MODULE Accounting for Partnership

03

Overview Learning Outcomes

This module tackles the different requirements
At the end of this module, the student should be able
needed to form a partnership. Also, it covers the
to:
measurements and valuations of partners’ initial
3.1 Discuss the requirements in the partnership
investments to the partnership. This module
formation
discusses how to account the partnership
3.2 Discuss the accounting for partners’ initial
formation given the different cases and scenarios.
investments in a partnership
It also covers the accounting for capital shares that
3.3 Discuss the accounting for partner’s assets
is more than or less than the capital contributed
contribution that has attached liabilities
by the partner.
3.4 Discuss how to account the partnership
formation in different scenarios.
3.5 Discuss the accounting for capital share different
from capital contribution

Requirements
Partnership Contract – The written agreement between or among the partners
governing the formation, operation and dissolution of the partnership is referred to as Learning Outcomes
the Articles of Co-Partnership.
3.1 Discuss the
The Articles of Co-Partnership contains the following: requirements in the
1. The name of the partnership partnership formation
2. The names and addresses of the partners, classes of partners, stating whether the
partner is general or limited partner
3. The effective date of the contract
4. The purpose or purposes and principal office of the business
5. The capital of the partnership stating the contributions of individual partners, their description and agreed values
6. The right and duties of each partner
7. The manner of dividing net income or loss among the partners, including salary allowance and interest on capital
8. The conditions under which the partners may withdraw money or other assets for personal use
9. The manner of keeping the books of accounts
10. The causes for dissolution
11. The provision for arbitration in settling disputes

Organizing a partnership – Before a partnership can operate legally, it has to comply first with certain registration
requirements which is summarized as follows:

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 Place of Registration
Securities and Exchange
Commission
Department of Trade and
Industry
City or Municipal Mayor’s
Office
Bureau of Internal
Revenue
Social Security System
Philippine Health
Insurance Corporation
Pag-IBIG Fund
Requirements for Registration
Articles of Co-Partnership
Filled SEC Registration form
Articles of Co-Partnership
SEC Certificate
Certificate of Registration of
Business Name
Articles of Co-Partnership
SEC Certificate
Filled SSS Application form
List of employees
SEC Registration
Employer Data Record
Business Permit or License
Articles of Co-Partnership
SEC Certificate
Certificates Issued
SEC Certificate
Certificate of Registration of Business Name
Mayor’s Permit and License to Operate
BIR registration No.
Partnership’s Tax Identification Number
Registration of books, invoices, and official receipts
SSS Certificate of Membership
SSS Employer ID Number
PhilHealth Employer Number
PhilHealth Certificate of Registration
PhilHealth Identification Number
Member Data Record
Pag-IBIG Fund Certificate of Membership
Pag-IBIG Fund Employer ID Number

Initial Investments
1. Amount of contribution – The amount of contribution shall be based on the
Learning Outcomes
partners’ agreement.
3.2 Discuss the
a. With agreement on individual contribution accounting for
Example 1: On July 1, 2020, A and B form a partnership with a total agreed partners’ initial
capitalization of P100,000 to be contributed in cash of 60% and 40% by A and B, investments in a
respectively.

To record the contribution of each partner

GENERAL JOURNAL
Page: GJ-01
Date Particulars PR Debit Credit
July 01 Cash Php 60,000.00
A, Capital Php 60,000.00
To record the initial investment of A

01 Cash 40,000.00
B, Capital 40,000.00
To record the initial investment of B

NOTE that there is a separate capital account as well as withdrawal account for each partner. The journal entries are
the same as journal entries for the investment by a sole proprietorship

b. Without agreement on individual partner’s contribution

Example 2: On July 1, 2020, A and B form a partnership with a total agreed capitalization of P100,000 to be
contributed in cash.

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 To record the contribution of each partner

GENERAL JOURNAL
Page: GJ-01
Date Particulars PR Debit Credit
July 01 Cash Php 50,000.00
A, Capital Php 50,000.00
To record the initial investment of A

01 Cash 50,000.00
B, Capital 50,000.00
To record the initial investment of B

NOTE that in the absence of any agreement, it shall be contributed equally.

2. Valuation of partners’ contribution

a. Cash contribution – If the contribution is in the form of cash, the amount to be recognized is the FACE VALUE of
cash
b. Non-cash contribution – If the contribution is in the form of property, it shall be recorded at AGREED VALUE for
the property; otherwise, it shall be recorded at the FAIR VALUE of the property to effect fair and equitable
valuation
NOTE that industry contribution is recorded in memorandum entry from.

Assets Contribution with Attached Liabilities

a. Liabilities to be assumed by the partnership
Example 3: C and D decided to formed a partnership on July 1, 2020. C contributed assets and liabilities agreed to be
assumed by the partnership, as follows:

COST AGREED VALUE FAIR VALUE Learning Outcomes

Machine Php 200,000 Php 180,000
3.3 Discuss the accounting
Furniture and fixtures 100,000 Php 140,000
for partner’s assets
Notes payable 50,000 50,000
contribution that has
To record the contribution of C. attached liabilities

GENERAL JOURNAL
Page: GJ-01
Date Particulars PR Debit Credit
July 01 Machine Php 180,000.00
Furniture and fixture 140,000.00
Notes payable Php 50,000.00
C, Capital 270,000.00
To record the initial investment of C
Observe that the liability together with the assets is recorded by the partnership.

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b. Liabilities not assumed by the partnership
Example 4: C and D decided to formed a partnership on July 1, 2020. C contributed assets but liabilities agreed not
to be assumed by the partnership, as follows:

COST AGREED VALUE FAIR VALUE

Machine Php 200,000 Php 180,000
Furniture and fixtures 100,000 Php 140,000
Notes payable 50,000 50,000

To record the contribution of C.

GENERAL JOURNAL
Page: GJ-01
Date Particulars PR Debit Credit
July 01 Machine Php 180,000.00
Furniture and fixture 140,000.00
C, Capital Php 320,000.00
To record the initial investment of C

Observe that the liability is no longer recorded because the partnership does not assume or does not agreed to pay
this liability.

Accounting for Partnership Formation

a. Individuals Without Existing Business – This formation of partnership Learning Outcomes

composing two or more individuals who does not have existing businesses. To
account this formation, simply record their individual investments to the 3.4 Discuss how to account the
partnership just like the previous examples. partnership formation in
different scenarios.
b. Conversion of Sole Proprietorship to Partnership – This formation of partnership is composed of one sole proprietor
or individual who has an existing business, and an individual.

This is accounted for by following the procedures:

1. Close the nominal accounts of the sole proprietorship business.

2. Record the adjustments of the assets and liabilities directly to the proprietor’s capital account
3. Close the books of the sole proprietorship.
4. Open the new set of partnership books by recording the partners’ contribution.

Example 5: E and F formed a partnership on July 1, 2020, wherein E is to contribute cash while F is to transfer the
assets and liabilities of his business. Account balances on the books of F are as follows:

Debit Credit
Cash 30,000
Accounts receivable 45,000
Inventories 24,000
Accounts payable 9,000
F, capital 90,000

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 The partners agreed on the following conditions:

1. An allowance for uncollectible accounts of Php 2,200 is to be established.

2. The inventories are to be valued at their current replacement cost of Php 27,000.
3. Prepaid expenses of Php 1,200 and accrued expenses of Php 500 are to be recognized.
4. F is to be credited for an amount equal to the net assets transferred.
5. E is to contribute sufficient cash to have an equal interest in the partnership.

Step 1: Adjust and close the books of the proprietor F to agreed values.

GENERAL JOURNAL
Page: GJ-10
Date Particulars PR Debit Credit
July 01 F, Capital Php 2,200.00
Allowance for uncollectible accounts Php 2,200.00

01 Inventories 3,000.00
F, Capital 3,000.00

01 Prepaid expenses 1,200.00

Accrued expenses 500.00
F, Capital 700.00

01 F, Capital 91,500.00
Accrued expenses 500.00
Accounts payable 9,000.00
Allowance for uncollectible accounts 2,200.00
Cash 30,000.00
Accounts receivable 45,000.00
Inventories 27,000.00
Prepaid expenses 1,200.00
To close the books of F

Observe that just for illustration, the explanations are ignored for those adjusting entries. Also, the capital balance of
F after the three adjusting entries amounted to Php 91,500.

Step 2: Record the investments of the partners to the new books.

GENERAL JOURNAL
Page: GJ-10
Date Particulars PR Debit Credit
July 01 Cash Php 30,000.00
Accounts receivable 45,000.00
Inventories 27,000.00
Prepaid expenses 1,200.00
Allowance for uncollectible accounts Php 2,200.00
Accounts payable 9,000.00
Accrued expenses 500.00
F, Capital 91,500.00

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 To record the investment of F

Cash 91,500.00
E, Capital 91,500.00
To record the investment of E

c. Two or More Sole Proprietorship Forming Partnership – This formation of partnership is composed of two or more
individuals both having separate existing businesses. To account this formation, follow the procedures mentioned
above on conversion of sole proprietorship to partnership.
Example 6: G and H are both owners of an existing single proprietorship business. They agreed to combine their
businesses into a partnership. They agreed to start with a total capitalization of Php 400,000 to be contributed
equally. They agreed to the following valuation of their business noncash assets:

a. Their receivables are 95% collectible.

b. The inventory has realizable value of Php 30,000.
c. The equipment has a fair value of Php 50,000.

They will invest additional cash if needed to complete their agreed contribution.
The account balances of the sole proprietorship businesses upon formation of GH Partnership is as follows:

G Business H Business
Cash Php 20,000 Php 5,000
Accounts receivable 60,000 45,000
Inventory 25,000
Store equipment 120,000
Accumulated depreciation 30,000
Accounts payable 70,000
G, capital 50,000
G, drawings 5,000
H, capital 125,000
Income summary (debit) (10,000) 15,000

Step 1: Close the nominal accounts of the sole proprietorship business.

Books of G Books of H
G, capital 15,000 Income summary 15,000
G, drawings 5,000 H, capital 15,000
Income summary 10,000

Step 2: Adjust and close the books of the G and H to agreed values.

Books of G Books of H
Inventory 5,000 H, capital 42,250
Accounts receivable 3,000 Accounts receivable 2,250
G, capital 2,000 Accum. Depreciation 40,000

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 Books of G Books of H
G, capital 37,000 H, capital 97,750
Accounts payable 70,000 Accum. Depreciation 70,000
Cash 20,000 Cash 5,000
Accounts receivable 57,000 Accounts receivable 42,750
Inventory 30,000 Store equipment 120,000

Step 3: Record the investments of the partners to the new books.

New Books of the Partnership

Cash 183,000
Accounts receivable 57,000
Inventory 30,000
Accounts payable 70,000
G, capital 200,000
To record the investment of G

Cash 107,250
Accounts receivable 42,750
Store equipment 50,000
G, capital 200,000
To record the investment of G

Capital Share Different from Capital

Contribution
Prior to the recording partners’ initial contributions to the partnership, partners must first agree not only on the valuation
of the net asset contributions but also on their capital share. The capital share of each partner is the percentage of equity
that each partner will have in the net assets of the newly formed partnership. Generally, the capital share of each partner
is equal to their capital contribution. However, partners may agree to a division of capital that is not proportionate to their
capital contribution. This is to recognize the intangible factors such as partner’s special expertise, establishing clientele or
necessary business connections. This situation will give rise to allowing bonus on initial investments.

Example 7: I and J formed a partnership by contributing Php 50,000 and Php 60,000, respectively. To record the investment
of the partners under two approaches are as follows:
Learning Outcomes
a. Full investment approach or Actual investment method
Cash Php 110,000 3.5 Discuss the accounting
I, capital Php 50,000 for capital share
J, capital 60,000 different from capital
b. Bonus approach contribution
Using Example 7, assume the partners agreed to have equal capital in the partnership.
Cash Php 110,000
I, capital Php 55,000
J, capital 55,000
In this case, J’s cash contribution amounts to Php 60,000 yet his capital balance equals to Php 55,000. Therefore, he
gives a Php 5,000 bonus to I.

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 References
• Advanced Financial Accounting and Reporting, Part 1 (2017). Milan, Z.V. Baguio City: Bandolin Enterprise
• Accounting for Partnership & Corporation (2011). Baysa, G.T., et al.Mandaluyong City: Millenium Books, Inc.
• Valencia, E. (2005). Partnership & Corporation Accounting. Mandaluyong City: Millennium Books, Inc.

Learning Activities

Exercise 1: Discussion Questions

1. Why is it preferable to have a written contract of partnership? What are the contents of a typical partnership
contract?
2. What is the major difference between a general and a limited partnership? How can they be distinguished? When a
partnership is a limited partnership, does the characteristic of “unlimited liability” still apply? Why or why not?
3. Why are capital accounts and drawing accounts opened for each partner?
4. Why is the Accumulated Depreciation account not carried over to the new books of the partnership?
5. Why is the Allowance for Uncollectible Accounts account carried over to the new books of the partnership? How
does this differ from the Accumulated Depreciation?

Exercise 2: Lynleen Co.

Lyn, the owner of a successful fertilizer business felt that it is time to expand operations. Lyn offered to form a
partnership with Leen, the owner of a nearby warehouse. The partnership would be called Lynleen Co. Leen accepted
Lyn’s offer and the partnership was formed on July 1, 2020.
The assets and liabilities of Lyn’s Fertilizer and their agreed valuation on June 30,2020 before the formation of the
partnership are given below:

Book Value Agreed Valuation

Cash Php 229,500 Php 229,500
Accounts receivable 2,103,000 2,103,000
Allowance for doubtful accounts 117,000 167,500
Inventory 1,012,500 900,000
Prepaid rent 29,250 0
Store equipment 390,000 300,000
Accumulated depreciation 97,500 0
Notes payable 330,000 330,000
Accounts payable 505,500 505,500

The partners agreed to share profits and losses equally and decided to invest an equal amount in the partnership. Lyn and
Leen agreed that Leen’s land is worth P500,000 and his building is P1,450,000. Both properties will be contributed by Leen
to the partnership. Leen will also invest additional cash sufficient to make his capital equal to Lyn. The partnership will use
a new set book.
Requirements:
1. Give the adjusting journal entries in books of Lyn.
2. Give the journal entries to record the investment of the partners in the partnership books.
3. Prepare Lynleen Co.’s Statement of Financial Position as of July 1, 2020.

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Exercise 2: JC Partnership
On August 1, 2020, Jon and Christian formed a partnership. Jon is to invest certain business assets at values which are yet
to be agreed upon. He is to transfer business liabilities and is to contribute sufficient cash to bring his total capital to
P210,000, which is 70% of the total capital as had been agreed upon.

Details regarding the book values of Jon’s business assets and liabilities and their corresponding valuation follows:

Book Values Agreed Valuation

Accounts receivable Php 58,000 Php 58,000
Allowance for doubtful accounts 4,200 5,000
Merchandise inventory 98,400 107,000
Store equipment 32,000 32,000
Accumulated depreciation-Store equipment 19,000 16,400
Office equipment 27,000 27,000
Accumulated depreciation-Office equipment 14,200 8,600
Accounts payable 56,000 56,000

Ira agrees to invest cash of 42,000 and merchandise valued at current market price.

Requirements:
1. Give the adjusting journal entries in books of Jon.
2. Give the journal entries to record the investment of the partners in the partnership books.
3. Prepare JC Partnership’s Statement of Financial Position as of August 1, 2020.

Self-Evaluation

What have I learned from this module?

What areas or topics I am having difficulties to understand or comprehend?

What are the questions I have formed after reading this module?

What are the answers to my questions formed above?

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