UNIT 1: PARTNERSHIP

CONCEPTS ON PARTNERSHIP

● Partnership = two or more persons bind themselves to contribute property, indutry

and money with the intention to divide profits and losses among themselves.
○ One person cannot form a partnership
○ 100 people can join together and form a partnership as it passes the definition of
being two or more persons
○ Bind themselves = contract
○ The intention to divide profits and losses legalizes the partnership (cannot
contribute only)

How do we divide profits?

1. If the problem is silent = ORIGINAL CAPITAL CONTRIBUTION

○ Beginning capital contribution and original capital contribution differ from each
other
■ Original = first establishment
■ Beginning = upon end of the first year of operations, original contributed
capital becomes ending capital, and then turns as the beginning capital of
the next year of operations
2. Agreements
○ P&L Ratio
○ Profit Ratio
○ Loss Ratio
○ Equally
○ Based on ending capital balance

● What happens if the agreement is based on profit ratio but the partnership
incurred a loss? You can still apply or use the profit ratio.

● What happens if the agreement is based on loss ratio but the partnership incurred
a profit? You will apply or use the original capital contribution.

A=L+E

● Sole Proprietorship
Owner’s Equity, beg XX
Additional Investment XX
Net Income XX
Withdrawals (XX)
Owner’s Equity, end XX
 ● Partnership
Capital, beg XX
Additional Investment XX
Net Income XX
Withdrawals (XX) permanent withdrawal
Owner’s Equity, end XX

Withdrawals
➔ Withdrawing or removing resources from your business
➔ Debit: Withdrawal and Credit: Cash (or any other asset)

1. Permanent
● Capital computations
● No intention to give back
● If problem is silent, it is assumed that withdrawal is permanent
● Used in averaging of capital

2. Temporary
● Withdrawing with the intention to give back the withdrawal
● Deducted from capital in the time being but will be added back once given back
● Not used in averaging of capital

Phases of Partnership

1. Formation
● Accounting for initial investments
● Contribution of partners
○ Cash = recorded at face value
○ Accounts Receivable = amount to be received, net realizable value
○ Inventories = fair market value, net realizable value
○ PPE = fair market value on the date of contribution

2. Operation
● Bonus
● Interest
● Salaries (managers)
● Remainder

P1 P2 Total
Bonus XX XX XX
Interest XX XX XX
Salaries XX XX XX
Remainder XX XX XX (adjustment)
XX XX XX (net income or loss)
Remainder is allocated to partners in many ways
● If problem is silent = original capital contribution
● By agreement

3. Dissolution
4. Liquidation