UNIT 2: ACCOUNTING FOR PARTNERSHIP

2.2. Partnership formation

2.2.1 Legal requirements in formation of partnership

ARTICLE 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or property,
shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission.

Articles of Partnership/ Articles of Co-Partnership

The Articles of Partnership is the name given to an instrument in writing by which the parties enter into a contract or
agreement of partnership. The principal parts of Articles of partnership are as follows:
1. Partnership name under which the company shall transact business
2. Names, nationalities and residences of the partners.
• If it is a limited partnership, the kind of partner (whether general or limited)
3. Principal office of the partnership
4. Purpose or purposes of the partnership
5. Duration or term of existence of the partnership
6. Capital of the partnership
7. Transfer clause
8. Undertaking to change partnership name
9. Other provisions, conditions, terms and stipulations
10. Signatures of the partners
11. Notarial Page

Steps in the formation of a partnership

1. Department of Trade and Industry (DTI) – Business name
2. Securities of Exchange and Commission (SEC) – Articles of Partnership
3. City Municipal Office – Mayor’s permit and license to operate
4. Bureau of Internal Revenue (BIR) – BIR registration number; Tax Identification Number (TIN); Registration of
accounting books, invoices, and official receipts
5. Social Security System (SSS); Philippine Health Insurance Corporation (Philhealth); Home Development Mutual
Fund (HDMF or Pag-ibig) – Certificate of membership; Employer ID number

2.2.2 Accounting for initial investment of partners

ARTICLE 1787. When the capital or a part thereof which a partner is bound to contribute consists of goods, their
appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall
be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for the
account of the partnership.
• in the manner prescribed in the contract of partnership = agreed value (AV)
• according to current prices = fair market value (FMV)

Fair market value/Fair value

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date. [CF6.12]

Fair value reflects the perspective of market participants in a market to which the entity has access. The asset or
liability is measured using the same assumptions that market participants would use when pricing the asset or
liability if those market participants act in their economic best interest. [CF6.13]

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Recording a partner’s investment
Cash Face value
Non-cash or property (1) Agreed value
(2) In the absence of an agreed value → Fair market value
Liability Net present value
Industry Memorandum entry

Reminders:
When transferring the following to a partnership:
• Property, plant, and equipment items are recorded net of depreciation.
• Accounts Receivable and its corresponding allowance account are both recorded in the books.

Ways to form a partnership

• Two or more partners form a new partnership
o Cash contribution
o Cash and non-cash contributions
o Cash and non-cash contributions with liabilities
▪ Liability is absorbed by the partnership
▪ Liability is not absorbed by the partnership
o Cash, non-cash, and industry contributions

• Sole proprietorship business converted into partnership

o An existing sole proprietorship business and a person without existing business
▪ using the books of the sole proprietor
▪ using new set of books
o Two or more existing sole proprietorship businesses combine their resources
▪ using the books of one of the sole proprietors
▪ using new set of books

Opening Entries if Capital Share Different from Capital Contribution

• Full investment approach – contribution [investment] made by a partner is equal to the capital share [book value]
• Bonus approach – contribution [investment] made by a partner is not equal to the capital share [book value] so a
bonus is awarded

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REFERENCES:
• Dela Cruz, A.L.C., Rabo, J.S., & Tugas, F.C. (2019). Basic financial accounting and reporting.
• Palma, Roberto C. (2014). Basic Accounting 2: Partnership and Corporation. Rex Bookstore, Inc.
• Electronic Sources:
o IFRS Foundation (2018, March). Conceptual Framework for Financial Reporting. [On-line] Available
https://www.ifrs.org/issued-standards/list-of-standards/conceptual-framework/
o Republic Act No. 386 An act to ordain and institute the Civil Code of the Philippines. [On-line] Available
https://www.officialgazette.gov.ph/1949/06/18/republic-act-no-386/
o Securities and Exchange Commission. [On-line] Available https://www.sec.gov.ph/

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