Aquino, Anjo V.

BSBA FM 1-3

Chapter 2: Nature and Formation of a Partnership

Discussion Questions

1. What is Partnership?
Answer:
According to Article 1767 of the Civil Code of the Philippines, a partnership is
defined as an agreement between two or more people who decide to bind themselves
by contributing or investing cash, property, or industry into a common fund. This
contract has the intention of generating profits that will be divided among themselves.
Reference:
Baysa & Lupisan (2014). Accounting for Partnership and Corporation (p. 43)

2. How does a partnership differs from a sole proprietorship?

Answer:
A legal form of business organization is mainly composed of a sole proprietorship,
partnership, or corporation. These organizations differ in how they function as entities.
Therefore, businessmen should think carefully about what they prefer when establishing
a business.
A sole proprietorship is a business organization managed by an individual. This
sole proprietor has all the responsibilities, including the business’ liabilities and any
concerns that may arise during its existence. Furthermore, they are the only ones who
will have a profit for the business, as they are the only ones who supervise it.
On the other hand, a partnership has a huge difference compared to a sole
proprietorship. This organizational business will be authorized by numerous people who
have agreed to manage the business as one. Although it has a huge advantage in the
business world considering the diverse knowledge of partners, it can be easily subjected
to dissolvement. This type of business has divided supervision among partners, which
may result in disagreements within the entity.
Reference:
Indeed Editorial Team (2023). Partnership and Sole Proprietorship: What’s the
Difference

3. Explain the meaning of unlimited liability or a partner for partnership debts. Is it an

advantage or a disadvantage on the part of the partnership?
Answer:
A partnership business, consisting of partners, may be subject to unlimited
liability from its creditors. Meaning, their personal assets would possibly be used as a
payment for partnership obligations when the assets of their business are not enough.
On the part of partners, it is considered a disadvantage. On the good side, it’s an
advantage to the partnership. They can subject themselves to more liabilities as long as
the partners are liable whenever the partnership asset is inadequate.
Reference:
Baysa & Lupisan (2014). Accounting for Partnership and Corporation (p. 44)

4. What is the basis for measuring the contributions or investments of partners in form
of non-cash assets?
Answer:
Partners who invest in an asset that is classified as ‘non-cash’ will do so upon
agreement of partners. Before recording the initial investments of an individual, non-
cash assets, such as property, will be recorded at agreed-upon values.
To further discuss, the following example was given: two sole proprietors decided
to merge their businesses. Part of their investment should be adjusted before being
recorded in the new books of partnership. These adjustments were made with the
agreement of partners. In this scenario, they decided to update the balances of their
non-cash assets, such as equipment and inventory.
Reference:
Baysa & Lupisan (2014). Accounting for Partnership and Corporation (p. 50)

5. Why is it preferable to have a written contract of partnership? What are the contexts
of a typical contract?
Answer:
Two or more individuals may form a partnership due to an agreement. It can be
created through oral or written agreements. The basis of their agreement is based on
their decisions. However, a written contract is a powerful advantage. This is due to the
fact that a misunderstanding between partners related to their contract may be
minimized or avoided. Additionally, partnerships are required to be registered with the
Office of the Securities and Exchange Commission; thus, a written agreement is
necessary.
A partnership contract, wherein a written agreement is preferred, is known as the
Articles of Co-Partnership. This document contains the necessary information between
partners and their respective partnerships. The Articles of Co-Partnership contain: (1)
name of the partnership; (2) details regarding the partner; (3) date of contract; (4)
business’ purpose; (5) initial investments of the partner; (6) rights and duties of the
partner; (7) manner of dividing net income or loss; (8) conditions under withdrawals of
money and assets for personal use; (9) manner of keeping the books of accounts; (10)
causes for dissolution; and (11) provision for arbitration.
 This will aid the business in having an organized and systematic partnership.
Furthermore, internal conflicts would be avoided and minimized.
Reference:
Baysa & Lupisan (2014). Accounting for Partnership and Corporation (p. 48)

6. What is the major difference between a general and a limited partnership? How can
they be distinguished? When a partnership is a limited partnership, does the
characteristic of “unlimited liability” still apply? Why or why not?
Answer:
Different kinds of partnerships differ in how the partners or certain owners of the
business operate. As to the liability of partners, a general co-partnership and a limited
partnership have different responsibilities with regards to the liabilities of the
partnership. A general co-partnership consists of general partners who are obligated to
use their personal assets aside from what they’ve invested as a subject for payment. It
means that their personal assets will be liable as a payment for partnership obligations
when their combined assets are not enough to settle liabilities. Unlike a general co-
partnership, which is composed of general partners, a limited partnership is mainly
composed of one or more general partners and limited partners. These limited partners
are not obligated to use their personal assets whenever partnership assets are
insufficient. And that is why the word ‘LIMITED’ or ‘LTD’ is added to the name of a
partnership in order to inform the public about their stand.
Considering the fact that they’re limited partners, they may still apply the concept
of unlimited liability to their business. As per the definition of limited partnership, it is
not composed of all limited partners. Meaning, it is also composed of a general partner
or partners. The general partner(s) are the ones who will be subjected to use their
personal assets if the obligations of the partnership are huge compared to their
combined assets. It's most likely to be unfair from the point of view of some, but it's
what has been decided upon their agreement.
Reference:
Baysa & Lupisan (2014). Accounting for Partnership and Corporation (p. 46)

7. Why are capital accounts and drawing accounts are opened for each partner?
Answer:
Creating one (1) capital and one (1) drawing account for each partner is necessary
in order to record a separate transaction from themselves. In line with this, a separate
account of capital and drawing for every partner creates transparency and accountability
within the business.
Reference:
Baysa & Lupisan (2014). Accounting for Partnership and Corporation (p. 49)
8. What are steps to be followed in recording the formation of a partnership if the books
of one of the previous sole proprietors will be used?
Answer:
A partnership may use the book of one sole proprietor for their decisions.
Through the retention of one of the sole proprietor’s books, an adjustment must be
executed. Adjustments were made to the agreed values that partners approved. After
adjusting one of the sole proprietor’s books, it is necessary to understand that the other
sole proprietor should adjust and close their books before transferring their assets and
liabilities to the new set of books. Furthermore, the closing entry is only applicable to a
sole proprietor whose book will no longer be used.
Reference:
Baysa & Lupisan (2014). Accounting for Partnership and Corporation (p. 56)

9. Why would a partnership decide to use the books of one of the previous proprietors
instead of opening new set of books?
Answer:
Partners would preferably use one of the books of the previous sole proprietor
because it is more convenient from their perspective. Adjustments can be easily
recorded to bring the account balance to its agreed value. Thus, recording investments
will be convenient for them. However, it could be subjective because some partners
prefer to open a new set of books for partnership. This procedure is more common in
partnership formation.
Reference:
Baysa & Lupisan (2014). Accounting for Partnership and Corporation (pp. 54-55)

10. Why is the Accumulated Depreciation account not carried over to the new book of
the partnership?
Answer:
In creating a new book for partnerships, an appropriate adjustment should be
implemented in order to update and remove unnecessary records. Depreciation, on the
other hand, is a reduction to the asset’s value, representing how much has been used
over its existence in the business. And that is the reason why the ‘accumulated
depreciation’ account cannot be carried over to the book of partnership. Considering
that it devalues the plant asset, it is no longer important to record as long as the asset
has been updated.
Reference:
Baysa & Lupisan (2014). Accounting for Partnership and Corporation (p. 58)
Tuovilla (2023). What Is Depreciation, and How Is It Calculated?