BASIC CONCEPTS OF PARTNERSHIP

Partnership – two or more persons who binds themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profit among themselves.

Procedure in Organizing a Partnership

- Register the business name with the Bureau of Domestic Trade.

- Have the partnership agreement be notarized.
- Obtain a tax account number for the partnership from the BIR.
- Register with SEC.
- Obtain the municipal licenses from local government.
- Apply for VAT or non-VAT.
- Register with the BIR the books of accounts and the business forms to be used.

Partnership Contract / Articles of Co-Partnership

1. Name of the partnership

2. Names of the partners
3. Place of business
4. Effective date of the partnership
5. Nature of business
6. Investment of each partner and corresponding capital credit
7. Duration of the contract
8. Rights, powers, and duties of the partners
9. Accounting period
10. Manner of dividing profits and losses
11. Liabilities of the partners for partnership debts
12. Compensation for services offered by partners
13. Treatment of partners’ additional investments and withdrawals
14. Procedure for settlement of partners’ interest upon dissolution of partnership
15. Provision for settlement of disputes

Characteristics

1. Mutual Contribution
2. Division of Profit and Loss
3. Co-Ownership of Contributed Assets
4. Mutual Agency
5. Limited Life
6. Unlimited Liability

Classification of Partnerships

As to object

a. Universal Partnership
 b. Particular Partnership

As to liability

a. General Partnership
b. Limited Partnership

As to legality of existence

a. De Facto Partnership
b. De Jure Partnership

As to duration

a. Partnership at Will
b. Partnership with a Fixed Term

Classes of Partners

As to contributions

a. Capitalist Partner
b. Industrial Partner
c. Capitalist-industrial Partner

As to liability

a. General Partner
b. Limited Partner

As to management

a. Managing Partner
b. Silent Partner

Other classes of partners

a. Secret Partner
b. Nominal Partner
c. Liquidating Partner

Advantages

1. It is easy to form. (compared to Corporation)

2. Suited to the practice of profession.
3. Flexibility of operation.
 4. More capital and better decision arrived at. (Compared to Sole Propietorship)
5. Good credit standing

Disadvantages

1. Unlimited liability of the partners.

2. Limited life.
3. Limited ability to raise capital

PARTNERSHIP FORMATION

The partnership is a separate accounting entity (not to be confused with a separate legal entity),
and therefore its assets and liabilities should remain separate and distinct from the individual
partner’s personal assets and liabilities.
All assets contributed to the partnership are recorded by the partnership at their fair market
values. All liabilities assumed by the partnership are recorded at their present values.
Upon formation, the amount credited to each partner’s capital account is the difference
between the fair market value of the assets (including goodwill, if any) contributed and the present
value of the liabilities assumed from the partner. The capital accounts represent the residual equity
of the partnership. The capital account of each partner reflects all of the activity of an individual
partner; contributions, withdrawals, and the distributive share of net income (loss). In some cases, a
drawing account is used as a clearing account for each partner’s transactions with only the net
effect of each period’s activity shown in the capital account.

Example: 1

A and B form a partnership. A contributes cash of P50,000, while B contributed land with
a fair market value of P50,000 and the partnership assumes a liability on the land of P25,000.
The entry to record the formation of the partnership is
Cash P50,000
Land 50,000
Liabilities P25,000
A, capital 50,000
B, capital 25,000

Example: 2

On June 1 20x9, S and T pooled their assets to form a partnership, with the firm to take over their
business assets and assume the liabilities. Partners capitals are to be based on the assets transferred
after the following adjustments:

a) T’s inventory is to be increased by P3,000.

b) An allowance for bad debts of P1,000 and P1,500 are be set up on the books of S and T,
respectively.
 c) Accounts payable of P4,000 is to be recognized in S’s books.
d) An amount of cash must be contributed by any one of the partners in order to establish
equal amount of interest.

The following balances appear on S and T’s individual books on June 1, before adjustments:
Assets Liabilities
S P 75,000 P 5,000
T 113,000 34,500

How much capital must be credited to S?

Answer:
S T Total
Assets of S P75,000 P113,000 P188,000
Less: Liabilities of S ( 5,000) ( 34,500) ( 39,500)
Unadjusted capital of S P70,000 P 78,500 P148,500
Adjustment:
a. Inventory increase 3,000 3,000
b. Allowance for bad debts ( 1,000) ( 1,500) ( 2,500)
c. Accounts payable recognized ( 4,000) _____ ( 4,000)
Capital before cash contribution P65,000 P 80,000 P145,000
Cash contribution by S 15,000 _______ _ 15,000
Equal interest P80,000 P 80,000 P160,000

Example: 3

The balance sheet as of July 31, 20x4, for the business owned by Sexy, shows the following assets
and liabilities:

Cash P 50,000 Furniture & Fixtures P164,000

Accounts receivable 134,000 Accounts payable 28,800
Merchandise inventory 220,000

It is estimated that 5% of the receivables will prove uncollectible. The cash balance includes a
1,000 shares marketable equity securities recorded at its cost, P4,000. The stock last sold on the
market at P17.50 per share. Merchandise inventory includes obsolete items costing P18,000 that
will probably realized only P4,000. Depreciation has never been recorded; however, the furniture
and fixtures are two years old, have an estimated total life of 10 years, and would cost P240,000 if
purchased new. Prepaid items amount to P5,000. Pogi is to be admitted as a partner upon investing
P200,000 cash and P100,000 merchandise. How much capital is to be credited to Sexy upon
formation of partnership?

Answer:
Assets contributed by Sexy:
Cash P 50,000
Accounts receivable 134,000
Merchandise inventory 220,000
Furniture and fixtures 164,000 P568,000
 Less: Accounts payable ( 28,800)
Unadjusted capital contributed P539,200
Adjustments:
Allowance for bad debts (5% x 134,000) ( 6,700)
Marketable securities (17,500 – 4,000) 13,500
Merchandise inventory (18,000 – 4,000) ( 14,000)
Furniture and fixtures (240,000 x 80% - 164,000) 28,000
Prepaid items 5,000
Adjusted capital of Sexy P565,000

1. On May 1, 2008, Jose and Pedro formed a partnership and agreed to share profits and
losses in the ratio of 3:7, respectively. Jose contributed a computer that cost him
P50,000.Pedro contributed P200,000 cash. The computer was sold for P55,000 on May 1,
2008 immediately after the formation of the partnership. What amount should be recorded
in Jose's capital account on formation of the partnership?

2. Red, White, and Blue form a partnership on May 1, 2008. They agree that Red will
contribute office equipment with a total fair value of P40,000; White will contribute
delivery equipment with a fair value of P80,000; and Blue will contribute cash. If Blue
want a one-third interest in the capital and profits, how much should he contribute?

3. Scooby admits Scrappy as a partner in the business. Balance sheet accounts of Scooby on
September 30, just before the admission of Scrappy show:
Cash P 2,600
Accounts receivable 12,000
Merchandise inventory 18,000
Accounts payable P 6,200
Scooby, capital 26,400

It is agreed that for purposes of establishing Scooby’s interest, the following adjustments
shall be made:

a. An allowance for doubtful accounts of 2% is to be established.

b. Merchandise inventory is to be valued at P20,200.
c. Prepaid expenses of P350 and accrued expenses of P400 are to be recognized.

Scrappy is to invest sufficient cash to obtain a 1/3 interest in the partnership. How much is
Scrappy’s investment to the partnership?

4. Minipao and Siopao formed a partnership with each contributing the following assets at the
indicating market value:
Minipao Siopao
Cash P20,000 40,000
Machinery and equipment 30,000
Land 200,000
Building 60,000
Office furniture 30,000

The partners agree to share profits in the ratio of one-fourth to Minipao and three-fourths to
Siopao. Assume that Siopao’s land and building are subject to a mortgage loan of
P120,000 that the partnership will assume, the partner’s capital accounts should have the
following initial balances: