ACCOUNTING FOR SPECIAL TRANSACTIONS 1.

Formation – accounting for initial

investments to the partnership
What is a Partnership?
2. Operation – division of profits or losses
A partnership is an unincorporated association of two 3. Dissolution – admission of a new partner
or more individuals to carry on, as co-owners, a and withdrawal, retirement or death of a
business with the intention of dividing the profits partner
among themselves (Zues Millan) 4. Liquidation – winding-up of affairs
By the contract of partnership two or more persons
bind themselves to contribute money, property, or
PARTNERSHIP FORMATION
industry to a common fund, with the intention of
dividing the profits among themselves.  Generally, the law provides, a contract of
partnership is consensual one as it is created by
Two or more persons may also form a partnership for
the exercise of profession (Art. 1767) the mere agreement of the partners which may
be constituted in any form, oral or written.
Characteristics of a partnership:  But Articles 1771 and 1772 requires that is a
1. Ease of formation partnership has a contribution of an immovable
2. Separate legal personality property, real rights, and/or has a capital of 3,000
3. Mutual agency Pesos or more, the agreement must be in a
4. Co-ownership of property public instrument and must be recorded with the
5. Co-ownership of profits Securities and Exchange Commission (SEC)
6. Limited life  Adding to that is if an immovable property is
7. Transfer of ownership therefore contributed, there must be an inventory
8. Unlimited liability (applicable to a general of it that is signed by the parties and attached to
partnership) a public instrument.
 Legal Existence begins from the execution of the
contract, unless otherwise stated.
Accounting for Partnership
 The following are the major considerations in the
accounting for the equity of a partnership
CASH INVESTMENTS 1. Individuals with no existing business formed a
partnership.
Cash investments in accordance with the current
2. A sole proprietor and an individual without
standards being a financial asset are recorded at fair
existing business formed a partnership.
value most often known as face value as far as cash
3. Two or more sole proprietorship formed a
valuation is concerned.
partnership
Cash denominated in foreign currency is valued at the 4. Admission or retirement of a partner
current exchange rate.
NONCASH INVESTMENTS
Noncash property is received at the agreed value
which is normally the fair value of the property at the
time of investment.
It should be noted that in case there is a conflict
between agreed value and fair value, agreed value
prevails.
SERVICES
Once services are contributed to the partnership, a
memorandum entry is essential if it were no value
agree upon, otherwise a journal entry would be
required.
LIABILITIES
Liabilities assumed by the partnership should be
valued at the present value (fair value) of the
remaining cash flows.

A partnership may be formed in any of the

following ways:
Partnership Operation 4. Allowing interest on capital balances and dividing
the remaining income/loss
Division of Profits and Losses
5. Allowing salaries to partners and dividing the
 The partnership law provides that profits and remaining income/loss (or both 4&5)
losses are to be divided in accordance with 6. Bonus to managing partners
the partners agreement.
 If no agreement is made between and among
the partners, profits and losses are to be divided
according to their original capital
contributions.
 Should the partners agree to divide the profits
only, losses, if any are to be divided in the same
manner as that of dividing the profits.
 Should the partners agree to divided the losses
only, profits, if any shall be divided by the
partners according to their original capital
contributions.
 Industrial partners shall not be liable for
losses because he cannot withdraw the work or
labour already done by him, unlike the capitalist
partner who can withdraw their capital.
Possible Methods of Dividing Net Income/Loss:
1. Equally
2. In an unequal/arbitrary ratio
3. In the ratio of capital balances:
a. Original capital balances
b. Beginning capital balances
c. Ending capital balances
d. Average capital balances