PART 2 - Accounting for Partnership
Overview
HOW PARTNERSHIP OPERATES?
Basically, the manner a partnership business operates is the same with that of a sole proprietorship;
be it on rendering of service, sale of merchandise and manufacturing of a product.
The Basic Accounting Equation
ASSETS = LIABILITIES + CAPITAL
SOLE PROPRIETORSHIP AND PARTNERSHIP DIFFER IN THE FOLLOWING:
1. Capital Structure
2. Plurality of Capital and
Drawing Accounts
3. Division of profits
4. Profit is closed to
“Drawing Account”
5. Admission
6. Closure of the
Partnership’s
Operation
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Sole Proprietorship Partnership
 Capital is owned and  Capital is owned and
provided by one person provided by at least two or
called proprietor and the more persons called
ownership in capital is partners and their
known as owner’s equity. ownership in capital is
known as partners’equity.
 One Capital and one  There are as many capitals
drawing account and drawing accounts
depending upon the
number of partners.
 As there is only one  Profits and loss will be
owner, once it makes shared by the partners
profit let’s say P60,000.00 based on their P/L ratio
the owner wholly receives agreement.
it. But for the losses he
solely shouldered it by
himself.
 Profit and loss is closed to  Profit and loss is closed to
capital account drawing account.
 When a new partner is
admitted in an existing
partnership, the contract
that was executed by the
old partners will be
dissolved in favor of a new
contract.
 A partnership will stop to
operate and liquidated
when partners ceased to
be partners. Follows next is
the sale of non-cash assets
for cash which is termed as
realization.
CHAPTER 2 - PARTNERSHIP (DEFINITION, NATURE AND FORMATION)

CHAPTER OUTLINE

1. Definition, Nature and Formation of a Partnership

2. Characteristics of Partnership
3. Advantages of a Partnership over Sole Proproietorship
4. Kinds of Partnership
5. Classification of Partners
6. Partnership contract
7. Articles of Co-Partnership
8. Articles of Co-Partnership
9. Opening of Partnership Books
a. Starting a Business
b. Sole Proprietorship Business Converted into Partnership
10. Illustration on How Two Sole Proprietors Form a Partnership and Books adjusted Prior to
Formation
11. Closing of the Sole Proprietor’s Book
12. Questions for Review, Quizzers, Exercises/Problems

DEFINITION, NATURE AND FORMATION OF A PARTNERSHIP

PARTNERSHIP

Article 1767 of the New Civil Code of the Philippines defines Partnership as “a contract
whereby two or more persons bind themselves to contribute money, property or industry to a
common fund, with the intention of dividing the profits among themselves”.

CHARACTERISTICS OF PARTNERSHIP

1. Mutual Agency – every partner has the authority to act for the partnership and become
binding if such act is within his express or implied authority.
2. Limited Life – partnership exists on contract drawn by the partners and can be terminated
anytime the partners so desire causing the partnership to be dissolved.
3. Unlimited Liability – creditors can run after the personal assets of the partners (except
limited partners) after all partnership assets have been exhausted in payment of its
obligation.
4. Co-ownership – when a property is invested by a partner in the partnership, such property is
no longer owned by him but by the partnership.
5. Plurality of Capital and Drawing Accounts – this is one unique characteristics of a
partnership wherein each partner is provided with a capital and drawing accounts.
6. Profit and Loss Distribution – as stipulated in their agreement, a partner has to share for
every amount of profit that the business makes or loss that the business incurs.

KINDS OF PARTNERSHIP

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 1. According to its activities
a. Trading Partnership - its main activity is to manufacture or purchase and sale of
goods.
b. Non-Trading Partnership – its main activity is to engage in service activities
professional or non-professional activities.
2. According to the liability of the partners
a. General Partnership – is one where all the partners are general partners, that is all
partners are personally liable for the partnership debts to the extent of their
personal assets in case partnership assets are not sufficient to pay the said
obligation.
b. Limited Partnership – not all partners can be limited partners. There should be at
least be one general partner.

CHARACTERISTICS OF PARTNERS

1. Capitalist Partners – contributes money or property.

2. Industrial Partner – contributes only his personal services
3. Capitalist-Industrial Partner – contributes not only money or property, but personal services
as well.
4. General Partner – is one who is liable for partnership debts up to the extent of his personal
assets.
5. Limited Partner – is one who is liable for partnership debts up to the extent of his interest in
the partnership only.
6. Nominal Partner – a partner who makes no investment, does not participate in running the
business but permits his name to be used either for accommodation or consideration.
7. Secret Partner – a partner who is not known as a partner but actively participate in running
the partnership affair.
8. Silent Partner – a partner who does not take active part in running the partnership affairs
but he is a general partner.
9. Dormant Partner – a partner who has a financial interest in the partnership but does not
take active part in running the Partnership affair and is not known as partner.

OPENING OF PARTNERSHIP BOOKS

The opening entry to be made in the book of the partnership is to record the initial investment of
the partners. The investment may be in form of cash or non-cash assets except for an industrial
partner where his contribution is his personal service which has no assigned value.

When non-cash assets are invested to the partnership, the value assigned to these assets are
recorded at the fair market value as of the date of transfer to the partnership.

Fair Market Value is the price at which an asset or liability could be exchanged in a current
transaction between knowledgeable, unrelated willing parties.

1) STARTING A BUSINESS

To illustrate:

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 On January 2, 20A, Cesario Edulan, Edgar Detoya and Pamela Tao formed a partnership
business with the following contributions:

o C. Edulan (General Partner) contributed cash of P100,000.00 and shares profit of

50%.
o E. Detoya (Limited Partner) contributed a brand new motorcycle costing
P120,000.00 in which his liability of P15,000.00 from Cebu Motorama will be
assumed by the partnership and shares profit of 50%.
o P. Tao’s (Industrial Partner) contribution will be her personal services and shares
10% in profit.

OPENING SIMPLE JOURNAL ENTRY

January 2 DR CR
Cash 100,000.00
C. Edulan, Capital 100,000.00
Initial investment of C. Edulan

Equipment 120,000.00
Accounts Payable 15,000.00
E. Detoyaa, Capital 105,000.00
Initial Investment of E. Detoya
with assumtion of a liability

Ms. Pamela Tao was admitted in the partnership as an industrial partner with a 10% share in profit.

Signed: C. Edulan
E. Detoya
P. Tao

Each partner affixed their signature in the journal.

COMPOUND OPENING JOURNAL ENTRY

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January 2 DR CR
Cash 100,000.00
Equipment 120,000.00
Accounts Payable 15,000.00
C. Edulan, Capital 100,000.00
E. Detoya, Capital 105,000.00
Initial investment of C. Edulan
and E. Detoya with assumption
of liability.

Ms. Pamela Tao was admitted in the partnership as an industrial partner with a 10% share in profit.

Signed: C. Edulan
E. Detoya
P. Tao

Take not of the basic accounting aquation: ASSETS, P220,000.00= LIABILITIES, P15,000.00 +
PARTNERS’ EQUITY, P235,000.00 is maintained.

The general ledger of the partnership will show the following

postings:

Cash
02-Jan 100,000.00  
 

Equipment
02-Jan 120,000.00  
 

Accounts Payable
  15,000.00 02-Jan
 
C. Edulan, Capital (50%)
  100,000.00 02-Jan
 

E. Detoya, Capital (50%)

  105,000.00 02-Jan
 

P. Tao, Capital (10%)-Industrial Partner

Ms. Pamela Tao was
admitted in the partnership
as an industrial partner
with a 10% share in profit.

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2) SOLE PROPRIETORSHIP BUSINESS CONVERTED INTO PARTNERSHIP

When either one of the partners or all of the prospective partners are sole proprietors who
have agreed to form a partnership, their respective sole proprietorship books are closed
and a new set of books will be opened by the partnership.

Before closing the sole proprietor’s books of accounts, adjustments are needed in order to
fairly and reasonably establish the equities of the sole proprietors on the net assets (Assets
less Liabilities) transferred because their adjusted balances will be carried in the book of the
partnerships which greatly affect on their agreement to divide profits or losses.

Adjustments will include the following:

a. Non-cash assets are revalued to conform with their fair market values
b. Recognition of liability and other adjustments which may be deemed necessary

Guide 1 – If the assets has a “contra-asset” or “asset offset” account, the adjustments is made
through this contra account.

Illustration 1

Accounts Receivable P80,000.00

Estimated Uncollectible Accounts 3,000.00
Estimated Realizable Value P77,000.00

As agreed, the provision for uncollectible accounts should be increased to 10% of the outstanding
receivable.

Explanation:

The Estimated Uncollectible Accounts is the contra-asset account of Accounts Receivable. The
adjustment should be made on this account. The amount of adjustment is P5,000.00 as computed
below:

Accounts Receivable P80,000.00

X10%
The required balance 8,000.00
The recorded balance 3,000.00
Needed amount of adjustment to increase the provision 5,000.00

Analysis:

The Estimated Uncollectible Accounts should be increased by P5,000.00 to meet the required
balance of P8,000.00 (P3,000.00+P5,000.00). To increase its balance is to credit the said account.
The debit therefore is the “Owner’s Equity account”.

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 Adjusting Journal Entry

Proprietor, Capital 5,000.00

Estimated Uncollectible Accounts 5,000.00

Illustration 2

Equipment P120,000.00
Less: Acc. Depreciation-Equipment 70,000.00
Net Book Value P50,000.00

As agreed, the equipment has a fair market value of P80,000.00

Explanation:

Accumulated Depreciation-Equipment is the “contra asset” accounts of Equipment. The adjustment

should be made on this account as shown below:

Per Book Per Appraisal

Equipment P120,000.00
Accum. Depreciation 70,000.00
Net Book Value P50,000.00 -80,000.00 = P30,000.00 -Excess
of fair market value
over net book value
Analysis:

To adjust the net book value of the equipment from P50,000.00 to its fair market value of
P80,000.00 was done through the Acc. Depreciation account and not directly through the asset
account, Equipment. The Accumulated Depreciation balance should be decreased by P30,000.00 so
that the net book value can be increased by P30,000.00 also. Thus,

Adjusting Journal Entry

Acc. Depreciation-Equipment 30,000.00

Proprietor, Capital 30,000.00

The debit and credit entries of Proprietor’s Capital Account to effect adjustments are summarized
below:

Proprietor's Capital
1. decrease in asset 1. increase in asset
2. increase in contra-asset 2. decrease in contra-asset
3.increase in liability 3. decrease in liability
 
Guide 2 – If the assets do not have the contra-asset or asset-offset account, the adjustments is made
to the asset account itself like for example, land and merchandise.

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Illustration 3
Fair Market Value P1,500,000.00
Land (per record) 1,000,000.00
Needed amount of adjustment to increase the
value of land P500,000.00

Adjusting Journal Entry

Land 500,000.00
Proprietor, Capital 500,000.00

Illustration 4

Fair Market Value of Merchandise P 360,000.00

Merchandise (per record) 310,000.00
Needed amount of adjustment to increase the
value of merchandise P 50,000.00

Adjusting Journal Entry

Merchandise 50,000.00
Proprietor, Capital 50,000.00

Illustration 5 – Adjustment on Recognition of Liability

Assume: An accrued interest on Notes Payable was not yet recorded, P500.00

Adjusting Journal Entry

Proprietor, Capital 500.00

accrued interest expense 500.00

Explanation:

The adjusting entry should have been a debit to interest expense. If interest expenses account was
debited, being a nominal account, will be closed to capital account. To directly effect the decrease,
the Proprietor’s Capital account was debited instead. The credit to Accrued interest expense is to
set-up the liability account.

ILLUSTRATION:

Let us assume that Marivic Peñaflor, proprietress of Dadiangas Merchandising and Jufel Tamala,
proprietor of Dadiangas Grocery have agreed to form a partnership business. The firm has been
registered with the Department of Trade and Industry under business name “Gensan Commercial”.

Prior to its formation on August 1, 20A, the Statements of Financial Position of the Sole Proprietors
before any adjustments were taken up and are presented on the next page:

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 Dadiangas Merchandising
Statement of Financial Position
As of July 31, 20A

ASSETS
Current Assets:
Cash in Bank 260,000.00
Accounts Receivable 90,000.00
Estimated Uncollectible Accounts 5,000.00 85,000.00
Merchandise Inventory 150,000.00
Non-Current Assets:
Equipment 70,000.00
Acc. Depreciation 20,000.00 50,000.00
Total Assets 545,000.00
LIABILITIES
Accounts Payable 50,000.00

OWNER'S EQUITY
M. Penaflor, Capital 495,000.00
Total Liabilities and Owner's Equity 545,000.00

Dadiangas Grocery
Statement of Financial Position
As of July 31, 20A

ASSETS
Current Assets:
Cash in Bank 280,000.00
Accounts Receivable 50,000.00
Estimated Uncollectible Accounts 2,000.00 48,000.00
Merchandise Inventory 190,000.00
Non-Current Assets:
Equipment 40,000.00
Acc. Depreciation 30,000.00 10,000.00
Total Assets 528,000.00
LIABILITIES
Accounts Payable 70,000.00

OWNER'S EQUITY
J. Tamala, Capital 458,000.00
Total Liabilities and Owner's Equity 528,000.00

The prospective partners have agreed further that the following adjustments should be made on
their respective sole proprietorship books:

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 1) Their respective provision for Uncollectible Accounts should be adjusted to equal to 10% of
the outstanding receivable.
2) The merchandise of M. Penaflor shall be revalued at P160,000.00 while that of J. Tamala at
P185,000.00 due to damages and obsolescence.
3) The Equipment of M. Penaflor is under depreciated by P8,000.00 while the Furniture and
Fixtures of J. Tamala should be revalued P 22,000.00
4) Unpaid utilities Expense:
a. M. Penaflor P3,000.00
b. J. Tamala 20,000.00

The sole proprietorship books of M. Penaflor and J. Tamala are adjusted to conform with the
prospective partners’agreement as shown below:
BOOK of M. Penaflor BOOK of M. Penaflor

Adjusting Entries Adjusting Entries

1 M. Penaflor, Capital 4,000.00 1 J. Tamala, Capital 3,000.00

Est. Uncollectible Accounts 4,000.00 Est. Uncollectible Accounts 3,000.00

2 Merchandise 10,000.00 2 J. Tamala, Capital 5,000.00

M. Penaflor, Capital 10,000.00 Merchandise 5,000.00

3 M. Penaflor, Capital 8,000.00 3 Acc. Depreciation 12,000.00

Acc. Depreciation 8,000.00 J. Tamala, Capital 12,000.00

4 M. Penaflor, Capital 3,000.00 4 J. Tamala, Capital 2,000.00

Accrued Expense 3,000.00 Accrued Expense 2,000.00

The above adjusting entries are posted to their respective General Ledger. Only the accounts
involved in the adjusting entries are shown with postings:

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General Ledger of M. Penaflor General Ledger of J. Tamala

Est. Uncollectible Accounts Est. Uncollectible Accounts

5,000.00 Beg. Bal. 2,000.00 Beg. Bal.
4,000.00 AJE 1 3,000.00 AJE 1
9,000.00 5,000.00

Merchandise Inventory Merchandise Inventory

Beg. Bal. 150,000.00 Beg. Bal. 190,000.00 5,000.00 AJE 2
AJE 2 10,000.00
160,000.00 185,000.00

Acc. Depreciation-Equipment Acc. Depreciation-Furnitures & Fixtures

20,000.00 Beg. Bal. AJE 3 12,000.00 30,000.00 Beg. Bal.
8,000.00 AJE 3
28,000.00 18,000.00

Accrued Expense Accrued Expense

3,000.00 AJE 4 2,000.00 AJE 4

M.Penaflor, Capital M.Penaflor, Capital

AJE 1 4,000.00 495,000.00 Beg. Bal. AJE 1 3,000.00 458,000.00 Beg. Bal.
AJE 3 8,000.00 10,000.00 AJE 2 AJE 2 5,000.00 12,000.00 AJE 3
AJE 4 3,000.00 AJE 4 2,000.00
15,000.00 505,000.00 10,000.00 470,000.00
490,000.00 Balance 460,000.00 Balance

After the adjustments, the capital balance of M. Penaflor has been decreased from P495,000.00 to
P490,000.00 while the capital of J. Tamala has been increased from P458,000.00 to P460,000.00.

The Statement of Financial Position as of the date of partnership formation on August 1, 20A is
shown on the next page under the new partnership name Gensan Commercial.

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 Gensan Commercial
Statement of Financial Position
As of August 1, 20A

ASSETS
Current Assets:
Cash in Bank 540,000.00
Accounts Receivable 140,000.00
Estimated Uncollectible Accounts 14,000.00 126,000.00
Merchandise Inventory 345,000.00
Non-Current Assets:
Equipment 42,000.00
Furnitures and Fixtures 22,000.00
Total Assets 1,075,000.00
LIABILITIES
Accounts Payable 120,000.00
Accrued Expense 5,000.00
Total Liabilities 125,000.00

PARTNERS` EQUITY
M. Penaflor, Capital 490,000.00
J. Tamala, Capital 460,000.00
Total Capital 950,000.00

Total Liabilities and Partners' Equity 1,075,000.00

Take note that the Owner’s Equity section in both sole proprietress/proprietor’s Statement of
Financial Position was changed to partners’equity as of August 1, after forming the partnership.

The above adjusted accounts of both prospective partners are the basis for recording their
respective investments in the partnership.

OPENING ENTRY IN THE PARTNERSHIP BOOK

The opening journal entries in the book of GENSAN COMMERCIAL to record the investments of M.
Penaflor and J. Tamala are as follows:

Áugust 1
Cash in Bank 260,000.00
Accounts Receivable 90,000.00
Merchandise Inventory 160,000.00
Equipment 42,000.00
Est. Uncollectible Accounts 9,000.00
Accounts Payable 50,000.00
Accrued Expenses 3,000.00
M. Penaflor, Capital 490,000.00
To record initial investments of M. Penaflor
in the Gensan Commercial Partnership.

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Áugust 1 Cash in Bank 280,000.00
Accounts Receivable 50,000.00
Merchandise Inventory 185,000.00
Furnitures and Fixtures 22,000.00
Est. Uncollectible Accounts 5,000.00
Accounts Payable 70,000.00
Accrued Expenses 2,000.00
J. Tamala, Capital 460,000.00
To record initial investments of J. Tamala
in the Gensan Commercial Partnership.

Take note that the Equipment in the Book of M. Penaflor and Furnitures and Fixtures in the book of
J. Tamala were recorded in the book of partnership at Net Book Value or carrying value of
P42,000.00 (P70,000.00-P28,000.00) and P22,000.00 (P40,000.00-P18,000.00) respectively based on
fair market values. In contrast with Accounts Receivable, it is shown at a gross amount together with
corresponding Est. Uncollectible Accounts because these were only mere provision and there is still
hope of collection.

CLOSING THE SOLE PROPRIETORS’ BOOK

CLOSING ENTRY IN THE BOOK OF DADIANGAS MERCHANDISING

31-Jul
Est. Uncollectible Accounts 9,000.00
Accumulated Depreciation 28,000.00
Accounts Payable 50,000.00
Accrued Expenses 3,000.00
M. Penaflor, Capital 490,000.00
Cash in Bank 260,000.00
Accounts Receivable 90,000.00
Merchandise Inventory 160,000.00
Equipment 70,000.00
To close the book Dadiangas Merchandising
for transfer to Gensan Commercial Book.

CLOSING ENTRY IN THE BOOK OF DADIANGAS GROCERY

31-Jul
Est. Uncollectible Accounts 5,000.00
Accumulated Depreciation 18,000.00
Accounts Payable 70,000.00
Accrued Expenses 2,000.00
M. Penaflor, Capital 460,000.00
Cash in Bank 280,000.00
Accounts Receivable 50,000.00
Merchandise Inventory 185,000.00
Furnitures and Fixtures 40,000.00
To close the book Dadiangas Grocery
for transfer to Gensan Commercial Book.

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After posting the above entries in their respective General Ledgers, all account balances will be
closed. Your guide in closing the book of the sole proprietorship book is: “to close is to debit all
accounts with credit balances and credit all accounts with debit balances”.

PROBLEMS

Problem 1

On July 1, 20A, Celso Sanada Sr. and Louie Estrebilla have agreed to form a partnership business
engaged in buying and selling of “tuna”fish within the vicinity of Genaral Santos City. Their
contributions among others included the following:

Sanada Estrebilla
Cash P250,000.00 P380,000.00
Frozen Tuna 180,000.00
Delivery Van 950,000.00

As agreed, Sanada’s “frozen tuna”was revalued at P160,000.00 while Estrebilla’s mortgage loan
balance of P250,000.00 for his delivery van was treated as his personal obligation from Mitsubishi
Gensan Branch.

Required:

1. Prepare two single journal entries recording their respective contributions.

2. Prepare a Statement of financial Position as of the date their partnership was formed.

Problem 2

Jocelyn Joson and Jocelyn Te are partners of JJ Pawnshop. After a year of successful business
operations, the partners’equity has reached to a total amount of P480,000.00 which is 50% higher
than last year when they have just started it. The percentage of outside creditors’claim in the total
partnership assets is 40%. Considering that both are general partners, answer the following
questions:

1. How much is the total assets of the partnership?

2. How much is total claims from outside creditors?

Multiple Choice Problem

Instruction: Choose the correct answer and show your solutions

Arnold Rada and Dexter Besinan agreed to form a laundry shop business in Davao City. They further
agreed that adjustments be made in the book of Rada after which Besinan will contribute cash equal
to the net assets (Net Assets = Assets - Liabilities) after adjustments. The ledger account balances of
Rada as follows:

Cash in Bank P65,000.00

Accounts Receivable 40,000.00

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 Estimated Uncollectible Accounts (3,000.00)
Laundry Equipment 120,000.00
Accumulated Depreciation (35,000.00)
Accounts Payable 15,000.00

The following adjustments are to be made:

a. Accounts Receivable should have a 70% probability of collection

b. Laundry equipment should have a fair market value of P100,000.00

Q-1 What amount of adjustment to be made on the Estimated Uncollectible Accounts?

a. To be increased by P9,000.00 c. To be increased by P12,000.00

b. To be decreased by P9,000.00 d. To be decreased by P12,000.00

Q-2 What amount the equipment is carried in the partnership book?

a. P85,000.00 c. P120,000.00
b. P100,000.00 d. P135,000.00

Q-3 How much cash that Besinan should contribute?

a. P178,000.00 c. P193,000.00
b. P188,000.00 d. P208,000.00

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