URDANETA CITY

UNIVERSITY
Owned and operated by the City Government of Urdaneta

Competency Appraisal
Advanced Financial Accounting and Reporting (AFAR)
Partnership Accounting
(Accounting for Partnerships, and Partnership Formation)
May 4, 2022 – (2)

Accounting for Partnerships

Generally Accepted Accounting Principles were discussed in Basic Accounting in

the context of sole proprietorship. These accounting principles also apply to a
partnership. Thus the recording of assets, liabilities, income and expenses is
consistent for both sole proprietorships and partnerships.

Briefly, the following are the Fundamental Concepts

1. Entity Concept. An accounting entity is an organization or section of an
organization that stands apart from other organizations and individuals as a
separate economic unit. Simply put, the transactions of different entities should
not be accounted for together. Each entity should be evaluated separately.
2. Periodicity Concept. An entity’s life can be meaningfully subdivided into
equal time periods for reporting purposes. This concept allows the users to
obtain timely information to serve as a basis on making decisions about future
activities. For the purpose of reporting to outsiders, one year is the usual
accounting period.
3. Stable Monetary Unit Concept. The Philippine peso is a reasonable unit of
measure and that its purchasing power is relatively stable.
4. Going Concern. Financial statements are normally prepared on the assumption
that the reporting entity is a going concern and will continue in operation for
the foreseeable future.

Basic Principles
1. Objectivity Principle. Accounting records and statements are based on the
most reliable data available so that they will be as accurate and as useful as
possible. Reliable data are verifiable when they can be confirmed by independent
observers.
2. Historical Cost. This principle states that acquired assets should be recorded
at their actual cost and not at what management thinks they are worth as at
reporting date.
3. Revenue Recognition Principle. Revenue is to be recognized in the
accounting period when goods are delivered or services are rendered or performed.

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UNIVERSITY
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4. Expense Recognition Principle. Expenses should be recognized in the

accounting period in which goods and services are used up to produce revenue and
not when the entity pays for those goods and services.
5. Adequate Disclosure. Requires that all relevant information that would affect
the user’s understanding and assessment of the accounting entity be disclosed in
the financial statements.
6. Materiality. Financial reporting is only concerned with the information that is
significant enough to affect evaluations and decisions. Materiality depends on the
size and nature of the item judged in the particular circumstances of its
omission. In deciding whether an item or an aggregate of items is
material, the nature and size of the item are evaluated together.
7. Consistency Principle. The firms should use the same accounting method from
period to period to achieve comparability over time within a single enterprise.
However, changes are permitted if justifiable and disclosed in the financial
statements.

However, differences arise between the two forms of business concerning owners’
equity. For a sole proprietorship, there is only one capital account and one drawing
account. On the other hand, since a partnership has two or more owners, separate
capital and drawing accounts are established for each partner.

A partner’s capital account is credited for his initial and additional net investments
(assets contributed less liabilities assumed by the partnership), and credit balance of
the drawing account at the end of the period. It is debited for his permanent
withdrawals and debit balance of the drawing account at the end of the period.

A partner’s drawing account is debited to reflect assets temporarily withdrawn by

him from the partnership. At the end of each accounting period, the balances in the
drawing accounts are closed to the related capital accounts.

Permanent withdrawals are made with the intention of permanently decreasing the
partner’s capital while temporary withdrawals are regular advances made by the
partners in anticipation of their share in profit.

Profit (or loss) is credited (or debited) to the capital account.

On September 6, 2007, the International Accounting Standards Board (IASB)

issued a revised International Accounting Standards (IAS) No. 1, Presentation of
Financial Statements. This standard supersedes the 2003 version of IAS 1 as
amended in 2005. It’s common to encounter “profit or loss” rather than usual “net
income or net loss” as the descriptive term used in the Statement of Comprehensive

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Income (the new title of the income statement per revised IAS No. 1). The balance
sheet is called the Statement of Financial Position.

Loans Receivable from or Payable to Partners

If a partner withdraws a substantial amount of money with the intention of

repaying it, the debit should be to Loans Receivable – Partner account instead of
Partner’s Drawing account. This account should be classified separately from the
other receivables of the partnership.

A partner may lend amounts to the partnership in excess of his intended permanent
investment. These advances should be credited to Loans Payable – Partner account
and not to Partner’s Capital account classified among the liabilities but separate
from liabilities to outsiders.

Partnership Formation

Valuation of Investments by Partners

The books of the partnership are opened with entries reflecting the net
contributions of the partners to the firm. Asset accounts are debited for assets
contributed to the partnership; liability accounts are credited for any liabilities
assumed by the partnership and separate capital accounts are credited for the
amount of each partner’s net investment (assets less liabilities).

Partners may invest cash or non-cash assets in the partnership. When a partner
invests non-cash assets, they are to be recorded at values agreed upon by the
partners. In the absence of any agreement, the contributions will be recognized at
their fair market values at the date of transfer to the partnership.

The fair market value of an asset is the estimated amount that a willing seller would
receive from a financially capable buyer for the sale of the asset in a free market.
Per International Financial Reporting Standards (IFRS) No. 3, fair value is the
price at which an asset or liability could be exchanged in a current transaction
between knowledgeable, unrelated willing parties.

Adjustment of Accounts Prior to Formation

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In cases when the prospective partners have existing businesses, their respective
books will have to be adjusted to reflect the fair market values of their assets, or to
correct misstatements in the accounts. If the adjustments will not be made, the
initial capital balances of the partners may be inequitable.

The adjustments of the assets and liabilities prior to formation will be similar to the
adjustments that we are already familiar with. However, when the adjustment
involves a debit or credit to a nominal account, the Capital account would instead be
debited or credited. This is so because the business has ceased to be a going concern.

A partnership may be formed in any of the following ways:

1. Individuals with no existing business form a partnership.
2. Conversion of a sole proprietorship to a partnership.
a. A sole proprietor and an individual without an existing
business form a partnership.
b. Two or more sole proprietors form a partnership.
3. Admission or retirement of a partner.

Problem 1
On April 30, 2020, Al, Ben and Ces formed a partnership by combining their
separate business proprietorships. Al contributed cash of P50,000. Ben contributed
property with a P36,000 carrying amount, a P40,000 original cost, and P80,000 fair
value. The partnership accepted responsibility for the P35,000 mortgaged attached
to the property. Ces contributed equipment with a P30,000 carrying amount, a
P75,000 original cost, and P55,000 fair value. The partnership agreement specifies
that profits and losses are to be shared equally but is silent regarding capital
contributions. Which partner has the largest capital account balance at April 30,
2020.
A. Al
B. Ben
C. Ces
D. All capital balances are equal.

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UNIVERSITY
Owned and operated by the City Government of Urdaneta

Prepared by:

REMEDIOS A. PALAGANAS, CPA, MBA

Assistant Professor IV

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