ACCOUNTING FOR PARTNERSHIP FORMATION: JOURNAL ENTRIES

ILLUSTRATIVE EXAMPLES
Source: Dela Cruz, A.L.C., Rabo, J.S., & Tugas, F.C. (2019). Basic financial accounting and reporting.

ILLUSTRATIVE EXAMPLE #1: Cash contribution

On January 1, 2022, Adam and Eve formed a partnership by contributing ₱50,000 each. Profit
or loss is to be shared equally among the partners.
Jan. 1 Cash 100,000
Adam, Capital 50,000
Eve, Capital 50,000
initial partners’ investments

ILLUSTRATIVE EXAMPLE #2: Cash and non-cash contributions with liabilities

On January 1, 2022, Adam and Eve formed a partnership by contributing ₱50,000 each. In
addition to Adam’s cash contribution, he invested furniture and fixtures costing ₱15,000 but
with an agreed value of ₱8,000. Moreover, Eve invested land with a fair value of ₱120,000 but
with an agreed value of ₱110,000 subject to unpaid mortgage of ₱25,000. Profit or loss is to
be shared equally among the partners.
Jan. 1 Cash 100,000
Furniture and Fixtures 8,000
Land 110,000
Mortgage Payable 25,000
Adam, Capital 58,000
Eve, Capital 135,000
initial partners’ investments

ILLUSTRATIVE EXAMPLE #3: Cash, non-cash, and industry contributions

On January 1, 2022, Adam, Eve, and Abel formed a partnership. Adam and Eve contributed
₱50,000 each. In addition to Adam’s cash contribution, he invested furniture and fixtures
costing ₱15,000 but with an agreed value of ₱8,000. Abel, an industrial partner, was to
contribute his skill in cooking. Profit or loss is to be shared equally among the partners.
Jan. 1 Cash 100,000
Furniture and Fixtures 8,000
Adam, Capital 58,000
Eve, Capital 50,000
initial partners’ investments

1 Memorandum Entry: Abel, an industrial

partner, was to contribute his skill in
cooking for an equal share in partnership
profits and losses.
 ILLUSTRATIVE EXAMPLE #4: An existing sole proprietorship and a person without
existing business using sole proprietorship’s books

On January 1, 2022, Abraham has been in a trading business for five years as a sole proprietor.
He needed additional capital to fund business expansion so he decided to invite Sarah by
investing
₱160,000 cash for a one-third interest in the new partnership, A&S Trading. A&S would assume
the liabilities of Abraham’s business. Profit or loss is to be shared 70:30 between Abraham and
Sarah, respectively. Sarah accepted the invitation and both agreed to revalue assets of
Abraham’s business as itemized below:
Accounts Receivable ₱ 50,000
Merchandise Inventory 28,000
Office Equipment 22,000
Land 279,000

Account balances in the books of Abraham were as follows:

Account Titles Debit Credit
Cash ₱135,000
Accounts Receivable 60,000
Allowance for Doubtful Accounts ₱ 4,000
Merchandise Inventory 25,000
Office Equipment 33,000
Accumulated Depreciation 15,000
Land 260,000
Accounts Payable 194,000
Abraham, Capital 300,000

1. To revalue assets of Abraham:

Jan. 1 Abraham, Capital 6,000
Allowance for Doubtful Accounts 6,000

Merchandise Inventory 3,000

Abraham, Capital 3,000

Accumulated Depreciation 4,000

Abraham, Capital 4,000

Land 19,000
Abraham, Capital 19,000

2. To close balance of Accumulated Depreciation:

Jan. 1 Accumulated Depreciation 11,000
Office Equipment 11,000
NOTE: Abraham, Capital, after revaluing assets:
₱300,000 – 6,000 + 3,000 + 4,000 + 19,000 = ₱320,000

3. To record investment of Sarah:

Jan. 1 Cash 160,000
Sarah, Capital 160,000
 ILLUSTRATIVE EXAMPLE #5: Two sole proprietorship businesses using new set of
books

On January 1, 2022, Abraham, owner of a trading business for five years, and Sarah, owner of
a general merchandise, decided to combine their businesses for a 1:1 interest in a new
partnership which aimed to fund geographical expansion in the hopes of catering the growing
demand in the market. The new partnership, A&S Brighter Trading, would assume the liabilities
of Abraham’s and Sarah’s existing businesses. Profit or loss is to be shared equally between
them. Moreover, they agreed on the following conditions:
Abraham Sarah
Accounts Receivable ₱ 50,000 ₱ 75,000
Merchandise Inventory 28,000 41,000
Office Equipment 22,000
Store Equipment 20,000
Building 268,000
Land 279,000

To ensure 1:1 interest, it was agreed that the partner with a lower capital balance after
adjustments had to infuse additional cash investment.

Account balances in the books of Abraham were as follows:

Account Titles Debit Credit
Cash ₱ 135,000
Accounts Receivable 60,000
Allowance for Doubtful Accounts ₱ 4,000
Merchandise Inventory 25,000
Office Equipment 33,000
Accumulated Depreciation 15,000
Land 260,000
Accounts Payable 194,000
Abraham, Capital 300,000

Account balances in the books of Sarah were as follows:

Account Titles Debit Credit
Cash ₱115,000
Accounts Receivable 80,000
Allowance for Doubtful Accounts ₱ 8,000
Merchandise Inventory 45,000
Store Equipment 35,000
Accumulated Depreciation – Store Equipment 18,000
Building 280,000
Accumulated Depreciation – Building 30,000
Accounts Payable 249,000
Sarah, Capital 250,000
1. To revalue assets of Abraham:
Jan. 1 Abraham, Capital 6,000
Allowance for Doubtful Accounts 6,000

Merchandise Inventory 3,000

Abraham, Capital 3,000

Accumulated Depreciation 4,000

Abraham, Capital 4,000

Land 19,000
Abraham, Capital 19,000
NOTE: Abraham, Capital, after revaluing assets: ₱320,000

2. To close books of Abraham:

Jan. 1 Abraham, Capital 320,000
Allowance for Doubtful Accounts 10,000
Accounts Payable 194,000
Accumulated Depreciation 11,000
Cash 135,000
Accounts Receivable 60,000
Merchandise Inventory 28,000
Office Equipment 33,000
Land 279,000

3. To record investment of Abraham:

Jan. 1 Cash 135,000
Accounts Receivable 60,000
Merchandise Inventory 28,000
Office Equipment 22,000
Land 279,000
Allowance for Doubtful Accounts 10,000
Accounts Payable 194,000
Abraham, Capital 320,000

4. To revalue assets of Sarah:

Jan. 1 Allowance for Doubtful Accounts 3,000
Sarah, Capital 3,000

Sarah, Capital 4,000

Merchandise Inventory 4,000

Accumulated Depreciation – Store Equipment 3,000

Sarah, Capital 3,000

Accumulated Depreciation – Building 18,000

Sarah, Capital 18,000
NOTE: Sarah, Capital, after revaluing assets: ₱270,000

5. To close books of Sarah:

Jan. 1 Allowance for Doubtful Accounts 5,000
Accumulated Depreciation – Store Equipment 15,000
Accumulated Depreciation – Building 12,000
Accounts Payable 249,000
Sarah, Capital 270,000
Cash 115,000
Accounts Receivable 80,000
Merchandise Inventory 41,000
Store Equipment 35,000
Building 280,000

6. To record investment of Sarah:

Jan. 1 Cash 165,000
Accounts Receivable 80,000
Merchandise Inventory 41,000
Store Equipment 20,000
Building 268,000
Allowance for Doubtful Accounts 5,000
Accounts Payable 249,000
Sarah, Capital 320,000

NOTE: Sarah, Capital:

₱270,000 + 50,000 additional cash investment = ₱320,000 (to equal Abraham, Capital)
 SAMPLE STATEMENT OF FINANCIAL POSITION:
(based on Illustrative Example #5)

A&S BRIGHTER TRADING

Statement of Financial Position
January 1, 2022

ASSETS
Current assets:
Cash ₱300,000
Trade and other receivables (Note 1) 125,000
Merchandise Inventory 69,000
Total current assets ₱ 494,000

Noncurrent assets:
Property, plant, and equipment (Note 2) 589,000
TOTAL ASSETS ₱1,083,000

LIABILITIES AND PARTNERS’ EQUITY

Current liabilities:
Accounts Payable ₱ 443,000

Partners’ equity:
Abraham, Capital ₱320,000
Sarah, Capital 320,000 640,000
TOTAL LIABILITIES AND PARTNERS’ EQUITY ₱1,083,000

Notes to the Financial Statements:

Note 1: Trade and other receivables
Accounts Receivable ₱140,000
Less: Allowance for Doubtful Accounts 15,000
NET REALIZABLE VALUE ₱125,000

Note 2: Property, plant, and equipment

Land ₱279,000
Building 268,000
Office Equipment 22,000
Store Equipment 20,000
TOTAL CARRYING AMOUNT ₱589,000
ACCOUNTING FOR PARTNERSHIP OPERATIONS: JOURNAL ENTRIES
ILLUSTRATIVE EXAMPLES
Source: Dela Cruz, A.L.C., Rabo, J.S., & Tugas, F.C. (2019). Basic financial accounting and reporting.

The year-end ledger of MLJ Enterprises showed the following movements in selected equity and
drawing accounts:
ACCOUNT: Matthew, Capital
Date Debit Credit Balance
Jan. 1 1,000,000
Mar. 1 200,000 1,200,000
Aug. 1 150,000 1,350,000
Oct. 1 80,000 1,270,000

ACCOUNT: Luke, Capital

Date Debit Credit Balance
Jan. 1 1,200,000
May 1 100,000 1,100,000
Jul. 1 120,000 1,220,000
Nov. 1 160,000 1,380,000

ACCOUNT: John, Capital

Date Debit Credit Balance
Jan. 1 800,000
Jun. 1 180,000 980,000
Dec. 1 90,000 1,070,000

ACCOUNT: Matthew, Drawings

Date Debit Credit Balance
Jan. 1 0
During the year 350,000 350,000

ACCOUNT: Luke, Drawings

Date Debit Credit Balance
Jan. 1 0
During the year 230,000 230,000

ACCOUNT: John, Drawings

Date Debit Credit Balance
Jan. 1 0
During the year 190,000 190,000

ACCOUNT: Income Summary

Date Debit Credit Balance
Jan. 1 0
Dec. 31 810,000 810,000

The company closes the Income Summary account to the Capital account.
 ILLUSTRATIVE EXAMPLE #1: Equally

The partners agreed to divide profits equally.

Dec. 31 Income Summary 810,000

Matthew, Capital 270,000
Luke, Capital 270,000
John, Capital 270,000
distribution of net income

ILLUSTRATIVE EXAMPLE #2: Arbitrary ratio

The partners agreed to divide profits in a 2:3:1 ratio to Matthew, Luke, and John, respectively.

Dec. 31 Income Summary 810,000

Matthew, Capital 270,000
Luke, Capital 405,000
John, Capital 135,000

ILLUSTRATIVE EXAMPLE #3: Capital contribution ratio

Partners Matthew, Luke, and John agreed to divide profits based on their original capital
contributions of ₱650,000, ₱900,000, and ₱450,000, respectively.

Dec. 31 Income Summary 810,000

Matthew, Capital 263,250
Luke, Capital 364,500
John, Capital 182,250
Ratio (65:90:45)

The partners agreed to divide profits based on capital at beginning of the current period.

Dec. 31 Income Summary 810,000

Matthew, Capital 270,000
Luke, Capital 324,000
John, Capital 216,000
Ratio (10:12:8)

The partners agreed to divide profits based on average capital for the current accounting
period.

Dec. 31 Income Summary 810,000

Matthew, Capital 293,095
Luke, Capital 295,721
John, Capital 221,184
Ratio (1209167:1220000:912500)
The partners agreed to divide profits based on ending capital for the current accounting
period.

Dec. 31 Income Summary 810,000

Matthew, Capital 276,532
Luke, Capital 300,484
John, Capital 232,984
Ratio (127:138:107)

ILLUSTRATIVE EXAMPLE #4: Interest on capital balance and balance based on

agreed ratio

Each partner is given a 10% interest on ending capital and the remaining profit is divided in the
ratio of 2:3:1 to Matthew, Luke, and John, respectively.

Dec. 31 Income Summary 372,000

Matthew, Capital 127,000
Luke, Capital 138,000
John, Capital 107,000
interest on capital balances

Dec. 31 Income Summary 438,000

Matthew, Capital 146,000
Luke, Capital 219,000
John, Capital 73,000
distribution of share of net income after
interest on capital balances in 2:3:1 ratio

-OR- when compounded:

Dec. 31 Income Summary 810,000
Matthew, Capital 273,000
Luke, Capital 357,000
John, Capital 180,000
distribution of net income

ILLUSTRATIVE EXAMPLE #5: Salary allowances to partners and balance based on

agreed ratio

John is given annual salaries of ₱360,000 and the remaining profit is divided in the ratio of
2:3:1 to Matthew, Luke, and John, respectively.

Matthew Luke John TOTAL

Annual salaries ₱360,000 ₱360,000
Remainder – 2:3:1 ₱150,000 ₱225,000 75,000 450,000
TOTAL ₱150,000 ₱225,000 ₱435,000 ₱810,000
 Dec. 31 Income Summary 810,000
Matthew, Capital 150,000
Luke, Capital 225,000
John, Capital 435,000
distribution of net income

ILLUSTRATIVE EXAMPLE #6: Bonus to managing partner and balance based on

agreed ratio

Luke, the managing partner, is given a bonus of 20% of profit before bonus and 30%
partnership income tax and the remaining profit is divided in the ratio of 2:3:1 to Matthew,
Luke, and John, respectively.

Matthew Luke John TOTAL

Bonus ₱231,429 ₱231,429
Remainder – 2:3:1 ₱192,857 289,286 ₱ 96,428 578,571
TOTAL ₱192,857 ₱520,715 ₱ 96,428 ₱810,000

Dec. 31 Income Summary 810,000

Matthew, Capital 192,857
Luke, Capital 520,715
John, Capital 96,428
distribution of net income

ILLUSTRATIVE EXAMPLE #7: Any combination of interest, salary, and/or bonus and
the balance based on agreed ratio

Partners Matthew, Luke, and John are given (1) a 10% interest on ending capital, and (2)
monthly salary of ₱25,000, ₱40,000, and ₱15,000, respectively. Luke, the managing partner, is
given a 20% bonus after deducting income tax but before deducting bonus. Any balance is
divided in the ratio of 2:3:1 to Matthew, Luke, and John, respectively.

Matthew Luke John TOTAL

10% interest ₱127,000 ₱138,000 ₱107,000 ₱372,000
Annual salaries 300,000 480,000 180,000 960,000
Bonus 162,000 162,000
Remainder – 2:3:1 (228,000) (342,000) (114,000) ( 684,000)
TOTAL ₱199,000 ₱438,000 ₱173,000 ₱810,000

Dec. 31 Income Summary 810,000

Matthew, Capital 199,000
Luke, Capital 438,000
John, Capital 173,000
distribution of net income