Nature and Formation

of a Partnership
PART 2 of 2
Partnership and Corporation Accounting 1
Partnership Formation
Formation B: Sole Proprietor and an Individual Form
a Partnership
• One of the prospective partners is already engaged
in business prior to formation of partnership; the
partnership may either:
1. Use the books of the sole proprietor
2. Open a new set of books (common practice)

• When individual set of books are kept – individual

adjustments are made on the separate books;
adjustments are made through the capital account
Illustrative Problem A
Aguilar and Angeles formed a partnership wherein
Aguilar is to contribute cash while Angeles is to transfer
the assets and liabilities of his business. Account
balances on the books of Angeles are as follow:

Debit Credit
Cash 300,000
Accounts Receivable 450,000
Inventories 240,000
Accounts Payable 90,000
Angeles, Capital 900,000
Illustrative Problem A
The partners agreed on the following conditions:
1. An allowance for uncollectible accounts of 22,000
is to be established.
2. The inventories are to be valued at their current
replacement cost of 270,000.
3. Prepaid expenses of 12,000 and accrued
expenses of 5,000 are to be recognized.
4. Angeles is to be credited amount equal to the net
assets transferred.
5. Angeles is to contribute sufficient cash to have an
equal interest in the partnership.
Illustrative Problem A
Assumption 1: The partnership will use the
books of the sole proprietor

Accounting procedure
1. Adjust the books of the sole proprietor to
bring the balance to agreed values
2. Record the investment of the sole proprietor
Illustrative Problem A
Assumption 1: The partnership will use the
books of the sole proprietor
Helpful rules in making adjusting entries:
• Debit asset and credit capital for increases in asset values
• Debit capital and credit asset for decreases in asset values
• Debit capital and credit liability for increases in liability balances
• Debit liability and credit capital for decreases in liability balances
Contra asset accounts:
• Debit contra asset account and credit capital account for
increases in asset values
• Debit capital and credit contra asset account for decreases in
asset values
Illustrative Problem A
Step 1: Adjust the books of sole proprietor Angeles
to agreed values
Debit Credit
a. Angeles, Capital 22,000
Allowance for Uncollectible Accounts 22,000

b. Inventories 30,000
Angeles, Capital 30,000

c. Prepaid Expenses 12,000

Expenses Payable 5,000
Angeles, Capital 7,000
900,000 – 22,000 + 30,000 + 7,000 = 915,000
Illustrative Problem A
Step 2: Record the investment of the other partner,
Aguilar
Debit Credit
Cash 915,000
Aguilar, Capital 915,000
Illustrative Problem A
Assumption 2: The partnership will open a
new set of books
Adjusting entries – Angeles Books Debit Credit
a. Angeles, Capital 22,000
Allowance for Uncollectible Accounts 22,000

b. Inventories 30,000
Angeles, Capital 30,000

c. Prepaid Expenses 12,000

Expenses Payable 5,000
Angeles, Capital 7,000
Illustrative Problem A
Assumption 2: The partnership will open a
new set of books
Closing entry – Angeles Books Debit Credit
Angeles, Capital 915,000
Expenses Payable 5,000
Accounts Payable 90,000
Allowance for Uncollectible Accounts 22,000
Cash 300,000
Accounts Receivable 450,000
Inventories 270,000
Prepaid Expenses 12,000
Illustrative Problem A
Assumption 2: The partnership will open a
new set of books
Opening Entries – New Partnership Books Debit Credit
a. Cash 300,000
Accounts Receivable 450,000
Inventories 270,000
Prepaid Expenses 12,000
Allowance for Uncollectible Accounts 22,000
Accounts Payable 90,000
Expenses Payable 5,000
Angeles, Capital 915,000
Investment of Angeles
Illustrative Problem A
Assumption 2: The partnership will open a
new set of books
Opening Entries – New Partnership Books Debit Credit
b. Cash 915,000
Aguilar, Capital 915,000
Investment of Aguilar
Partnership Formation
Formation C: Two or More Sole Proprietors Form a
Partnership

Illustrative Problem B:
Antonio, owner of Antonio Variety Store, and Albano,
owner of Albano Trading decided to combine their
businesses of September 30, 2021. Each is to transfer
business assets and liabilities to at agreed values.
Illustrative Problem B
Antonio Variety Store
Statement of Financial Position
September 30, 2021
ASSETS
Cash P120,000
Accounts Receivable P72,000
Less: Allowance for Uncollectible Accounts 6,000 66,000
Merchandise Inventory 330,000
Store Equipment P600,000
Less: Accumulated Depreciation 30,000 570,000
TOTAL ASSETS P1,086,000
LIABILITY AND CAPITAL
Accounts Payable P132,000
Antonio, Capital 954,000
TOTAL LIABILITY AND CAPITAL P1,086,000
Illustrative Problem B
Albano Trading
Statement of Financial Position
September 30, 2021
ASSETS
Cash P30,000
Accounts Receivable P300,000
Less: Allowance for Uncollectible Accounts 21,000 279,000
Merchandise Inventory 1,260,000
Delivery Equipment P480,000
Less: Accumulated Depreciation 6,000 474,000
TOTAL ASSETS P2,043,000
LIABILITY AND CAPITAL
Accounts Payable P333,000
Albano, Capital 1,710,000
TOTAL LIABILITY AND CAPITAL P2,043,000
Illustrative Problem B
The partners agreed on the following conditions:
1. Partners’ capital in the partnership shall be equal
to the net assets transferred.
2. Adjustments are to be made as follows:
a. Allowance for uncollectible accounts shall be
7,200 and 30,000, respectively.
b. Inventories are to be valued at 120% of their
recorded values.
c. Both store and delivery equipment are 5%
depreciated.
Illustrative Problem B
Assumption 1: The partnership will use the
books of one of the sole proprietors
Step 1 – Adjust the books of Albano Trading
Debit Credit
a. Albano, Capital (30,000 – 21,000) 9,000
Allowance for Uncollectible Accounts 9,000

b. Merchandise Inventory (1,260,000 x 20%) 252,000

Albano, Capital 252,000

c. Albano, Capital [474,000 – (480,000 x 95%)] 18,000

Accumulated Depreciation – Delivery Equip. 6,000
Delivery Equipment 480,000 x 5% 24,000
Illustrative Problem B
Assumption 1: The partnership will use the
books of one of the sole proprietors
Adjusting Entries – Antonio Variety Store Debit Credit
a. Antonio, Capital (7,200 – 6,000) 1,200
Allowance for Uncollectible Account 1,200

b. Merchandise Inventory (330,000 x 20%) 66,000

Antonio, Capital 66,000
Illustrative Problem B
Assumption 1: The partnership will use the
books of one of the sole proprietors
Closing Entries – Antonio Variety Store Debit Credit
Allowance for Uncollectible Accounts 7,200
Accumulated Depreciation – Store Equip 30,000
Accounts Payable 132,000
Antonio, Capital 1,018,500
Cash 120,000
Accounts Receivable 72,000
Merchandise Inventory 396,000
Store Equipment 600,000
Illustrative Problem B
Assumption 1: The partnership will use the
books of one of the sole proprietors
Step 2 – Record the investment of Antonio
Debit Credit
Cash 120,000
Accounts Receivable 72,000
Merchandise Inventory (330,000 x 120%) 396,000
Store Equipment (600,000 x 95%) 570,000
Allowance for Uncollectible Accounts 7,200
Accounts Payable 132,000
Antonio, Capital 1,018,800
Illustrative Problem B
Assumption 2: The partnership will use or
open new set of books

Accounting procedure
1. Adjust the books of each sole proprietor to
bring the balance to agreed values
2. Close each sole proprietor books
3. Record investment of each partner at agreed
values in the new set of books
Illustrative Problem B
Assumption 2: The partnership will use or
open new set of books
Investment of Antonio Debit Credit
Cash 120,000
Accounts Receivable 72,000
Merchandise Inventory (330,000 x 120%) 396,000
Store Equipment (600,000 x 95%) 570,000
Allowance for Uncollectible Accounts 7,200
Accounts Payable 132,000
Antonio, Capital 1,018,800
Illustrative Problem B
Assumption 2: The partnership will use or
open new set of books
Investment of Albano Debit Credit
Cash 30,000
Accounts Receivable 300,000
Merchandise Inventory (1,260,000 x 120%) 1,512,000
Delivery Equipment (480,000 x 95%) 456,000
Allowance for Uncollectible Accounts 30,000
Accounts Payable 333,000
Albano, Capital 1,935,000
Illustrative Problem B
Antonio and Albano Immediately After
Statement of Financial Position the Formation of
September 30, 2021 the Partnership

ASSETS
Cash P150,000
Accounts Receivable P372,000
Less: Allowance for Uncollectible Accounts 37,200 334,800
Merchandise Inventory 1,908,000
Store Equipment 570,000
Delivery Equipment 456,000
TOTAL ASSETS P3,418,800
LIABILITY AND CAPITAL
Accounts Payable P465,000
Antonio, Capital 1,018,800
Albano, Capital 1,935,000
TOTAL LIABILITY AND CAPITAL P3,418,800
Goodwill: Arising from Acquisition
of a Sole Proprietorship by a
Partnership
Goodwill
• Result from the acquisition by the new partnership of
the net assets of the sole proprietorship(s)
• Capital credit > agreed values or fair values of net
assets acquired by the partnership
• It is not amortized but tested for impairment annually,
or more frequent, if events changes
• Intangible asset
• Established reputation of a business, proprietary or
intellectual property, and brand recognition, which is
not easily quantifiable
Capital Share Different from
Capital Contribution
Illustrative Problem C:
Alfonso and Afable formed a partnership by
contributing 500,000 and 600,000, respectively.

FULL INVESTMENT APPROACH Debit Credit

Cash 1,100,000
Alfonso, Capital 500,000
Afable, Capital 600,000
Capital Share Different from
Capital Contribution
Illustrative Problem C:
Alfonso and Afable formed a partnership by
contributing 500,000 and 600,000, respectively.

BONUS APPROACH Debit Credit

Cash 1,100,000
Alfonso, Capital 550,000
Afable, Capital 550,000
(500,000 + 600,000 = 1,100,000 / 2)
Loan Receivable and Loan
Payable
Loan Receivable (Loan to Partner / Advances to
Partner / Due from Partner)
• Advance money to partner(s), other than
withdrawals, in the form of loan
• Payable immediately by the partner(s), usually
with interest
• Classified as an asset (current or noncurrent
depending on the terms of the loan)
Loan Receivable and Loan
Payable
Loan Payable (Loan from Partner / Advances from
Partner / Due to Partner)
• Advance money from partner(s), other than
investments, in the form of loan
• Payable immediately to the partner(s), usually
with interest
• Classified as a liability (current or noncurrent
depending on the terms of the loan)
End of Presentation
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