CHAPTER 2-NATURE AND

INFORMATION OF
PARTNERSHIP
Partnership
- The Ph Civil Code defines
partnership as “a contract whereby two or
more persons bind themselves to
contribute money, property, or industry to
a common fund, with the intention on
dividing profit among themselves.
- Written partnership contract is
known as the Articles of Co-Partnership
and is required when total partnership
capital reaches P 3,000 in money or
property.
-Partners share not only profits, but
also costs, risks and responsibilities
involved in operating their business.
Contracts includes infos such as:
1. The name of the partnership;
 2. The names, addresses of the partners,
classes of partners identified whether
the partner is a general or limited
partner ;
3. The effective date of the contract;
4. The purpose and principal place of the
business;
5. The capital of the partnership stating
the contributions of each partner;
6. The rights and duties of each partner;
7. The profit or loss sharing among the
partners;
8. The conditions regarding the partner’s
withdrawals of assets;
9. The manner of keeping the books of
accounts;
10. The causes of dissolution;
11. The provision for arbitration for
settlement of disputes.
- The partnership is required to register
with the following government offices
before it can start its operation.
1. Securities and Exchange
Commission- to secure the certificate
in order to have the license to operate a
business.
2. Department of Trade and Industry-
to register the partnership’s trade or
business name to ensure that the
business name will not be used by
others.
3. City or Municipal Mayor’s Office- to
secure for mayor’s permit and license
to operate in the city or municipality
and to ensure that the business is in
compliance with their ordinances and
standards.
4. Bureau of Internal Revenue- to
secure a BIR Certificate of
Registration, a Tax Identification
Number, authorization to print official
receipts, to register the books of
accounts and paying the national
internal revenue taxes.
 5. SSS, Philhealth and Pag-ibig Fund-
to register the partnership as an
employer and for remitting the
employees’ contribution together with
the employer’s share.
CHARACTERISTICS OF
PARTNERSHIP
Mutual Contribution- Pare-parehas
kayong may ibinigay
1. Mutual Agency- kung anong ginawa
ng isa ay counted as ginawa din ng isa
or involve and isa with a limit of
authority given. Acting behalf of the
partnership.
2. Unlimited Liability- Walang
hangganan ang utang, maaaring gamitin
ang personal assets ng parties
pambayad.
3. Profit and Loss Sharing- Depending
sa kung anong napag-usapan. As a
general rule, the agreement must be
stated in the articles of co-partnership.
4. Limited Life- May katapusan ang
partnership, maaari itong matapos
depende sa napagkasunduan, death,
law, new partner, withdrawal, or the
partner have no capability to continue.
5. Co-ownership of partnership assets-
pag mamay-ari ng isa ang pag-aari ng
isa na cinontribute sa partnership.
6. Legal Entity- Separate at may sariling
entry ng capital ang bawat party.
7. Taxable- partnerships are subject to an
annual income tax rate of 30% except
general professional partnerships.
ADVANTAGES OF A PARTNERSHIP
1. Easy Formation- a partnership may be
created by a simple contract and has fewer
legal requirements.
2. Larger resources- due to the more number
of partners, the partnership has larger
resources for its business operations
compared to a sole proprietorship.
3. Better management- the partnership will
be well managed by all the partners as they
take interest in the daily operations of the
business because of ownership, profit, and
control.
4. Unlimited liability- considered as one of
the characteristics of a partnership, this
makes it reliable from the point of view of
creditors in their decision to grant credit or
not.
DISADVANTAGES OF A
PARTNESHIP
1. Instability- as one of the characteristics of a
partnership, it does not exist for an
indefinite period of time because it is easily
dissolved.
2. Unlimited liability- this is also a
disadvantage from the point of any of the
partners since their personal properties
maybe called upon to pay the firm’s
liabilities.
3. Lack of harmony- there may be incidence
of differences and disagreements of
 opinions among the partners in conducting
the affairs of their business.
4. Transfer of ownership- it is not easy to
transfer ownership in a partnership because
the consent of each partner is required.
KIND/CHARATERISTICS OF
PARTNERSHIP
A partnership is classified according
to the following:
1. According to activities
a. Service
b. Merchandising
c. Manufacturing
2. According to Liability
a. General- dept paying can extends to
personal properties once partnership
asset have been exhausted
b. Limited- extent of his capital interest
in the partnership
3. According to Object
1. Universal Partnership
 a. Universal partnership of all present
property- all property will be
contributed in the partnership, in
which will be the common
partnership assets. And dividing
the profit in both
b. Universal partnership of profits-
the profits will be the only thing
that can be divided with the
partners
2. Particular Partnership- specific
4. According to duration of partnership
existence
a. Partnership at will- no period is fixed
by the partners for its duration;
terminate at will of one or both
parties
b. Partnership with a fixed term or
particular undertaking- term or
period for the partnership existence is
agreed upon by the partners
5. According to representation to others
 a. Ordinary partnership- actually exists
among the partners as well as to third
persons.
b. Partnership by estoppel- in realty is
not a partnership but is considered as one
with respect to those who, by reason of
their conduct or admission, are precluded
from denying its existence.
6. According to publicity
a. Secret partnership- the existence of
certain persons as partners is not
made known to the public by any of
the partners
b. Open partnership- existence is made
known to the public by the members
of the firm.
7. According to legality of existence
a. De Jure partnership- complied with
all the legal requirements for its
establishment
 b. . De Facto partnership- failed to
comply with all the legal
requirements for its establishment
CLASSES OF PARTNERS
1. As to contribution
a. Capitalist partner- contribute money
or property
b. Industrial partner- contributes skills,
labor or services
c. Capitalist-Industrial partner-
contributes both
2. As to liability to third persons
a. General partner- extends to personal
properties (difference of personal
asset and liability)
b. Limited partner- can only pay in the
creditor the amount he/she
contributes
3. As to management participation
a. Managing partner- appointed by the
partners to take charge of the
partnership business
 b. Silent partner- no active part in the
management of the partnership but is
known to be a partner
4. Other Classes of partners
a. Secret partner- takes active part in
management affairs but is not known
to be a partner
b. Dormant partner- no active part in
management affairs and is not known
to be a partner; he is both a secret
and a silent partner.
c. Nominal or Ostensible partner- a
partner in name only by allowing the
use of his name either for
accommodation or for consideration;
subject to liability as a partner for the
protection of innocent third persons
d. Liquidating partner- takes charge of
the winding up of partnership affairs
upon dissolution.
ACCOUNTING FOR PARTNERSHIP
FORMATION
 The accounting for partnership is
basically the same as is applied for a sole
proprietorship except that there are more
owners. Each partner should have a
separate capital account and drawing
account to show the effects of the
transactions affecting the partner’s
accounts as illustrated below:

A partnership maybe organized in any of

the following ways:
A. Partnership is formed for the first
time. The partners are new in the
business.
- Cash contributed by a partner is
recorded at face value.
 - Non-cash asset or property contributed
must be recorded at its value agreed
upon by all of the partners, or in the
absence of an agreement, must be
recorded at fair value at the date it was
invested by the partner.
- A partner who contributed his industry
or special skill is recorded as a
memorandum entry
Illustration: James, Kevin and Thomas formed
a partnership and contributed the following;

The automobile is mortgaged at a bank

with an outstanding balance of P200,000 and is
to be assumed by the partnership.
James is an industrial partner with a 25%
share in the profits, the balance to be divided
equally between Kevin and Thomas.
The entry to record the investments of Kevin
and Thomas is:
The memorandum entry to record the
contribution of James is:
James is admitted as an industrial
partner to the partnership with a 25%
share in the partnership profit.
B. Partnership is formed by a former
sole proprietor and an individual.
- The sole proprietor may change his
organization into a partnership with an
agreement with an individual not engaged
in any business. The sole proprietor will
transfer his net assets as his investment to
the partnership at agreed values or in the
absence of agreed values, at its fair market
value. There are two assumptions to record
the investments of the partners:
- 1) the partnership will use the books of
accounts of the sole proprietor, or
- 2) the partnership will use new set of
books of accounts. The usual practice,
 however, is to use new set of books of
accounts.
- Any adjustments on the value of an asset
or liability will be recorded through the
capital account of the partner affected by
such adjustments on his books of accounts.
- +A, -Contra A, -L (debit) Capital
(credit)
- -A, +Contra A, +L (credit) Capital
(debit)
Illustrative Problem:
The statement of financial position of Jordan
Company on January 1, 2020 is presented
below:

Jordan invited Axel to form a partnership

on January 1, 2020. Axel agreed to invest cash
to have 25% interest in the partnership. Jordan
will transfer the assets of his business and the
liabilities are to be assumed by the partnership
subject to the following adjustments as agreed
upon by Jordan and Axel.
 a. An allowance for bad debts of 10% of the
accounts receivable is to be recognized.
b. Prepaid expenses of P 18,000 are to be
recognized.
c. Accrued expenses of P 10,000 are also to
be recognized.
d. Merchandise inventory is to be valued at P
140,000.
e. The Equipment is to be depreciated by
20%.
The capital of Jordan will be equivalent to
the amount equal to his net assets contributed
which is to be 75% interest of the total
partnership capital.
Assumption 1: Books of the sole proprietor
will be used by the partnership
Step 1: Prepare the journal entries to record the
adjustments:
After posting the adjustments, the adjusted
capital balance of Jordan will be:

Step 2: Prepare the journal entry to record

the investment of Axel, the other partner:

Cash investment of Axel is computed as

follows:

Assumption 2: New set of books will be used

by the partnership
Prepare the journal entries to record the
investments of the partners:
 The adjusting entries for the assets and
liabilities affected will be recorded on the books
of the partner with existing business. A closing
entry will also be prepared to formally close the
books of the sole proprietor.
Using the above illustration, the following
are the journal entries on the books of Jordan:

To record the closing entry:

The Statement of Financial Position of

Jordan and Axel will be presented as follows,
see next page
 The Accumulated Depreciation account
from the books of the sole proprietor is not
carried on the books of the partnership. Fixed
assets transferred to the partnership books are
recorded net of depreciation or its carrying
value. The carrying value of the Fixed Asset
will be the basis for future recording of
depreciation by the partnership. The Allowance
for Bad Debts, however, is recorded on the
books of the partnership because of the
possibility that it might still be collected.
C.Partnership is formed by combining the
businesses of two or more sole
proprietors
- When two or more sole proprietors decided
to combine their businesses and form a
partnership, they may agree to transfer their
net assets to the partnership at values
agreed upon or at fair market values.
 - The partnership may either: 1) use the
books of accounts of one of the sole
proprietors, or 2) use new set of books of
accounts.
- As mentioned earlier, it is a common
practice to use new set of books of
accounts.
ILLUSTRATIVE PROBLEM:
On March 1, 2020, Carl and Melo decided
to combine their businesses to form a
partnership. Statement of Financial Position on
March 1, 2020, before the formation, showed
the following:

They agreed to the following adjustments

before the formation:
a. Each partner will provide allowance for
bad debts equal to 5% of the outstanding
accounts receivable.
 b. Carl’s office furniture should be valued at
P 155,000, while Melo’s office equipment
is under depreciated by P 1,250.
c. Rent expense incurred previously by Carl
was not recorded and paid amounting to P
5,000 while Salary expense incurred by
Melo was also not recorded and paid
amounting to P 4,000.
d. The fair value of the merchandise inventory
amounted to P 147,500 for Carl and
P105,000 for Melo.
e. Melo will contribute sufficient cash to
make his capital interest equal to 40% in
the new firm
Assumption 1: Books of the sole proprietor
will be used by the partnership
The steps to be followed under this
assumption are similar to the procedures as
discussed in Formation B Assumption 1.
Assuming the books of Carl Co. will be used by
the partnership, the following are the steps to be
followed:
Step 1: Prepare the journal entries to record the
adjustments of Carl Co.:
 FURNI

Step 2: Prepare the journal entries to record the

investment of Melo Co.:

The books of Carl Co. will not be closed

since it will be used by the new partnership.
The adjustments on the affected accounts of
Melo Co. will not be taken up in the books of
Carl. The following journal entries to record the
adjustments and closing entry on the books of
Melo Co. are as follows:
The journal entry to close the books of Melo Co
is:

(net)
(net)

The computation for the adjusted capital of

Carl and Melo and his additional cash
investment is presented as follows:
Assumption 2: New set of books will be used
by the partnership
Prepare the journal entries to record the
investments of the partners:

The Statement of Financial Position of

Carl and Melo immediately after the formation
of the partnership is presented as follows:
CARL AND MELO
Statement of Financial Position
March 1, 2020
 The percentage capital share of each
partner is the amount of equity that each partner
will have in the net assets of the new
partnership. The capital contribution of the
partner is generally equal to his capital share.
However, there are cases where partners may
agree to a capital share equity which is not
equal to his capital contribution. This situation
will give rise to bonus on the initial investments
of the partners
Example: Billy and Joel agreed to form a
partnership by investing P 130,000 and P
85,000 respectively. Profits and losses are
shared 65% and 35% respectively.
1. Capital accounts of the partners are equal to
the amount of contribution

2. Partners agreed to have equal capital interest

in the partnership. Implied bonus will be given
to Joel since he has a lesser amount of
contribution

3. Partners agreed to have their respective

capital interest in proportion to their profit and
loss agreement in the partnership. Implied bonus
is given to Billy.