Week 4: Sto. Tomas College of Agriculture, Sciences and Technology

Republic of the Philippines
Commission on Higher Education

Region XI
Sto. Tomas College of Agriculture, Sciences and Technology
Feeder Road 4, Tibal-og, Santo Tomas, 8112, Davao del Norte, Philippines
WEEK 4
Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

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BACHELOR OF SCIENCE IN AGRI-BUSINESS Instructor
Region XI
Partnership Operations
Introduction
The manner a sole proprietorship operates is basically similar with that of a partnership,
that is, when we speak of accounting principles involved and assumption as well.
Transactions peculiar for a sole proprietorship business engaged in merchandising,
manufacturing, and service concern are the same nature of transactions encountered in
partnership business. The steps of the accounting process are also followed from
Journalizing up to preparation of Reversing Entries.
Because they differ in ownership structure, as a result, they also differ in the areas of
formation, division of profits and losses, dissolution and liquidation which will be the
center of our discussion. In addition, we are going to study, firstly, some accounts
peculiar to a partnership which we have not yet encountered in the study of sole
proprietorship and if have been encountered, the uses differ. These are as follows:
Capital accounts, Drawing accounts, Partner's Loan accounts and Partner's Receivable
accounts.
CAPITAL ACCOUNTS
In a sole proprietorship, there is only one capital account being provided because there
is only one owner of the business. In the case of a partnership, the capital accounts to
be provided depend upon the number of partners. So as, if there are three partners,
there will also be three capital accounts to be provided. If there are two partners, there

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Region XI
will also be two capital accounts. In other words, each partner is to be provided with a
capital account.
The use of a partner's capital account is outlined by way of a T-account as presented
below:
DRAWING ACCOUNTS
Each partner is also provided with a Drawing account. The use of a partner’s Drawing
account is outlined by way of a T-account as presented below:

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Region XI
Personal withdrawals by a partner in anticipation of profits are not viewed as permanent
in character and are therefore recorded in the drawing account and not in the capital
account. The Securities and Exchange Commission rules that a partner can make
withdrawals only up to the extent of his share in profits realized from business
operations. When his withdrawal, however, exceeds what has been agreed, the excess
is chargeable to capital account.
A partner s share in profit or loss is shown in the drawing account only. Therefore, the
drawing account is held open. The purpose is to keep intact the capital account for
original and additional investments and permanent withdrawals and excess amount
allowable for withdrawal only. Although the drawing account is held open in the book,
capital and drawing balances are combined in reporting each partner s total interests on
the statement of Financial Position. The details showing the increases and decreases in
partner’s equities are reported in a separate statement called "Statement of Changes in
Partners' Equity".
If however, the partners will agree that the balance of their drawing accounts will be
closed to capital accounts forming part of the original capital, they may do so provided
the partnership contract has to be amended to reflect the increase or decrease in the
partners’ capital contribution which is already a waste of time and effort.

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Region XI
PARTNER'S LOAN ACCOUNTS
In an instance wherein partnership is badly in need of additional funds and instead of
borrowing money from outside creditor of from a bank, the partnership borrows money
from the partners. A debtor-creditor relationship exists. The partnership becomes the
debtor and the partners, the creditors.
The amount of loan extended by the partners is recorded in the partnership book as
“Partner's Loan Payable" which is a liability account and therefore presented in the
Balance Sheet. It is being separated from "Partner's Capital" because payment of loan
has a priority over payment of capital in case of settlement during the liquidation
process.
The use of a Partner's Loan account is outlined by way of a T-account as presented
below:

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Region XI
To illustrate:
Assume that Mr. Blue and Mr. Green are partners of BG Partnership. Both partners
extended loans to the partnership in the amount of P10,000 and P20,000 respectively.
Journal Entry in the Partnership Book to record loans granted by the partners:
Cash P30,000
Blue, Loan Payable P10,000
Green, Loan Payable 20,000
To record loans granted by partners.
Journal Entry to record repayment of loans by the partnership:
Blue, Loan Payable P10,000

Green, Loan Payable 20,000
Cash P30,000
To record payments of loans to partners.
PARTNER'S RECEIVABLE ACCOUNTS
In certain instances, instead of the partnership borrowing money from the partners, the
partners borrow from the partnership instead. Said borrowing is not recorded as a
withdrawal from capital on rather offset from the would-be share of profit but as a
separate account, "Receivable from Partner" To avoid confusion, partners advances
should be identified from that of "customers advances" This is because allowing a
partner to make a big amount of advances would be unfair to other partners. Therefore,
if separately shown, can easily be seen or noticed when financial statement is analyzed.

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Region XI
The use of Partner's Receivable account is outlined by way of T-account as presented
below:
CLOSING ENTRIES
At the end of an accounting period of usually one year, closing entries are prepared. All
nominal accounts are closed to a temporary account "Income and Expense Summary"
and later, Income and Expense Summary is finally closed to the partners drawing
account. Again, this is the point that you should take note, that while under sole
proprietorship, Drawing is finally closed to Capital account, under partnership, the
drawing account is not closed but instead "left open" for reason already explained.
To close, nominal accounts with credit balances are debited and the credit in Income &
Expense Summary. On the other hand, nominal accounts with debit balances are
credited and the debit is Income & Expense Summary account.

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Region XI
To illustrate:
Let us assume that the following balances were taken from the partnership of Susan
Ramirez and Cynthia Tac-an of Ozamiz Enterprises on 30 June 20B, the end of its fiscal
year.
Merchandise Inventory on 30 June 2OB was P20,000. The partners shared profits and
losses equally.

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Region XI
The Closing Entries on 30 June 20B to be recorded in the General Journal are as
follows:
Step 1 - Close the sales and related accounts to Income & Expenses Summary.
Step 2 - Close the Merchandise Inventory Beginning, Purchases and the related
accounts.
Step 3 - Set-up the merchandise inventory at the end.

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Region XI
Step 4 - Close all expense accounts.
At this point, all nominal accounts are closed and the temporary account income &
Expense Summary will have the following postings:
The debit totals of Income & Expense Summary account is P797,000 while credit totals
is P815,000. Inasmuch as the debit side represents costs and expenses while credit
side represents Sales and Inventory End, we are only matching Income against Cost
and Expenses. Thus, the P18,000 amount of difference between the two sides
represents Profit during the period.

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Region XI
Step 5 - Close the Income & Expense Summary account to partners drawing accounts.
After posting the closing entry in step 5, the Income & Expense Summary account
closed as shown below:

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Region XI
The Capital and Drawing accounts will have the following balances after posting the
closing entries:
As a beginner, you might find it difficult to understand the balances of the partners’
drawing account which are no longer in its normal balances of a debit but credit instead
and these credit balances are “left open”. This can be interpreted and meant that their
respective share of the partnership profit is bigger than their withdrawal.
When a Statement of Financial Position is being prepared, the Drawing account will no
longer be shown. The capital accounts are shown instead with both amounts of Capital
and Drawing accounts are combined as follows:
S. Ramirez, Capital = P64,000 (60,000 plus P4,000)
C. Tac-an, Capital = P72,000 (P70,000 plus P2,000)

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Republic of the Philippines

Commission on Higher Education

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Transactions peculiar for a sole proprietorship business engaged in merchandising,

Journalizing up to preparation of Reversing Entries.

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

The use of a partner's capital account is outlined by way of a T-account as presented

account is outlined by way of a T-account as presented below:

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Personal withdrawals by a partner in anticipation of profits are not viewed as permanent

is chargeable to capital account.

partner’s equities are reported in a separate statement called "Statement of Changes in

partners’ capital contribution which is already a waste of time and effort.

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

PARTNER'S LOAN ACCOUNTS

In an instance wherein partnership is badly in need of additional funds and instead of

debtor and the partners, the creditors.

The use of a Partner's Loan account is outlined by way of a T-account as presented

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Journal Entry to record repayment of loans by the partnership:

Blue, Loan Payable P10,000

PARTNER'S RECEIVABLE ACCOUNTS

separate account, "Receivable from Partner" To avoid confusion, partners advances

should be identified from that of "customers advances" This is because allowing a

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

The use of Partner's Receivable account is outlined by way of T-account as presented

proprietorship, Drawing is finally closed to Capital account, under partnership, the

credited and the debit is Income & Expense Summary account.

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Step 3 - Set-up the merchandise inventory at the end.

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Step 4 - Close all expense accounts.

Expense Summary will have the following postings:

represents Profit during the period.

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

closed as shown below:

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

respective share of the partnership profit is bigger than their withdrawal.

and Drawing accounts are combined as follows:

S. Ramirez, Capital = P64,000 (60,000 plus P4,000)

C. Tac-an, Capital = P72,000 (P70,000 plus P2,000)

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

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