CHAPTER 1
There are three (3) trial balances in the
ACCOUNTING FOR PARTNERSHIP –
BASIC CONSIDERATIONS AND
FORMATION
REVIEW
1. Inthe 1983 accounting definition,
“Accounting is a service activity. Its function is
to provide quantitative information, primarily
financial in nature about economic entities,
that is intended to be useful in making
economic decisions.” This definition was
provided by
A. American Institute of Certified Public
Accountants (AICPA)
B. Philippine Institute of Certified Public
Accountants (PICPA)
C. Financial Accounting and Standards Board
(FASB)
D. Accounting Standards Council (ASC)
E. Board of Accountancy (BOA)
2. Which of the following statements is correct?
A. Debit means increase and credit means
decrease.
B. Unearned rent account is a liability account
and increases on the debit side.
C. Prepaid insurance account is a nominal
account and has debit normal balance.
D. Withdrawal is a permanent account and
decreases on the credit side.
E. Sales discount account is a contra-
revenue account and increases on the debit
side.
3. Which of the following statements is/are
correct?
A.
characteristics to enhance the usefulness of
accounting cycle. information?
B. The financial statements are prepared
after the adjusted trial balance is prepared A. Comparability
but before closing entries are journalized and B. Neutrality
posted. C. Verifiability
C. The post-closing trial balance is prepared D. Timeliness
before the closing entries are journalized and E. Understandability
posted.
D. The reversing entries are journalized and 8. The purpose of adjusting entries is
posted at end of the accounting year.
E. After the closing entries are journalized A. to increase the account balance.
B. to decrease the account balance.
and posted, only assets, liabilities, capital,
withdrawals and income summary accounts C. to update the account balance.
D. to close the account balance.
remain open.
E. to reverse the account balance.
4. IncomeSummary is a permanent equity
9. What is the preferred order of preparation of
account and has a credit normal balance.
the following?
A. True
B. False
5. There is no difference in the Philhealth
contribution table for employees and employer
between 2019 and 2020.
A. True
B. False 10. Inthe terms of purchase include FOB
destination, what is the entry of the buyer on
6. Which
of the following is not used as initial the freight paid by seller?
measurement of assets or liabilities?
A. Historical
B. Carrying amount
C. Replacement value
D. Net realizable value
E. Present Value
7. Relevance and faithful representations are
qualitative characteristics of useful financial
information. What is not a qualitative

DEFINITION
In a 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
also form a partnership for the exercise of a
profession.
(Civil Code of the Philippines Article 1767)
CHARACTERISTICS OF A PARTNERSHIP
Mutual Contribution
Division of profits or losses
Co-ownership of contributed assets
Mutual agency
Unlimited liability
Income taxes
Partners’ equity accounts
Mutual Contribution. There cannot be a
partnership without contribution of money,
property or industry (i.e. work or services
which may either be personal manual efforts
or intellectual) to a common fund.
Division of Profits or losses. The essence
of partnership is that each partner must share
in the profits or losses of the venture.
Co-ownership of contributed assets. All
assets contributed into the partnership are
owned by the partnership by virtue of its
separate and distinct personality. If one
partner contributes an asset to the business,
all partners jointly own it in a special sense.
Mutual agency. Any partner can bind the
other partners to a contract if he is acting
within his express or implied authority.
Limited life. A partnership has a limited 2. Combines special skills, expertise and
life. It may be dissolved by the admission, experience of the partners.
death, insolvency, incapacity, withdrawal of a 3. Offers relative freedom and flexibility of
partner or expiration of term specified in the action in decision-making.
partnership agreement.
ADVANTAGES OF PARTNERSHIP VS
Unlimited liability. All partners (except CORPORATION
limited partners), including industrial partners
are personally liable for all debts incurred by 1. Easier and less expensive to organize.
the partnership. If the partnership cannot 2. More personal and informal.
settle its obligations, creditors’ claims will be
satisfied from the personal assets of the DISADVANTAGES OF PARTNERSHIP VS
partners without prejudice to the rights of the CORPORATION
separate creditors of the partners. 1. Easily dissolved and thus unstable
compared to a corporation.
Income taxes. Partnership, except general 2. Mutual agency and unlimited liability may
professional partnerships, are subject to tax at create personal obligations to partners.
the rate of 30% (per R.A. 9337) of taxable 3. Less effective than a corporation in raising
income. large amounts of capital.
Partners’ equity accounts. Accounting for PARTNERSHIP DISTINGUISHED FROM
partnership are much like accounting for sole CORPORATION
proprietorships. The difference lies in the
number of partners’ equity accounts. Each
partner has a capital account and a
withdrawal account that serves similar
functions as the related accounts for sole
proprietorships.
DEFINITION OF CORPORATION
It is an artificial being created by operation of
law, having the right of succession, and the
powers, attributes and properties expressly
authorized by law or incident to its existence
(Revised Corporation Code of the
Philippine (RCCP), Section 2).
ADVANTAGES OF PARTNERSHIP VS
SOLE PROPRIETORSHIP
1. Brings greater financial capability to the
business.

CLASSIFICATION OF PARTNERSHIP
KINDS OF PARTNERS
1. General partner – One who is liable to the
extent of his separate property after all assets
of the partnership are exhausted.
2. Limited partner – One who is liable only to
the extent of his capital contribution. He is not
allowed to contribute industry or services only.
3. Capitalist partner – One who contributes
money or property to the common funds of the
partnership.
4. Industrial partner – One who contributes
his knowledge or personal services to the
partnership.
5. Managing partner – One whom the
partners has appointed as manager of the
partnership.
6. Liquidating partner – One who is
designated to wind up or settle the affairs of
the partnership after dissolution.
7. Dormant partner – One who does not take
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 or partner by estoppel – One
who is actually not a partner but who
represents himself as one.
ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in
writing. In the latter case, partnership
agreements are embodied in the Articles of
Partnership.
Essential provisions may be contained in the
agreement:
1. The partnership name, nature, purpose and
location.
2. The names, citizenship and residences of
the partners.
3. The date of formation and the duration of
the partnership.
4. The capital contribution of each partner, the
procedure for valuing noncash investments,
treatment of excess contribution (as capital or
as loan) and the penalties for a partner’s
failure to invest and maintain the agreed
capital.
5. The rights and duties of each partners.
6. The accounting period to be adopted, the
nature of accounting records, financial
statements and audits by independent public
accountants.
7. The method of sharing profit or loss,
frequency of income measurement and
distribution, including any provisions for the
recognition of differences in contributions.
8. The drawings or salaries to be allowed to
partners.
9. The provision for arbitration of disputes,
dissolutions and liquidation.
SEC REGISTRATION
When the partnership capital is P3,000 or
more, in money or property, the public
instrument must be recorded with the
Securities and Exchange Commission
(SEC) Even if it is not registered, the
partnership having a capital of P3,000 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 Philippine Accountancy
Act 2004, Section 28)
The purpose of the registration is to set “a
condition for the issuance of the licenses to
engage in business or trade. In this way, the
tax liabilities of big partnership cannot be
evaded, and the public also determine more
accurately their membership and capital
before dealing with them.
Documents to be submitted:
 Articles of partnership.
 Verification slip for the Business Name.
 Written undertaking to change business
name, if required.
Tax Identification Number (TIN) of each
 the absence of any agreement, the
partner and that of the partnership.
 Registration data sheet for partnership
duly accomplished in six (6) copies.
 Other documents that may be required:
1. Endorsement from other government
agencies if the proposed partnership will
engage in an industry required by the
government.
2. For partnership with foreign partners,
SEC Form F-105, bank certificate on the
capital contribution of partners, proof of
remittance of contribution of foreign
partners.
▶ Pay the registration/filing and
miscellaneous filing fee equivalent to 1/5 of
1% of the partnership capital but not less than
P1,000 and legal research fee which is 1% of
the filing fee.
▶ Forward documents to the SEC
Commissioner for signature.
ACCOUNTING FOR PARTNERSHIP
▶ Owners’ Equity Accounts
▶ Loan Receivable From or Payable to
Partners
PARTNERSHIP FORMATION INDIVIDUALS WITH NO EXISTING
BUSINESS
Valuation of Investment by Partners.
On May 1, 2020, Antonio Beltran and Carlos
Partners may invest cash or non-cash assets
Domingo agreed to form a partnership. The
in the partnership. When a partner invests
partnership agreement specified that Beltran
non-cash assets, they are to be recorded
is to invest P500,000 cash and Domingo is to
at values agreed upon by the partners. In
contribute land with a fair market value of
P1,500,000 with P200,000 mortgage to be
contribution will be recognized at their fair
assumed by the partnership.
values at the date of transfer to the
partnership. What happened between the partners?
Fair market value of an asset is the  They agreed to form a partnership.
estimated amount that a willing seller would
When was the agreement of the partners?
receive from a financially capable buyer for
the sale of the asset in a free market. Per  May 1, 2020
International Financial Reporting Standards Who are the partners?
(IFRS) No. 3, fair value is the price at which
an asset or liability could be exchanged in a  Antonio Beltran and Carlos Domingo
current transaction between knowledgeable, What will the partners contribute?
unrelated willing parties.  Beltran to contribute P500,000 cash while
Domingo will contribute land with fair
A partnership may be formed in any of the
market value of P1,500,000 with
following ways:
P200,000 mortgage to be assumed by
1. Individuals with no existing business form a the partnership.
partnership
2. Conversion of a sole proprietorship to a
partnership
a. A sole proprietor and an individual without
an existing business form a partnership.
b. Two or more sole proprietors form a
partnership.
3. Admission or retirement of a partner (to be
discussed in dissolution of partnership).
4. Two or more partnerships form a
partnership (to be discussed in advanced
accounting.
AN INDIVIDUAL AND SOLE PROPRIETOR

Grace Hila offered to invest cash to get capital

credit equal to one-half of Elena Flores’s
capital after giving effect to the adjustments
below. Elena Flores accepted the offer.
1. The merchandise is to be valued at
P55,000.
2. The accounts receivable is estimated to be
90% collectible.
3. The furniture and fixtures are to be valued
at P130,000. 4. The office supplies on hand
that have been charged to expense in the
past amounted to P5,000. These will be used
by the partnership.

The following procedures may be used in

recording the formation of the partnership:

Books of Elena Flores:

1. Adjust the assets and liabilities of Elena
Flores in accordance with the agreement.
Adjustments are to be made to her capital
accounts.
2. Close the books.

Books of Partnership:
1. Record the investment of Elena Flores.
2. Record the investment of Grace Hila.
 depreciated by P6,000. 5. The delivery
equipment of White is to be depreciated by
P9,000.

TWO OR MORE SOLE PROPRIETORS

FORM A PARTNERSHIP

The conditions and adjustments agreed upon

by the partners for purposes of determining
their interests in the partnership are:
1. Actual count and bank reconciliation on
Matalino proprietorship’s cash account
revealed cash shortage and unrecorded
expense P1,000.
2. Establishment of 10% allowance for
uncollectible accounts in each book.
3. The merchandise of Matalino is to be
decreased by P5,000 while merchandise of
White is to be increased by P10,000 4. The
furniture and fixture of Matalino are to be