Accounting for

Partnership
Basic Considerations and Formation

Prepared by:
Michael Angelo M. Manayao, CPA, MBA
 Learning Objectives
 Differentiate between the accounting for partnership
and corporations
 State the valuation contribution of the partners
 Account for the initial investments of the partners to the
partnership
 State the peculiar accounts used in a partnership and
identify the transactions that affects these accounts.
 Define each of the elements of financial statements
 Use the accounting equation in solving accounting
problems
 1 Basic
Considerations
2
 DEFINITION
In a 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 profit
among themselves. Two or more persons may also form
a partnership for the exercise of a profession (Civil Code
of the Philippines, Article 1767).
 Characteristics of a Partnership

 Mutual Contribution
 Division of Profits or Losses
 Co-Ownership of Contributed Assets
 Mutual Agency
 Limited Life
 Unlimited Liability
 Income Taxes
 Partners' Equity Accounts
 Advantages and Disadvantages of a Partnership

Advantages versus Proprietorships

 Brings greater financial capability to the business.
 Combines special skills, expertise and experience
of the partners.
 Offers relative freedom and flexibility of action in
decision-making.

Advantages versus Corporations

 Easier and less expensive to organize.
 More personal and informal.
 Advantages and Disadvantages of a Partnership

Disadvantages
 Easily dissolved and thus unstable compared to a
corporation.
 Mutual agency and unlimited liability may create
personal obligations to partners.
 Less effective than a corporation in raising large
amounts of capital.
Partnership Distinguished from Corporation
Partnership Distinguished from Corporation
 Classifications of Partnerships
1. According to object:
A. Universal partnership of all present property. All contributions
become part of the partnership fund.
B. Universal partnership of profits. All that the partners may
acquire by their industry or work during the existence of the
partnership and the use of whatever the partners contributed at
the time of the institution of the contract belong to the
partnership. If the articles of universal partnership did not
specify its nature, it will considered a universal partnership of
profits.
C. Particular partnership. The object of the partnership is
determinate-its use or fruit, specific undertaking, or the exercise
of a profession or vocation.
 Classifications of Partnerships
2. According to liability:
A. General. All partners are liable to the extent of their
separate properties.
B. Limited. The limited partners are liable only to the extent
of their personal contributions. In a limited partnership,
the law states that there shall be at least one general
partner.

3. According to duration:
A. Partnership with a fixed term or for a particular
undertaking.
B. Partnership at will. One in which no term is specified and is
not formed for any particular undertaking.
 Classifications of Partnerships
4. According to purpose:
A. Commercial or trading partnership. One formed for the
transaction of business.
B. Professional or non-trading partnership. One formed for
the exercise of profession

5. According to legality of existence:

A. De jure partnership. One which has complied with all the
legal requirements for its establishment
B. De facto partnership. One which has failed to comply with
all the legal requirements for its establishment.
 Kinds of Partners
 General partner. One who is liable to the extent of his separate
property after all the assets of the partnership are exhausted.
 Limited partner. One who is liable only to the extent of his capital
contribution. He is not allowed to contribute industry or services
only.
 Capitalist partner. One who contributes money or property to the
common fund of the partnership
 Industrial partner. One who contributes his knowledge or personal
service to the partnership
 Managing partner. One whom the partners has appointed as
manager of the partnership.
 Kinds of Partners
 Liquidating partner. One who is designated to wind up or settle the
affairs of the partnership after dissolution.
 Dormant partner. One who does not take active part in the
business of the partnership and is not known as a partner.
 Silent partner. One who does not take active part in the business
of the partnership though may be known as a partner.
 Secret partner. One who takes active part in the business but is not
known to be a partner by outside parties.
 Nominal partner or partner by estoppel. One who is actually not a
partner but who represents himself as one.
 Articles of Co-Partnership
A partnership may be constituted orally or in writing. In the
latter case, partnership agreements are embodied in the
Articles of Partnership. The following essential provisions may
be contained in the agreement:
1. The partnership name, nature, purpose and location;
2. The names, citizenship and residences of the partners;
3. The date of formation and the duration of the partnership;
4. The capital contribution of each partner, the procedure for
valuing non-cash investments, treatment of excess
contribution (as capital or as loan) and the penalties for a
partner's failure to invest and maintain the agreed capital;
 Articles of Co-Partnership
5. The rights and duties of each partner;
6. The accounting period to be adopted, the nature of
accounting records, financial statements and audits by
independent public accountants;
7. The method of sharing profit or loss, frequency of income
measurement and distribution, including any provisions for
the recognition of differences in contributions;
8. The drawings or salaries to be allowed to partners;
9. The provision for arbitration of disputes, dissolution, and
liquidation.
 SEC Registration
 When the partnership capital is P3,000 or more, in money or property, the
public instrument must be recorded with the Securities and Exchange
Commission (SEC). Even if it not registered, the partnership having a capital
of P3,000 or more is still valid and therefore has legal personality.

 The SEC shall not register any corporation organized for the practice of
public accountancy (The Philippine Accountancy Act of 2004, Sec. 28).

 To register a partnership with the SEC, here are the basic steps to follow:
 Have your proposed business name verified in the verification unit of SEC,
The partnership name shall bear the word "Company" or "Co." and if it's a
limited partnership , the word "Limited" or "Ltd." A professional partnership
may bear the word "Company," "Associates" or "Partners" or other similar
descriptions (SEC Memorandum Circular 5, Series 2008).
 SEC Registration
 Submit the following documents:
 Articles of Partnership
 Tax identification number of each partner and/or that of the partnership
 Registration data sheet for partnership duly accomplished in six copies
 Other documents that may be required:
 endorsement from other government agencies if the proposed
partnership will engage in an industry regulated by the government.
 for partnership with foreign partners: SEC Form F-105, bank certificate
on the capital contribution of partners, proof of remittance of
contribution of foreign partners; .
 Pay the registration/filing and miscellaneous fees: filing fee equivalent to 1/5
of 1% of the partnership capital but not less than P1,000 and legal research
fee which is 1% of the filing fee;
 Forward documents to the SEC Commissioner for signature.
Accounting for
1

Partnerships
2
 Owners’ Equity Accounts
In Basic Accounting, generally accepted accounting
principles were discussed in the context of a sole
proprietorship. These accounting principles also apply to
a partnership. Thus, the recording of assets, liabilities,
income and expenses is consistent for both
proprietorships and partnerships. Comparing two
businesses of the same nature, one organized as a sole
proprietorship and another as a partnership, there will be
no marked difference in their operations.
 Owners’ Equity Accounts
However, differences arise between the two forms of
business concerning owners' equity. For a proprietorship,
there is only a single owner. Therefore, there is only one
capital account and one drawing account. On the other
hand, since a partnership has two or more owners,
separate capital and drawing accounts are established
for each partner.
 Owners’ Equity Accounts
Partners' Capital
Permanent withdrawals Original investment
Debit balance of the drawing Additional Investment
account at the end of the Credit balance of the
period drawing account at the end
of the period
Partners' Drawing
Temporary withdrawals Share in profit (this may be
Share in loss (this may be credited directly to Capital
debited directly to Capital account)
account)
 Loan Receivable from or Payable to Partners
 If a partner withdraws a substantial amount of money with the
intention of repaying it, the debit should be to Loans Receivable-
Partner account instead of to Partner's Drawing account. This
account should be classified separately from the other receivables
of the partnership
 A partner may lend amounts to the partnership in excess of his
intended permanent investment. These advances should be
credited to Loans Payable-Partner account and not to Partner's
Capital account classified among the liabilities but separate from
liabilities to outsiders.
 This distinction is important in case of liquidation. Loans payable
to partners must be paid after the claims of outside creditors have
been paid in full. These loans have priority over partners' equity.
Forms of Contribution
 Valuation

Contribution Valuation
Cash Face amount (PAS 7)
Noncash asset Order of Priority:
1. Agreed value
2. Fair market value
3. Carrying amount
Industry Memorandum entry only
 Illustration - Cash

Ara and Mark agreed to form a partnership.

Ara invested cash of P100,000 and Mark
invested P150,000.
 Illustration – Non-Cash Asset
Michael and Angelo decided to form a partnership.
Michael contributed P200,000 cash and equipment with
a fair market value of P180,000. Angelo invested cash of
P120,000 and a delivery truck with a fair market value of
P300,000 with a book value of P1,200,000.
 Industry

Memorandum entry only.

“______ is admitted into the partnership as an

industrial partner to share _____ in the
partnership profit.”
 Let’s Try This!!!
Bruce, Peter, and Tony formed a partnership. Bruce
contributed P450,000; Peter contributed cash of
P250,000 and equipment valued at P300,000; Tony
is an industrial partner to contribute his special skills
and talents to the partnership. Profit or loss is to be
shared equally among the partners.

Requirement: Prepare the journal entries to record

the partners’ investments.
Let’s Try This!!!
 Adjustment of Accounts Prior to Formation

 In cases when the prospective partners have existing

businesses, their respective books will have to be adjusted
to reflect the fair market values of their assets or to correct
misstatements in the accounts. If the adjustments will not
be made, the initial capital balances of the partners may be
inequitable.
 Opening Entries of a Partnership Upon Formation

A partnership may be formed in any of the following

ways:
a. Individuals with no existing business form a
partnership.
b. Conversion of a sole proprietorship to a partnership.
i. A sole proprietor and an individual without an
existing business form a partnership.
ii. Two or more sole proprietors form a partnership.
c. Admission or retirement of a partner (to be covered
in Module/Chapter 3).
 Individuals with No Existing Business
Form a Partnership
The opening entry to recognize the contributions of each
partner into the partnership is simply to debit the assets
contributed, and to credit the liabilities assumed and the
capital account of each partner.
 Illustration
On July 1, 2019, Burgos and Ruiz agreed to form a
partnership. The partnership agreement specified that
Burgos is to invest cash of P700,000 and Ruiz is to
contribute land with a fair market value of P1,300,000 with
P300,000 mortgage to be assumed by the partnership.

Requirement: Prepare the journal entries to record the

partners’ investments.
Illustration
 Illustration
After the formation, the statement of financial position of
the partnership is:
Burgos and Ruiz
Statement of Financial Position
July 1, 2019

ASSETS
Cash P 700,000
Land 1,300,000
Total Assets P 2,000,000

LIABILITIES and PARTNERS' EQUITY

Mortgage Payable P 300,000
Burgos, Capital 700,000
Ruiz, Capital 1,000,000
Total Liabilities and Partners' Equity P 2,000,000
 Let’s Try This!!!
Froilan Labausa contributed land, inventory and
₱280,000 cash to a partnership. The land has a book
value of ₱650,000 and a market value of ₱1,350,000.
The partnership also assumed a ₱350,000 note
payable owed by Labausa that was used to purchase
the land. Rosalie Balhag agreed to put up cash
equivalent to Labausa’s net investment.

Required: Prepare the journal entry to record

Labausa’s and Balhag’s investment in the partnership.
 Let’s Try This!!!
Cash 280,000
Inventory 510,000
Land 1,350,000
Note Payable 350,000
Labausa, Capital 1,790,000
To record the investment of Labausa.

Cash 1,790,000
Balhag, Capital 1,790,000
To record the investment of Balhag.
 Let’s Try This!!!
Gogola and Paglinawan have just formed a
partnership. Gogola contributed cash of ₱1,260,000
and computer equipment that cost ₱540,000. The fair
value of the computer is ₱360,000. Gogola has notes
payable on the computer of ₱120,000 to be assumed
by the partnership. Gogola is to have 60% capital
interest in the partnership. Paglinawan contributed
only ₱900,000. The partners agreed to share profit and
loss equally.

Required: Gogola should make an additional

 Let’s Try This!!!
Contribution of Paglinawan 900,000
Capital Interest 40%
Total Agreed Capital 2,250,000
Capital Interest of Gogola 60%
Total Capital of Gogola 1,350,000
Net Contributions of Gogola -1,500,000
Withdrawal -150,000
 Let’s Try This!!!
Problem 3
Let’s Try This!!!
Books of Mulles
Accounts receivable
Per agreement 1,799,000
Per record 2,103,000
Adjustments - decrease -304,000

Store equipment
Per agreement 300,000
Per record 390,000
Adjustments -90,000

Historical cost 390,000 390,000

Less: Accumulated Depreciation -97,500
Net Book Value 292,500 300,000
 Let’s Try This!!!
Mulles, Capital 321,250
Allowance for uncollectible accounts 117,000
Accumulated depreciation 7,500
Accounts receivable 304,000
Inventories 112,500
Prepaid rent 29,250
To adjust the books of Mulles.

Accumulated depreciation 90,000

Store Equipment 90,000
To record the write-down of assets.
 Let’s Try This!!!
Mulles, Capital 2,393,000
Accounts payable 505,500
Notes payable 330,000
Cash 229,500
Accounts receivable 1,799,000
Inventories 900,000
Store equipment 300,000
To close the books of Mulles.
Let’s Try This!!!
Books of the Partnership
Cash 229,500
Accounts receivable 1,799,000
Inventories 900,000
Store equipment 300,000
Accounts payable 505,500
Notes payable 330,000
Mulles, Capital 2,393,000
To record the investment of Mulles.

Cash 443,000
Land 500,000
Building 1,450,000
Lucena, Capital 2,393,000
To record the investment of Lucena.
 A Sole Proprietor and Another Individual
Form a Partnership
 A sole proprietor may consider forming a partnership
with an individual who has no existing business. Under
this type of formation, the assets and the liabilities of
the proprietorship will be transferred to the newly
formed partnership at values agreed upon by all the
partners or at their current fair prices.
 A Sole Proprietor and Another Individual
Form a Partnership
When a sole proprietorship is converted into a
partnership, the following should be followed:
1. All nominal accounts should be closed to the capital
account including the drawing account of the
proprietor.
2. The proprietorship assets should be adjusted to reflect
their fair values or the values agreed upon by the “to
be” partners.
 Guidelines for the Adjustment of Assets
Assets should be adjusted based on the following
guidelines:
1. When the asset to be adjusted has with it a contra-
account, adjustment is made through the contra
account.
2. When the asset to be adjusted has no contra account,
adjustment is made directly to the asset account.
3. All adjustments of assets shall be made with a
corresponding adjustment to the capital account of
the owner.
 Let’s Try This!!!
Problem 4
 Let’s Try This!!!
Cash 300,000
Land 450,000
Calaguas, Capital 750,000
To record the investment of Calaguas.

Cash 100,000
Building 600,000
Mortgage Payable 400,000
dela Cruz, Capital 300,000
To record the investment of dela Cruz.
 Let’s Try This!!!
Problem 5
Let’s Try This!!!
Books of Geron
Geron, Capital 27,500
Accounts Receivable 20,000
Inventories 5,500
Other Assets 2,000
To adjust the books of Geron.

Accounts Payable 178,940

Notes Payable 200,000
Geron, Capital 614,476
Cash 11,000
Accounts Receivable 214,536
Inventories 114,535
Land 603,000
Furniture and Fixtures 50,345
To close the books of Geron.
 Let’s Try This!!!
Books of Yumul
Yumul, Capital 45,300
Accounts Receivable 35,000
Inventories 6,700
Other Assets 3,600
To adjust the books of Yumul.

Accounts Payable 243,650

Notes Payable 345,000
Geron, Capital 683,052
Cash 22,354
Accounts Receivable 532,890
Inventories 253,402
Building 428,267
Furniture and Fixtures 34,789
To close the books of Yumul.
 Let’s Try This!!!
Partnership Books
Cash 11,000
Accounts Receivable 214,536
Inventories 114,535
Land 603,000
Furniture and Fixtures 50,345
Accounts Payable 178,940
Notes Payable 200,000
Geron, Capital 614,476
To record investment of Geron.
 Let’s Try This!!!
Cash 22,354
Accounts Receivable 532,890
Inventories 253,402
Building 428,267
Furniture and Fixtures 34,789
Accounts Payable 243,650
Notes Payable 345,000
Geron, Capital 683,052
To record investment of Yumul.
 Limited Liability Company
 A limited liability company (LLC) is a hybrid form of business for it combines
the best features of a partnership and a corporation.
 LLC is a form of legal entity that provides limited liability to its owners.
 The owners of an LLC are called members. These owners may be individuals,
partnerships, corporations or other entities.
 This type of entity is attractive for professional service firms because the
owners will not have personal liability for the other owners' malpractice.
 A limited liability partnership (LLP) is very similar to an LLC except that
investment in LLP is restricted to professionals. The four major
international accounting firms KPMG, Ernst & Young,
PricewaterhouseCoopers and Deloitte Touche started as partnerships. As
they grew and the risk increased, these firms were allowed to change, by
operation of law, to LLPs.
 The accounting for LLCs is the similar to partnerships. The terms "member"
and "member's equity" are used instead of "partner" and "partner's equity."
QUESTIONS?
Thank you for
listening!

Michael Angelo M. Manayao, CPA, MBA