capital credits equal to their respective interests in the equity of
the partnership?
Solution:
Agreed initial capital 140,000
PAGE \* Arabic \*
MERGEFORMAT 2
A’s required capital balance (140,000 x 60%) 84,000

B’s required capital balance (140,000 x 40%) 56,000
A B Totals
Actual contribution 100,000 40,000 140,000

Required capital balance 84,000 56,000 140,000
Additional (withdrawal) (16,000) 16,000 -

PAGE \* Arabic \*
MERGEFORMAT 2
II: OPERATION
DEFINITION
o The main concern of partnership operations is the allocation of the profit and losses to the
partners.
o Partners share in partnership profits or losses in accordance with their partnership agreement.
o Art 1797 of the Philippine Civil Code Provide the ff: additional rules for profit or loss
sharing of partners:
⮚ If the share on profits has been agreed upon by the partners, the share for losses shall be in
the same proportion
⮚ In the absence of the stipulation, the share of each partner in the profit or loss shall be in
proportion to what they have contributed, but an industrial partner shall not be liable for
losses.
Two types of Partner:

A. Capitalist Partner- the one who contributes cash or other non-cash assets to the partnership.
B. Industrial Partner- the one who contributes services to the partnership.
The Partnership agreement may also stipulate the following:
a.) Salaries- normally, the industrial partner is the one who receives salary as compensation for
his services to the partnership.
b.) Bonuses- The managing partner may be entitled to a bonus for excellent management
performance. A partner is only entitled to a bonus only if the partnership earns a profit.
c.) Interest on Capital Contribution- The partnership agreement may stipulate that capitalist
partners are entitled to an annual interest on their capital contributions.
The IMPORTANT RULES you need to remember when solving problems that involve the
allocation of profits and losses to partners:
a. If the profit-sharing ratio is not given, the following hierarchy shall apply:
i. Use the ORIGINAL capital ratio to allocate profits.
ii. In the absence of letter (a), use the BEGINNING capital ratio.
iii. In the absence of (a) and (b), allocate profits equally.
b. If the loss ratio is not given, then it is assumed to be equal to the profit-sharing ratio.
c. Temporary, regular and year-end drawings should not be considered when computing
for average capital using the peso-time approach.
d. The profit or loss sharing ratio may not be equal to the percentage interests of the partners in
the partnership. However, when the problem is silent, the interest of a partner in the
partnership and his/her profit or loss ratio are equal.
e. Bonuses are not given when the partnership incurs a net loss. All other allocation bases
may be given even if there is a net loss or there is “negative allocation” due to insufficient
profit.
f. When the profit or loss sharing agreement involves multiple allocations, profit or loss is
allocated in the order it is stated in the problem (e.g. salaries first, then interest, then
bonuses, and so on…)
g. When the phrase “To the extent of the profit” or “as far as the profit is available” is used in
the problem, the allocation bases are used only to the extent of the profit (i.e. no negative
allocation should occur). This is most relevant when multiple allocation bases are used. For
PAGE \* Arabic \*
MERGEFORMAT 2
instance, if the profit or loss agreement involves allocation of salaries and bonuses, but profit
is only enough for salaries, then bonus is no longer given.
EXAMPLE:
1.) JJ and KK are partners who share profit and losses in the ratio 60%:40%, respectively. JJ’s
salary is P60,000 and P30,000 for KK. The partners are also paid interest on their average
capital balances. In 2015, JJ received P30,000of interest and KK, P12,000. The profit and
loss allocation is determined after deductions for the salary and interest payments. Iff KK’s
share in the residual income (income after deducting salaries and interest) was P60,000 in
2015, what was the total partnership income?
SOLUTION:
JJ KK TOTAL
Salary P 60,000 P30,000 P90,000
Interest 30,000 12,000 42,000
Balance or Residual Profit 60,000 150,000
P 282,000
2.) The partnership agreement of XX, YY & ZZ provides for the year-end allocation of ndet
income in the following order:
● First, XX is to receive 10% of net income up to P200,000 and 20% over P200,00
● Second, YY and ZZ each are to receive 5% of the remaining income over P300,000
● The Balance of income is to be allocated equally among the three partners
The partnership’s 2011 net income was P500,000 before any allocations to partners. What
amount should be allocated to XX?
XX YY ZZ TOTAL
XX first P200,000 x 10% …………. P20,000 P
20,000
Over P200,000: (500,000-
P200,000)x 20%............................ 60,000
60,000
YY and ZZ: 5% of remaining income
Over P300,000: (P500k-P200k-P60k
-P300k) x 5%...................................... P 6,000 P6,000 12,000
Balance: Allocate equally……………… 136,000 136,000 136,000 408,000
P216,000 P142,000 P142,000 P500,000

PAGE \* Arabic \*
MERGEFORMAT 2
III. Dissolution
DEFINITION
o Dissolution is the change in relation of the partners caused by any partner being
disassociated from the business.
DISSOLUTION VS. LIQUIDATION

Liquidation is the termination of the business operations or the winding up of affairs.
Dissolution does not necessarily terminate the business.
MAJOR CONSIDERATION IN THE ACCOUNTING OF PARTNERSHIP

DISSOLUTION
1. Admission of a partner
2. Withdrawal, retirement, or a death of a partner
3. Incorporation of a partnership
1 and 2 causes change in the partnership relation and therefore dissolves the original partnership
agreement.
1. Admission of a partner
o Purchase of interest
This is a personal transaction between and among the partners. As such, any consideration
paid or received is not recorded in the partnership books. A transfer within equity is the only
entry made in the books.
Illustrations:
On October1, 20x1, C was admitted to the partnership when he purchased a proportionate
interest from A and B representing 20% interest in the net assets and profits of the firm for
100,000. The net assets of the firm as of this date approximate their fair values.
Journal Entry
October 1, A, Capital (400k x 20% x 40%) 32,000
20x1 B, Capital (400k x 20% x 60%) 48,000
C, Capital (400k x 20%) 80, 000
to record the admission of C to the
partnership
Capital Balances of the Partners after the admission of C

A B C
Totals
Capital, beg. 150,000 250,000 -
400,000
Credit - - 80,000
80,000
Debit (32,000) (48,000) -
(80,000)
Capital, end. 118,000 202,000 80,000
400,000
Note that, when a new partner is admitted through “Purchase Interest”, the total capital
of the partnership does not change. No gain or loss is recognized in the partnership books
when a new partner is admitted.
Personal gains or losses recognized by A and B, but not recorded in the partnership
books.
A B

PAGE \* Arabic \*
MERGEFORMAT 2
Total
Consideration received
(100k x 40%); (100 x 60%) 40,000 60,000
100,000
Amount debited to capital account (32,000) (48,000)
(80,000)
Personal gain (loss) 8,000 12,000
20,000
Revaluation of assets
When a partnership is dissolved a new partnership is created. The assets and liabilities are
then carried over to the new partnership, they will be restated to fair values.
o Investment in the partnership

This is a transaction between the new partner and the partnership as such consideration paid
or received is recorded in the books. There’s no gains or losses recognize because this is a
transaction with the owner.
Things that may happen when an investment occurs:
● The new partner’s capital account is credited at an amount equal to the fair value of the
investment.
● The new partner’s capital account is credited at an amount greater than or less than the
fair value of his investment. (This is accounted for under the bonus method).
Illustrations:
On July 1, 2020 C was admitted to AB Partnership by acquiring 20% interest in the net
assets and profits of the firm, he payed 100,000 for the investment. The net assets
approximate their fair values.
The capital balances and profit and loss ratio of the firm as of July 1, 2020 are as followed:
Capital Accounts P/L Ratios
A, Capital 150,000 40%
B, Capital 250,000 60%
400,000
Scenario 1: C’s Capital is credited for 100,000
July 1, 2020 Cash 100,000
C, Capital 100,000
Scenario 2: C’s Capital is credited for 80,000
July 1, 2020 Cash 100,000
C, Capital 80,000
A, Capital [(100k-80k)x40%] 8,000
B, Capital [100k-80k)×60%] 12,000
Purchase of interest vs. Investment in the partnership

Purchase of Interest Investment in the
Partnership
The incoming partner’s The contribution is recorded
contribution is not recorded in the books.
in the partnership books.
Partnership capital remains Partnership capital is
the same before and after the increased by the new
admission of the new partner. partner’s contribution.
No gains or losses are No gains or losses are
recognized in the books. recognized in the books.
PAGE \* Arabic \*
MERGEFORMAT 2
2. Withdrawal, retirement or death of a partner

When a partner withdraws, retires, or dies, his interest may be purchased by:
⮚ one or all the remaining partners
⮚ the partnership
The interest of the withdrawing, retiring or deceased partner adjusted for.
⮚ his share of any profit or loss during the period up to the date of his withdrawal,
retirement, or death; and
⮚ His share of any revaluation gains or losses as at the date of his withdrawal, retirement,
or death.
Purchase by remaining partners Purchase by partnership

✔ The payment to the outgoing partner is ✔ The payment to the outgoing partner is
not recorded in the partnership books. recorded in the partnership books.
✔ Partnership capital remains the same ✔ Partnership capital is decreased by the
before and after the withdrawal, payment for the outgoing partner’s
retirement or death of the outgoing capital balance.
partner.
✔ No gain or loss is recognized in the ✔ No gain or loss is recognized in the
partnership books. partnership books.
Illustrations:
The capital account balances of the partners in ABC Partnership on July 1, 20x1 before any
necessary adjustments are as follows;
Capital Accounts
A, Capital (20%) 150,000
B, Capital (30%) 250,000
C, Capital (50%) 100,000
Total 500,000
Case 1: Purchase of interest by remaining partners

On July 1, 20x1, C withdrew from the partnership when he was bought-out by his co-workers for
P620, 000 cash. The net assets of the firm as of this date approximate their fair values.
A (20%) B (30%) C (50%)
Total
Unadjusted balance 150, 000 250, 000 100, 000
500, 000
Share in Profit
[900k x (20%; 30% &50%)] 180, 000 270, 000 450, 000
900, 000
Adjusted Balance 330, 000 520,000 550,000
1, 400, 000
Journal Entry: To adjust the capital balances of the partners on C’s withdrawal date.
July 1, 20x1 Income Summary 900, 000

PAGE \* Arabic \*
MERGEFORMAT 2
A, 180, 000
Capital 270, 000
B, 450, 000
Capital
C,
Capital
Journal Entry: To record the withdrawal of C

July 1, 20x1 C, Capital 550, 000
A, Capital (550k x 220, 000
20%/50%) 330, 000
B, Capital (55ok x
30%/50%)
The capital structure of the new partnership is as follows;

A B
Total
Adjusted Balances- July 1, 20x1 330, 000 520, 000
850, 000
Credit from withdrawal of C 220, 000 330, 000
550, 000
New Capital Balances 550, 000 850, 000
1, 400, 000
Notes:
⮚ The settlement amount (P620, 000) paid by the remaining partners to C is not recorded in
the books.
⮚ The capital balance of C is allocated to the purchasing partners using their relative old
profit or loss ratio.
⮚ The adjusted total capital of the partnership remains the same before and after the
withdrawal of C.
Case 2: Purchase of interest by partnership
C retires on July 1, 20x1. It was agreed that C shall receive P620, 000 cash from the partnership
in settlement of his interest.
July 1, 2ox1 C, Capital 550, 000
A, Capital (620k-550k) x 28,000
20%/50% 42, 000
B ,Capital (620k-550k x 620, 000
30%/50%
Cash
⮚ The retirement of C resulted to a bonus of P70, 000 (620k settlement – 550k capital
balance). The bonus is deducted from the capital balances of the remaining partners.
⮚ The payment of C is recorded in the books because the interest of C is purchased by the
partnership, rather than by the remaining partners.
A B
TOTAL
Adjusted balance- July 1, 20x1 330, 000 520, 000
850, 000
PAGE \* Arabic \*
MERGEFORMAT 2
Debit for the bonus to C (28,000) (42,000)

(70, 000)
New Capital Balances 302, 000 478, 000
780, 000
The total capital of the partnership is reduced by the payment for the withdrawing partner’s
capital balance.
Adjusted capital before withdrawal of C 1,400, 000
Total capital after withdrawal of C 780, 000
Decreased in total capital equal to amount paid to C 620, 000
3. Incorporation of a Partnership
When a partnership becomes a corporation the relation of the partners change, they cease to be
partners and become stockholders.
The corporation assumes any assets and liabilities of the partnership and in turn issues shares of
stocks to the partners.
On Date of Incorporation
● Partner’s capital balances are adjusted for their respective share in any p/l and revaluation
gain or loss as of date of incorporation. The adjusted capital balance may be used in
determining the number of shares to be issued.
● Books of the partnership are closed and new books are made for the corporation.
Illustrations:
On January 1, 2020 ABC Partnership shall be converted to a corporation to admit other
investors. The authorized capital is 2,000,000 which is divided into 200,000 ordinary shares with
par value of 10 per share.
Carrying Amounts Fair Values Increase
(decrease)
Cash 20,000 20,000 -
Receivables 60,000 40,000 (20,000)
Inventory 80,000 70,000 (10,000)
Equipment 540,000 670,000 130,000
Payables 50,000 50,000 -
A, Capital (20%) 150,000 N/A -
B, Capital (30%) 200,000 N/A -
C, Capital (50%) 300,000 N/A -
100,000
Adjusted balances
A(20%) B(30%) C(50%) Total
Unadjusted Balance 150,000 200,000 300,000 650,000
Share in revaluation gain 20,000 30,000 50,000 100,000
[100kx(20%;30%&50%)
]
Adjusted Balances 170,000 230,000 350,000 750,000
750,000 is the aggregate par value of the shares issued to each partner.
A B C Total
Adjusted Capital 170,000 230,000 350,000 750,000
Balance
Divide by: Par 10 10 10 10
value/share
No. of shares 17,000 23,000 35,000 75,000
PAGE \* Arabic \*
MERGEFORMAT 2
issued
Partnership books
Jan 1, 2020 Equipment 130,000
Receivables 20,000
Inventory 10,000
A, Capital 20,000
B, Capital 30,000
C, Capital 50,000
To adjust the net
assets
Jan 1, 2020 A, Capital 170,000

B, Capital 230,000
C, Capital 350,000
Payables 50,000
Cash 20,000
Receivables 40,000
Inventory 70,000
Equipment 670,000
To close the books
Corporation books
Jan 1, 2020 Cash 20,000
Receivables 40,000
Inventory 70,000
Equipment 670,000
Payables 50,000
Share Capital 750,000

PAGE \* Arabic \*
MERGEFORMAT 2
IV: LIQUIDATION
DEFINITION:
o Termination of business operations or the winding up of affairs.
o It is a process by which
a. Assets are converted into cash
b. Liabilities are settled, and
c. Any remaining amount is distributed to the owners
o May be either voluntary (per agreement of partners of a solvent partnership) or involuntary
(bankruptcy).
CONVERSION OF NON-CASH ASSETS INTO CASH

o Realization – conversion of assets into cash
o Liquidation – settlement of claims of creditors and owners. However, it is used in a broader
sense to include the entire winding up process.
Winding up starts with the conversion of non-cash assets into cash. As such, the timing of the
“realization” of non-cash assets determines the manner in which the “liquidation” (payment of
claims) is carried out.
METHODS OF LIQUIDATION
1. Lump-sum liquidation (one time or single payment)
All the non-cash assets of the partnership are sold simultaneously or within a very short period of
time. Proceeds are used to settle first all of the liabilities and the remaining amount is paid to the
partners.
Lump-sum liquidation is possible when there is a contracted buyer of all of the non-cash assets
of the partnership or the assets are sold on a “package deal” basis.
2. Installment liquidation
In most cases, it would take some time before all the assets of a business are converted into cash.
In such cases, the partners’ claims are settled on an installment basis as cash becomes available,
but only after all partnership liabilities are fully settled.
Order of Priority in the settlement of claims:
1. Outside creditors
2. Inside creditors (payable to partners)
3. Owners’ capital balances
Right of Offset – the legal right of offset allows a deficit in a partner’s capital account to be
offset by a loan payable to that partner.
Lump-sum and Installment example:

PAGE \* Arabic \*
MERGEFORMAT 2

PAGE \* Arabic \*
MERGEFORMAT 2

PAGE \* Arabic \*
MERGEFORMAT 2
Accounting Procedures when computing for the settlement of the partners' interests in case
of liquidation:
Step 1: Compute for the net proceeds. Deduct all expenses, whether paid or not, as well as any
cash retention for future costs.
Step 2: Compute for the gain or loss by comparing the net proceeds with the total carrying
amount of non-cash assets, whether sold or not.
Step 3: Allocate the gain or loss to the partners' interest. Any residual amount in a partner's
capital balance represents the settlement of his interest in the partnership.
Statement of Liquidation
Financial report that highlights the realization (receipts from asset disposals) and the liquidation
(settlement of creditors' and partners' claims) of a partnership.
Marshalling of assets
Use in case of partnership insolvency. Under this rule, only the excess of a partner's personal
assets over his personal liabilities can be used to settle partnership debt. Any capital deficiency
of an insolvent partner is absorbed by the solvent partners.
Safe Payment Schedule

Shows how much cash can be “safely” paid to the partners during installment liquidation, which
avoid any overpayment.
The preparation requires the applications of the following concepts:
a. Unsold non-cash assets are treated as loss, and
b. Expected further liquidation costs and potential unrecorded liabilities are recognized
immediately as losses.
o May be used as supporting information to a Statement of liquidation.
Example:

PAGE \* Arabic \*
MERGEFORMAT 2
Cash Priority Schedule/ Cash Distribution Program

PAGE \* Arabic \*
MERGEFORMAT 2
Determines which partner shall be paid first and which partner shall be paid last, after all the
liabilities are settled.
Can be prepared even prior to the sale of any asset.
The preparation requires the applications of the following concepts:
a. Unsold non-cash assets are treated as loss, and
b. Expected further liquidation costs and potential unrecorded liabilities are recognized
immediately as losses.
Additional procedure: to rank the partners in accordance to their maximum loss absorption
capacity. The partner with the highest (lowest) maximum loss absorption capacity shall be paid
first (last).
Maximum loss absorption capacity = Total partners' interest in the partnership/ Partner's
profit or loss percentage

PAGE \* Arabic \*
MERGEFORMAT 2

Partnership Accounting

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Partnership Accounting

Uploaded by

Copyright:

Available Formats

Ateneo de Zamboanga University

ACCOUNTANCY ACADEMIC ORGANIZATION

HOW PARTNERSHIP DIFFER FROM OTHER TYPES OF ENTITIES:

a. A partnership is owned by two or more individuals while a sole proprietorship is owned by

WHO ARE ELIGIBLE TO FORM A PARTNERSHIP?

Two or more persons may form a partnership I + I = PARTNERSHIP

Two or more sole proprietors may form a partnership. SP + SP = PARTNERSHIP

An individual and a sole proprietor may form a partnership. I + SP = PARTNERSHIP

ADVANTAGES AND DISADVANTAGES

Easy to form Easily dissolved

Shared responsibility of running the business Unlimited liability

Flexibility in decision making Conflict among partners

Greater capital compared to sole Lesser capital compared to corporation

Accountancy Academic Organization Tutorials 2020

4. Co-ownership of property - each partner is co-owner of the properties invested in the

ACCOUNTING FOR PARTNERSHIP

Considerations in accounting for the equity of partnership are the ff:

Accountancy Academic Organization Tutorials 2020

VALUATION OF CONTRIBUTION BY PARTNERS

NET ASSET CONTRIBUTION ≠ CAPITAL CREDIT

As asset decreases, equity also decreases.

Accountancy Academic Organization Tutorials 2020

PARTNER’S LEDGER ACCOUNTS

Receivable from or payable to a partner

ILLUSTRATION (APPLYING THE LONG SOLUTION AND THE SHORTCUT)

X and Y formed a partnership. The following are their contribution

Accounts receivable 50,000 -

Total P 230,000 P 230,000

Notes payable 60,000 -

Total P 230,000 P 230, 000

● Included in A/R is an account amounting to P20,000 to which is deemed uncollectible.

Cash P100,000 - P100,000

Total 210,000 145,000 355,000

Adjusted capital balances P165,000 P135,000 P300,000

Capital P 170,000 P 170,000

Mortgage -land (10,000)

Under Depreciation (25,000)

Adj. capital balances P 165,000 P 135,000

Accountancy Academic Organization Tutorials 2020

1. There would be a transfer of capital from one partner to another.

EXAMPLE (XY PARTNERSHIP)

X and Y agreed to form a partnership. X contributed P 165,000 while Y contributed P 135,000.

Actual Contribution Capital Credit

1. Agreed Capital is more than Unadjusted Capital = Investment

● Initial capital of P 140,000

A contributed P 100,000 cash while B contributed P40,000 cash.

A’s required capital balance (140,000 x 60%) 84,000

Actual contribution 100,000 40,000 140,000

Additional (withdrawal) (16,000) 16,000 -

Accountancy Academic Organization Tutorials 2020

Two types of Partner:

Accountancy Academic Organization Tutorials 2020

DISSOLUTION VS. LIQUIDATION

MAJOR CONSIDERATION IN THE ACCOUNTING OF PARTNERSHIP

Capital Balances of the Partners after the admission of C

Accountancy Academic Organization Tutorials 2020

o Investment in the partnership

Purchase of interest vs. Investment in the partnership

2. Withdrawal, retirement or death of a partner

Purchase by remaining partners Purchase by partnership

Case 1: Purchase of interest by remaining partners

Accountancy Academic Organization Tutorials 2020

Journal Entry: To record the withdrawal of C