FINANCIAL ACCOUNTING AND REPORTING 2

PARTNERSHIP AND CORPORATION ACCOUNTING

ACCOUNTING FOR PARTNERSHIPS

1. BASIC CONSIDERATIONS AND FORMATION
In a contract of partnership, two or more persons bind themselves to contribute money,
propery or industry to a common fund, with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession (referred to as
General Professional Partnership or GPP)
- Art. 1767 of the Civil Code of the Philippines
Features of Partnership:
* Resemble sole proprietorship except there are two or more owners of the business (partners)
* Formed to bring various talents and knowledge of the partners
* Provides more equity capital than a single individual

Characteristics of a Partnership
1. Mutual contribution 5. Limited life
2. Division of profits or losses 6. Unlimited liability
3. Co-ownership of contributed assets 7. Income taxes
4. Mutual agency 8. Partner's equity accounts

ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP

as to proprietorships:
1. brings greater financial capability
2. combines special skills, expertise and experience
ADVANTAGES
3. relative freedom and flexibility of action in decision
as to corporations
1. easier and less expensive to organize
2. more personal and informal
1. easily dissolved and thus unstable compared to a corporation
2. mutual agency and unlimited liability may create personal
DISADVANTAGES obligation to partners
3. less effective than a corporation in raising large amounts of
capital

PARTNERSHIP DISTINGUISHED FROM CORPORATION

Comparision Partnership Corporation
A. Manner of Creation mere agreement of the partners operation of law
B. Number of Persons two or more persons not exceeding 15
C. Commencement of Juridical execution of the articles of issuance of certificate of
Personality partnership incorporation by SEC
D. Management every partner is an agent if the vested on the Board of Directors
partnership did not appoint a (BOD)
managing partner
E. Extent of Liability partners are liable to the extent stockholders are liable only to
of his personal assets (except the extent of their interest or
limited partner) investment in the corporation
F. Right of Succession NO YES*
G. Terms of Existence any period of time stipulated shall have perpetual existence
by the partners unless its AOI provides
otherwise

* A corporation has continued existence regardless of the death, withrawal, insolvency or incapacity
of its directors or stockholders
* AOI - articles of incorporation

CLASSIFICATIONS OF PARTNERSHIPS
1. According to subject
A. Universal partnership of all present property
B. Universal partnership of profits
C. Particular partnership
2. According to liability
A. General - all partners are liable to the extent of their separate properties
B. Limited - limited partners are liable only to the extent of their personal contributions. 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
4. According to purpose
A. Commercial or trading partnership
B. Professional or non-trading partnership
5. 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

KINDS OF PARTNERS
1. General Partner - liable to the extent of his separate property after the assets of the
partnership are exhausted.
2. Limited Partner - liable only to the extent of his capital contribution. Not allowed to contribute
industry or services only.
3. Capitalist Partner - money or property contributor.
4. Industrial Partner - knowledge or personal service contributor.
5. Managing Partner - appointed as manager of the partnership.
6. Liquidating Partner - designated to wind up or settle the affairs of the partnership.
7. Dormant Partner - one who takes active part in the business of the partnership and is not known
as a partner.
8. Silent Partner - one who does not take active part in the business of the partnership though
may be known as a partner.
9. Secret Partner - one who takes active part in the business but is not known to be a partner by
outside parties.
10. Nominal partner or partner by estoppel. One who is acually not a partner but who
represents himself as one.
ARTICLES OF PARTNERSHIP
A partnetrship may be constituted orally or in writing. When the partnership agreements are
writing in nature, these are embodied in the articles of partnership.

SEC REGISTRATION
When the partnership capital is 3,000 or more, in money or property, the public instrument must
be recorded with sec. Even if it not registered, the partnership having a capital of 3,000 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 purpose of registration is to set a condition for the issuance of the licenses to engage in the
business or trade.

ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY

CPAs, firms and partnership of CPAs, engaged in the practice of public accountancy, including
the partners and staff members thereof, shall register with the Professional Regulation
Commission (PRC) and the Professional Regulatory Board of Accountancy (PRBOA).
The registration shall be renewed every three years.

ACCOUNTING FOR PARTNERSHIPS

Owner's Equity Accounts
* The recording of A, L, I and E is consistent for both proprietorships and partnerships.
* There are no differences in the operations of two business organizations.
* Differences arise between two forms of business concerning OE. In partnership, separate
capital and drawing accounts are established for each partner unlike sole proprietorship by which
there is only one capital and drawing account.
Partner's Capital Account
Debit Credit
1. Permanent withdrawals 1. Original Investment
2. Debit balance of the drawing 2. Additional Investment
account at the end of the period 3. Credit balance of the drawing
account at the end of the period

Partner's Drawing Account

Debit Credit
1. Temporary withdrawals 1. Share in profit (this may be
2. Share in loss (this may be credited directly to capital)
debited directly to capital)

Permanent withdrawals - made with the intention of permanently decreasing the partner's capital.
Temporary withdrawals - regular advances made by the partners in anticipation of share in profit.

The profit or loss is debited or credited either to the drawing account or to capital account
depending on the intention of the partners. If they preferred to maintain their capital accounts
for investments and permanent withdrawals, profit or loss should be entered in the drawing
account. On the other hand, if the partner's purpose is to make profit or loss part of their capital,
capital account should be used. Ending capital balances will be the same in either case.
LOAN RECEIVABLE FROM OR PAYABLE TO PARTNERS
If a partner withdraws a substantial amount of money with the intention or repaying it, the
debit should be to Loans Receivable - Partner Account instead of to Partner's Drawing account.
(classified separately from other receivables of the partnership)
On the other hand, 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 liabilities separate from liabilities to
outsiders. The 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 partner's
equity

PARTNERSHIP VALUATION
Valuation of Investments by Partners
- Assets are debited for assets contributed to the partnership
- Liabilities are credited for liabilities assumed by the partnership
- Separate capital accounts are credited for net investment ( A - L )
Partners may invest cash or non cash assets in the partnership.
Order of priority of NCA: 1. Values agreed upon by the partners
2. Fair market value (FVM) at the date of transfer to the partnership
Fair market value of an asset is the estimated amount that a willing seller would receive from a
financially capable buyer for the sale of the asset in a free market. Fair value is the price at which
an A or L could be exchanged in a current transaction between knowledgeable, unrelated willing
parties. (IFRS 3)

Adjustment of Accounts Prior to Formation

*Respective books of existing businesses should be adjusted to reflect the fair market values
of their assets or to correct misstatements in the accounts.
*The adjustment of the assets or liabilities prior to formation will be similar to the adjustments
that we are already familiar with. However, when the adjustment involves a debit or credit to a
nominal account (income or expenses) the capital account would instead debited or credited.

Example:
1. Establishment of an allowance for uncollectible accounts of certain percentage of AR.
Pro-forma Adjusting Entry: Adjusting Entry (partnership formation)
Uncollectible Accounts Expense CPA, Capital
Allowance for Uncollectible Accounts Allowance for Uncollectible Accounts
(example of increase in contra asset)
2. Recognition of additional salaries payable
Pro-forma Adjusting Entry: Adjusting Entry (partnership formation)
Salaries Expense CPA, Capital
Salaries Payable Salaries Payable
(example of increase in liability)
3. Omission of prepaid expenses by the accountant.
Adjusting Entry (partnership formation)
Prepaid Expenses
CPA, Capital
(example of increase in asset)
SUMMARY OF NECESSARY ADJUSTMENTS TO CAPITAL ACCOUNT:
Owner's Equity Account
Debit Credit
1. Decrease in asset 1. Increase in asset
2. Increase in Liability 2. Decrease in Liability
3. Increase in contra-asset 3. Decrease in contra-asset

Opening Entries of a Partnership Upon Formation

1. Individuals with no existing business form a partnership
Procedures:
1. Prepare journal entry to record initial investment of the partners.
Example:
Cash xxx
Non-Cash Assets (at FVM) xxx
Liabilities (include only when assumed) xxx
A, Capital (net investment) xxx
B, Capital (net investment) xxx
To record the initial investments of A and B

2. Prepare the statement of financial position of the partnership

A and B Partnership
Statement of Financial Position
Date (Date of Formation)

Assets
Cash xxx
Non-cash assets xxx
Total Assets xxx

Liabities and Owner's Equity

Liiabilities xxx
A, Capital xxx
B, Capital xxx
Total Liabilities and Owner's Equity xxx

2. Conversion of sole proprietorship to a partnership

a. Sole proprietor and another individual form a partnership
(where individual usually invest in accordance of portion of proprietor's adjusted
capital)
Procedures:
1. Adjust the books of the proprietor in accordance of agreement. Adjustments are to
be made to his capital account.
 (COMPOUND ENTRY)
A, Capital (net adjustment/balancing figure) xxx
Increased Asset Account xxx
Decreased Liability Account xxx
Decreased Contra Asset Account xxx
Decreased Asset Account xxx
Increased Liability Account xxx
Increased Contra Asset Account xxx
A, Capital (net adjustment/balancing figure) xxx
To record adjustments to restate A, Capital

2. Close the books (consider the effects of adjustments)

Liabilities xxx
Contra Asset (eg. Allowance for DA/Accum Dep) xxx
A, Capital xxx
Cash xxx
Non-cash assets xxx
To close the books of A

3. Record the investment of A in the partnership books

Cash xxx
Non Cash Asset xxx
Contra-asset (Allowance for DA only*) xxx
Liabilities xxx
A, Capital xxx
To record the investment of A
*Accumulated Depreciation is eliminated when recording at partnership books.
The related PPE (except land) is recorded at net amount (cost less A/D)

4. Record the investment of B in the partnership books

Cash xxx
B, Capital xxx
To record the investment of B

5. Prepare the statement of financial position of the partnership

(combined balances of A and B from 3-4)
 A and B Partnership
Statement of Financial Position
Date (Date of Formation)

Assets
Cash xxx
Non-cash assets xxx
Total Assets xxx

Liabities and Owner's Equity

Liiabilities xxx
A, Capital xxx
B, Capital xxx
Total Liabilities and Owner's Equity xxx

b. Two or more sole proprietors form a partnership.

Procedures:
1. Adjust the books of both parties in accordance of agreement. Adjustments are to
be made to his capital account.
(COMPOUND ENTRY)
A, Capital (net adjustment/balancing figure) xxx
Increased Asset Account xxx
Decreased Liability Account xxx
Decreased Contra Asset Account xxx
Decreased Asset Account xxx
Increased Liability Account xxx
Increased Contra Asset Account xxx
A, Capital (net adjustment/balancing figure) xxx
To record adjustments to restate A, Capital
(COMPOUND ENTRY)
B, Capital (net adjustment/balancing figure) xxx
Increased Asset Account xxx
Decreased Liability Account xxx
Decreased Contra Asset Account xxx
Decreased Asset Account xxx
Increased Liability Account xxx
Increased Contra Asset Account xxx
B, Capital (net adjustment/balancing figure) xxx
To record adjustments to restate B, Capital
2. Close the books of both parties(consider the effects of adjustments)
Liabilities xxx
Contra Asset (eg. Allowance for DA/Accum Dep) xxx
A, Capital xxx
Cash xxx
Non-cash assets xxx
To close the books of A
 Liabilities xxx
Contra Asset (eg. Allowance for DA/Accum Dep) xxx
B, Capital xxx
Cash xxx
Non-cash assets xxx
To close the books of B

3. Record the investment of A in the partnership books

Cash xxx
Non Cash Asset xxx
Contra-asset (Allowance for DA only*) xxx
Liabilities xxx
A, Capital xxx
To record the investment of A
*Accumulated Depreciation is eliminated when recording at partnership books.

4. Record the investment of B in the partnership books

Cash xxx
Non Cash Asset xxx
Contra-asset (Allowance for DA only*) xxx
Liabilities xxx
B, Capital xxx
To record the investment of B
*Accumulated Depreciation is eliminated when recording at partnership books.

5. Prepare the statement of financial position of the partnership

(combined balances of A and B from 3-4)
A and B Partnership
Statement of Financial Position
Date (Date of Formation)

Assets
Cash xxx
Non-cash assets xxx
Total Assets xxx

Liabities and Owner's Equity

Liiabilities xxx
A, Capital xxx
B, Capital xxx
Total Liabilities and Owner's Equity xxx

3. Admission or retirement of a partner (to be covered in partnership dissolution)

LIMITED LIABILITY COMPANY
- a hybrid form of business for it combines the best features of a partnership and corporation.
- form of legal entity that provides limited liability to its owners.
- may be treated as a partnership for tax purposes subject to conditions.
- owners of an LLC are called members (may be individuals, partnerships, corporations or other
entities)
- this type of entity is attractive for professional service firms.

LIMITED LIABILITY PARTNERSHIP

- very similar to LLC except that investment in LLP is restricted ti 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 very similar to partnerships. The terms "member" and "member's
equity" are used instead of "partner" and "partner's equity".

Reference:
Partnership and Corporation Accounting by Win Ballada (2020 Issue - 22nd Edition)