Partnership

Formation
Advanced Accounting 1
Partnership
By the 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 profits among themselves.

Two or more persons may also form a partnership for the exercise of a
profession.
Characteristics of a Partnership
1. Ease of formation
2. Separate legal personality
3. Mutual agency
4. Co-ownership of property
5. Co-ownership of profits
6. Limited life
7. Transfer of ownership
8. Unlimited liability (this is applicable to a general partnership)
Accounting for Partnerships
The following are the major considerations in the accounting for the
equity of a partnership:
1. Formation – accounting for initial investments to the partnership
2. Operation – division of profits or losses
3. Dissolution – admission of a new partner and withdrawal, retirement
or death of a partner
4. Liquidation – winding-up of affairs
Valuation of Contributions of Partners
All assets contributed to (and related liabilities assumed by) the
partnership shall be measured at:
1. Agreed value
2. Fair value

Bonus on Initial Investments

A bonus exists when the capital account of a partner is credited for an
amount greater than or less than the fair value of his contributions.
The bonus is treated as adjustment to the capital accounts of the other
partners.
Capital and Drawing Accounts
Each partner shall have its own capital account.
Partner A, Capital
Withdrawals xx xx Initial investment
Losses xx xx Additional investment
Debit balance in drawings xx Profits
account xx

Partner A, Drawings
Withdrawals xx xx Reimbursable costs
Computation of Agreed Capital
Contributed Capital Entry Agreed Capital % Capitalization
Partner A xx xx xx xx%
Partner B xx (xx) xx xx%
Total xx - xx 100%

1. Bonus method – total contributed capital = total agreed capital

2. Goodwill method – total contributed capital < total agreed capital
3. Cash settlement