AFAR 01: PARTNERSHIP FORMATION
Characteristics of a Partnership as a Form of
Business Organization
Separate Legal Personality
A partnership may acquire property in its own name
and may enter into contracts.
Ease of Formation
The formation of a partnership does not require as
many formalities as a corporation.
Co-Ownership of Partnership Property and
Profits
Each partner has a proprietary interest in the
assets and profits of the partnership.
Limited Life
The death, bankruptcy, or any event taking away
the ability of a partner to enter into or fulfill a
contract ends a partnership. Any one of the
partners can also terminate a partnership at will.
Mutual Agency
Any change in the agreement of the partners
terminates the partnership. a partnership may also
expire due to changes in the relationship of the
partners (death, withdrawal, etc.).
Unlimited Liability
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.
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Partner’s Ledger Accounts
1. Capital account
2. Drawing or personal account
3. Accounts for loans to or from partner
Transactions Where a Partner's Capital Account
Is Credited for
1. Original investment
2. Additional investment
3. Partner's share of the profits (after being
closed to the drawing account)
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Transactions Where a Partner's Capital Account
Is Debited for
1. Permanent withdrawal of capital
2. Debit balance of the drawing account at the
end of the period
3. Partner's share in the losses (after being
closed to the drawing account)
Transactions Where a Partner's Drawing
Account Is Credited for
1. Partnership obligations assumed or paid by
a partner
2. Personal funds or claims of partner
collected and retained by the partnership
3. Periodic partner's salaries depending on
agreement by the partners
Transactions Where a Partner's Drawing
Account Is Debited for
1. Withdrawal of assets by the partners in
anticipation of net income (temporary
withdrawals)
2. Partner's personal indebtedness paid or
assumed by the partnership
3. Funds or claims of partnership collected and
retained by the partner
Rule on the Valuation of Assets Contributed by
Partners
In order of priority:
1. Agreed value
2. Fair market value/appraisal value
Note: Assessed value is never used.
Rule on the Assumption of a Partner’s Personal
Liability by the Partnership
If the problem is silent, the partnership will not
assume such liability. Assumption must be
expressly stated in the problem before such liability
is recorded in the partnership books.
Contributed Capital
Contributed assets - Liabilities assumed by the
partnership = Contributed capital
Initial Capital Credit
It is the amount of capital of each partner after
formation.
 AFAR 01: PARTNERSHIP FORMATION

Rule on the Amount of Initial Capital Credit to

be Received by a Partner
In order of priority:
a. Agreed capital (using the ratio agreed upon)
b. Contributed capital

Bonus Method
It is a method used when partners agree on capital
interests that are not equal to their net assets. This
method does not recognize any additional goodwill
nor revalue any of the contributed assets but refers
to the mere transfer of capital between partners.

Goodwill
It is an intangible asset recorded only as a result of
an acquisition made by a reporting entity (business
combination).

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