PARTNERSHIP FORMATION

In order to form the partnership firm, the following are the essentials features of
Partnership Agreement

Though, partnership can be created orally. But, in order to protect the

interest of each partner, it is always good to have the agreement in writing.

Agreement among partners is called Partnership Deed.

The deed must mention the way of distributing profits and losses among
partners. They can decide to share equally or in other agreed ratio.

Interest on profits may be shared among existing partners according to the

ratio of capital invested by each of them. Such amount is called Interest on
Capital. Usually, this interest rate is decided and mutually agreed among
partners is written in the deed document.

Whenever a partner draws funds from the partnership, it is referred to as

drawing. Partners may decide to charge interest on drawing amount. Such
interest is mentioned in the partnership deed on per annum basis. It is a
penalty amount which reduces the profit share of the individuals in the firm.

If some of the partners take lead role or active role in managing the
business, then he or she may be allowed to take reward which is called
Partnership Salary.

PROBLEM

Akira, Baren and Choi decided to form the partnership firm. They contributed as
follows:

Akira – computers ₱500,000 and cash ₱300,000

Baren – cash ₱700,000 and stock 100,000

Choi – plant 280,000 and cash ₱520,000

Required:

Calculate the initial capital of each partner,

Pass journal entries for the above transaction in the books of partnership firm,

Prepare the statement of financial position/ balance sheet on the formation of the
partnership.

SOLUTION

Initial Capital Calculation

Akira – Cash 300,000 + computers 500,000 = ₱800,000

Baren – Cash 700,000 + stock 100,000 = ₱800,000

Choi – Cash 520,000 + plant 280,000 = ₱800,000

Journal Entries

Description Debit Credit

Cash 300,000   

Computers 500,000   

      Akira’s capital   800,000 

     

Cash  700,000  

Stock 100,000   

     Baren’s capital   800,000 

     

Cash  520,000  
Plant   280,000   

      Choi’s capital    800,000