Partnership Dissolution
Definition
The dissolution of a partnership is the
change in the relation of the partners
caused by any partner ceasing to be
associated in the carrying on as
distinguished from the winding up of the
business of the partnership (Civil Code
of the Philippines, Article 1828).
Characteristics of Partnership Dissolution
• Partnership is not terminated, but
continues until the winding up of
partnership affairs is completed
(Article 1829).
• The partnership relations change
among the partners.
• Only the partnership relation is
dissolved but the business
operation continues.
• This is in accordance with the
limited life feature of a
partnership.
Note: Dissolution is different from
Liquidation. In dissolution only the
partnership relation changes or the
partners but not the business operation
itself. While in liquidation both
partnership operation and partnership
are terminated.
Causes of Dissolution
1. ADMISSION OF A PARTNER
2. WITHDRAWAL OR
RETIREMENT OF A
PARTNER
3. DEATH OF A PARTNER
4. INCORPORATION OF THE
PARTNERSHIP
PART I - ADMISSION OF A PARTNER
1. Purchase of interest from existing
partners
i. Purchase of a partner
ii. Purchase of an outsider
2. Investment of assets in a
partnership
i. No Bonus
ii. Bonus to old partners
iii. Bonus to the new partners
iv.
1. PURCHASE OF AN INTEREST
FROM EXISTING PARTNERS
• It is a direct transaction between
the existing partners and the
incoming partner.
• The incoming partner purchase a
portion of the capital interest of
the selling partner of a
partnership for a specified
amount, and the payment is
made directly to the selling
partner and not to the
partnership.
• This type of admission doesn’t
affect the partnership’s Assets,
Liabilities and Equity.
• It is merely a transfer of Capital
from existing partners to the
incoming partner.
Measurement and Recording:
 Since it involves only the transfer of
capital, the amount personally paid
by the incoming partner to the
selling partner will have no bearing.
The only thing that matters here is
TOTAL AGREED CAPITAL (TAC)
the Capital interest itself or the % of
the Capital Interest of the Selling
Partner.
Journal Entry:
Selling Partner/s , Capital
xxx
Incoming Partner/s, Capital
xxx
B. INVESTMENT OF ASSETS IN A
PARTNERSHIP
• The incoming partner may be
admitted by investing cash or
other assets in the business.
• It is a transaction in which the
incoming partner invested
assets in the partnership and
does not made personal
payment to the individual
partners.
• The investment will
INCREASE Total Assets and
the Total Partners Equity.
• This transaction results to
either Bonus or No Bonus, i.e,
Bonus to new partner or Old
Partner/s Important
Definitions
TOTAL CONTRIBUTED CAPITAL
(TCC)
• The sum of the capital
balances of the old partners
and the actual investment of
the new partner.
• The total capital of the
partnership after considering
the capital credits given to
each of the partners.
• Under the Bonus method,
TCC=TAC, capital credits to
each partner may be equal to,
greater than, or less than his
capital contributions.
BONUS
• The amount off capital or
equity transferred by one
partner to another partner.
CAPITAL CREDIT
• It is the equity of a partner in
the new partnership.
• For the newly admitted
partner, Capital credit is
computed by TAC X % of
Capital Interest.
Journal entries for investment of
assets of new partner
 Record the actual investment
Cash or Other Assets
xxx
New Partner’s Capital
xxx
 Follow-up entry for bonus
a) NO BONUS
 - No follow up entry
b) BONUS GIVEN TO NEW
PARTNER
Old Partners, Capital
xx
New Partner, Capital
xx
c) BONUS GIVEN TO OLD
PARTNERS
New Partner, Capital
xxx
Old Partners, Capital
xxx
NOTES:
• Those partner/s who receives the
bonus, their capital account/s is
being credited, because a credit
entry on capital, increases
capital.
• Those partner/s who gives a
bonus, their capital account/s are
debited; a debit entry on capital
decreases the capital balance.
PART II- WITHDRAWAL OR
RETIREMENT OF A PARTNER
1. Sale of interest to a partner or an
outsider
2. Sale of interest to partnership
i. Withdrawal @ book
value
ii. Withdrawal @ more than
book value
iii. Withdrawal @ less than
book value
>Before any partner/s withdraw in the
partnership this should be first permitted
or atleast given a consent by the existing
partners
>Before withdrawal the partnership
accounts must be updated or atleast
stated properly, REVALUATION is
needed.
1) Sale of Interest to a Partner or an
Outsider
• This type of withdrawal is
similar to Purchase of Interest on
admission, in which the buyer
paid a specified amount to the
withdrawing/selling partner in
exchange of his capital interest.
• This transation involves the
buying partner and the
withdrawing partner and not the
partnership.
• Total Partnership Assets and
Equity are not affected.
• It involves direct payment of a
buyer to the withdrawing/selling
partner.
• It is merely a transfer of capital
interest.
Measurement:
The personal payment price/purchase
price will have no bearing, the amount
that only matters is the Capital Interest
of the withdrawing partner.
Journal Entry:
Selling/Withdrawing Partner,
Capital xxx
Buying Partner, Capital xxx
2) SALE OF INTEREST TO THE
PARTNERSHIP
• This type of withdrawal involves
the withdrawing partner and the
Partnership.
• When a withdrawing partner
sells his interest to the
partnership, the partner is paid
from the assets of the
partnership, He may receive an
amount equal to, greater than, or
less than the balance of his
capital account.
• This is a typical type of
withdrawal however we don’t
use the withdrawal account.
Since this is a final withdrawal
the capital account is used
instead, the withdrawing
partner’s capital account is
removed from the partnership as
a result of his withdrawal.
• This type of withdrawal reduces
the assets and equity of the
partnership.
• The withdrawing partner leaves
the partnership, and he/she may
receive his/her share of the
business assets like cash or other
assets.
• Before withdrawal in the
partnership, the partnership
accounts must be first
updated/adjusted and revaluation
is necessary.
• In partnership withdrawal under
sale of interest to the partnership,
a bonus is either given to
withdrawing partner
continuing partner/s.
PART III- DEATH OF A PARTNER
1. Sale of capital interest of the
deceased partner to a partner or
an outsider
2. Sale of capital interest of the
deceased partner to the
partnership
i. Withdrawal @ BV
ii. Withdrawal @ more than
BV
iii. Withdrawal @ less than
BV
• When the death of a partner does
not result to liquidation, the
accounting treatment for this is is
similar to Withdrawal of a
Partner.
• The deceased partner may be
considered to have retired from
the partnership and his heirs or
estate can expect to receive the
amount of his interest from the
business.
• If payment to the estate of the
deceased cannot be made
immediately, the balance in the
capital account of the deceased
partner should be transferred to a
liability account, Payable to the
Estate.
•
POSSIBLE ACCOUNTING
TREATMENTS ON THE DECEASED
PARTNER’S CAPITAL
1. The heirs may sold the deceased
partner’s capital directly to the
outsider or continuing partners
• This transaction is between
or the heirs and continuing
partner’s/outsider, payment
and receipt of payment is
 made among them
personally.
PART IV- INCORPORATION OF A
• This transaction does not PARTNERSHIP
affect the partnership’s total
assets, liabilities and equity. • A partnership may decide to
• This only requires incorporate after evaluating the
transferring from the various advantages of a
deceased partner capital corporate entity.
balance to the buying • After the necessary adjusting and
partner’s capital. closing entries, the assets and
liabilities of the partnership are
Measurement: transferred to a corporation in
• The amount to be entered in exchange for share of stocks.
the journal entry is the • The shares received by the
amount of capital interest of partnership are distributed to the
the deceased partner. The partners based on their equity
payment or purchase price interests.
will have no bearing since it • In the books of the corporation,
is personal transactions the receipt of transferred assets
outside the partnership and and liabilities will be recorded
these requires only transfer along with the issuance of share
of capital. capital to the incorporators, the
‘’former’’ partners.
2. The heirs may sold the deceased
partner’s capital or withdraw it to the
Partnership
• This transaction occurs
inside the Partnership and
occurs between the
Partner’s heirs and the
Partnership.
• It will cause changes in the
Partnership books usually
decreases assets and equity
and sometimes affect
liabilities if payment to
partner’s heir cannot be
made immediately.
• This also results to either no
bonus or bonus to deceased
partner or continuing
partners.