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Chapter 1 Partnership Formation

Financial Accounting and Reporting (Pontifical and Royal University of Santo Tomas,
The Catholic University of the Philippines)

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involuntary dissolution such as through

CHAPTER 1: PARTNERSHIP bankruptcy proceedings
FORMATION - A partnership may also come to an end
upon completion of the objective or
Nature of Formation goal for which the partnership was
- Two or more persons can contribute formed
money, property, or industry to a common - The dissolution of the partnership does
fund with the intention of dividing the not necessarily terminate the
profile among themselves partnership as a reporting entity
- Two or more persons may also form a
partnership for the exercise of a profession  Division of profits among partners
(Article 1767 of the New Civil Code) - Based on the definition of a
partnership from a New Civil Code – it
A partnership is characterized by the ff.: is deemed that the primary purpose of
 Voluntary agreement a partnership is to earn profits and to
- A partnership agreement is perfected divide the same among the partners in
by mere consent, that is, upon express conformity with the terms of the
or implied agreement of two or more partnership agreement
persons
 Mutual contribution of money, A partnership may be perfected in any
property, or industry to a common form, but it is always preferable to have the
fund contract in writing.
- In order to become partner in a
partnership, one must contribute Articles 1771 and 1772 of the New Civil
money and/or property to a common Code
fund - Require the partnership contract to be in
- An individual may also be a partner by public instrument when immovable
investing his services to the firm property or real rights are contributed
- w/out the element of mutual there to or when partnership capital is at
contribution, there can be no least there thousand pesos (P3,000)
partnership
Articles of Co-Partnership
 Co-ownership of the property
- Written contract of a partnership
- The assets contributed by each partner
- Contain the ff. information:
in a partnership become the common
- The name of the partnership
property of all partners - The names, citizenship and residences
- No partner owns any particular piece of the partners
of partnership property - The effective date of the contract
 Mutual agency - The nature of the business, purpose
- Each partner acts as an agent for the and principal office of the business
partners - The capital of the partnership, stating
- This means that the partnership is the contributions of individual partners,
their descriptions and agreed values
legally held responsible for the acts of
- The rights and duties of each of the
any partner as long as those acts
partners
relate to the normal partnership - The provisions for additional
activities investments and withdrawals
- Partnership is not bound by an act - The manner in which profits and losses
committed by any of the partner that are to be shared
is considered beyond the scope of - The manner of keeping the book of
partnership business accounts
- The procedures for dissolving the
 Unlimited liability partnership
- Each partner is held personally liable - The provision for arbitration in settling
for the debts of the firm disputes
- Partnership obligations can be satisfied
not only with partnership assets but Kinds of Partners
with the personal holdings or assets of Partners may be classified in a variety of
each partner ways, as follows:
- When all partnership assets are 1. As to nature of contributions
exhausted and there are still 2. As to partners’ liabilities to third
partnership obligations that have not persons
been settled, the partnership creditors
can claim from the personal assets of 3. As to partners’ interest or obligation of
the partners the business
 Limited life
- The legal life of the partnership
terminates with the admission of a new 1. As to nature of contributions, a partner
partner, death, bankruptcy or may be classified as:
withdrawal of any partner, voluntary o Capitalist partner
dissolution by the partners, or by

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- One who contributes money or - One which is composed of one

property into the partnership or more general partners and
o Industrial partner one or more limited partners
- One who contributes money - A limited partnership shall bear
only his industry or services to the word “Limited” or “Ltd” in
the partnership its firm name
o Capitalist-industrial partner
- One who contributes money or 2. As to object a partnership is either universal
property as well as his services or particular:
to the partnership o universal partnership of all present
property
2. As Liabilities to third persons a partner - In which the partners contribute
may be classified as: all the property which actually
o General partner belongs to them to a common
- One whose liability to fund with the intention of
partnership creditors extends to dividing the same among
his personal separate property themselves, as well as all the
o Limited partner profits which they may acquire
- One whose liability to third therewith
persons is limited to his capital o universal partnership of profits
contributions - Comprises all that the partners
may acquire by their industry at
3. As to their interest in or obligations to work during the existence of
the business, a partner may be classified as: the partnership
o managing partner o particular partnership
- one who manages the affairs of - Has for its object determinate
the business things, their use or fruits or a
o secret partner specific undertaking, or the
- One who is not known by third exercise of a profession or
parties to be a partner in the vocation
business but takes active part
in the business 3. As to duration, a partnership is either at will
o silent partner of a partnership w/ a fixed term
- One who does not take active o Partnership at will
part in the business - is one which no time or period
o dormant partner is specified for its existence and
- One who does not take active is not formed for a particular
part in the business and is not undertaking or venture
known by third parties to be a o partnership with a fixed term
partner - is one in which the term for
o Ostensible partner which the partnership will exist
- One who takes active part and or agreed upon
known to the public as a - this also applied to a
partner in the business, partnership that is formed for a
whether or not he has an actual particular objective or
interest in the firm undertaking

Classifications of Partnership 4. As to purpose, a partnership is either

Partnerships may be classified as: commercial/trading or professional
1. Liability of the partners o commercial or trading partnership
2. As to object - is organized to undertake
business transactions such as
3. As to duration merchandising or
manufacturing transactions
4. As to purpose o professional partnership
- is formed for the practice of a
profession (such as auditing
1. As to liability of the partners, a forms for CPAs, law firms for
partnership may be classified as either lawyers, medical clinic for
general or limited: medical practitioners, etc)
o General partnership
- One in which all partners are Advantages and Disadvantages of a
general partners, which means Partnership
that the liability of all partners Partnership is preferred over sole
to the partnership creditors proprietorship because:
extend to their personal 1. “two heads are better than one”; The skills
separate property and talents of 2 or more individuals can be
o Limited partnership combined, providing more ideas and

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inputs on business and management him or ger to avoid competing with each other
strategies; could also lead to dividing the or to expand their operations
management functions more than one  The old set of books of one of the old
person proprietors may be used for the partnership
2. With more than one investor involved in a transactions, but it is preferable to use a new
partnership, it has the capacity to set of books since a new basis of
generate more capital accountability arises upon the formation of
Disadvantages: the partnership
1. Since there are 2 or more persons  A new set of books is usually required to be
managing the business, there is always registered with the Bureau of Internal
the possibility of conflicts bet or among Revenue (BIR)
partners arising from differences in
decision-making  Partners may agree to retain the books either
2. A partnership has limited life such that of the 2 partners
withdrawal, death or insolvency of a  If partner A would be retained, it would be
partner as well as admission or a new necessary to close the books of partner B and
partner will lead to its dissolution to transfer his business assets and liabilities
3. The characteristic or mutual agency of a to the books of B. Santos –
o (but not suggested, since the
partnership may be considered as a
government agencies regulating
disadvantage. This could make the
businesses in the country would
partnership liable for the unscrupulous
normally require a new set of books)
and wrongful acts of any partner  When a new set of books would be used by
4. Unless the partner is a limited partner, the the partnership – both partners (Partners A
characteristic of unlimited liability could and B) should be adjusted and closed
bring the business risk of the partner o Ideally assets are revalued to reflect
extending to his personal assets their current values, thereby adjusting
the respective capital accounts, after
Accounting for formation of a partnership w/c, all accounts should be brought to
 Accounting procedures for a partnership are zero balances
identical to those of a single proprietorship. o The adjusted assets and liabilities of
 One primary difference between a partnership both partners should then be
and a single proprietorship is that – there are transferred to the new set of books for
separate drawing and capital accounts for the partnership
 If the partners use new set of books:
each partner in partnership.
o In the individual books of partners A
 Assets invested in a partnership are recorded
and B
by crediting the capital account of the
 Assets and liabilities shall
contributing partner adjusted, debiting or crediting
 A capital account is maintained for each directly the capital accounts
capitalist partner to record all permanent  All accounts shall be brought to
investments in and permanent withdrawals zero balances
from the partnership funds o In the new set of books of the
 When non-cash assets contributed by a partnership
partner or partners, these assets are recorded  The assets and liabilities
at values agreed upon by all partners, w/c received from both partners
generally are the fair values of the assets at shall be recorded. The PPE
the time of contribution accounts are taken up at the
 Fair value is determined by a reference to agreed fair values, w/o
transferring to the books of the
values of similar resources in an active market
partnership the related
or through an independent appraisal
accumulated depreciation. The
 When there is no active market for an asset creating of the partnership
contributed by a partner or when it is gives rise to a new basis of
impracticable to engage the services of an accountability, such that the
appraiser, the values agreed upon by all the fair values at the date of
partners will be assigned values to the contribution are the cost basis
invested assets for property, PPE.
 Any obligation assumed by the partnership  The cash contributed coming
related to the contributed asset is credited to from the single proprietorships
the specific liability account involved and is shall be increased or decreased
netted against the value of the asset to to bring their respective capital
determine the amount credited to the capital balances to the agreed amount
AJE
account of the partner
 the adjustments to a/r, building, and furniture
 The admission of an industrial partner is
and equipment are made through their
recorded through a memorandum entry, valuation accounts, i.e., allowance for
stating that fact and his or her share in profits uncollectible accounts and related
 In some cases, a partnership is formed when a accumulated depreciation
proprietor invites some individuals or another o to decreased the amortized cost of
proprietor in the same line of business to join accounts receivable, the allowance for
uncollectible accounts is credited

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 to decrease the carrying value of building, the

accumulated depreciation is credited
 to increase the carrying value of furniture and
equipment, the related accumulated
depreciation account is debited
 in cases where the fair value of the property
and equipment exceeds to its original cost, it
would be necessary to debit the existing
accumulated depreciation account to the
extent only if its balance with the remaining
increased being charged directly to the asset
account
 partner A – after posting the foregoing entries
to the general ledger, all accounts in the
partner A would have zero balances
 partner B – adjusting entries and closing
entries should be made
 the assets and liabilities from the Books A and
B are transferred to the new set of books for
the partnership
New set of books
 building and furniture and equipment
accounts are carried forward to the books of
the partnership at their new cost basis
 the accum dep balances are netted against
the asset accounts
 the assets are recorded at their fair or agreed
values that served as the initial measurement
bases of the assets in so far as the
partnership is concerned
 allowance for uncollectible accounts, is not
netted against the accounts receivable, since
the allowance reflects the accounts that are
estimated only to be uncollectible
 when part of the accounts receivable is
considered to be directly uncollectible, such
amount should be directly deducted from the
balance of the accounts receivable
__________________________________________________
 by contract of co-partnership
o 2 or more persons may contribute money
o Property or industry to a common fund w/ the
intention of dividing the profits among
themselves
o 2 or more persons may also form a partnership
for the exercise of a profession
 A partnership is characterized by
o Mutual agency
o Co-ownership of enterprise assets
o Unlimited liability
o Limited life
 Partners may be classified as to nature of contributions. A
partner may be a:
o Capitalist partner
o Industrial partner
o Capitalist-industrial partner
As to liability to their persons, a partner may either be a
o General
o Limited partner
 Several owners contribute to the resources of the
partnership – a partnership maintains a capital account
for each of its capitalist partner; assets contributed by the
partners at the date of the formation of the partnership
are recorded at fair market values determined either
based on values of similar assets, through independent
appraisal or based on values agreed upon by all partners
 The admission of an industrial partner into partnership is
recorded using a memorandum entry only. The
memorandum record must also indicate the share of the
industrial partner in a partnership profits
 When one or more proprietorships are converted into a
partnership, it is preferable to use a new set of separate
books to record the transactions of the partnership. At the
date of the partnership formation, the individual of the
proprietorship should be adjusted and closed. The assets
and liabilities of the former sole proprietorships are then
transferred to the new set of books of the partnership at
values agreed upon by the partners, w/c equal their fair
values

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