IM On ACCO 20033 Financial Accounting and Reporting Part 1 Revised Cover Page

Financial Accounting and Reporting Part 1 1
2 Financial Accounting and Reporting Part 1

ACCO 20033
Financial Accounting and Reporting Part
1 An Instructional Material
Compiled by:
Melinda S. Balbarino
Maria Teresa M. Corrales
Marietta M. Doquenia
Julieta G. Fonte
Leandro C. Fua
Editha A. Peralta
Andrea Rose E. Rimorin
Catherine D. Sotto
GENERAL INFORMATION ABOUT THE COURSE
Course Code and Title : ACCO 20033 - FINANCIAL ACCOUNTING AND REPORTING 1
Semester and Academic Year : First Semester, Academic Year 2020- 2021
Course Credit : 3 Units
Pre-Requisite : ABM 1 and 2 from Senior High School/; Financial Accounting P1 and P2 for Non-
ABM SHS graduates
Course Description : This course provides overview of basic accounting taken up during the
students’ senior high school. The course comprises
topics such as the formation of a partnership, division of profit and
loss by the partners; accounting for the admission and
retirement/withdrawal of a partner
Course Outcomes : Upon completion of the course, the students will be able to:
a. Have detailed knowledge and understanding of the

accounting process of a Single Proprietorship for both
service and merchandising;
b. Produce the required entries and financial records of a
partnership;
c. Competence and honesty in the performance of
accountancy service; and
d. Demonstrate the qualities of a future accountant skilled in
the use of a calculator, computer and other business
equipment
Faculty Email Contact Details M. Doquenia - mmdoquenia@pup.edu.ph Prof.

: To help and guide you in your progress, you may Julieta G. Fonte – jgfonte@pup.edu.ph
get in touch with your Faculty-In-Charge (FIC) in the
Prof. Leandro C. Fua – lcfua@pup.edu.ph
following email addresses:
Prof. Editha A. Peralta – eaperalta@pup.edu.ph
Prof. Andrea Rose E. Rimorin –
Prof. Melinda S. Balbarino – arerimorin@pup.edu.ph Prof. Catherine D. Sotto –
msbalbarino@pup.edu.ph Prof. Maria Teresa M. cdsotto@pup.edu.ph
Corrales – mtmcorrales@pup.edu.ph Prof. Marietta
TABLE OF CONTENTS
Content Page Number
Cover Page 1 Title Page 2 General Information About the
Course 3
Module 1 – Review of Accounting Process 5 Module 2 -
Nature and Formation of A Partnership 38 Module 3 -
Partnership Operations 53
Module 4 - Partnership Dissolution 75
Module 5 - Dissolution of Partnership By

85
Disassociation Of A Partner Due To Withdrawal,
Retirement, Insolvency, Incapacity Or Death Of A
Partner
MODULE 1
REVIEW OF THE ACCOUNTING PROCESS
Overview
The module gives us a review of the accounting process for single proprietorship both in
service and merchandising business.
Module Objectives
At the end of this module, the students should be able to:
1. Understand the definition of accounting and identify the users of accounting information.
2. Identify and explain the steps in the accounting process
3. Prepare adjusting entries and understand the rationale for their preparation. 4. Prepares
closing and reversing entries and understand the rationale for their preparation.
5. Prepare a financial statement for service and merchandising business.
ACCOUNTING DEFINED
Accounting is a service activity. Its function is to provide quantitative information,

primarily financial in nature, about economic entities, that is intended to be useful in making
economic decisions, in making reasoned choices among alternative courses of action. This
definition stipulates the nature and purpose of accounting. An accountant provides services and
furnishes quantitative information expressed in terms of money that is useful to the users of the
accounting information. The information are outlined into reports called financial statements and
served as a basis for making important economic decisions.
The users of the accounting information are categorized as either internal or external
users. External users are decision makers who have no direct access to the information
provided by the operations of the company. Internal users represent the managers or the
decision makers of an entity and they need the accounting information for the continued
operation of their business.
Examples of users and their need for accounting information as the basis for their
decision making are:
a. Investors are influenced with the returns from their investments and to decide whether to
make additional investments, hold or sell their shares of stocks.
b. Creditors/Suppliers/Lenders need accounting information to help in their decision

whether to extend credit or loans being applied by businesses.
c. Government and their agencies need to know if an entity is abiding the implemented
government rules and regulations.
d. Employees/Labor unions are interested in the stability and profitability of the company
they are working with and for the assurance of their security of tenure.
e. General Public and Customers need to know if the company would provide them
continuity of their services and updates on improvements of their products and
services.
BRANCHES OF ACCOUNTING
There are two main branches of accounting: Financial Accounting and Management
Accounting.
Financial Accounting is designed in providing accounting information for all parties

external to the operating responsibility of the company. It is the process of preparing accounting
reports known as financial statements that show the company’s financial performance and
position to people outside the company like creditors and customers.
Management or Managerial Accounting is designed in providing accounting information

and operational needs for use by the internal users, the management. It involves financial
analysis, budgeting and forecasting, cost analysis, and evaluation of business decisions.
AREAS OF ACCOUNTING
Accounting is commonly misinterpreted and understood as just the recording of business

transactions, known as bookkeeping. However, bookkeeping is only one of the functions of
accounting while accounting is a diversified profession. Accountants can be employed in four
broad or specialized areas:
Public Accounting
Public accounting offers accounting and related services to its clients on a fee basis.
Some of the services being offered include preparation, review and audit of the company’s
financial statements, tax services, and consultation involving accounting systems, mergers and
acquisitions. Accountants practicing public accounting are licensed professionals known as
Certified Public Accountants
Private Accounting
Private accounting offers accounting services for a specific company and is an important
part to the success of any organization. Private accountants offer a higher level of services
through familiarity with the full workings of the company’s business interests. They are
concerned with the collection and analysis of financial data within a specific company. They are
also involved with strategic planning and developing new products and services.
Government Accounting
Under Section 109, of the PD No. 1445, Government Accounting is defined as one that
encompasses the process of analyzing, classifying, summarizing and communicating all
transactions that are involved in the receipt and disbursement of all government funds and
properties, and interpreting the results thereof. Its objectives were set to include several areas
in government operations. The accounting data should show how government funds were used
and should indicate the outflow and inflow of funds and the need for a study of fund
management and control, if necessary.
Accounting Education
Accounting Education is an area of accounting that covers the upgrading, researching

and teaching accounting knowledge to students, aspiring accountants or accounting
professionals seeking continuous education and updates. This area is composed of
accountants (Certified Public Accountants) who are into teaching, training and development,
including research. Accountants in education pursue a career as a faculty member in a school,
an author of an accounting book, a researcher, a trainer, or a reviewer.
FORMS OF BUSINESS ORGANIZATION
The most common forms of business organization are the following:
Sole Proprietorship
Sole or Single Proprietorship is organized and owned by only one person. It is easy to
form and offers complete control to the owner. However, he is also personally liable for all
financial obligations and debts of his business.
Partnership
A partnership is formed by two or more individuals who agreed to carry on a trade or

business. Each individual contributes money, property, labor or skill, and expects to share in the
profits of the business.
Corporation
A Corporation is a more complex form of business organization as differentiated from a

sole proprietorship and a partnership. It is a separate legal entity whose ownership is divided
into shares of stocks. Its owners are known as shareholders. It is also subject to more legal
requirements and government regulations.
TYPES OF BUSINESS ACTIVITIES
A business is an organization that uses basic resources (inputs) like materials and labor
to provide goods or services to customers or clients. There are three major types of business:
Service Business
A service type of business provides services rather than products to customers or clients
for a fee. Examples are salons, repair shops, hotels and restaurants, and professional firms like
law and accounting.
Merchandising Business
This type of business is also called a trading business. Merchandising companies buy
goods in salable form and sell them to their customers at a higher cost to make a profit.
Examples are department stores, bookstores, appliance stores and other resellers.
Manufacturing Business
This type of business buys raw materials with the intention of using them in making a
new product. Manufacturing companies converts these raw materials into finished products
before selling them to their customers.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
Generally accepted accounting principles are a common set of accounting principles,

standards and procedures that must be followed when preparing financial statements.
Because it is important that all who will receive accounting reports be able to interpret
them, a set of practices were developed that will provide guidelines for financial accounting. The
term used to describe these practices is generally accepted accounting principles (GAAP).
Generally accepted accounting principles encompass the conventions, rules, and

procedures necessary to define accepted accounting practice at a particular time. These
“principles” are not like the unchangeable laws of nature found in chemistry or physics. They are
developed by accountants and businesses to serve the needs of decision makers, and they can
be changed or altered as better methods are developed or as circumstances change.
A few examples of these generally accepted accounting principles are:
1. Business Entity Concept
Under the business entity concept, the activities of a business are recorded separately from the
activities of the owner or owners. This concept is important because it limits the economic data
in the accounting system to data related directly to the activities of the business. Thus, the
accountant for a business with one owner (a proprietorship) would record the activities of the
business only, not the personal activities, property, or debts of the owner.
2. Going Concern or Continuity Assumption
To prepare financial statements for an accounting period, the accountant must make an
assumption about the ability of the business to continue. Specifically, the accountant assumes
that unless there is evidence to the contrary, the business entity will continue to operate for an
indefinite period. This method of dealing with the issue is called the going concern or continuity
assumption. The justification for all the techniques of income measurement rests on this
assumption of continuity.
3. Time Period Assumption
The operating results of any business cannot be known with certainty until the company
has completed its life span and ceased doing business. But financial reports covering shorter
time periods are needed because external decision makers require timely accounting
information to satisfy their analytical needs. Because of this, businesses have imposed the
time-period assumption, requiring that changes in a business’s financial position be reported
over a series of shorter time periods like annually, semi-annually, quarterly or monthly. An
annual accounting period is the most common which can be a calendar year or a fiscal year.
Example: January 1, 2017 to December 31, 2017 is a calendar year; July 1, 2017 to June 30,
2018 is a fiscal year.
4. Unit-of-Measure Assumption
The unit-of-measure assumption specifies that accounting should measure and report
the results of a business’s economic activities in terms of a monetary unit such as the Philippine
peso. The assumption recognizes that the use of a standard monetary unit throughout all
financial statements is an effective means for aggregating and communicating accounting
information. It is a standard practice to ignore changes in the purchasing power of a peso.
ACCRUAL BASIS AND CASH BASIS OF ACCOUNTING
The difference between accrual basis and cash basis of accounting lies in the timing of
when is revenues and expenses are recognized and incurred when recorded in the books.
Under the cash basis of accounting, revenues are recognized and recorded when cash
is received or collected and expenses when cash is paid. No adjusting entries are needed in this
method of accounting.
Under the accrual basis of accounting, revenues are recognized and recorded when
earned regardless of when cash is received or collected. Expenses incurred are recorded
whether or not cash is paid. Adjusting entries are needed under this method to update the
account balances at the end of the accounting period.
THE ACCOUNTING CYCLE
The accounting cycle, also known as the accounting process, refers to a series of steps
accountants perform during an accounting period for the orderly accumulation, reporting and
interpretation of data pertaining to the financial operations of the business. The functions of
accounting can be summarized as the recording, classifying, summarizing and interpreting of
business data. The first three functions represent the process by which accounting information
is developed. These steps are applied in accordance with generally accepted accounting
principles and practices developed by the accounting profession. The interpreting function
involves the use of analytical techniques and procedures as a base for management decisions.
The steps in the accounting cycle include the following:
1. Documentation
2. Journalizing
3. Posting
4. Preparation of the trial balance
5. Compilation of data needed for adjustments
6. Preparation of the worksheet
7. Preparation of the Financial Statements
8. Adjusting entries are journalized and posted to the ledger
9. Closing entries are journalized and posted to the ledger
10. Preparation of the post-closing trial balance

11. Reversing entries are journalized and posted to the ledger
The first three steps constitute the recording phase of accounting. The summarizing
phase begins with the trial balance preparation up to the post-closing trial balance. Reversing
entries prepared on the first day of the next accounting period is considered to be an optional
step.
RECORDING PHASE
Accounting is based on a double entry system which means that a business transaction
has a dual effect when recorded. Business transactions are recorded in at least two accounts.
Documents are needed to serve as a basis for recording the transactions. The two books of
accounts where transactions are recorded are the journal and the ledger. The double-entry
accounting system has specific rules of debit and credit for recording the transactions in the
accounts. Debit is the left side of an account while credit is the right side.
To summarize the rules of debit and credit:
Debit: Credit:
Increases in assets • • Decreases in assets

Decreases in liabilities • • Increases in liabilities
Decreases in equity/capital • • drawings • Increases in equity/capital • investments
• decrease in revenue • increase in • increase in revenue
expense • decrease in expense
Applying the rules of debit and credit, transactions are first recorded in the book of
original entry called the general journal and the process is known as journalizing. The chart of
accounts should show the elements of the financial statements which shall be used in recording
the transactions. Special journals are sometimes used by businesses that are designed for
recording a single type of transaction that occurs frequently. The format and the number of
special journals used will depend on the nature of the business. The most common special
journals include the cash payments journal, cash receipts journal, revenue/sales journal and the
purchases journal. The general journal will be used for entries that cannot be recorded in the
special journals such as adjusting and closing entries.
The information from the journal is then transferred to the book of final entry called the
general ledger and the process is called posting. The ledger is a complete listing of all the
accounts as found in the chart of accounts of a business. The purpose of this process is to
classify the effects of transactions on the elements of the financial statements. Businesses may
have control accounts and subsidiary ledgers that will show their balances are the same.
Subsidiary ledger is a group of related accounts showing the details of the balance in the control
account. Examples of control accounts are Accounts receivable and Accounts payable
accounts.
SUMMARIZING PHASE
After all the transactions are posted in the ledger, the account balances are then
computed and must show the normal balances of each individual account. The preparation of
the trial balance will mathematically prove the equality of the debit and credit balances of each
account but will not give the assurance that no errors have been made during the journalizing
and posting process in case the total debit and credit amounts are shown as equal. Inequality in
the debit and credit totals would automatically prove the presence of an error. The most
common examples of errors showing inequality of total debit and credit amounts are
transposition and slide.
Transposition is the erroneous rearrangement of writing an amount like P 1,250 written

as P 1,520. Slide is an error in which the whole amount is moved one or more spaces to the
right or the left, like P 1,000 written as P 100 or P 10,000.
At the end of the accounting period, some of the account balances presented in the trial
balance are not yet updated and may require adjustments before financial statements are
prepared. Data for adjustments are then compiled for such updating. The types of accounts
that require adjustment are as follows:
1. Prepaid Expenses – These are expenses paid by the business in advance; or these are
expenses already paid in cash by the business but the expenses are not yet incurred or
only a portion of the amount paid was used up as expense. Prepaid expenses are also
termed as deferred expenses.
There are two methods of accounting for prepaid expenses:
a. Asset method – if at the date of payment, the business debited an asset account.
The pro-forma adjustment is:
Expense Account xxx Compute used or expense

Asset Account xxx portion
b. Expense method – if at the date of payment, the business debited an expense

account.
Asset Account xxx Compute unused or asset Expense Account xxx portion
To illustrate, assume that Lakers Company is using a monthly accounting period. On

January 1, 2017, the company paid P 30,000 representing 3-month rent beginning January 1,
2017. The company adjusts and closes its books every month. The entry to record the
prepayment and the adjusting entry at the end of the month will be:
Asset Method Expense Method 2017

Jan 1 Prepaid Rent 30,000 Rent Expense 30,000 Cash 30,000 Cash 30,000
31 Rent Expense 10,000 Prepaid Rent 20,000 Prepaid Rent 10,000 Rent Expense 20,000
Since P 30,000 is for 3 months, the monthly rent is P 10,000. For January, the used or
expense portion is one month or P 10,000; therefore the unused or asset portion will be two
months or P 20,000 as of January 31.
Regardless of which method a business used in any particular case, the amount
reported as expense in the income statement and the amount reported as asset in the balance
sheet will be the same.
Both methods of accounting for prepayment are acceptable although most companies
employ the expense method due to its simplicity. A business must also use a method
consistently for a particular type of prepayment, say asset method for rent while expense
method for supplies.
2. Unearned Revenues – These are revenues collected or received by the business in

advance; or these are revenues already collected in cash by the business but the
revenues are not yet earned or only a portion of the amount received was earned or
became revenue. Unearned revenues are also termed as deferred revenues.
There are two methods of accounting for unearned revenues:
Liability method – if at the date of collection, the business credited a liability a.

account.
Liability Account xxx Compute earned or income Revenue Account xxx

portion
b. Revenue method – if at the date of collection, the business credited a revenue

account.
Revenue Account xxx Compute unearned or liability Liability Account xxx

portion
To illustrate, assume that Miami Company is using a monthly accounting period. On

January 1, 2017, the company collected or received P 30,000 representing 3-month rent
beginning January 1, 2017. The company adjusts and closes its books every month. The entry
to record the advance collection and the adjusting entry at the end of the month will be:
Liability Method Revenue Method 2017

Jan 1 Cash 30,000 Cash 30,000 Unearned Rent 30,000 Rent Income 30,000
31 Unearned Rent 10,000 Rent Income 20,000 Rent Income 10,000 Unearned Rent
20,000
Since P 30,000 is for 3 months, the monthly rent is P 10,000. For January, the earned or
income portion is one month or P 10,000; therefore the unearned or liability portion will be two
months or P 20,000 as of January 31.
Regardless of which method a business used in any particular case, the amount
reported as income in the income statement and the amount reported as liability in the balance
sheet will be the same.
Both methods of accounting for unearned or deferred revenues are acceptable although
most companies employ the revenue or income method due to its simplicity. A business must
also use a method consistently for a particular type of unearned or deferred revenue, say
liability method for rent while income or revenue method for subscription.
3. Accrued Expenses – These are expenses incurred in one period but remain unrecorded
and unpaid as of the end of the period. They are also called accrued liabilities or
unrecorded expenses.
Expense account xxx

Liability account xxx
For example: A company’s accounting period is monthly, January 1-31, 2017. All
expenses incurred during the month of January must be recorded in January. Let us say,
telephone bill for the month of January amounting to P 5,000 will be paid on February 5, 2017,
the adjusting entry will be:
2017
Jan 31 Utilities Expense 5,000
Utilities Payable 5,000
So, since we are using the accrual basis of accounting, the question is when did the
company incur the expense? The answer of course is for the month of January, therefore we
will record the expense in January. And since this will still be paid in February, we will record a
liability in January.
Another example is, assume a small business is paying a total of P 10,000 for the wages
of its employees for a 5-day work week. Payday is every Friday. Accounting period is monthly.
The Wages Expense during the month of March is shown below:
Wages Expense
Mar. 5 10,000
12 10,000
19 10,000
26 10,000
40,000
If March 26 is a Friday, then the last day of the month (March 31) falls on a Wednesday.
Therefore the adjusting entry to be made will be:
Mar. 31 Wages Expense 6,000

Wages Payable 6,000
If financial statements are prepared on March 31, the Wages Expense to be shown in
the income statement totaled P 46,000 and the balance sheet will show Wages Payable
amounting to P 6,000.
4. Accrued Revenues – These are revenues earned in one period but remain unrecorded
and not received as of the end of the period. They are also called accrued assets or
unrecorded revenues.

Asset account xxx
Revenue account xxx
For example: ABC Company’s accounting period is monthly, August 1-31, 2017. All
revenues earned during the month of August must be recorded in August. If the company is in
the business of renting apartments and one of its tenants has not paid the August rent for P
8,000, then the adjusting entry of ABC Company will be:
2017
Aug. 31 Rent Receivable 8,000
Rent Revenue 8,000
5. Depreciation of Property, Plant and Equipment
Physical resources that are owned and used by a business which are permanent in
nature or have a long useful life are called fixed assets or plant assets. Examples are land,
building, equipment, trucks, automobiles, a computer, store fixtures, or office furniture. These
assets help generate income for the business. Therefore it is important and proper that a portion
of the asset be recorded as expense in each accounting period.
Fixed assets, with the exception of land have limited useful lives and as such are subject
to depreciation.
Depreciation is the systematic allocation of the cost of the fixed asset over its useful life.
Depreciation is not a process of asset valuation.
The pro-forma adjustment for depreciation is:
Depreciation Expense – Name of asset xxx

Accumulated Depreciation – Name of asset xxx
There are different methods of computing depreciation. We will discuss here only the
simplest and the most commonly used method which is the straight-line method. This method
will result into equal periodic charges for depreciation. Also take note that in the adjusting entry
for depreciation, the account credited is the account Accumulated Depreciation. This is a contra-
asset account which will be deducted from the related fixed asset account in the balance sheet.
The credit is not made directly to the fixed asset account in order to preserve the original cost of
the fixed asset in the balance sheet.
To illustrate, assume that on January 1, 2017, Knicks Company bought a delivery truck
for a total cost of P 500,000. Its estimated life is 10 years and the estimated residual value is P
50,000. The company is using the straight-line method of computing depreciation and it is using
an annual accounting period. The entries of Knicks Company for the above transactions are:
2017
Jan 1 Delivery Truck 500,000
Cash 500,000 To record the purchase of delivery truck
The adjusting entry on December 31, 2017:
2017
Dec 31 Depreciation Expense-Delivery Truck 45,000
Accumulated Depreciation-Delivery Truck 45,000 Computations will be:
Annual depreciation = Cost – Residual Value
Estimated Life
= P 500,000 – 50,000
10
= P 45,000
===========
Other computation for straight-line method is:
Annual depreciation = (Cost – Residual Value) x Depreciation Rate
= (P 500,000 – 50,000) x 10%
= P 45,000
==========
The depreciation rate can be computed by getting the reciprocal of the life. Example: 10
years is equal to 1/10 or 10%.
The balance of the Depreciation Expense account is shown in the income statement. In
the balance sheet as of December 31, 2017, the carrying amount or the book value of the asset
is P 455,000, as shown below:
Delivery Truck P 500,000

Less Accumulated Depreciation 45,000
Carrying amount or Book value P 455,000
The depreciation of the fixed asset will be recorded at the end of each year (for ten
years). The same adjusting entry will be recorded for 10 years. Assuming a balance sheet will
be made on December 31, 2022:
Delivery Truck P 500,000

Less Accumulated Depreciation 270,000
Carrying amount or Book value P 230,000
At the end of ten years, the Accumulated Depreciation account will have a balance of P
450,000. At this point, the book value of the asset will be equal to the residual value of P
50,000.
6. Uncollectible accounts – these are estimated amounts due from customers that may no
longer be collected and are considered to be as bad debts. The allowance method
estimates the amount of uncollectible accounts receivable and will be recorded as an
adjusting entry at the end of the accounting period and follows the matching principle.
Doubtful Accounts Expense xxx

Allowance for Doubtful Accounts xxx
Since the loss is an estimate only and the specific customer cannot be identified at this
point, the Accounts Receivable may not be credited. Instead a contra asset account, Allowance
for Doubtful Accounts, is credited. The Doubtful Accounts Expense is also called Bad Debts
Expense or Uncollectible Accounts Expense. The Allowance for Doubtful Accounts is also called
Allowance for Bad Debts or Allowance for Uncollectible Accounts.
The estimate of uncollectible amount at the end of the accounting period is based on
past experience and forecasts of the future. This is computed based on the Accounts
Receivable balance wherein:
a. Single rate is applied to outstanding accounts receivable or

b. Aging of accounts receivable where accounts are classified according to how long
they remain outstanding
The computation for the estimated Doubtful Accounts Expense is shown as:
Required ending balance of Allowance for Doubtful Allowance for Doubtful Accounts before adjustment
Accounts P xxx
*add if debit balance/deduct if credit balance) xxx Doubtful Accounts

Expense for the period P xxx ==========
As an example, the following accounts were found in the ledger of Cavs Red Enterprises
on December 31 of the current year:
Debit Credit
Accounts Receivable 187,520
Allowance for Doubtful Accounts 10,680
Net Sales 4,272,000
The estimated doubtful accounts at the end of the current year is 10% of the outstanding
Accounts Receivable. The adjusting entry on December 31 is as follows:
Doubtful Accounts Expense 8,072

Allowance for Doubtful Accounts 8,072
Required ending balance of Allowance for Doubtful P18,752

Accounts (10% x P 187,520)
Less credit balance of allowance before adjustment 10,680 Doubtful Accounts

Expense for the period P 8,072 ==============
7. Merchandise Inventory– these represents good on hand and available for sale in the
ordinary course of the business. If the company is using the periodic inventory system,
adjusting entries are required to replace or remove the beginning balance of the
merchandise inventory with the balance at the end of the accounting period. The
adjusting entries to record the replacement of the beginning merchandise inventory
balance and to enter the ending inventory balance would be:
Income Summary xxx

Merchandise Inventory xxx
To close the beginning inventory
Merchandise inventory xxx

Income Summary xxx
To record the ending inventory
Under the perpetual inventory method, purchases and sale of goods are recorded in the
merchandise inventory account and the cost of goods sold account. As a result, the balances of
the merchandise inventory and the cost of goods accounts are always updated.
After all the adjustments are compiled, the next step is the preparation of the
worksheet. This is an optional step in the accounting cycle. However, it is useful in showing the
flow of the accounting information from the unadjusted trial balance to the adjusted trial balance
and in analyzing the impact of such adjustments on the financial statements. A worksheet is a
working paper prepared by an accountant to facilitate the preparation of the financial
statements.
After the completion of the worksheet, financial statements are prepared and serve as
the primary means of communicating important accounting information to users. These are
accounting reports that quantify the financial strength, performance and liquidity of a business.
Financial statements represent the final output in the work of an accountant. They include
Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Financial
Position, the Cash Flow Statement and Notes to the Financial Statements.
The Statement of Comprehensive Income, also known as the Profit and Loss Statement,
presents the income, expenses and the operating result (profit or loss) during an accounting
period.
The Statement of Changes in Equity shows the summary of changes (increases or

decreases) affecting the equity of the owner/s during an accounting period.
The Statement of Financial Position, also known as the Balance Sheet, shows the
financial condition of the business as of a specific date. It helps the users in assessing the
financial soundness of business in terms of liquidity risk, financial risk, credit risk and business
risk.
The Cash flow Statement presents the movement of cash (input and output) over a
period and is classified as either under operating, financing or investing activities.
The Notes to the Financial Statements are an integral part of an entity’s financial
statements. They are for complying with the full disclosure principle.
The adjusting and closing entries are entries prepared and posted in the ledger at the
end of the accounting period. The adjusting entries are prepared after the data for adjustments
are compiled and presented in the worksheet. Accounts in the ledger are classified as nominal
or temporary accounts and real or permanent accounts. Nominal accounts include revenue,
expense, owner’s drawing and income summary accounts. Real or permanent accounts include
the assets, liability and the owner’s equity (capital) accounts.
Closing entries are prepared to reduce the nominal account balances to zero on the
general ledger. The revenue and expense account balances are transferred to the Income
Summary account. The Income Summary balance is then transferred to the owner’s equity or
capital account. A credit balance in the Income Summary indicates the profit while a debit
balance indicates a net loss. The owner’s drawing account is also transferred in the owner’s
capital account. The following entries show how the closing process is made:
1. Revenue xxx
Income Summary xxx
To close revenue accounts
2. Income Summary xxx

Expenses xxx
To close expense accounts
*3. Income Summary with a credit balance:
Income Summary xxx

Owner’s Capital xxx
To close income summary account
*Income Summary with a debit balance:
Owner’s Capital xxx

Income Summary xxx
To close income summary
account
4. Owner’s Capital xxx
Owner’s Drawing xxx
To close drawing account
The post-closing trial balance is a list of accounts and their balances after the closing
entries have been journalized and posted to the ledger. It includes all the real accounts since
the nominal account balances have been reduced to zero. The purpose of the post-closing trial
balance is to verify that all nominal accounts have been closed properly and the total debits and
credits in the accounting system are equal after the closing process.
Reversing entries are journal entries prepared on the first day of the next accounting
period which reverses certain types of adjusting entries immediately made in the preceding
period. The adjusting entries that may be reversed include the accruals, prepaid expense using
the expense method and unearned revenue using the revenue method. This step is an optional
procedure and is useful to simplify record keeping in the next accounting period. The rule to
follow is all adjusting entries that increase an asset or liability will be reversed. Whether
reversing entries are made or not, the same result is achieved. The following show reversing
entries that are made on the first day of the next accounting period:
1. Prepaid expense using expense method

Expense xxx
Prepaid 2. Unearned revenue using revenue method
Expense/Asset Unearned revenue xxx
xxx
Revenue xxx
3. Accrued expense
Payable xxx
Expense xxx
4. Accrued Revenue
Revenue xxx
Receivable xxx
THE ACCOUNTING PROCESS
Business
Transactions
Reversing - General
entries journal
- Special
journals
Post- closing
trial balance Posting
preparation - General
ledger
- Subsidiary
ledgers
Journalizing
and posting of
adjusting and Financial statements preparation
closing entries Trial Balance
Documentatio preparation
n
Journalizing Adjustments Work sheet

preparation
MERCHANDISING BUSINESS
The activities of a service business differ from that of a merchandising business. A

service business earns revenue by rendering services to customers or clients. The revenue
activities of a merchandising business involve the buying and selling of goods or merchandise to
its customers. However, except for the merchandise related accounts, the accounting cycle for
both types of business activities are the same. Because of the differences in their revenue
activities, the general format of the condensed statements of comprehensive income of service
and merchandising companies are illustrated below:
Service Business Merchandising Business
Service Revenue P xxx Sales P xxx
Less Operating Expenses xxx Sold xxx
Less Cost of Merchandise
Net Income xxx INVENTORY SYSTEMS
Gross Profit xxx
Less Operating Expenses xxx
Net Income xxx
The two main types of inventory systems are the periodic inventory system and the
perpetual inventory system. Companies that sell goods of low unit value or inexpensive items
use the periodic inventory system. The periodic system relies upon the physical count of the
inventory to determine the ending inventory balance. Merchandise bought intended for sale are
recorded in the Purchases account. The balance in the Purchases account is then added to the
beginning balance of the inventory account to arrive at the cost of merchandise available for
sale. When a physical inventory count is done, the amount of the ending inventory balance will
then be deducted from the cost of merchandise available for sale to arrive at the cost of
merchandise sold. Sale of merchandise is recorded in a revenue account, Sales. However, the
cost is not recorded.
Under the perpetual inventory system, purchases and sale of merchandise is recorded in
the Merchandise Inventory account and the Cost of the Merchandise Sold account. This system
is used by companies that sell goods of high unit value like automobiles, jewelry, and other
large home appliances. The business keeps track of its cost of merchandise sold on a
continuous basis, thus, at any given time, there is an estimate of the company’s inventory level.
At the end of the accounting period, an actual count is taken on the number of units still on hand
and is compared with the records showing the ending inventory balance.
VALUE ADDED TAX
Value Added Tax (VAT) is a type of sales tax which is levied on the consumption on the
sale of goods, services or properties, as well as goods imported in the Philippines.
A 12% value added tax rate is levied on goods and is recorded as a separate account in
recording the sale and purchase transactions. It is an indirect tax that is passed on to the buyer
and is added to the selling price. The amount paid by the customer, known as the invoice price,
will include the selling price and the 12% value added tax.
Output Vat refers to the value added tax the seller passed on to the buyer and is
classified as a liability account. Input Vat refers to the value added tax the buyer paid on the
purchase. The excess of output tax over input tax is the Value added tax due and payable to the
Bureau of Internal Revenue and is to be remitted by the company within 25 days of the following
month.
The following transactions illustrate the accounting for value added tax using the periodic
system:
Mar 5 A Company sold merchandise to B Company for cash, P 22,400 vat inclusive.
A Company B Company Cash 22,400 Purchases 20,000 Sales 20,000 Input tax 2,400 Output
tax 2,400 Cash 22,400
Mar 6 A Company sold merchandise on account to X Company, P 28,000 vat inclusive.
A Company X Company Accounts Receivable 28,000 Purchases 25,000 Sales 25,000 Input
tax 3,000 Output tax 3,000 Accounts Payable 28,000
Mar 9 A Company issued a credit memorandum to X Company for defective merchandise

returned sold on March 6, invoice price P 2,800
A Company X Company
Sales returns and allowances 2,500
2,500 Accounts Payable 2,800
Accounts Receivable
Output tax 300 Purchase ret. and allow. 2,800 Input tax 300
Mar 15 A Company collected amount due from X Company
A Company X Company Cash 25,200 Accounts Payable 25,200

Accounts SPECIAL JOURNALS
Receivable 25,200 Cash 25,200
We have used the general journal to record all types of business transactions. However,
as the transactions of a company increase, there is a need to change to a more efficient and
timesaving manner. Accountants have developed an accounting system for an orderly and
effective processing of data. They have developed special journals. Each special journal
records one particular type of transaction that occurs frequently, such as sales on account, cash
receipts, purchases on account, or cash disbursements.
The special journals are designed to systematize the original recording of major recurring types
of transactions. The number and format of the special journals actually used in a company
depend primarily on the nature of the company’s business transactions. The special journals
commonly used by merchandising companies include the sales, cash receipts, purchases, cash
disbursements journals.
• The Sales Journal is used to record all sales of merchandise on account (on credit). • The
Cash Receipts Journal is used to record all inflows or receipts of cash into the business.
• The Purchases Journal is used to record all purchases of merchandise and other items
on account (on credit).
• The Cash Payments Journal is used to record all payments (or outflows) of cash by the
business.
Although all these four special journals are being used, the General Journal is still needed.
The General Journal is used to record all transactions that cannot be recorded in any one of
the special journals. All five of these journals are books of original entry. If a transaction is
recorded in the journal, it is posted to the ledger and made part of the accounting records.
Therefore, if a transaction is recorded in a special journal, it should not be recorded in the
general journal because this would record the transaction twice.
Since the journal entries are posted to the ledger accounts, the posting reference column in
the ledger should indicate the source of the posting. The following abbreviations are used for
the five journals:
Journal Transactions Abbreviation Sales Journal Merchandise sold on account S Cash

Receipts Journal Cash receipts from all sources CR Purchases Journal Merchandise and other
items purchased on account P Cash Payments Journal Cash payments for various purposes
CD
General Journal Any transaction that is not included in the special
G
journals.
CONTROL ACCOUNTS AND SUBSIDIARY LEDGERS
A control account is an account in the general ledger that shows the total balance of all
the subsidiary accounts related to it. An example of a control account is the general ledger
Accounts Receivable account, which summarizes all of the amounts owed to the company.
The subsidiary ledger accounts show the details supporting the related general ledger
control account balance. The company may use subsidiary accounts for receivables to send out
customer statements. They may use the subsidiary accounts for payables to determine the
amount payable to each supplier. These accounts are normally arranged alphabetically by the
name of the customer or supplier. The sum of the subsidiary accounts in a subsidiary ledger
should agree with the balance in the related general ledger control account when the company
prepares the financial statements.
A subsidiary ledger, then, is a group of related accounts showing the details of the
balance of a general ledger control account. The subsidiary ledger is separated from the
general ledger in order to relieve the general ledger of a mass of details and thereby shorten the
general ledger trial balance. Also, having separate ledger promotes a division of labor.
SCHEDULE OF ACCOUNTS PAYABLE
A schedule of accounts payable is prepared to make certain that the total of the
balances in the subsidiary ledger accounts agrees with the control account.
SCHEDULE OF ACCOUNTS RECEIVABLE
A schedule of accounts receivable is prepared to ensure that the total of the balances
in the subsidiary ledger account agrees with the control account. This schedule is merely a
listing of open account balances.
Readings
• Chapter 1, Accounting for Partnership and Corporation, 2011 Edition, Gloria J.

Tolentino- Baysa and Ma. Concepcion Yamat Lupisan
Assessment
Instructions:
1. Give the adjusting entries.
2. Complete the worksheet
3. Prepare the financial statements
T
c
t
B
i
d
T
N
r
c
E
t
C
i
N
b
i
C
A
r
L
c
1
S
t
i
0
b
2
J
e
,
d
1
I
E
B
I
D
M
N
E
T
E
A
C
E
E
H
H
D
C
t
i
S
d
D
K
e
E
R
M
D
S
c
O
T
S
N
W
E
N
M
A
T
E
S
Y
U
L
E
J
H
D
T
t
A
R
b
e
O
d
F
EC
T
ti
ti
d
0
hs
a
C
0
el
A
0
9
st
A
0
O
0
S
0
ge
b
,
M
0
ec
n
P
0
P
0
E
e
O
0
A
0
S
0
4
t
A
0
el
A
0
el
N
el
b
a
S
el
U
el
I
0
B
0
B
0
1
s
P
0
nI
-
F
0
&
P
0
5
t
P
0
S
0
S
0
8
tn
u
S
es
n
S
es
n
O
0
es
n
S
0
es
n
f
O
er
R
e
D
er
D
e
U
es
e
B
es
n
I
es
n
I
0
9
0
NAME ______________________________________ SECTION _________________ GENERAL JOURNAL Page 1
Date Description PR debit credit

Financial Accounting and Reporting Part 1 27 GENERAL JOURNAL Page 2
Date Data for Adjusments

Description PR debit credit
1 Merchandise inventory at the end of the year, P84,400
2 Office Supplies used amounted to P3,450

Unused store supplies amounted to P6,000
3 25% of the Prepaid Rent is used as of the end of the year Half
of the Prepaid Insurance has expired
4 Office Equipment were depreciated at 10% per year

Store Equipment has a useful life of 5 years
5 Accrued Expenses
Utilities P4,320; Store Salaries, P3,500; Interest P16,250 6 Allowance of
Uncollectible accounts is to be 10% of Receivables
NAME _________________________________________ SECTION _________________ DATE

______________ PROF. M. DOQUENIA
LEPTOWS MERCHANDISING
WORKSHEET
FOR THE YEAR ENDED DECEMBER 31, 2017
Sales xxx Sales Returns and Allowances xxx

Sales Discount xxx xxx Net Sales xxx
Less: Cost of Goods Sold

Merchandise Inventory, beg xxx
Add: Purchases xxx
Add: Freight-In xxx
Total xxx
Less: Purchases Returns & Allowances xxx
Purchase Discount xxx xxx
Net Purchases xxx
Merchandise (Goods) Available for sale xxx
Less: Merchandise Inventory, end xxx
Cost of Goods Sold xxx
Gross Profit xxx Less: Operating Expenses
Selling Expenses
Store Supplies Expense xxx
Store Salaries Expense xxx
Rent Expense - Store xxx
Depreciation Expense - Store Equipment xxx xxx
Administrative (General) Expense
Office Supplies Expense xxx
Office Salaries Expense xxx
Depreciation Expense - office equipment xxx
Utilities Expense - Office xxx
Bad debts Expese xxx
Insurance Expense xxx xxx
Other Expenses
Interest Expense xxx
Total Expenses xxx
Net Income xxx
CUMMULATIVE EXAMINATION
INSTRUCTIONS:
Complete the accounting Cyle of Apol Company
1 Enter the beginning balances of the Balance Sheet accounts in the ledger
2 Journalize the entries for the month of March (see transactions below)
3 Post the entries for the month of March…..use PENCIL for temporary balance (items column)
4 Complete the Worksheet of APOL COMPANY for the month ended March 31, 2020
5 Journalize and post Adjusting and Closing entries.
6 Rule and Balance, see sample below
6 Prepare a post-closing Trial balance
7 Journalize and post the reversing entries.
The following are the Ledger Balances as of February 28, 2020

know the correct normal balance of each of the account
Cash 197,500.00
Accounts Receivable Supplies Accumulated Depreciation - Hardware & Equipments Accounts Payable
Software & Programs Unearned Service Income
98,500.00 21,000.00 8,200.00 25,000.00 Utilities Payable
Accumulated Depreciation - Software & Programs Apol, Capital
208.00 3,292.00 101,800.00 3,250.00 850.00
Hardwares & Equipments 240,800.00
Complete the Accounting Cycle for the month ended March, 2020
March 1 Paid one year insurance, P2,400
2 Paid past month's utilities, P850
3 collected from credit customer, P11,000
5 rendered services on account, P7,000
7 Apol withdrew P4,500
9 Paid rent, P9,500
10 Purchased supplies, P623
11 Rendered services for cash P17,000
12 Returned supplies purchased on March 10, P623
13 Paid an account, P10,000
15 Paid salalries P12,500
17 Received bill for utilities, P 2,815
20 Rendered services amounting to P30,000, half was for cash half on account 21
Rendered services previously collected from the customer, P3,250
NAME _______________________________________________________ SECTION ________________________

Student Number _________________________ PROF. __________________________ ITEMS P R DEBIT ITEMS P R CREDIT ITEMS P R
DEBIT ITEMS P R CREDIT
GENERAL LEDGER
CASH ACCOUNTS RECEIVABLE

Acct No 101 Acct No. 102
DATE DATE DATE DATE
ITEMS P R DEBIT ITEMS P R CREDIT ITEMS P R DEBIT ITEMS P R CREDIT

SUPPLIES PREPAID INSURANCE
Acct No 103 Acct No 106
DATE DATE DATE DATE ITEMS P R DEBIT ITEMS P R CREDIT ITEMS P R DEBIT ITEMS P R CREDIT
SOFTWARE & PROGRAMS Accumulated Depreciation -S & P

Acct No. 104 Acct No. 105
HARDWARES & EQUIPMENTS Accumulated Depreciatin H & E

Acct No. 107 ` Acct No. 108
ACCOUNTS PAYABLE UNEARNED SERVICE INCOME

DATE DATE DATE DATE
Financial Accounting and Reporting Part 1 31 ITEMS P R DEBIT ITEMS P R CREDIT ITEMS P R DEBIT ITEMS P R CREDIT
UTILITIES PAYABLE SALARIES PAYABLE
Acct No 203 Acct No 204
DATE DATE DATE DATE
ITEMS P R DEBIT ITEMS P R CREDIT DATE ITEMS P R DEBIT DATE ITEMS P R CREDIT
APOL, CAPITAL APOL, DRAWING
DATE DATE Acct No. 301 Acct No 302

INCOME SUMMARY SERVICE INCOME
DATE DATE Acct No 303 Acct No. 401 DATE DATE

SALARIES EXPENSE RENT EXPENSE
DEPRECIATION EXPENSE S & P DEPRECIATION EXPENSE F & E

UTILITIES EXPENSE INSURANCE EXPENSE

DATE DATE DATE DATE
SUPPLIES EXPENSE MISCELLANEOUS EXPENSE
DATE DATE DATE DATE
Data for Adjustment

March 31 Recorded expired portion of Insurance, P200
31 Recorded used portion of Supplies, P4,000
31 Recorded depreciation of S & P for the month, P208
31 Recorded depreciation of H & E for the month, P3,292
March 1 beg bal ✓ 8,200 March 12 G 2 623 March 29 G 3 1,099 March 31 closing 1,443 ITEMS P R DEBIT ITEMS P R CREDIT ITEMS P R DEBIT ITEMS P
R CREDIT
31 Recorded accrued salaries P1,200

10 G 2 623 31 adjustingG 3 4,000 31 adjusting G 3 344
31 Recorded accrued miscellaneous Expense, P344.
SUPPLIES MISCELLANEOUS EXPENSE

Acct No 103 Acct No. 301 DATE DATE
DATE DATE
4,200 8,823
end bal 4,200 1,443 1,443 8,823 8,823
April 1 beg bal 4,200
use pencil for PENCIL FOOTING

total debits minus total credits
INSTRUCTIONS:
A Prepare a Trial balance for the month ended March 31, 2013 for the Apol Computer Services
APOL COMPUTER SERVICES
Trial Balance
As of March 31, 2013
Debit Credit
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Software & Programs
Accumulated Depreciation S & P
Hardwares & Equipments
Accumulated Depreciation H & E
Accounts Payable
Unearned Service Income
Utilities Payable
Salaries Payable
Apol, Capital
Apol, Drawing
Service Income
Salaries Expense
Rent Expense
Utilities Expense
Insurance Expense
supplies Expense
Miscellaneous Expense
t
P
i
P R
n
R
o
E
E
i
i
P
P R
i
N
D
e
P
i
P R
n
R
o
E
E
i
i
P
P R
L

TE
E
O
T
ST
EC
T
ti
c
ti
ti
ti
ti
ti
ti
ti
ti
ti
hs
C
el
A
s
S
ec
s
n
P
s
&
S
P
&
A
st
&
H
E
&
y
a
A
e
U
el
U
el
S
l
A
g
A
e
S
es
S
es
R
P
&
S
D
E
&
D
es
U
es
I
es
S
es
M
l
C
t g eu s s 1 :d 1
n d
h
e n e e 3
e
A
i c
s s
e
v
r
: d
s L
g
n n
h
e
a
a s
e n e A
S
W
R
i h
e e
T
p p M
t
L c
O
h
x x
a O r
L
E r E
T a
E
e
e
e ,
c
B
l
c
M
p
i
n
a
l
v
t
a O
i
l r a
t
S ,
e p
a
T o
S a
B ST
E a
T
) C
N t
L
S
i
s
E
S
A
s p
A T
d M
o a
I
n E L
C
P
(
a T
e
A
C
m
T
o
t S
l
n
n
a
e
I
L i
ST p
A
e E
I
t a
S t
C
a C
S e
t
N
A
N
S S
,
I
N
lo
p
I
T
L
l
I
F
A
L
a A L
t I A
T
i
B T
p O I
E
A
a T P
I
C L
A
t
E
n
D
T
e
E
N
m A
S
t O
S E
L
e
B
m
o A
s
I
c
s
L
e
I
L
C
MODULE 2
NATURE AND FORMATION OF A PARTNERSHIP
Overview
This module introduces us to the definition and concepts about partnership form of
business. It also includes the different kind of partnership, how to form a partnership, and its
accounting entries.
Module Objectives
At the end of this module, the students should be able to:
1. Define and describe the nature and characteristics of a partnership -its advantages and
disadvantages.
2. Identify the different kinds of partnerships and the classes of partners.
3. Discuss the requirements in the formation of a partnership.
4. Discuss accounting for partners’ initial investments in a partnership.
Course Materials
A partnership is defined in Article 1767 of the Civil Code of the Philippines as “a contract
whereby two or more persons bind themselves to contribute money, property or industry into a
common fund with the intention of dividing profits among themselves.”
CHARACTERICTICS AND ELEMENTS OF A PARTNERSHIP
1. Mutual contribution – by its definition, the partners must contribute money, property and/or
industry to the common fund.
2. Mutual agency. Any partner can bind the other partners to a contract if he is acting within the
express or implied authority. may act as agent of the partnership in conducting its affairs.
3. Unlimited liability. The personal assets of any partner may be used to satisfy the
partnership creditors’ claims upon liquidation, if partnership assets are not enough to settle
the liabilities to outsiders.
4. Limited life. A partnership may be dissolved at any time by admission, death, incapacity, or
withdrawal of any partner or by expiration of the term specified in the partnership
agreement.
5. Division of profits and losses. It is the reason why a partnership was formed. The element
that distinguishes the partnership contract from a voluntary religious or social
organization. A stipulation which excludes one or more partners from any share in the profits
or losses is void.
6. Legal entity. A partnership has legal personality separate and distinct from that of each the
partners.
7. Co-ownership of contributed assets. Property contributed to the partnerships are owned
by the partnership by virtue of its separate legal personality. Assets contributed by each
partner are joint assets of all partners.
8. Income tax. Partnerships, other than general professional partnerships (GPP) are subject to
the same tax of a corporation, 30% income tax. GPP are those organized for the exercise of
professions like CPA’s lawyers, engineers, etc. are exempt from income tax.
ADVANTAGES OF A PARTNERSHIP
1. It is easy to organize and less expensive than a corporation, as it is formed by a mere

agreement between two or more persons.
2. The unlimited liability of the partners makes it attractive to creditors.
3. With two or more partners will be a better opportunity to obtain additional funds than does a
single proprietorship.
4. More partners of different skills and expertise makes it possible to manage all the partnership
activities.
DISADVANTAGES OF A PARTNERSHIP
1. It is less stable because it can easily be dissolved (limited life).
2. Business partners are jointly and individually liable for the actions of the other partners
(Mutual agency).
3. The liability of the partnership will extend to the personal property of the partners (unlimited
liability).
4. Since decisions are shared, disagreement among partners may lead to dissolution.
5. A partner has to consult the other partners before a decision can be arrived at.
KINDS OF PARTNERSHIPS
1. As to liability of partners
a. General partnership – one consisting of general partners who are liable to the extent
of their separate properties for partnership debts.
b. Limited partnership – one formed by two or more persons having as members one
or more general partners and one or more limited partners. The limited partners are
not personally liable for the obligations of the partnership.
The word “LIMITED” or “LTD.” Is added to the name of the partnership to inform the
public that it is a limited partnership. There should be at least one general partner in
a limited partnership.
2. As to duration
a. Partnership at will – one for which no term is specified and is not formed for a
particular undertaking and which may be terminated any time by mutual agreement
of the partners or at the will of any one partner.
b. Partnership with fixed term – one in which the term for the existence of the
partnership is fixed or is agreed upon or one formed for a particular undertaking.
3. As to legality of existence
a. De jure partnership – one that has complied with all the requirements for its
establishments.
b. De facto partnership – one which has failed to comply with one or more of the legal
requirements for its establishment.
4. As to purpose or activity
a. Commercial or trading partnership – one whose main activity is the manufacture
and sale or the purchase and sale of goods.
b. Professional or Non-trading partnership – one formed for the exercise of

profession or for the purpose of rendering services.
5. As to object
a. Universal partnership
1. Universal partnership of all present property – one in which each partners
contribute to the partnership at the time of its constitution. The properties were
contributed to a common fund with the intention of dividing the same among
themselves including it’s profits which they may acquire therewith.
All assets contributed to the partnership and subsequent acquisitions become

partnership assets.
2. Universal partnership of all profit – one which the usufruct or use of assets only
was contributed to the partnership, either at the time of it’s formation and/or during
the life of the partnership by which the partner may acquire thru industry or work. The
original movable or immovable property contributed do not become the common
partnership assets.
b. Particular partnership – one which has for its object a determinate thing, their use or
fruits, or a specific undertaking or the exercise of a profession or vocation.
6. As to representation to others
a. Ordinary partnership – one which actually exists among the partners and to the third
parties.
b. Partnership by estoppel – one which on reality is not a partnership but is considered

as one only in relation to those who, by their conduct or omissions are precluded to
deny or disprove it’s partnership existence.
7. As to publicity
a. Secret partnership – one wherein the existence of certain person as partners is not
made known to the public by any of the partners.
b. Open partnership – one wherein the existence of certain persons as partners is

made known to the public by the members of the firm.
CLASS OF PARTNERS
1. As to contribution
a. Capitalist partner – one who contributes capital in cash (money) or property. b.
Industrial partner – one who contributes industry, labor, skill, talent or service. c.
Capitalist-industrial partner – one who contributes cash, property, and industry.
2. As to liability
a. General partner – one whose liability to third persons extends to his separate (private)
property.
b. Limited partner – one whose liability to third persons is limited only to the extent of his
capital contribution to the partnership.
3. As to management
a. Managing partner – one who manages actively the business of the partnership.
b. Silent partner - one who does not participate in the management of the partnership
affairs.
4. Other classifications
a. Liquidating partner – one who takes charge of the winding up of partnership affairs upon
dissolution.
b. Nominal partner – one who is not really a partner, not being a party to the partnership
agreement, but is made liable as a partner for the protection of innocent persons.
c. Ostensible partner –.one who takes active part int the management of the firm and is
known to the public as a partner in the business.
d. Secret partner - one who takes active part in the management of the business but whose
connection with the partnership is concealed or unknown to the public.
e. Dormant partner – one who does not take active part in the management of the business
and is nit known to the public as a partner; he is both a silent a secret partner.
PARTNERSHIP CONTRACT
A partnership is created by an oral or a written agreement. Since partnerships are required to be

registered with the Securities and Exchange Commissions, it is necessary that the agreement
be in writing. In this case misunderstandings and disputes among the partners relative to the
nature and terms of the contract may be avoided or minimized. The written agreement between
or among the partners governing the formation, operation and dissolution of the partnership is
referred to as the Articles of Co-Partnership.
The Articles of Co-Partnership contains the following information:

1. The name of the partnership;
2. The names and address of the partners, classes of partners, stating whether the partner is a
general or a limited partner;
3. The effective date of contract;
4. The purpose or purposes and principal office of the business;
5. The capital of the partnership stating the contributions of individual partners, their description
and agreed values;
6. The rights and duties of each partner;
7. The manner of dividing net income or loss among the partners, including salary allowance
and interest on capital;
8. The conditions under which the partners may withdraw money or other assets for personal
use;
9. The manner of keeping the books of accounts;
10. The causes for dissolution; and
11. The provision for arbitration in settling disputes.
ORGANIZING A PARTNERSHIP
To operate legally, the partnership has to comply with the registration requirements of the
following government offices:
Government Agencies
Securities and Exchange a duly filled-up Articles of Co-Partnership shall be filed to

commissions (SEC) SEC to secure license to operate a business
City or Municipality Mayor’s To secure Mayor’s Permit and License to Operate that the
Office business are in compliance with their ordinances and
standards.(renewable annually).
ACCOUNTING FOR PARTNERSHIPS
Accounting for a partnership is the same as with single proprietorship except that there are
more owners. There should be as many any capital accounts and as many drawing accounts as
there are partners. (meaning, one capital account and one drawing account is maintained for
each partner).
42 Financial Accounting and Reporting Part 1 PARTNER’S CAPITAL ACCOUNT
1. Permanent withdrawal (decrease) of capital 1. Original investment by a partner
2. Share in partnership loss from partner 2. Additional investment by a partner 3. Closing

entry of drawing account 3. Share in partnership profits from operations
PARTNER’S DRAWING ACCOUNT

1. Personal withdrawal by a partner 1. Share in partnership profits from
2. Share in partnership loss form operations OPENING ENTRIES
(this may be deducted directly to the operations (this may be credited directly to
partner’s capital account) the partner’s capital account
Partners may contribute cash, property, or industry to the partnership. Appropriate asset
accounts are debited for the assets contributed and partner’s capital accounts are credited for the
total amount of assets contributed.
If the assets contributed is in the form of cash, it is recorded on the partnership books at face
value, if the asset contributed is in the form of property or non-cash asset, it is recorded at
agreed value, or in the absence of an agreement, at fair market value. When industry is
contributed into the partnership, a memorandum entry is prepared.
PARTNERSHIP FORMATION
A. TWO OR MORE PERSONS FORM A PARTNESHIP FOR THE FIRST TIME.

ALL PARTNERS ARE NEW IN THE BUSINESS.
1. Cash Contributions (Capitalist Partners)

Amado and Agustin agreed to form a partnership by contributing P200,000 cash each.
The entry to record the contributions in the partnership is:
Cash 800,000
Amado, capital 400,000
Agustin, capital 400,000
2. Cash and Non-cash Contributions (Capitalist Partners)

Bicen and Bunque made the following contributions in the partnership:
Bicen Bunque
Cash P200,000 P300,000
Inventories 300,000
Equipment 400,000
The entry to record the contributions of the partners follows:
Cash 500,000
Inventories 300,000
Equipment 400,000
Bicen, capital 500,000
Bunque, capital 700,000
3. Contributions in the form of Cash, Non-cash Assets, and Industry (Capital and Industrial
Partners)
Cindy, Carla, and Carmen formed a partnership. Cindy contributed P200,000 cash, Carla
contributed P150,000 cash and equipment valued at P350,000; Carmen is an industrial
partner to contribute her special skills and talents to the partnership. Profit or loss to be shared
equally among the partners.
The entry to record the contributions of partners Cindy and Carla follows:
Cash 350,000
Equipment 350,000
Cindy, capital 200,000
Carla, capital 500,000
The memorandum entry to record the contribution of partner Carmen follows:
Carmen is admitted into the partnership as an industrial partner to share one-

third in the partnership profit.
B. A SOLE PROPRIETOR AND AN INDIVIDUAL FORM A PARTNERSHIP
When one of the prospective partners is already engaged in business prior to the formation of
the partnership. That partner may transfer his/ her net assets (assets net of liabilities) to the
partnerships at agreed values or at fair market values if no agreed values. The partnership may
either: (1) use the books of the sole proprietor, (2) open a new set of books.
It is a common practice that a new sets of books be opened for any new business undertaking.
When the individual set of books are kept by each partner or by any of the partners, adjusting
entries are made on the separate books of the partners to update the recorded values. These are
made through the capital accounts. The capital account is credited for any increase in the value of
net assets and is debited for any decrease in the value of net assets.
Alternatively, a Capital Adjustment Account may also be used. The balance of this account,
after recording all the necessary adjustments is transferred to the capital accounts.
Illustrative Problem 1.) Mejia and Reyes formed a partnership wherein Mejia is to contribute
cash while Reyes is to transfer the assets and liabilities (net assets) of his business. Account
balances on the books of Reyes are as follows:
Debit Credit
Cash 300,000

Inventories 200,000
Accounts Payable 80,000
Reyes, Capital 670,000
The partners agreed on the following conditions:
1. An allowance for uncollectible accounts of P12,000 is to be established.
2. The inventories are to be valued at their current replacement cost of P220,000. 3.
Prepaid expenses of P7,000 and accrued expenses of P4,000 are to be recognized. 4.
Reyes is to be credited for an amount equal to the net assets transferred. 5. Mejia is to
contribute sufficient cash to have an equal interest in the partnership. Assumption 1 –
The partnership will use the books of the sole proprietor The following procedures
should be followed in accounting for this type of formation:
1. Adjust the books of the sole proprietor to bring account balances to agreed values.
2. Record the investment of the other partner.
The adjusting entries necessary to update the balances to agreed values upon partnership
formation are recorded through the capital accounts of the partners. A capital adjustment account
may also be used and its balance is transferred to the capital accounts after all adjustments in the
net assets are made.
The following rules will be helpful in making the necessary adjusting

entries: Debit asset and credit capital for increase in asset values
Debit capital and credit asset for decreases in asset values
Debit capital and credit liabilities for increases in liability balances
Debit liabilities and credit capital for decreases in liability balances
In the case of contra asset accounts, the following rules shall apply:
Debit contra asset account and credit capital for increases in asset values
Debit capital and credit contra asset account for decreases in asset
values
Hence, the information on the partnership of Mejia and Reyes will be accounted for as
follows: Step 1: Adjust the books of the sole proprietor Reyes to agreed values
a. Reyes, Capital 12,000

Allowance for Uncollectible Accounts 12,000
b. Inventories 20,000
c. Prepaid Expenses 7,000

Expenses Payable 4,000

The balance of the capital account of Angeles after the three adjusting entries are posted is
P681,000 (P670,000 –P12,000 + P20,000 + 3,000).
Step 2: Record the investment of the other partner, Aguilar
Cash 681,000
Mejia, Capital 681,000
Assumption 2: - The partnership will open a new set of books
When a new set of books are opened for the partnership, the entry required on the new books
of the firm is the recording of the investment of the partners at agreed values. The opening
entries on the new partnership book using the data given in Illustrative Problem A are shown as
follows:
a. Cash 300,000
Inventories 220,000
Prepaid Expenses 7,000 Allowance for Uncollectible Accounts 12,000
Accounts Payable 80,000 Expenses Payable 4,000 Reyes, capital 681,000 To
record the investment if Angeles
b. Cash 681,000
Mejia, Capital 681,000
To record the investment of Aguilar
Alternatively, a compound entry may be prepared to record the investments of the two partners.
Entries to adjust and close the accounts are made in the separate books of the sole proprietor
but not in the new books of the partnership. Using the same illustrative problem, the adjusting
and closing entries on the books of Reyes are as follows:
a. Reyes, Capital 12,000

b. Inventories 20,000
c. Prepaid Expense 7,000

Expense Payable 4,000
Reyes, capita 3,000
d. Reyes, Capital 681,000

Expense Payable 4,000

Cash 300,000
Inventories 220,000
Prepaid Expenses 7,000
To close the books of Reyes
C. TWO OR MORE SOLE PROPRIETORS FORM A PARTNERSHIP
When all the prospective partners are already in business, they made decide to transfer their
asset and liabilities (net assets) to the partnership at value agreed upon or at fair market values,
in the absence of agreed values, The partnership may either: (1) use the books of the sole
proprietors, or (2) open a new set of books for the partnership. As mentioned earlier,
however, it is more common to open a new set of books for the partnership.
Illustrative Problem B: Villegas, owner of Villegas Variety Store, and Valdez, owner of Valdez
Trading decided to combine their business on July 1, 2020. Each is to transfer business assets
and liabilities (net assets) at agreed values. Statements of financial position for two proprietors
are presented below.
Villegas Variety Store

Statement of Financial Position
July 1, 2020
Assets
Cash P 130,000 Accounts Receivable P 75,000
Less Allowance for Uncollectible Accounts 5,000 70,000 Merchandise Inventory
300,000 Store Equipment P 630,000
Less Accumulated Depreciation 35,000 595,000 Total Assets P1,095,000 Liabilities
and Capital
Accounts Payable P 150,000 Villegas, Capital 945,000 Total Liabilities and Capital
P1,095,000
Valdez Trading
July 1, 2020
Assets
Cash P 35,000 Accounts Receivable P350,000
1,250,000 Delivery Equipment P 470,000
Less Accumulated Depreciation 8,000 462,000 Total Assets P2,072,000 Liabilities
and Capital
Accounts Payable P 345,000 Valdez, Capital 1,727,000 Total Liabilities and Capital P
2,072,000
The partners Villegas and Valdez agreed on the following conditions, respectively:
1. Partner’s capital in the partnership shall be equal to the adjusted net assets transferred.
2. Adjustments are to be made as follows:
a. Allowance for Uncollectible Accounts shall be P7,500 and P32,000, respectively.
b. Inventories are to be valued at 110% of their recorded values.
c. Both store and delivery equipment are 5% depreciated.
Assumption 1 – The partnership will use the books of the sole proprietor
The procedures to be followed under his assumption are similar to the procedures discussed
under Formation B – Assumption 1. Thus, if the books of Valdez Trading will be used by the
partnership, the following procedures will be followed:
1. Adjust the books of Valdez Trading to bring the balances of accounts to agreed values.
2. Record the investment of Villegas.
Step 1: Adjust the books of Valdez Trading
a. Valdez, Capital 7,000

P32,000 – P25,000 = P7,000
b. Merchandise Inventory 125,000
Valdez, Capital 125,000 P1,250,000 x 10%= P125,000
c. Valdez, Capital 15,500

Accumulated Depreciation – Delivery Equipment 8,000
Delivery Equipment 23,500 P470,000 x 5% = P23,500
P462,000 NBV old – (P470,000 x 95%)NBV new = P15,500
Step 2: Record the investment of Villegas
a. Cash 130,000
Accounts Receivable 75,000 Merchandise Inventory (P300,000 x 110%)
330,000
Store Equipment (P630,000 x 95%) 598,500
Accounts Payable 150,000 Villegas, Capital 976,000
The Adjustments on the account balances of Villegas Variety Store are not taken up on the
books of Valdez Trading which are now the partnership books. Instead the following adjusting
and
closing entries are prepared separately on the books of Villegas Variety Store:
a. Villegas, Capital 2,500

P7,500- P5,000 =P2,500
b. Merchandising Inventory 30,000

Villegas, Capital 30,000
Accumulated depreciation-Store equipment 35,000

Store equip 31,500 Villegas, capital 3,500 P630,000 x 5% = P31,500
P595,000 nbv old – (P630,000 x 95%) nbv new = P3,500
c. Allowances for Uncollectible Accounts 7,500

Villegas, Capital 976,000
Cash 130,000 Accounts Receivable 75,000 Merchandise Inventory 330,000
Store Equipment 598,500
Assumption 2: The partnership will use a new sets of books
When a new set of books are opened for the partnership, entries are prepared to record the
investment of the partners at agreed values. The opening entries on the new partnership books
using the data given in Illustrative Problem B are shown below:
a. Cash 130,000
Merchandise Inventory (P300,000 x 110%) 330,000
Store Equipment (P630,000 x 95%) 598,500
Villegas. Capital 976,000

To record the investment of Villegas
b. Cash 35,000
Merchandise Inventory (P1,250,000 x 110%) 1,375,000
Delivery equipment (470,000 x 95%) 446,500
Allowance for Uncollectible Accounts 32,000 Accounts Payable 345,000 Valdez,
Capital 1,829,500
The new partnership may prepare a separate entry for each partner’s contribution as shown or a
compound entry that shows the contributions of all the partners.
The plant assets transferred to the books of the new partnership are recorded net of
depreciation. The account accumulated depreciation is not carried on the partnership books. The
net amount, being the agreed value, represents the cost of the plant assets to the partnership and
such amount becomes the basis for the future depreciation of the partnership.
On the other hand, both accounts receivable and the corresponding allowance for uncollectible
accounts are recorded on the partnership books. The allowance for uncollectible accounts is
carried on the partnership books because of the possibility of collection. However, if there are
specific accounts receivable which are deemed worthless, such must be written off and removed
permanently from the outstanding accounts receivable.
A statement of financial position prepared immediately after the formation of the partnership of
Antonio and Albano is shown below.
Villegas And Valdez

July 1, 2020
Assets
Cash P 165,000 Accounts Receivable P 425,000
1,705,000 Store Equipment 598,500 Delivery Equipment 446,500 Total Assets P3,300,500
Liabilities and Capital
Accounts Payable P 495,000 Villegas, capital ,976,000 Valdez, capital 1,829,500 Total
Liabilities and Capital P3,300,500
Readings:
Assessment:
Exercise 2 – 1 (Cash and Non-cash Contributions)

Journalize the investment of Marco into the partnership under the following independent
assumptions:
a. Cash of P250,000
b. Inventories that cost P200,000 using the moving average method accepted by the
partnership at its FIFO value of 750% of average cost.
c. Accounts receivable of P450,000 with an allowance for uncollectible accounts of P20,000. d.
Equipment that cost P800,000 with a book value of P300,000 after four years of use without
salvage value. The equipment should have been over a 10-year useful life.
Exercise 2 – 2 (Cash and Net Asset Contribution)

Elma and Lara have decided to form a partnership. Elma invests the assets presented below at
their agreed valuation, and also transfers his liabilities to the new firm.
Ledger Agreed
Balances Valuation
Cash P400,000 P400,000 Accounts Receivable 170,000 170,000 Allowance for
Uncollectible Accounts (13,000) (10,000) Merchandise Inventory 320,000 280,000
Equipment 175,000 125,000
Accumulated Depreciation 30,000 ------ Accounts Payable 102,000 102,000
Notes Payable 95,000 95,000
Lara agrees to invest cash for a one-third interest in the firm.

Instructions:
1. Prepare the entries to record the investments of Elma and Lara in the partnership’s new set
of books.
2. Prepare the entries to adjust and close the balances of accounts on the books of Elma.
Exercise 2 – 3 (An Individual and a Previous Sole Proprietor)
Amor admits Andrea to a partnership interest in his business. Accounts in the ledger of Amor on
January 1, 2020 before the admission Andrea, show the following:
Debit Credit
Cash P 205,000
Merchandise Inventory 1,450,000
Accounts Payable P 495,000 Amores, Capital 1,610,000
It is agreed that for the purpose of establishing the interest if Amor, the following adjustment
shall be made:
a. An allowance for uncollectible accounts of P22,000 is to be established.

b. The merchandise is to be valued at P1,500,000.
c. Prepaid expenses of P70,000 and unrecorded liability of P98,000 are to be recognized.
Andrea is to invest sufficient cash for an equal interest in the partnership.
Instructions:
1. Assuming the new partnership will use the books of Amor, give the entries to adjust the
account balances of Amor and to record the investment of Andrea.
2. Assuming the new partnership will open new set of books, give the entries to record the
investment of Amor and Andrea.
3. Prepare a statement of financial position for the new partnership.
Exercise 2 – 4 (Cash and Non-cash Contributions; Bonus)
Aguas and Ara have decided to form a partnership. Aguirre contributes cash of
P800,000 and Ara contributes land with a fair market value of P600,000 and a building with a
fair market value of P1,300,000. Ara purchased the land and building five years ago for
P750,000. Aras’ book value of the land is P275,000 and the book value of the building is
P650,000. The P1,300,000 mortgage on the land and building is to be assumed by the
partnership. The partners agree to share profits and losses in the ratio of 3:2 respectively.
Instructions: Prepare the journal entries to record the formation of the partnership under each
of the following independent assumptions:
1. Each partner is credited for the full amount of net assets invested.
2. Each partner initially is to have equal interest in partnership capital.
3. Each partner is credited in accordance with their P& L ratio.
MODULE 3
PARTNERSHIP OPERATIONS
Overview
This module gives us a background on how the partnership divides its profits and losses
to partners.
Module Objectives
After studying this module, the students should be able to

1. Differentiate the closing entries in a partnership and in a sole proprietorship. 2.
Determine the factors affecting the distribution of profits and losses. 3. Identify the
different methods and rules of dividing partnership profits and losses among
partners.
4. Understanding on how to prepare the financial statements of a partnership.
NATURE OF PARTNERSHIP OPERATION
Basically accounting for partnership operations and accounting for the operations of a
sole proprietorship is essentially the same. Steps of the accounting cycle and the rule of debit
and credit to record the transactions are also the same for both sole proprietorship and
partnership. Purchased of office chairs and table on account is debited to Furniture and Fixtures
and credited to Accounts Payable. Payment of expenses is debited to Expenses and credited to
Cash. Sale of merchandise on account is debited to Accounts Receivable and credited to Sales.
Collection of accounts is debited to Cash and credited to Accounts Receivable.
At the end of the accounting period, adjustments are made for merchandise inventory,
accruals, prepayments, provision for uncollectible accounts, and provision for depreciation.
Profit or loss is determined in the usual manner, that is, by matching periodic income and
expense.
However, special problems are encountered in accounting for partnership

operations. These problems include:
1. Closing entries of a partnership

2. Distribution of profits and losses
3. Preparation of a work sheet
4. Preparation of financial statements
a. Statement of income / statement of comprehensive income
b. Statement of financial position
c. Statement of changes in partners’ equity
CLOSING ENTRIES OF A PARTNERSHIP
The procedures for the preparation of closing entries for a partnership are similar to that
of a sole proprietorship. First, all revenue and other nominal accounts with credit balances (such
as Purchases Discounts and Purchases Returns and Allowances) are debited and
Income Summary is credited. Second, income Summary is debited and all expense and other
nominal accounts with debit balances (such as Sales Discounts and Sales Returns and
Allowances) are credited. Third, the balance of the Income Summary account, which represents
profit or loss of the partners. Finally, the balance of the drawing account of each partner is
transferred to his/her capital account.
The balance of the Income Summary account is transferred to the drawing accounts of the
partners if the partners’ intention is to keep the capital account intact for investments and
permanent withdrawals of capital. A credit balance in the Income Summary account represents
a profit and its balance is transferred to the drawing accounts of the partners based on their
profit and loss sharing ratio. The entry is as follows:
Income Summary xxx

X, Drawing xxx
Y, Drawing xxx
Any resulting credit balance in the drawing account of a partner may be withdrawn by the
partner or reinvested into the firm. If the balance in the drawing accounts is withdrawn in cas,
the entry is as follows:
X, Drawing xxx
X, Cash xxx
However if the partner decides to reinvest into the firm this balance in his drawing account, the
entry is as follows:
X, Drawing xxx
X, Capital xxx
A debit balance in the Income Summary account represents a loss and its balance is
transferred to the drawing accounts of the partners based on their profit and loss sharing ratio.
The entry is as follows:
X, Drawing xxx
Y, Drawing xxx
Income Summary xxx
The resulting debit balance in the drawing account of a partner is charged against his capital
with the following entry:
X, Capital xxx
X, Drawing xxx
On the other hand, the balance of the Income Summary account may be transferred directly to
the capital accounts of the partners if the partners’ intention is to make the profit or loss a part of
permanent capital. It should be noted, however, that either treatment will result to the same net
effect on partners’ ending capital balances. All illustrations mentioned, pertaining to distribution
of profit or loss are recorded directly to the capital accounts with the assumption that partners
intend to make their respective share on the profit loss as a direct part of their permanent
capital.
A credit balance in the Income Summary account represent a profit and its balance is
transferred to the capital accounts of the partners based on their profit and loss sharing ratio.
The entry is as follows:
Income Summary xxx

X, Capital xxx
Y, Capital xxx
A debit balance in the Income Summary account represents a loss and its balance is transferred
to the capital accounts of the partners based on their profit and loss sharing ratio. The entry is
as follows:
X, Capital xxx
Y, Capital xxx
Income Summary xxx
DISTRIBUTION OF PROFIT AND LOSSES
To make distribution of partnership profits and losses equitable, the following factors are
considered:
1. Services rendered by the partners to the partnership
2. Amount of capital contributed by the partners to the business
3. Entrepreneurial ability or managerial skill of the partners
RULES FOR DIVIDING PROFITS AND LOSSES
Profits and losses in general shall be divided in accordance with the agreement among the
partners. In the absence of an agreement, the partners shall share in the profits in proportion to
their capital contributions after satisfying the share of the industrial partner on such profit.
The following is the list of rules in the division of profits and losses of the partnership
based on the provision of the New Civil Code:
1. As to Capital Partners
a. Division of profits
1. in accordance with agreement
2. in the absence of an agreement, division of profits is in accordance with capital
contributions
b. Division of losses
1. In accordance with agreement
2. If only division of profits is agreed upon, the division of losses will be the same as
the agreement on the division of profits
3. In the absence of an agreement, division of losses is in accordance with capital
contributions
2. As to Industrial Partners
a. Division of profits
2. In the absence of an agreement, the industrial partner shall receive a just and
equitable share of the profits and the capitalist partners shall receive profits in
accordance with their capital contributions
b. Division of losses
2. In the absence of an agreement, the capitalist- industrial partner in his/her character
as industrial partner shall have no share in the losses, but in his/her character as a
capitalist partner will share in proportion to the capital contribution
METHODS OF DISTRIBUTING PROFITS BASED ON PARTNERS’ AGREEMENT
1. Arbitrary ratio (Percentage, Decimal, Fraction, Ratio)- it is simple to apply but does not
give recognition on the disparity of capital contributions nor does it recognize the time
and effort that a partner may devote in running the firm’s business operations.
2. Capital ratio (Original, Beginning, Ending, Average) – this method recognizes the
differences in the capital contributions but does not take into account the time and effort
that a partner may devote in running the firm’s business operations.
3. Interest on capital and the balance on agreed ratio- this method recognizes the
differences in the capital contributions but does not take into account the time and effort
that partner may devote in running the firm’s business operations. Interest is allowed to
partners for the use of invested capital. Interest as agreed by the partners shall be
allowed in proportion over the period such capital was actually used. Moreover, the
interest shall be provided whether profit is sufficient or insufficient or there is a net loss
unless otherwise agreed upon by the partners.
4. Salary allowances to partners and the balance on agreed ratio- this method recognizes
the time and effort that a partner may devote in running the firm’s business operations
but does not take into consideration the differences in capital contributions.
Salaries are allowed to partners as a compensation for their time devoted in the
business. Salaries as agreed by the partners shall be allowed in proportion to the time
the partners actually rendered services to the firm. Such salaries shall be provided
whether the profit is sufficient or insufficient or there is net a loss unless otherwise
agreed upon by the partners.
5. Bonus to managing partner and the balance on agreed ratio- this method allows a
bonus, as an incentive, to the managing partner. It is usually a percentage of the profit.
Bonus, therefore, is allowed only when there is a profit. It may be computed using
any one of the following as basis:
a. Bonus is based on profit before deducting bonus and income tax
b. Bonus is based on profit after deducting bonus but before deducting income tax
c. Bonus is based on profit after deducting income tax but before deducting bonus
d. Bonus is based on profit after deducting both bonus and income tax.
6. Interest on capital, salaries to partners, bonus to managing partner, and the balance on
agreed ratio.
Illustrative Problem : The following accounts and balances are available in the books of
Ciara and Dolly Partnership for the year 2019.
Ciara, Capital
May 1 P150,000 Jan.1 Beg’g. Balance P2,200,000 Apr. 1 250,000
Oct. 1 500,000
Bal. P2,800,000
Ciara, Drawing
Jan. 1 – Dec. 31 P300,000
Dolly, Capital
May 1 P150,000 Jan.1 Beg’g. Balance P1,500,000 Dec.1 50,000 Oct. 1 500,000
Balance- P1,800,000
Dolly, Drawing
Jan. 1 – Dec. 31 P225,000
Income Summary
Dec. 31 P800,000
Case 1- Profit is divided in the ratio of 75% and 25% to Ciara and Dolly
Income Summary 800,000

Ciara, Capital 600,000
Dolly, Capital 200,000
P800,000 x 70% = P600,000
P800,000 x 25% = P200,000
Case 2- Profit is allocated based on the beginning capital ratio

P800,000 x 2,200/3,700 = P475,676
P800,000 x 1,500/3,700 = P324,324
Case 3- Profit is allocated based on the ending capital ratio

P800,000 x 2,800/4,600 = P486,957
P800,000 x 1,800/4,600 = P313,043
Case 4 - Profit is allocated based on the average capital ratio.

P800,000 x 2,412,500/ 3,933,333.33 = P490,678
P800,000 x 1,520,833.33/ 3,933,333.33 = P309,322
Average capital ratio is a method of dividing profits based on the amount of capital
invested and the time during which such capital is actually used in the business.
The following steps are to be followed in determining the average capital of each partner using
the peso month method; thus, arriving at the average capital ratio:
1. Multiply beginning capital by the number of months that it remained unchanged. 2.

Determine each new capital balance in chronological order and multiply by the number of
months it remained unchanged.
3. Add the products which represents peso month and divide the total by twelve (12) to
obtain the average monthly capital.
By following the steps given, the average capital of each partner can be calculated as follows:
Ciara, Average Capital

No. of Mos.
Period Capital Balance Unchanged Peso Months Average Capital
Jan.1 – Mar.31 P2,200,000 3 P 6,600,000 Apr. 1 – Apr.30 2,450,000 1
2,450,000
May 1 – Sept.30 2,300,000 5 11,500,000
Oct. 1 – Dec. 31 2,800,000 3 8,400,000
12 P28,950,000 P2,412,500
Dolly, Average Capital
Jan.1 – Apr. 30 P1,500,000 4 P 6,000,000 May 1– Sept. 30 1,350,000 5 6,750,000

Oct. 1 – Nov. 30 1,850,000 2 3,700,000
Dec. – Dec. 31 1,800,000 1 1,800,000
12 P18,250,000
P1,520,833.33
P3,933,333.33
Case 5- Each partner is allowed 12% interest on ending capital and the remaining profit is
divided equally.

Alternative entry to record the distribution of profits may be recorded separately as follows:

Interest on ending capital.

Remaining income divided equally
Division of profit
Ciara Dolly Total
Interest on ending capital
P2,800,000 x 12% P336,000
P1,800,000 x 12% P216,000 P552,000 Remainder-equally
P248,000 /2 124,000 124,000 248,000 Totals P460,000 P340,000 P800,000
Case 6- Ciara is allowed a salaries of P600,000 and the remaining profit is divided in the ratio of
1:4

Division of profit
Ciara Dolly Total
Salaries P600,000 P600,000

Remainder- 1:4
P200,000 x 1/5 P 40,000
P200,000 x 4/5 160,000 200,000
Total P640,000 P160,000 P800,000
Case 7- Dolly, the managing partner, is allowed a bonus of 20% of profit BEFORE bonus and
income tax and the remainder is divided in the ratio of beginning capital.
Using the income tax rate of 30%, the partnership income before income tax is P1,142,857, that
is, net profit of P800,000 divided by 70%.

Division of profit
Ciara Dolly Total
Bonus(1,142,857x20%) P228,571 P228,571 Remainder:
P571,429 x 2,200/3,700 P339,769
P571,429 x 1,500/3,700 231,660 571,429
Total P339,769 P460,231 P800,000
Case 8- The partners are allowed P5,000 and P10,000 weekly salaries, respectively, 10%
interest on average capital, and the remainder is divided in the ratio of 2:3.

Division of profit Ciara Dolly Total Salaries to partners

P 5,000 x 52weeks P260,000
P10,000 x 52weeks P520,000 P780,000 Interest on average capital
P2,412,500 x10% 241,250
P1,520,833.33 x 10% 152,083 393,333 Remainder – (P373,333.33)
(P373,333.33) x 2/5 ( 149,333)
(P373,333.33) x 3/5 (224,000) (373,333) Total P 351,917 P448,083
P800,000
The sum of the salary allowance and interest allowed on the average capital of the
partners exceeded the profit of P800,000 resulting in a negative remainder (loss or deficit).
Such loss is distributed as provided in the profit and loss sharing agreement.
Case 9- Assume the same agreement as in Case 8 except that instead of a profit, the
partnership has incurred a loss of P100,000. The allowance for salaries and interest will still be
provided, thereby resulting in a total loss to be divided as agreed.

Division of profit
Ciara Dolly Total
Salaries to partners
P 5,000 x 52 P260,000
P10,000 x 52 P520,000 P780,000 Interest on average capital
P2,412,500 x10% 241,250
P1,520,833.33 x 10% 152,083 393,333 Remainder–(P1,273,333)
(P1,273,333) x 2/5 ( 509,333)
(P1,273,333) x 3/5 (764,000) (1,273,333) Total (P 8,083) (P 91,917) (P100,000)
The allocation of partnership profit follows the order of the profit sharing agreement in allocating
the bonus, the salary allowances, the interests and the remainder to individual partners.
The bonus is computed on the basis of the partnership profit as the concept of “partnership
profit” is generally understood in accounting practice. Partners may, however, intend for salary
and interest allowances to be deducted in determining the base for computing the bonus. In
such case, no bonus is allowed if there is insufficient profit after distribution of salaries and
interests.
The interests of the partners may not be apparent when technical accounting terms are used;
so, the partnership agreement should be precise in specifying measurement procedures to be
used in determining the amount of a bonus.
Illustrations on the computation of bonus using other assumptions. The same data in Illustrative
Problem A shall be used. Bonus rate is 20%
1. Bonus is based on profit after deducting bonus but before deducting income tax.
B = .20 x (P P1,142,857– B)
B = P228,571 - .20B
B + .20B = P228,571
B = P228,571 / 1.20
B = P190,475.83
2. Bonus is based on profit before deducting bonus but after deducting income tax
B = .20 (P1,142,857 – T)
T = .30 x P1,142,857
= P342,857
Substituting for T in the first equation and solving for B
B = .20 x (P1,142,857 – P342,857)

B = .20 x P800,000
B = P160,000
Key Points. The bonus was not deducted from the profit subject to income tax. The
bonus being computed is not an expense but a distribution of profit after income tax.
3. Bonus is based on profit after deducting bonus and income tax
B = .20 (P1,142,857 – B-T)
T = .30 x P P1,142,857
= P342,857
Substituting for T in the first equation and solving for B
B = .20 x (P1,142,857 – B – P342,857)

B = .20 (P800,000 – B)
B = P160,000 - .20 B
B + .20B = P160,000
B = P160,000 / 1.20
B = P133,333
Key Points. In the preceding examples, bonus is treated as distribution of partnership profit, and
therefore such bonus is not deductible as an expense in determining the amount of taxable
profit. The same is true for salaries and interest allowed on capital.
The partnership form of business allows a wide selection of profit distribution ratios to meet the
individual desires of the partners. Ratios for profit distributions may be based on the percentage
of total partnership capital, time and effort invested in the partnership, or a variety of other
factors. Some partnerships, however, have a profit sharing ratio that is different from their loss
sharing ratio.
PREPARATION OF WORK SHEET and FINANCIAL STATEMENTS
At the end of each accounting period, the partnership books are adjusted and closed and
financial statements are prepared. In order to classify accounting data in a convenient and
orderly manner and to facilitate the preparation of financial statements, a work sheet is
prepared. The form or columns of the worksheet may vary depending on the needs of the
company. The following illustrative problem will use the simplest form of worksheet with
emphasis not on the form but the underlying principles and procedures in preparing such
worksheet.
Illustrative Problem: The trial balance for EXCEL CORPORATION as at December 31, 2019 is
presented below:
EXCEL CORPORATION
Trial balance
December 31, 2019
Debit Credit Cash 1,900,000

Notes Receivable 625,000
Accounts Receivable 1,125,000
Allowance for Uncollectible Accounts 50,000 Merchandise Inventory 1,250,000
Furniture and Equipment 1,500,000
Accumulated Depreciation 200,000 Notes Payable 500,000 Accounts Payable 375,000
FERNANDO, Capital 1,250,000 FERNANDO, Drawing 155,000
GOMEZ, Capital 3,125,000 GOMEZ, Drawing 250,000 Sales 5,000,000 Sales Returns and
Allowances 50,000 Sales Discounts 75,000
Purchases 2,412,500 Purchases Returns and Allowances 100,000 Purchase Discounts 62,500
Freight- In 125,000
Selling Expenses 825,000
General Expenses 362,500
Interest Income 17,500 Interest Expense 25,000 10,680,000 10,680,000
Data for adjustments as of December 31, 2019:
a. Merchandise inventory, P1,000,000.

b. Depreciation of furniture and equipment, 10% per year, 40% of which us considered part
of general expenses.
c. Unpaid sales salaries, P25,000
d. Accrued interest on notes receivable, P2,500
e. Accrued interest on notes payable, P1,500
f. Allowance for uncollectible accounts to be increased to P112,500
g. Unused supplies: office-P10,000, store- P15,000
h. Income tax, 30% of profit before income tax
The Articles of Co-Partnership contain the following provisions regarding the division of profits
and losses:
1. Annual salaries of P400,000 and P500,000, respectively.
2. Interest of 10% on beginning capital
3. The remainder is divided in the ratio of 3:2.
A work sheet prepared for the partnership and the related statement of financial position and
income statement are presented.
0
0
N
9
ti
ic
F
f
tn
e
I
f
tn
e
tS
ti
r
C
ti
ti
ti
D
0
0
5
1
0
5
2
2
0
.
0
5
0
0
0
0
.
0
0
,
3
2
3
,
8
5
1
₱
0
0
5
.
0
0
,
5
3
2
₱
0
₱
OI m t , 1 0 .
9
TA
,
ec n 5
R
e
1
e 2
00 3
t
OP 5
t
i . . . . . 5
, 00 00 00 00 5
0, 0 0 5 .
e d
2 05 , , 0 2
1
e e
6 5 2 5
0
0
r , .
00
h
r 1 0 5
5
0 , 5
C
eb 0 ,
s
1
RO mt 0 0
S d c
s e
kr f h
D b
g
g
d
C u i 0 2 , 0 5,
0 0
LE j
oW ,
ed b 2 0
,
0 0 0 5
n 0 0
d
5
0 6
0 0.
0 5 6
E A 0
r 05
t 9 ,
XE
ae
ht
oF
e
D
0
0.
00
0,
9,
1
0
0.
00
0,
526
0
0.
00
0,
1,
1
0
0.
00
0,
05
0.
00
0,
2,
1
0
0.
00
0,
5,
1
0
0.
00
0,
002
0.
00
0,
005
0.
00
0,
573
0.
00
0,
2,
1
0
0.
00
0,
551
0
0.
00
0,
1,
3
0
0.
00
0,
052
0
0.
00
0,
0,
5
0
0.
00
0,
05
0
0.
00
0,
57
0
0.
00
5,
4,
2
0
0.
00
0,
001
0.
00
5,
26
0.
00
0,
521
0.
00
5,
263
0.
00
5,
71
0
0
0
0
0
0
.
.
0
0
0
0
0
0
,
,
5
0
2
8
1
00
5
d
0
0,
2
.
g
0,
35
2
.
h
915
t
a
i
n
e
r
o
f
n tn t n e at e
e
s
u a c
e
m
o n
w
o
m )
c a
d x
oc
fe
c
w b %
a
A t
o 0
: 3
l
t
A
f
tn
e
o
e e
r
l
m
e x
p
b
e
b
i
t
t
s 0
d
tn
0
n e
s
n
5
a
e m
s o
i s
t c et
c c m q l a n a s e e n r r 4
o v e e y
a
a t i s
e
e l l a
e t e e e
ic
l i l s 8
l p e b g s m
l nr
n oll t
e b
v i b p p
r u s
l st t ,
n e oc
i A e c
l n
y n
n l P
pe dn d
u a i 3
o r a a n n
e (
b e
u i i
g n e x
b
ec
ec
R
U
r
e
n
si
d
E
dn
a
D
et
a
a
l
y
b
a
y
pa
C
,
o
w
d
,
o
a
ip
a
C
n
ar
D
nr
ut
t
s
t
s
s
oc
si
D
nI
s
px
n
px
E
s
e
n
b
ya
P
v
ec
e
e
l
a
y
n
a
o
px
a
a
a
f
it
id
er
l
ti
be
d
l
r
b
ti
x
at
t
e
st
c
n
er
lu
a
st
d
d
,
e
i
es
es
es
-
l
I
E
l
s
R
p
s
t
T
S
S
at
at
at
f
m
if
R
he
nu
o
na
w
a
hc
u
ti
n
mu
P
se
nu
o
nan
nan
ze
ze
R
s
s
D
s
a
hc
a
hc
a
hc
t
gi
il
ar
e
ts
er
ts
er
at
o
ei
a
ts
er
ts
er
e
il
p
em
em
LA
T
I
L
A
u
p
oT
oT
or
P
oc
I
or
C
to
N
cc
A
oll
A
r
eM
r
F
cc
A
to
N
cc
A
r
eF
r
eF
m
G
m
G
e
la
S
e
la
S
e
la
S
r
P
r
P
r
P
er
F
le
S
n
G
et
I
et
I
T
la
S
et
I
et
I
pu
S
oc
I
oc
I
T
OT
O
RP
T
OT
m
EXCEL CORPORATION
Statement of Changes in Partner’s Equity
For the Year Ended December 31, 2019
Fernando Gomez Total Equity, January 1 P1,250,000 P3,125,000 P4,375,000 Add Profit for 2019:
Salaries P 400,000 P 500,000 P 900,000 Interest on beginning capital 125,000 312,500 437,500
Balance – 3:2 (P747,050)
P747,050 x 3/5 ( 448,230)
P747,050 x 2/5 ( 298,820) (747,050) Total share profit P 76,770 P 513,680 P 590,450 Total
P1,326,770 P3,638,680 P4,965,450 Less Withdrawals 155,000 250,000 405,000 Equity, December
31 P1,171,770 P3,388,680 P4,560,450
EXCEL CORPORATION
Comprehensive Statement of Income
For the Year Ended December 31, 2019
Schedule
Net Sales 1 P4,875,000 Cost of Sales 2 2,625,000 Gross Profit P2,250,000 Other Operating
Income- Interest 20,000 Operating Expenses:
Selling P925,000
General 475,000 (1,400,000) Operating Profit P 870,000 Interest Expense ( 26,500) Profit before
tax P 843,500 Income Tax Expense (30%) ( 253,050)
Profit for the Period P 590,450
Division of profit
Fernando Gomez Total Salaries P400,000 P500,000 P900,000 Interest on beginning capital
125,000 312,500 437,500 Balance – 3:2 (P747,050)
P747,050 x 3/5 (448,230)
P747,050 x 2/5 (298,820) (747,050) Total share in profit P 76,770 P 513,680 P 590,450
Schedule 1- Net Sales

Sales P5,000,000 Less: Sales Returns and Allowances P50,000
Sales Discounts 75,000 125,000 Net Sales P4,875,000
Schedule 2- Cost of Sales
Merchandise Inventory, January 1 P1,1250,000 Net Purchases

Purchases P2,412,500
Add Freight In 125,000
Total P2,537,500
Less: Purchases Returns and Allowances P100,000
Purchases Discounts 62,500 162,500 2,375,000
Cost of Goods Available for Sale P3,625,000 Less Merchandise Inventory, December 3
1,000,000 Cost of Sales P2,625,000
Key points. The Statement of Income of a partnership is similar to that of a sole proprietorship except that
it includes a schedule showing the division or distribution of profit to partners.
EXCEL CORPORATION
December 31, 2019
Assets
Current Assets:
Cash P1,900,000
Notes Receivable 625,000
Accounts Receivable P1,125,000
Less Allowance for Uncollectible Accounts 112,500 1,012,500
Interest Receivable 2,500
Merchandise Inventory 1,000,000
Supplies 25,000 P4,565,000
Furniture and Equipment P1,500,000 Less Accumulated Depreciation 350,000 1,150,000
Total Assets P5,715,000
Liabilities
Current Liabilities:
Notes Payable P 500,000
Salaries Payable 25,000
Interest Payable 1,500
Income Tax Payable 253,050
Total Liabilities P1,154,550 Partners’ Equity
Fernando, Capital P1,171,770 G0mez, Capital 3,388,680 Totals Partners’ Equity 4,560,450
Total Liabilities and Partners’ Equity P5,715,000

JOURNALIZING CLOSING ENTRIES IN THE PARTNERSHIP BOOKS

DATE DESCRIPTIONS DEBIT CREDIT
Sales 5,000,000
Interest Income 20,000

Purchase Returns and Allowances 100,000
Purchase Discounts 62,500
Income Summary 5,182,500
To close the revenue and other nominal accounts

with credit balance.
Income Summary 4,342,050
Sales Returns and Allowances 50,000
Sales Discounts 75,000
General Expenses 475,000
Selling Expenses 925,000
Purchases 2,412,500
Freight In 125,000
Interest Expense 26,500
Income Tax Expense 253,050
To close the expenses and other

nominal accounts with debit balance.
Income Summary 590,450 513,680
Fernando, Capital 76,770
Gomez, Capital
To close the income summary account.
Fernando, Drawing 155,000
Gomez, Drawing 250,000
Fernando, Capital 155,000
Gomez, Capital 250,000
To close the drawing accounts.

CORRECTION IN PROFIT FOR ERRORS AND OMISSIONS PRIOR TO DISTRIBUTION
The partnership books may show an incorrect profit because of errors and omissions. Such include failure to
record prepaid expenses, accrued expenses, accrued income, unearned income and also overstatement or
understatement in purchases, inventories, and depreciation. The reported profit should be corrected before it is
distributed to the partners. The required corrections may be summarized as follows:
Correction to profit of current year for errors made in Prior Year Current Year
1. Unrecorded prepaid expenses - + 2. Unrecorded accrued expenses + - 3.
Unrecorded accrued income - + 4. Unrecorded unearned income + - 5.
Overstatement of inventories + - 6. Understatement of inventories - + 7.
Understatement of purchases - + 8. Understatement of purchases + - 9.
Overstatement of depreciation none + 10.Understatement of depreciation none
-
It is understood that the tax implications of these corrections are properly accounted for particularly if the
partnership is not a general professional partnership.
Illustrative Problem : Honey, Ina, and Juan are partners sharing profits on a 2:3:5 ratio. On January 1, 2019,
Kent was admitted into the partnership with a 20% share in profits. The old partners shall continue to
participate in profits in proportion to their original ratios.
For the year 2019, the partnership books showed a profit of P450,000. It was ascertained, however, that the
following errors were made:
1. Accrued expenses not recorded at the end of 2018 P 5,000 2.

Overstatement of 2019 ending inventory 48,000 3. Goods received and
inventoried in 2019 but related purchases
not recorded 20,000 4. Income received in advance (unearned income),
not recorded
at the end of 2018 10,000 5. Prepaid expenses not recorded at the end of
2018 3,000
The correct profit of 2019 based on a 30% income tax rate shall be computed as follows:
Reported profit P450,000 Corrections:

Unrecorded accrued expense, 2018 P 5,000
Unrecorded unearned income, 2018 10,000
Overstatement of ending inventory, 2019 (48,000)
Unrecorded purchases, 2019 ( 20,000)
Unrecorded prepaid expenses, 2018 ( 3,000)
Total corrections before income tax P(56,000)
x 70%
Total corrections after income tax (39,200) Corrected profit P358,800

The corrected profit shall be divided among partners as follows:
Honey P450,000 x (20% x 80%) P57,408

Ina P450,000 x (30% x 80%) 86,112
Juan P450,000 x (50% x 80%) 143,520
Kent P450,000 x 20% 71,760
P358,800
REVIEW of the LEARNING OBJECTIVES
1. Discuss the closing entries in a partnership and differentiate them form the
closing entries in a sole proprietorship. The closing entries of a partnership
are almost similar to those of a sole proprietorship. However, the profit or loss of
the partnership is transferred to the individual drawing account or capital account
of the partners and is distributed according to the profit and loss sharing
agreement.
2. Identify and discuss the different methods and rules of dividing partnership
profits and losses to the partners. The distribution of partnership profits and
losses to the partners may be expresses in any of the following ways: (1) by
percentage; (2) by fraction; (3) by decimal; or (4) by ratio. The Civil Code of the
Philippines provides rules on how partnership profits and losses be divided
among the partners. As a general rule, profits or losses should be divided in
accordance with the partner’s agreement. In the absence of an agreement, the
division shall be made in accordance with capital contributions. To give
recognition to the services rendered by the partners or to the differences in the
amount contributed in the partnership or to the entrepreneurial ability or
managerial skill of the partners, salaries, interest and bonuses may be allowed to
partners as part of the division of profits and losses.
3. Discuss and understand the preparation of financial statements of a

partnership. The financial statements are prepared after the work sheet is
completed ( or after journalizing and posting the adjusting entries if a work sheet
is not prepared). These financial statements include the income statement, the
statement of financial position, and the statement of changes in partners equity.
The income statement includes a schedule showing the division of the
partnership profit or loss to the “Partner’s Equity” and it shows capital balances of
individual partners. The statement of changes in partners equity shows the
division of profit or loss to the partners, the amount of withdrawals during the
period, and the partner’s capital balances at the end of the period.
Readings

Assessment
EXERCISES
Exercise 3-1 (Division of Profit using Ratios)

Bong, Bueno, and Bunny formed a partnership and have capital balances of P350,000,
P250,000 and P200,000, respectively. They devoted time to personally managed their
partnership as follows:
Bong - three-fourths time

Bueno - one-half time
Bunny - one-fourth time
Instructions: Determine the participation of the partners in the profit of P1,000,000 if profit is
divided:
1. In the ratio of capital investments

2. In the ratio of time devoted in the business
Exercise 3-2 (Division of Profit; Interest on Average Capital)
Danica and Jenson are partners. Their capital accounts during the fiscal year 2019 were as
follows:
Danica, Capital J enson, Capital 9/1 120,000 1/1 800,000 3/1 180,000 1/1 1,200,000
4/1 160,000 7/1 140,000
11/1 60,000 10/1 100,000
Profit of the partnership is P250,000 for the year. Determine the partners shared profit under
the following assumptions:
1. Each partner is to be credited 12% interest on his average capital.

2. Any remaining profit or loss is to be divided equally.
Exercise 3-3 (Division of Profit; Interest on Capital and Salaries to Partners)
Ruel and Renan have a capital balances at the beginning of the year of P600,000 and
P675,000, respectively. They share profit as follows:
1. Interest of 8% on beginning capital balances

2. Salary allowances of P225,000 to Bueno and P115,000 to Renan
3. Balance in the ratio of 3:2.
The partnership realized a profit of P375,000 during the current year before interest and salary
allowances to partners.
Instructions:
1. Show how the profit of P375,000 should be divided between Ruel and Renan
2. Assuming that Ruel and Renan simply agree to share profit in a 3:2 ratio with a minimum
of P175,000 guaranteed to Renan, show the profit of P375,000 should be divided.
Exercise 3-4 (Division of Profit under Various Assumptions)

Blessing and Linda formed a partnership by investing P220,000 and P380,000, respectively. At
the end of its first year of operations , the partnership has realized a profit of P400,000.
Instructions: determine the distribution of profit under each of the following independent
assumptions:
1. The partnership agreement does not mention profit sharing

2. Profit is divided in the ratio of the original investments.
3. Interest at 10% is to be allowed on the original capital investments and the balance to be
divided equally.
4. Salaries of P75,000 and P55,000 respectively and the balance to be divided equally. 5.
Interest at 12% is to be allowed on the original capital investments, salaries of P225,000
and P275,000 to partners, respectively and the balance to be divided in the ratio 2:3. In
case of insufficient net income, however, this has to be distributed in the salary ratio. While
if there is a net loss, then it has to be distributed equally.
Exercises 3-5 (Division of Profit; Interest on Average Capital and Salaries to
Partners) The partnership of Ben and Ban has the following provisions in the partnership
agreement:
1. A partner earns 10% interest on the excess of his average capital over the other
partner.
2. Ben and Ban are allowed annual salaries of P300,000 and P200,000, respectively.
3. Any remaining profit or loss is to be divided in the ratio of 40:60.
The average capital of Ben is P1,000,000 and that of Bunye is P500,000.
Instructions: Prepare a profit distribution schedule assuming the profit of the partnership is (a)
P800,000; and (b) P400,000.
Exercise 3-6 (Division of Profit; Interest on Capital, Salary Allowance, and Bonus to
Managing Partner)
Becky and Lala formed a partnership on January 2, 2019 and agreed to share profit 90% and
10%, respectively. Becky invested cash of P200,000. Lala invested no assets but has a
specialized expertise and manages the firm full time. There were no withdrawals during the
year. The partnership contract provides for the following:
1. Capital accounts are to be credited annually with the interest at 10% of beginning
capital.
2. Lala is to be paid a salary of P8,000 a month.
3. Lala is to receive a bonus of 25% of profit calculated before deduction of salary and
interest on capital accounts.
4. Bonus, interest, and Lala’s salary are to be considered as expenses.
The fiscal year 2014 income statement for the partnership includes the following:
Revenue P701,600
Expenses (including salary, interest and bonus) 379,600
Profit P322,000
Instructions: Determine the amount of bonus to be credited to Lala.
Exercise 3-7 (Calculation of Bonus)
Powell is the managing partner of Power Partnership. He is given an incentive of 5% bonus on

profit. The profit of the partnership id P400,000 and income tax rate is 30%.
Instruction: Determine the amount of bonus under each of the following assumptions:
1. Bonus is computed based on profit before deduction for bonus and income tax.
2. Bonus is computed based on profit after deduction for bonus but before deduction for
income tax.
3. Bonus is computed based on profit before deduction for bonus but after deduction for
income tax.
4. Bonus is computed based on profit after deduction for both bonus and income tax.
Exercise 3-8 ( Computation of Partnership Profit)
Marte, a partner in the Triple M Partnership, has a 25% participation in profit. Marte’s capital
account had a net decrease of P240,000 during the year 2019. During 2019, Marte withdrew
P520,000 (charged against his capital account) and invested in the partnership a property with a
fair value of P100,000.
Instructions: Determine the profit of the Triple M Partnership for the year 2019.
Exercise 3-9 (Division of Profit under Various Assumptions)
The capital accounts of Bondoc and Barba at the end of the fiscal year 2014 are as follows:
Barbie, Capital
January 1 Balance P210,000
May 1 Investment 90,000
October 1 Withdrawal P 60,000
Carla, Capital
January 1 Balance P150,000
October 1 Withdrawal P30,000
The partnership profit for the year ended December 31, 2014 is P300,000.
Instructions: Give the journal entries to record the transfer of profit to the capital accounts under
each of the following assumptions: (Show the necessary computations after the journal entries
as an explanation for each entry).
1. Profit is divided 60% to Carla and 40% to Barbie.

2. Profit is divided in the ratio of capital balances at the beginning of the period.
3. Profit is divided in the ratio of average capital.
4. Interest at 10% is allowed on average capital and the balance of profit is divided in the
ratio of 40% and 60% for Barbie and Carla respectively.
5. Salaries of P60,000 and P48,000 are allowed to Carla and Barbie, respectively, and the
balance of profit is divided in the ratio of capital balances at the end of the period.
6. Carla is allowed a bonus of 33 1/3% of profit after bonus, and the balance of the profit is
divided in the ratio of the average capital.
MODULE 4
PARTNERSHIP DISSOLUTION
Overview
Partnership is an agreement between two or more persons (called partners) for sharing
the profits of a business carried on by all or any of them acting for all. Any change in the existing
agreement amounts to changes in partnership ownership. This results in an end of the existing
agreement and a new agreement comes into being with a changed relationship among the
members of the partnership firm and/or their composition. The partners often resort to
admission of a new partner, change in profit sharing ratio, retirement of a partner, death or
insolvency of a partner.
In this Module, we shall have a brief idea about all these and in detail about the
accounting implications of admission of a new partner or an on change in the profit sharing ratio.
Additional capital may be required by firms in an attempt to compete within a business
environment where the firm operates. The existing partners may consider to invite additional
person/s to infuse capital into the firm.
Under Article 1830 of the New Civil Code of the Philippines, the legal partnership
dissolution may be caused by any of the following:
1, Admission of a new partner;

2. Withdrawal of an old partner;
3. Involuntary dissolution of a partnership by the partners;
4. Involuntary dissolution through bankruptcy proceedings;
5. Termination of the definite term or particular undertaking specified in the agreement;
6. Civil interdiction of any partner;
7. Any event which makes it unlawful for the business of the partnership to be carried on
or for the members to carry it on in the partnership.
There is a difference between a dissolution and a liquidation. Partnership dissolution is

defined in Article 1825 of the Civil Code of the Philippines as the change in the relation of the
partners caused by any partner ceasing to be associated in the carrying out of the business.
Dissolution refers to the termination of the life of an existing partnership. This process does not,
however, take into account whether or not the partnership will resume its operations. When a
partner is admitted into a partnership, the original relationship between or among the existing
partners ends and a new relationship between the old and new partners is created. It will be
noted dissolution is not always followed by liquidation. Partnership liquidation is the process of
winding up the affairs of the partnership and affects the interest of third parties. There are
numerous reasons for the changes in partnership ownership. Under this Module, it discusses
Admission of a New Partner.
Module Objectives:
After studying this module, the students should be able to
1. Identify the causes of changes in partnership ownership particularly on account for

admission of a new partner in a partnership;
2. Differentiate between partnership dissolution and partnership liquidation 3. Explain the
concept and the ways of admission of a partner into a partnership firm; 4. Identify the
matters that need adjustments in the books of firm when a new partner is admitted
5. Determine the profit and loss ratio before and after admission of a partner
6. Make necessary adjustments for revaluation of assets
Admission of a new partner
A new partner may be admitted when the firm needs additional capital or managerial
help. According to the provisions of Partnership Act 1932 unless it is otherwise provided in the
partnership deed a new partner can be admitted only when the existing partners unanimously
agree for it. A new partner may be admitted in a partnership by (a) purchase of interest from one
or more of the original or existing or old partner/s; or (b) investment or contribution of asset to
the partnership.
According to the Partnership Act 1932, a new partner can be admitted into the firm only
with the consent of all the existing partners unless otherwise agreed upon. With the admission
of a new partner, a newly admitted partner acquires two main rights in the firm, namely:
1. Right to share the assets of the partnership firm; and

2. Right to share the profits of the partnership firm.
For the right to acquire share in the assets and profits of the partnership firm, the partner
brings an agreed amount of capital either in cash or in kind. Moreover, in the case of an
established firm which may be earning more profits than the normal rate of return on its capital
the new partner is required to contribute some additional amount known as premium or
goodwill.
Admission of a Partner is primarily to compensate the existing partners for loss of their
share in the profits of the firm.
Following are the other important points which require attention at the time of admission
of a new partner:
1. New profit sharing ratio;

2. Revaluation of assets;
3. Distribution of accumulated profits prior to admission of a partner; and
4. Adjustment of partners’ capitals.
New Profit Sharing Ratio occurs when new partner is admitted as he acquires his share
in profits from the old partners. In other words, on the admission of a new partner, the old
partners sacrifice a share of their profit in favor of the new partner. What will be the share of
new partner and how he will acquire it from the existing partners is decided mutually among the
old partners and the new partner. However, if nothing is specified as to how does the new
partner acquire his share from the old partners; it may be assumed that he gets it from them in
their profit sharing ratio. In any case, on admission of a new partner, the profit sharing ratio
among the old partners will change keeping in view their respective contribution to the profit
sharing ratio of the incoming partner. Hence, there is a need to ascertain the new profit sharing
ratio among all the partners. This depends upon how does the new partner acquires his share
from the old partners for which there are many possibilities. Let us understand it with the help of
the following examples:
The profit ratio will likewise be affected upon the admission of a partner.
Example No. 1: Perry and Penny are partners sharing profits in the ratio of 3:2. On April 1,
20XX, they admitted Pedro as a new partner with 1/6 share in profits of the firm. With this
change, there are three partners of the firm. Hence, there must be a change in the profit sharing
ratio among the existing partners to include the new partner. Sometimes the partners of a firm
may decide to change their existing profit sharing ratio. This may happen an account of a
change in the existing partners’ role in the firm.
Example No. 2: Amy, Annie and Angie are partners in a firm sharing profits in the ratio of 3:2:1.
They decided to share profits equally as Apolla brings in additional capital. This results in a
change in the existing agreement leading to the admission of Apolla into the firm.
Example No.3: Annie and Vic are partners sharing profits in the ratio of 3:2. They admitted Mel
as a new partner for 1/5 share in the future profits of the partnership firm. Calculate new profit
sharing ratio of Annie, Vic and Mel
Solution:
Mel’s share = 1/5
Remaining share = 4/5
Annie’s new share = 3/5 of 4/5 = 12/25
Vic’s new share = 2/5 of 4/5 = 8/25
New profit sharing ratio of Annie, Vic and Mel will be 12:8:5.
Note: It has been assumed that the new partner acquired his share from old partners in old
ratio.
Example No. 2: Amie and Maria are partners sharing profits in the ratio of 3:2. They admit Delia
as a new partner for 1/5th share in the future profits of the firm which he gets equally from Amie
and Maria.
Calculate new profit and loss ratio of Amie, Maria and Delia.
Solution:
Delia’s share = 1/5 or 2/10
Amie’s share = 3/5-1/10 = 5/10
Maria’s share = 2/5-1/10= 3/10
New profit sharing ratio between, Amie, Maria and Delia will be 5:3:2.
Admission of a New Partner by Purchase

Since a partnership is based on contract, any changes in the composition of the partners will
dissolve the partnership.
Dissolution may take place without disrupting the regular operation of the business. It will
only involve a change in the partnership contract to cover the changes in the association of
the partners.
CAUSES OF DISSOLUTION:
A. Admission of a new partner
B. Retirement of a partner
C. Withdrawal of a partner
D. Incapacity of a partner
E. Death of a partner
A. Admission By Purchase of Interest
This is a private transaction between the selling partner and the buying partner.
A.
The cash payment given directly to the selling partner. The partnership will simply record the change in
ownership. Also, take note that the
assets and equity before and after admission is the same.
Entry on the books of the partnership:

Selling Partner's Capital.............................................xx
Buying partner's Capital ................................................xx
To record the admission of new partner.
Capital of the new partner to be recorded is equal to the capital of the selling partner
multiplies by the interest acquired by buying partner.
ILLUSTRATIONS:
Case 1. The new partner purchases from one of the partners at book value.
Gan and Ban are partners with capital balances of P200,000 and P100,000, respectively.
They share profits and losses equally. San will be admitted as a new partner by purchasing
1/5 interest from Gan paying P40,000.
Entry on the books of the partnership
Gan, Capital............................................ P40,000
San, Capital ..........................................................P40,000
To record the admission of the new partner.
P200,000 X 1/5 = P40,000
The partnership will only record the transfer of the 1/5 interest from Gan to San. The
payment of P40,000 cash by San to Gan is not recorded in the company books
because it is a personal transaction. The amount paid is equal to the book value of the
acquired interest.
After the admission of San, the total capital of the partnership will still be at P300,000 as
shown below:
Gan, Capital (P200,000-P40,000). . . . . . . . . . . . . . P160,000
Ban, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
San, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Total Capital. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . P300,000
Case 2. The new partner purchases from the partnership more than the book value.
1/5 interest from the partnership by paying P100,000.

Gan, Capital............................................ P40,000
Ban, Capital............................................ 20,000
San, Capital………………………………………….P60,000
P200,000 X 1/5 = P40,000
P100,000 X 1/5 = P20,000
The partnership will only record the transfer of the 1/5 interest from Gan and Ban to San. The
payment of P100,000 cash by San to Gan and Ban is not recorded in the company books
because it is a personal transaction. The amount paid is more than the book value of the
acquired interest, therefore San incurred a personal loss of P40,000 but it is recorded in the
partnership books.
shown below:
Gan, Capital (P200,000-P40,000). . . . . . . . . . . . . . P160,000
Ban, Capital. (100,000 -20,000) . . . . . . . . . . . . . . . 80,000
San, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Total Capital. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . P300,000
Case 3. The new partner purchases from the partnership less than the book value.
1/5 interest from the partnership by paying P50,000.
Gan, Capital............................................ P40,000

Ban, Capital............................................ 20,000
San, Capital………………………………………….P60,000
P200,000 X 1/5 = P40,000
P100,000 X 1/5 = P20,000
The partnership will only record the transfer of the 1/5 interest from Gan and Ban to San.
The payment of P50,000 cash by San to Gan and Ban is not recorded in the company
books because it is a personal transaction. The amount paid is less than the book value of
the acquired interest, therefore San incurred a personal gain of P10,000 but it is recorded in
the partnership books.
shown below:
Gan, Capital (P200,000-P40,000). . . . . . . . . . . . . . P160,000
Ban, Capital. (100,000 -20,000) . . . . . . . . . . . . . . . 80,000
San, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Total Capital. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . P300,000
Case 4. Admission of a Partner by Purchase with Positive Asset Revaluation
Positive revaluation of assets of the old partnership is being done before admission of new
partner. The result of the revaluation of assets is carried to the capital accounts of the old
partners. The adjusted capital of the old partners becomes the basis for the interest
transferred to the new partner.
Illustration:
Partners Capital Balances Before Profit and Loss Ratio
Admission
Antonio 150,000 40%
Pascua 100,000 30%
Mendiola 50,000 30%
Total 300,000 100%
Santos, the new partner, is to purchase ¼ interest from the partners paying P80,000.
Prior to the admission of Santos, the assets of the partnership will be revalued. The
amount to be paid by Santos, P80,000 will be applied as the basis for the revaluation. DR
CR
Other Assets 20,000
Antonio, Capital (20,000 x 40%) 8,000 Pascua, Capital (20,000 x 30%) 6,000
Mendiola, Capital (20,000 x 30%) 6,000
Computation:
New Partnership Capital 320,000
Old Partnership Capital 300,000
Positive Asset Revaluation 20,000
Antonio, Pascua, Mendiola, Total

Capital Capital Capital
Capital balances before 150,000 100,000 50,000 300,000

revaluation
Share in asset revaluation 8,000 6,000 6,000 20,000
Capital balances after 158,000 106,000 56,000 320,000

revaluation
Interest purchased 1/4 1/4 1/4 1/4
Capital transferred to Santos 39,500 26,500 14,000 80,000


revaluation

admission of Santos
DR CR
Antonio, Capital 39,500
Pascua, Capital 26,500
Mendiola, Capital 14,000

Santos, Capital 80,000
Case 5. Admission of a Partner by Purchase with Negative Asset Revaluation

Negative Revaluation of assets of the old partnership is being done before admission of
new partner. The result of the revaluation of assets is carried to the capital accounts of the
old partners. The adjusted capital of the old partners becomes the basis for the interest
transferred to the new partner.
Illustration:
Partners Capital Balances Before Profit and Loss Ratio
Admission
Antonio 150,000 40%
Pascua 100,000 30%
Mendiola 50,000 30%
Total 300,000 100%
Santos, the new partner, is to purchase ¼ interest from the partners paying P50,000. Prior
to the admission of Santos, the assets of the partnership will be revalued. The amount to be
paid by Santos, P50,000 will be applied as the basis for the revaluation.
The entry to record the negative revaluation

DR CR
Antonio, Capital (100,000 x 40%) 40,000
Pascua, Capital (100,000 x 30%) 30,000
Mendiola, Capital (100,000 x 30%) 30,000
Other Assets 100,000

Computation:
New Partnership Capital 200,000
Old Partnership Capital 300,000
Negative Asset Revaluation (100,000)

Capital balances before 150,000 100,000 50,000 300,000

revaluation
Share in asset revaluation 40,000 30,000 30,000 100,000

revaluation
Interest purchased ¼ ¼ ¼ 1/4


revaluation
Capital balances after admission 52,500 15,000 150,000

IM On ACCO 20033 Financial Accounting and Reporting Part 1 Revised Cover Page

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

IM On ACCO 20033 Financial Accounting and Reporting Part 1 Revised Cover Page

Uploaded by

Copyright:

Available Formats

Financial Accounting and Reporting Part 1 1

2 Financial Accounting and Reporting Part 1

Financial Accounting and Reporting Part

GENERAL INFORMATION ABOUT THE COURSE

a. Have detailed knowledge and understanding of the

Faculty Email Contact Details M. Doquenia - mmdoquenia@pup.edu.ph Prof.

Content Page Number

Cover Page 1 Title Page 2 General Information About the

Nature and Formation of A Partnership 38 Module 3 -

Module 4 - Partnership Dissolution 75

Module 5 - Dissolution of Partnership By

REVIEW OF THE ACCOUNTING PROCESS

At the end of this module, the students should be able to:

Accounting is a service activity. Its function is to provide quantitative information,

b. Creditors/Suppliers/Lenders need accounting information to help in their decision

Financial Accounting is designed in providing accounting information for all parties

Management or Managerial Accounting is designed in providing accounting information

Accounting is commonly misinterpreted and understood as just the recording of business

Accounting Education is an area of accounting that covers the upgrading, researching

FORMS OF BUSINESS ORGANIZATION

The most common forms of business organization are the following:

A partnership is formed by two or more individuals who agreed to carry on a trade or

A Corporation is a more complex form of business organization as differentiated from a

TYPES OF BUSINESS ACTIVITIES

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Generally accepted accounting principles are a common set of accounting principles,

Generally accepted accounting principles encompass the conventions, rules, and

A few examples of these generally accepted accounting principles are:

1. Business Entity Concept

2. Going Concern or Continuity Assumption

ACCRUAL BASIS AND CASH BASIS OF ACCOUNTING

THE ACCOUNTING CYCLE

The steps in the accounting cycle include the following:

10. Preparation of the post-closing trial balance

To summarize the rules of debit and credit:

Increases in assets • • Decreases in assets

Transposition is the erroneous rearrangement of writing an amount like P 1,250 written

There are two methods of accounting for prepaid expenses:

The pro-forma adjustment is:

Expense Account xxx Compute used or expense

b. Expense method – if at the date of payment, the business debited an expense

The pro-forma adjustment is:

To illustrate, assume that Lakers Company is using a monthly accounting period. On

Asset Method Expense Method 2017

2. Unearned Revenues – These are revenues collected or received by the business in

There are two methods of accounting for unearned revenues:

Liability method – if at the date of collection, the business credited a liability a.

The pro-forma adjustment is:

Liability Account xxx Compute earned or income Revenue Account xxx

b. Revenue method – if at the date of collection, the business credited a revenue

The pro-forma adjustment is:

Revenue Account xxx Compute unearned or liability Liability Account xxx

To illustrate, assume that Miami Company is using a monthly accounting period. On

Liability Method Revenue Method 2017

The pro-forma adjustment is:

Expense account xxx

Mar. 31 Wages Expense 6,000

The pro-forma adjustment is:

5. Depreciation of Property, Plant and Equipment

The pro-forma adjustment for depreciation is:

Depreciation Expense – Name of asset xxx

The adjusting entry on December 31, 2017:

Other computation for straight-line method is:

NAME ______________________ SECTION _ GENERAL JOURNAL Page 1

NAME _________________________ SECTION _ DATE

NAME _______________________________ SECTION