Theory on partnership:

1. Define partnership

An association of two or more persons who bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profit among themselves.

2. Discuss the phrase ‘exercise of profession’.

It refers to the practice of the skills and competencies of a profession. For CPAs, it includes
public accounting which takes care of tax returns, financial statements, audit of financial
records. For CPA teachers, it refers to engagement in the academe.

3. What are the essential characteristics of a partnership?

Mutual contribution. Contribution by the partners in the form of money, property, or industry
(work or services) into a common fund.

Division of profits or losses. Profits or losses will be shared by the partners according to their
agreement.

Co-ownership of contributed assets. All assets contributed into the partnership are owned by
the partnership by virtue of its separate and distinct juridical personality. If one partner
contributes an asset to the business, all partners jointly own it in a special sense.

Unlimited life. The partnership may be dissolved by the admission, death, insolvency, incapacity,
withdrawal of a partner or expiration of the term specified in the partnership agreement.
Income taxes. Partnerships, except general professional partnerships, are subject to tax at the
rate of 30% of taxable income.

Partners’ equity accounts. Accounting for partnerships are much like accounting for sole
proprietorships. However, in a partnership, each partner has a capital and a withdrawal account
that serves similar functions as the related accounts for sole proprietorships.

4. What is meant by mutual agency and unlimited liability?

Mutual agency. Any partner can bind the other partners to a contract if he is acting within his
express or implied authority.

Unlimited liability. All partners (except limited partners), including industrial partners, are
personally liable for all debts incurred by the partnership. It means that if the partnership assets
are exhausted, creditors may claim from the personal assets of the partners.

5. Identify the advantages of a partnership in comparison with a sole proprietorship.

a. Brings greater financial capability to the business
b. Combines special skills, expertise and experience of the partners.
c. Offers relative freedom and flexibility of action in decision-making
6. Identify advantages of a partnership in comparison with a corporation.
a. Easier and less expensive to organize
b. More personal and informal

This study source was downloaded by 100000856474918 from CourseHero.com on 11-22-2022 18:53:32 GMT -06:00

https://www.coursehero.com/file/80457194/Theory-On-Partnershippdf/
 7. Identify disadvantages of a partnership form of business organization.
a. Easily dissolved and thus unstable compared to a corporation
b. Mutual agency and unlimited liability may create personal obligations to partners
c. Less effective than a corporation in raising large amounts of capital
8. Differentiate a partnership from a corporation.

Manner of creation. A partnership is created by mere agreement of the partners while a

corporation is created by operation of law.

Number of persons. Two or more persons may form a partnership; in a corporation, at least five
(5) persons, not exceeding fifteen (15).

Commencement of juridical personality. In a partnership, juridical personality commences from

the execution of the articles of partnership; in a corporation, from the issuance of certificate of
incorporation by the Securities and Exchange Commission.

Management. In a partnership, every partner is an agent of the partnership if the partners did
not appoint a managing partner; in a corporation, management is vested on the Board of
Directors.

Extent of liability. In a partnership, each of the partners except a limited partner is liable to the
extent of his personal assets; in a corporation, stockholders are liable only to the extent of their
interest or investment in the corporation.

Right of succession. In a partnership, there is no right of succession; in a corporation, there is

right of succession. A corporation has the capacity of continued existence regardless of the
death, withdrawal, insolvency or incapacity of its directors or stockholders.

Terms of Existence. In a partnership, for any period of time stipulated by the partners; in a
corporation, not to exceed fifty (50) years but subject to extension.

9. Identify the kinds of partnership as to object, liability, duration, purpose and legality of
existence.
A. According to object:
• Universal partnership of all present property. All contributions become part of the
partnership fund.
• 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.
• Particular partnership. The object of the partnership is determinate – its use or
fruit, specific undertaking, or the exercise of a profession or vocation.
B. According to liability:
• General. All partners are liable to the extent of their separate properties.

This study source was downloaded by 100000856474918 from CourseHero.com on 11-22-2022 18:53:32 GMT -06:00

https://www.coursehero.com/file/80457194/Theory-On-Partnershippdf/
 •
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.
C. According to duration:
• Partnership with a fixed term or for a particular undertaking
• Partnership at will. One in which no term is specified and is not formed for any
particular undertaking.
D. According to purpose:
• Commercial or trading partnership. One formed for the transaction of business.
• Professional or non-trading partnership. One formed for the exercise of profession.
E. According to legality of existence
• De jure partnership. One which has complied with all the legal requirements for its
establishment
• One which has failed to comply with all the legal requirements for its establishment
10. Differentiate a general from a limited partner.

A general partner is liable to the extent of his separate property after all the assets of the
partnership are exhausted while a limited partner is liable only to the extent of his capital
contribution.

11. Differentiate a capitalist from an industrial partner.

A capitalist partner contributes money or property to the common fund of the partnership
while an industrial partner contributes his knowledge or personal service.

12. How do dormant, secret and silent partners differ from one another?

The dormant and silent partner does not take active part in the business of the partnership
while the secret partner does. The silent partner may be known as a partner but both the
dormant and secret partner are not known by outside parties as partners.

13. Discuss the concept of limited liability partnerships.

Limited liability partnerships [LLPs] have features of both general partnerships and
professional corporations. Individual partners of LLPs are personally responsible for their
own actions and for the actions of partnership employees under their supervision.
However, they are not responsible for the actions of other partners. The LLP as a whole, like
a general partnership, is responsible for the actions of all partners and employees.

14. Define articles of partnership. Name seven important provisions to be incorporated in this
instrument.

Articles of partnership contain the partnership agreements.

Essential provisions contained in the Articles of Partnership:

a. Partnership name, nature, purpose and location

b. Names, citizenship and residences of partners
c. Date of formation and duration of the partnership

This study source was downloaded by 100000856474918 from CourseHero.com on 11-22-2022 18:53:32 GMT -06:00

https://www.coursehero.com/file/80457194/Theory-On-Partnershippdf/
 d. Capital contribution of each partner, procedure for valuing non-cash investments,
treatment of excess contribution (as capital or loan) and penalties for a partner’s
failure to invest & maintain the agreed capital
e. Rights and duties of each partner
f. Accounting period to be adopted, nature of accounting records, financial
statements and audits by independent public accountants
g. Method of sharing profit or loss, frequency of income measurement and
distribution, including any provisions for recognition of differences in contributions
h. Drawings or salaries to be allowed to partners
i. Provision for arbitration of disputes, dissolution, and liquidation.
15. What are the steps involved in the SEC registration of partnerships?
a. Have your proposed business name verified in the verification unit of SEC
b. Submit the following documents:

Articles of Partnership
Verification slip for the business name
Written undertaking to change business name if required
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
c. Pay the registration/filing and miscellaneous fees
d. Forward documents to the SEC Commissioner for signature
16. What are the transactions normally debited and credited to the partner’s capital account?

Partner’s Capital Account

Debit Credit
1. Permanent withdrawals 1. Original investment
2. Debit balance of the drawing account at 2. Additional investment
the end of the period.
3. Credit balance of the drawing account
at the end of the period

17. Differentiate permanent withdrawals from temporary withdrawals.

Permanent withdrawals are made with the intention of permanently decreasing the
partner’s capital while temporary withdrawals are regular advances made by the partners
in anticipation of their share in profit.

18. What is the proper accounting treatment of loans receivable from partners and loan payable to
partners?

Loans Receivable from Partner. 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 a Partner’s Drawing account. This account should be classified separately from
the other receivables of the partnership.

This study source was downloaded by 100000856474918 from CourseHero.com on 11-22-2022 18:53:32 GMT -06:00

https://www.coursehero.com/file/80457194/Theory-On-Partnershippdf/
 Loans Payable to Partner. 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.

19. What is the basis for recording the values of the non-cash assets contributed to the partnership?

When partners invest non-cash assets, they are to be recorded at values agreed upon by
the partners. In the absence of any agreement, the contributions will be recognized at their
fair market values at the date of transfer to the partnership.

20. What is meant by fair market value of an asset?

The estimated amount that a willing seller would receive from a financially capable buyer
for the sale of the asset in a free market.

21. Outline the accounting procedures involved in recording the formation of a partnership by a sole
proprietor and an individual with no existing business.

The assets and 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.

Steps: 1. Adjust the assets and liabilities of the single proprietor in accordance with the
partners’ agreement. Adjustments are to be made to the capital account. 2. Close the
books.

Step 3. Open the books of the partnership. Record the investment of the single proprietor
and the other individual. Prepare the Statement of Financial Position of the newly-formed
partnership.

This study source was downloaded by 100000856474918 from CourseHero.com on 11-22-2022 18:53:32 GMT -06:00

https://www.coursehero.com/file/80457194/Theory-On-Partnershippdf/
Powered by TCPDF (www.tcpdf.org)