Republic of the Philippines

CAMARINES NORTE STATE COLLEGE

F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

ACCOUNTING FOR PARTNERSHIP DISSOLUTION

Learning Objectives:

1. State the causes of partnership dissolution.

2. Account for the effects of partnership dissolution on the partnership equity.
3. Prepare journal entries to record transaction relating to partnership dissolution.

Discussion:

Partnership Dissolution

Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on as distinguished from the winding up of the business (Art. 1828). It is the point in time when the
partners cease to carry on the business together. In dissolution, the partnership is not terminated, but
continues until the winding up of partnership affairs is completed (Art. 1829).

Dissolution is different from liquidation. Liquidation is the termination of business operations or the winding
up of affairs. Partnership dissolution does not necessarily terminate the business. The business continues until
the remaining partners decide to liquidate the business. If the business is continued after dissolution, new
articles of partnership should be drawn up.

Accounting for Partnership Dissolution

Partnership dissolution is due to changes in ownership, such as the following:

1. Admission of a partner
2. Withdrawal, retirement or death of a partner
3. Incorporation of a partnership

Admission of a Partner

A new partner can be admitted with the consent of all partners in the business. Such an admission brings
about a new association of individuals and represents the formation of a new partnership, the original
partnership is considered dissolved by common consent.

A partnership agreement is binding only while the relationship between the original parties to the agreement
remains unchanged. A new agreement should be drawn up that specifies the partners’ interests upon
formation of the partnership, the distribution of profits and losses among partners, and all other
considerations relative to the new association.

Before admission of a new partner is accounted for, partnership books must be adjusted and updated for the
following items, with adjustments to be made to existing partners’ capital accounts:
• Recognition of accounting errors in prior periods
• Recognition of profit or loss from the beginning of the accounting period to the date of admission.
• Closing of partnership books.
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

• Recognition of net asset revaluations.

The admission of a new partner may be done either through:

a. Purchase of interest
b. Investment in the partnership

Purchase of Interest

A new partner may be admitted when he/she purchases part or all of the interest of one or more of the
existing partners. This transaction is a personal transaction between and among the partners.

The partnership books are not affected by the amount of transfer or consideration from the new partner to the
existing partner. The only journal entry to be made in the partnership books is the transfer of capital from the
existing partner to the new partner, debiting the capital account of the existing partner/s, and crediting the
account of the new partner.

Any gain or loss on the transaction (amount of payment by a new partner may be more or less than the
interest he/she is acquiring) is a personal transaction between the parties, and is therefore, not reflected in the
partnership books. The total capitalization of the partnership before and after the purchase of interest will
remain the same, except when there is revaluation of assets.

Illustration:

Yas, Mar and Veg formed a partnership on January 1, 2009. The following are the capital balances of the
partners after ten years of operation, on January 1, 2019:
January 1, 2019 Profit and Loss Ratio
Yas P300,000 50%
Mar 200,000 30%
Veg 100,000 20%
Total P600,000

On this date, the partners agreed to admit their old friend, Ger, when he purchases an interest for P150,000:

1. Sixty percent (60%) of Mar’s capital

Ger paid P150,000 to acquire 60% of Mar’s capital. This is a personal transaction between the two
partners, which means that the amount of payment, and any gain by Mar will not be reflected in the
books of the partnership. Only the transfer of capital from Mar to Ger will be recorded by the
partnership.

Mar, Capital 120,000

Ger, Capital 120,000
(200,000 x .60)

The gain of P30,000 (150,000 – 120,000) will not be recorded, as it is a personal transaction between
Mar and Ger.
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

Partners’ capital accounts after admission:

Yas 300,000
Mar 80,000
Veg 100,000
Ger 120,000
Total 600,000

The total partnership capital did not change as a result of the admission by purchase of interest. There
was only a change in the capital structure within partnership equity.

The same journal entry will be made, and the same capital structure will result if instead Ger paid only
P100,000 to Mar. The amount of loss in this case of P20,000 (100,000-120,000) will not be recorded in
the partnership books, as it is a personal transaction between Mar and Ger.

2. Twenty percent (20%) from Yas, Mar and Veg (all partners)/ from the partnership

Yas, capital (300,000 x .20) 60,000

Mar, capital (200,000 x .20) 40,000
Veg, capital (100,000 x .20) 20,000
Ger, capital (600,000 x .20) 120,000

Partners’ capital accounts after admission:

Yas 240,000
Mar 160,000
Veg 80,000
Ger 120,000
Total 600,000

The old partners’ respective capital accounts were reduced by 20%, and the amount was transferred to
the new partner, Ger. The gain of P30,000 (150,000-120,000) is not credited to the existing partners’
capital accounts because the purchase of interest from all partners/from the partnership is a personal
transaction among the partners. They may divide the gain according to their profit and loss ratio

3. Thirty percent (30%) from the partnership, payment to Yas and Mar only (proportionate share)

Yas, capital (600,000 x .30 x 5/8) 112,500

Mar, capital (600,000 x .30 x 3/8) 67,500
Ger, capital (600,000 x .30) 180,000

Partners’ capital accounts after admission:

Yas 187,500
Mar 132,500
Veg 100,000
Ger 180,000
Total 600,000
 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

Revaluation of Assets

Before admission of a new partner, the assets and liabilities of the existing partnership that is to be carried
over to the new partnership must be restated to fair values. The adjustment to the assets and liabilities is
allocated first to the existing partners before recording the admission of a new partner.

Admission by Investment

The admission by investment requires recording of the consideration transferred by the new partner by the
partnership. The transaction is between the new partner and the partnership. The following terms may be
helpful in accounting for admission of a new partner by investment:

• Contributed capital (CC) – refers to the actual contribution of the new partner, as well as the existing
partners
• Capital credit/ Agreed capital (AC) – refers to the capital of each of the partners agreed upon in the
formation of the new partnership.
• Total Contributed Capital (TCC) – refers to the total amount of actual contribution of the partners in
the new partnership
• Total Agreed Capital (TAC) – refers to the total amount of capital of the new partnership as agreed
upon by the partners.
• Capital Interest – refers to the share of each partner in the total agreed capital. It may be expressed as
a ratio, fraction, or percentage.
• Bonus – refers to transfer of capital from the new partner to the existing partners, or vice versa,
depending on the difference in their respective CC’s and AC’s
• Goodwill – refers to the excess of TAC over the TCC, and may be attributed to the new partner or the
existing partners, depending on the change/difference in their respective CC’s and AC’s
• Revaluation of assets - refers to the excess of TCC over the TAC, and may be attributed to the new
partner or the existing partners, depending on the change/difference in their respective CC’s and AC’s

Illustration:

Yas, Mar and Veg formed a partnership on January 1, 2009. The following are the capital balances of the
partners after ten years of operation, on January 1, 2019:
January 1, 2019 Profit and Loss Ratio
Yas P300,000 50%
Mar 200,000 30%
Veg 100,000 20%
Total P600,000

On this date, Ger is admitted as a new partner when he invested P150,000.

 Republic of the Philippines
CAMARINES NORTE STATE COLLEGE
F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte, 4600 Philippines

1. Ger is to have a 20% interest in the partnership.

CC AC
Yas 300,000 300,000
Mar 200,000 200,000
Veg 100,000 100,000
Total 600,000 600,000
Ger 150,000 150,000
Total 750,000 750,000

Cash 150,000
Ger, capital 150,000

Partners’ capital accounts after admission:

Yas 300,000
Mar 200,000
Veg 100,000
Ger 150,000
Total 750,000

References:
Millan, Vernon Zeus (2020), Accounting for Special Transactions
Dayag, Antonio (2017), Advanced Financial Accounting and Reporting
Bagayao, Ivan Yannick (2020), AFAR Quick Notes