NORTHERN LUZON ADVENTIST COLLEGE

DEPARTMENT OF BUSINESS EDUCATION

COURSE: ACCOUNTING FOR SPECIAL TRANSACTION

PARTNERSHIP: AN OVERVIEW

I. Introduction

A partnership is another type of business organization whose formation is

primarily based on the contract of two or more persons who contribute money,
property, or industry to a common fund. This chapter gives an overview on the
characteristics of partnership, and discusses the types of partner and partnership.

II. Learning Outcomes

After reading this chapter, the YOU should be able to:

 Define and discuss the nature of a partnership – its characteristics,

advantages and disadvantages.

 Identify the different kinds of partnerships and the classes of partners.

III. Integration of Faith:

Whoever is a partner with a thief hates his own life; He swears to tell the truth,
but reveals nothing. Proverbs 29:24

IV. Topics for Reading:

Book: Accounting for Special Transaction
Fundamentals of Accounting 2
Advanced Accounting 2
 PARTNERSHIP: AN OVERVIEW

Partnership is a popular form of business because they are easy to form and
because they allow several individuals to combine their talents and skills in a particular
business venture. In addition, partnerships provide a means of obtaining more capital
than a single individual can obtain and allow the sharing of risk for rapidly growing
businesses. Partnerships are particularly common in the service professions, especially
law, medicine, and accounting. These professions have generally not adopted the
corporate form of business because of their long-standing tradition of close professional
association with clients and the total commitment of the professional’s business and
personal assets to the propriety of the advice and service given to clients.

Definition of a Partnership

Article 1767 of the Civil Code of the Philippines defines partnership as follows:

By the contract of partnership, 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.

The keywords in the definition of a partnership are:

1. Contract
2. Person
3. Money, property, or industry
4. Common fund
5. Division of profit

1. Contract
A contract is an agreement between two or more persons that is enforceable by
law. In can be in oral or in written form.
An oral agreement will suffice to create a partnership.
However, the following instances require that the partners’ agreement be
contained in a written contract and registered with the Securities and Exchange
Commission (SEC):
a. When the partnership’s capital is P3,000 or more; or
b. When an immovable or real property is contributed by a partner.
When the contributed capital is P3,000 or more and the agreement is only orally settled,
or when the partnership’s agreement is put in writing but the contract is not registered
with the SEC, the following conditions apply:
a. The contract is still valid
b. The partnership acquires juridical personality
 c. The liability to the third person is not affected
On the other hand, when an immovable property is contributed and an oral
agreement is made, or an agreement is written but is not registered with the SEC, the
following conditions apply:
a. The partnership contract is void.
b. The partnership does not acquire juridical personality

The written contract of partners is called the Articles of Co-Partnership which contains
the following information:
1. The name of the partnership;
2. The names and addresses of the partners, classes of partners, stating whether the
partner is a general or a 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 rights 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; and
11. The provision for arbitration in settling disputes.

2. Person
In the definition of partnership, what does person refer to?
A person can be either natural person or a juridical entity. A natural or human
person is created according to the image and likeness of God as defined by a biblical
context while a juridical person is created by the operation of law.
The term “person” in the definition of partnership should refer only to an
individual human being. It does not connote any other juridical persons like a
corporation, partnership, and joint venture.
It is the concept of unlimited liability that disallows a partnership or a corporation
from becoming a partner in another partnership.
Another possible reason that prohibits a partnership or corporation from
becoming a partner in another partnership is the intimate personal relationship and
mutual trust existing between or among partners.
3. Money, property, or industry
Money may include bills and coins, checks, treasury bills, and warrants. Property
may include any non-cash assets like property, plant, and equipment. Industry refers to
the services provided by a partner in a partnership. Any of these can be a contribution
of a partner to the partnership.

4. Common fund
The concept of common fund indicates that the contributions of individual
partners become properties of the partnership. The individual distinction and ownership
of the properties are removed once the contributions become properties of the
partnership.

5. Division of Profit.
The definition of partnership construed as a profit-oriented, not a service-oriented
(non-profit activities/charity), organization.
In a partnership, the realized profits from the operation are divided among the
partners. It must not remain invested and continue to accumulate like in a corporation.

Characteristics of a Partnership
Before taking up the accounting problems encountered in partnership, it is helpful to
know the important characteristics of the partnership form of organization.

1. Separate Legal Personality. Article 1768 of the Partnership Law states that the
partnership has a juridical personality separate and distinct from that of each of
the partners. A partnership may, therefore, acquire property in its own name and
may enter into contracts.

2. Ease of Formation. The formation of a partnership does not require as many

formalities as a corporation. The partnership may be created by oral or written
agreement between two or more persons, or merely by inferences from the
implication of their conduct.

3. Co-ownership of Partnership Property and Profits. All assets invested in the

partnership become the property of the partnership. The right of each partner to
possess partnership property for the partnership purposes is equal to the right of
each of the other partners. Each partner has a proprietary interest in the
partnership. This interest reefer’s to each partner’s share in the earning and in the
capital.
 4. Limited Life. Any change in the agreement of the partners terminates the
partnership contract. A partnership may also expire anytime when there is a
change in the relationship of the partners due to death, withdrawal, bankruptcy
or incapacity of a partner. No one can be forced against his will to continue as a
partner regardless of the agreed terms of operations. Other factors which may
bring a partnership to an end are the expiration of the period specified in the
partnership contract and the admission of a new partner.

5. Mutual Agency. Each partner has an equal right to act for the partnership and to
enter into contracts binding upon it, as long as he acts within the normal scope
of business operations. Each partner is a principal as well as an agent of the
partnership.

6. Unlimited Liability. Each partner may be held personally liable for all the debts of
the partnership. All of his business and personal properties may be used for the
settlement of partnership liabilities. There is, however, a special type of
partnership, called limited partnership, wherein certain partners are allowed to
limit their personal liabilities to the extent of their capital contributions only.

Kinds of Partners
1. As to contribution
a. Capitalist partner – one who contributes capital in cash (money) or
property
b. Industrial partner – one who contributes industry, labor, skill, talent or
services
c. Capitalist-industrial partner – one who contributes cash, property, and
industry.

2. As to liability
a. General partner – one whose liability to third persons extends to his
separate (private) property.
b. Limited partner – one whose liability to third persons is limited only to the
extent of his capital contribution to the partnership.

3. As to management
a. Managing partner – one who manages actively the business of the
partnership
b. Silent partner – one who does not participate in the management of the
partnership affairs
 4. Other Classifications
a. Secret partner – one who takes active part in the management of the firm
and is not known to the public as a partner in the business.
b. Dormant partner – one who does not take active part in the management
of the business and is not known to the public as a partner.
c. Nominal partner – one who is not really a partner, not being a party to the
partnership agreement, but is made liable as a partner for the protection
of innocent third persons.
d. Liquidating partner – one who takes charge of the winding up of
partnership affairs upon dissolution.

Kinds of Partnership

1. As to liability of partners
a. General partnership – is a partnership created and operating with a
general partner. A general partner is one whose financial liabilities or
obligations are not limited only to his/her capital contributions.

b. Limited partnership – one formed by two or more persons having as

members one or more general partners and one or more limited partners,
who as such are not bound by the obligations of the partnership. The
word “LIMITED” or “LTD.” Is added to the name of the partnership to inform
the public that it is a limited partnership.

2. As to object
a. Universal partnership
i. Universal partnership of all present property – one in which the
partners contribute, at the time of the constitution of the
partnership, all the properties which actually belong to each of
them into a common fund with the intention of dividing the same
among themselves as well as the profits which they may acquire
therewith.

All assets contributed to the partnership and subsequent

acquisitions become common partnership assets.

ii. Universal partnership of all profits – one which comprises all that the
partners may acquire by their industry or work during the existence
of the partnership and the usufruct of movable or immovable
property which each of the partners may possess at the time of the
institution of the contract.
 Partnership assets consist of assets acquired during the life of the
partnership and only the usufruct or use of assets contributed at the
time of partnership formation. The original movable or immovable
property contributed do not become common partnership assets.

b. Particular partnership – one which has for its object determinate things,
their use or fruits, or a specific undertaking or the exercise of a profession
or vocation.

3. As to taxation
a. General Co-partnership – is a partnership created for the purpose of
obtaining profits from the conduct of trade or business. The income
derived from this trade or business is subject to income tax. This type of
partnership is also classified as trading.

b. General professional partnership – is a partnership formed for the purpose

of exercising the partners’ common profession like CPAs, lawyers,
engineers, etc.. No part of income derived from engaging in trade or
business and, therefore, the partnership is not subject to income tax. This
type of partnership is also classified as non-trading.
References:
1. Accounting for Partnership and Corporation (Tolentino-Baysa & Lupisan, 2018)
2. Financial Accounting and Reporting (Cabrera & Cabrera, 2019)
3. Advanced Accounting 1 (Guerrero & Peralta, 2017)
4. Partnership and Corporation Accounting (Aduana, 2016)
5. Financial Accounting and Reporting (Millan, 2019)