PARTNERSHIP

PARTNERSHIP - a contract whereby 2 or more persons bind themselves

to contribute money, property, or industry into a common fund
with the intention of dividing profits among themselves
As to duration:
CHARACTERISTICS OF A PARTNERSHIP
PARTNERSHIP AT WILL- no term is specified & is not formed
Mutual agency Legal entity for any particular undertaking; may be terminated anytime
Limited liability Co-ownership of contributed by mutual agreement.
Limited life assets PARTNERSHIP WITH FIXED TERM- the term or period for
Mutual participation in profits Income tax which the partnership is to exist is agreed upon; partnership
form for a particular undertaking.
As to representation to others:
ADVANTAGES DISADVANTAGES ORDINARY PARTNERSHIP- actually exists among partners &
Easy and inexpensive Personal liability of a partner
also to third persons.
Unlimited liability makes it for firm debts may deter
PARTNERSHIP BY ESTOPPEL- one which in reality is not a
reliable in the POV of creditor many from investing
partnership but is considered as one only in relation to those
Combined personal credit of A partner may be subject to
who, by their conduct or omission are precluded to deny or
partners obtain opportunity personal liability for wrongful
disprove the partnership’s existence.
of additional capital acts of his associates
As to the legality of existence:
Participation of partners It is less stable because it can
DE JURE- one which has complied with all the requirements
makes it possible for closer easily be dissolved
for its establishment.
supervision There is divided authority
DE FACTO- one which failed to comply with one or more of
Direct gain to partners is an among the partners
the legal requirements for its establishment.
incentive to give close There is a constant likelihood
As to publicity:
attention to the business of disagreement between
SECRET- one wherein the existence of certain persons as
Personal element in the parties with the same
partners is not made known to the public by any of the
characters retained authority
partners.
OPEN- one wherein the existence of certain persons as
KINDS OF PARTNERSHIP partners is made known to the public by the members of the
firm.
As to activity:
TRADING- main activity is manufacture & sale or the
purchase & sale of goods. Classes of partners
NON-TRADING- organize for the purpose of rendering
As to contribution:
services.
CAPITALIST- one who contributes money or property.
As to object:
INDUSTRIAL- one who contributes industry, labor, skill,
UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTY- all
talent, or service
assets contributed to the partnership & subsequent
CAPITALIST-INDUSTRIAL- one who contributes money,
acquisitions become partnership assets.
property & industry.
UNIVERSAL PARTNERSHIP OF ALL PROFIT- partnership
As to liability:
assets consist of assets acquired during the life of the
GENERAL PARTNER- one whose liability to third persons
partnership & only the usufruct or use assets contributed at
extends to his separate property.
the time of partnership formation.
LIMITED PARTNER- one whose liability to a third person is
PARTICULAR PARTNERSHIP- one which has for its object
limited only to the extent of his contribution to the
determinate things, their use of fruits, or a specific
partnership.
undertaking or the exercise of a profession or vocation.
As to management:
As to the liability of partners:
MANAGING PARTNER- one who manages actively the
GENERAL COPARTNERSHIP- consisting of general partners
business of the partnership.
who are liable pro-rata & sometimes solidarily with their
SILENT PARTNER- one who does not participate in the
separate property for partnership liability.
management of the partnership affairs.
LIMITED PARTNERSHIP- formed by one or more general
partners & one or more limited partners; word LTD or
LIMITED is added in the name of the partnership.
 Other classification: FORMATION
LIQUIDATING- one who takes charge of winding up of
partnership
NOMINAL- one who is not really a partner but is made liable
2 OR MORE FORM A PARTNERSHIP FOR THE FIRST TIME, ALL
the innocent party PARTNERS NEW IN BUSINESS
OSTENSIBLE- one who takes active part in the management
of the firm & is known to the public Cash xx
SECRET- takes active part in the management of the firm Inventories xx
but whose connection with the partnership concealed Equipment xx
DORMANT- one who does not take active part in the A, Capital xx
management & is not known to the public B, Capital xx

CAPITAL ACCOUNT If industrial: C is admitted to the partnership as an industrial partner to

Debit Credit share one-third in the partnership profit.
Permanent withdrawal of Original investment by a
capital partner CAPITAL ADJUSTMENT ACCOUNT

Share in partnership loss Additional investment by a

Debit asset and credit capital for increases in asset values
from operation partner
Debit capital and credit asset for decreases in asset values
Debit balance of drawing Share in profit that will be
Debit capital and credit liabilities for increases in liability
account closed to capital added to capital
balances
Debit liability and credit capital for decreases in liability
DRAWING ACCOUNT balances
If there are contra asset accounts:
Debit Credit
Debit contra asset account and credit capital for increases in
Withdrawal by partners Salary allowance or interest
asset values
Payment made from allowance to the partner
Debit capital and credit contra asset account for decreases in
partnership funds to settle Payments made from
asset values
personal obligations personal account to settle
Partnership receivable partnership liabilities
collected & retained by the Partner’s receivable collected A SOLE PROPRIETOR & AN INDIVIDUAL FORM A PARTNERSHIP
partner & retained by partnership The partnership will use the book of the sole proprietor
Partner’s share in the loss of Partner’s share of profit Adjust the book of the sole proprietor based on the agreed
the firm values
Withdrawal of share in Record the investment of the other partner
income The partnership will open a new book
Record the assets and liability of the sole proprietor based
To keep the same intact & not combined with the temporary changes on the agreed value
in equity, the drawing account of partner is not close to capital. Record the investment of the other partner

PROPRIETARY THEORY- it looks the entity through the eyes of the owners.
·Salaries to partners are viewed as distribution of income
rather than component of income
·Unlimited liability of the general partner extends beyond the
entity to the individual partner
·Income of the partnership is not taxed at the partnership
level rather than included to individual partner taxable
income
·Original partnership is dissolved upon admission or
withdrawal of a partner
2 OR MORE SOLE PROPRIETORS FORM A PARTNERSHIP
-same procedures with letter B except that both partners
need to adjust their books.
The PPEs are recorded net of depreciation while both accounts
receivable and allowance for doubtful accounts are recorded in the
partnership books since there is a possibility of collection.
CAPITAL SHARE the percentage of equity that each of them will
have in the net assets of the newly formed partnership.

OPENING ENTRIES
·Full investment approach
CASH AND CASH
Measured at face value
EQUIVALENT AGREED CONTRIBUTED
BONUS
CAPITAL CAPITAL

PROPERTY Measured at agreed value. If none, at fair

value. A, Capital 400,000 400,000 -

INVENTORY Measured at net realizable value (At COST

or Estimated selling price less cost to B, Capital 600,000 600,000 -
complete & sell, whichever is lower)

INDUSTRY Memorandum entry TOTAL 1,000,000 1,000,000 -

 METHODS ON DISTRIBUTING PROFIT
Cash 1,000,000
A, Capital 400,000 ·EQUALLY- simple to apply but does not give due recognition
B, Capital 600,000 on the disparity of capital contribution nor the time and
effort devoted by the partners.

·Bonus approach Income summary 500,000

A, Capital 250,000
AGREED CONTRIBUTED
BONUS B, Capital 250,000
CAPITAL CAPITAL
ARBITRARY RATIO- simple to apply but does not give due
A, Capital 500,000 400,000 100,000 recognition on the disparity of capital contribution nor the
time and effort devoted by the partners.

B, Capital 500,000 600,000 (100,000) Income summary 500,000

A, Capital (25%) 125,000
TOTAL 1,000,000 1,000,000 - B, Capital (75%) 375,000

CAPITAL RATIO- based on the original, beginning, average or

Cash 1,000,000 ending capital; recognizes the differences in the capital but
A, Capital 500,000 does not take into action the time and effort devoted by the
B, Capital 500,000 partners

AVERAGE CAPITAL
DUE TO PARTNERS- loans made by partners to partnership, which
are payable immediately by the partnership.
NO. OF
CAPITAL PESO AVERAGE
PERIOD MONTHS
BALANCE MONTHS CAPITAL
UNCHANGE
DUE FROM PARTNERS- advances to partners other than withdrawals
in the form of loans. Capital Peso
balance x No. month/12

OPERATION of months
unchange
Factors to consider in making distribution of P/L:
Services rendered
Amount of capital contributed ·INTEREST ON CAPITAL, SALARIES TO PARTNERS, BONUS TO
Entrepreneurial ability/ managerial skill MANAGING PARTNERS, AND THE BALANCE ON THE AGREED
RATIO
Ways in expressing distribution of P/L
By percentage (25%)
By fraction (1/4) A, Capital B, Capital Total
By decimal (0.25)
By ration (1:4)
Salaries to
partners
RULES FOR DIVIDING P/L
Interest on Interest x Interest x
As to capitalist partners capital capital capital
Division of Profit
In accordance with the agreement
Bonus
In the absence of the agreement, in accordance with
the capital contribution
Division of losses
In accordance with the agreement Total Total Net income
In the absence of the agreement, in accordance with Remainder remainder x remainder x less salaries,
the agreed profit agreed P/L agreed P/L interest and
In accordance with capital contribution bonus

As to industrialist partners
Division of profit Equal to
Total
In accordance with the agreement given net
In the absence of the agreement, just and equitable income
share
Division of losses
The industrialist partner shall have no share in the
losses
 CORRECTION IN PROFIT FOR ERRORS AND OMISSIONS PRIOR ENTRY:
TO DISTRIBUTION Cash 200,000
Asset 300,000
Correction to profit of current A, Capital 225,000
year for errors made in B, Capital 75,000
C, Capital 200,000
Prior Year Current Year

- + ·Bonus approach
Unrecorded prepaid expenses
Unrecorded accrued expenses + -
AGREED CONTRIBUTED
Unrecorded accrued income - + CAPITAL CAPITAL
BONUS
Unrecorded unearned income + -
Overstatement of inventories + -
OLD 720,000 700,000 20,000
Understatement of inventories - +
Overstatement of purchases - + NEW 180,000 200,000 (20,000)
Understatement of purchases + - (900,000 * 20%)
Overstatement of depreciation None +
Understatement of - TOTAL 900,000 900,000 -
None
depreciation

ENTRY:
DISSOLUTION Cash 200,000
A, Capital 15,000
DISSOLUTION he change in the relation of the partners caused by B, Capital 5,000
by any partner ceasing to be associated in the carrying out of
C, Capital 180,000
the business.
LIQUIDATION the termination of the business carried on and the RETIREMENT OR WITHDRAWAL OF PARTNER- the partnership
winding up of partnership affairs preparatory to going out of may allow any of its partners to withdraw or retire from the
business. firm. The business may continue after such withdrawals and the
interest of the retiring partner may be sold.

CONDITIONS RESULTING TO DISSOLUTION

Investment xx
ADMISSION OF NEW PARTNERSHIP- a new partner with the Add: Share in profits to date of retirement xx
consent of all partners may be admitted to an existing Loans and advances to partnership
xx
partnership. Revaluation of assets increasing
Purchase of interest from partners their recorded values xx xx
Entry: Less: Share in losses to date of retirement
xx
Name of Seller, Capital xx Loans and advances from partnership
Revaluation of assets decreasing xx
Name of Buyer, Capital xx
their recorded values
xx xx
Interest upon retirement
No gain or loss is recognized in the partnership books because the gain or xx
loss is a personal gain or loss of the selling partner and not of the
partnership.
Sale of interest to a new partner and continuing partners-
Investment or asset contributions to the partnership same procedure with purchase of interest from partners.

Illustrative Problem: C invest P200,000 for a 20% interest in the

partnership of A and B. The contributions of A and B are P500,000 and Sale of interest to the partnership
P200,000 respectively, and they share profit and losses in the ratio of 3:1.
Settlement is equal to the interest
·Full investment approach Entry:
C, Capital 80,000
Cash 80,000
AGREED CONTRIBUTED
BONUS
CAPITAL CAPITAL

OLD 1,000,000 700,000 300,000

NEW
200,000 200,000 -
(200,000/20%)

TOTAL 1,200,000 900,000 300,000

 Settlement is less than interest
Order of claims against the personal assets:
Illustrative: The partnership paid C P75,000 for his interest of P80,000. Personal creditors of individual partners
A, B, and C P/L ratio is 1:3:1 Partnership creditors on unpaid partnership liabilities
·Bonus method
RIGHT OF OFFSET- involves offsetting a deficit in a partner's
Entry:
capital against the loan payable to that partner.
C, Capital 80,000
Cash 75,000
A, Capital 1,250 The loan payable to a partner has highest priority in liquidation than a
B, Capital 3,750 partner's capital balance but a lower priority than liabilities to outside
creditors.
Asset Revaluation
Entry: 2 Types of LIQUIDATION
C, Capital 80,000 LUMP-SUM LIQUIDATION- the distribution of cash to the
A, Capital 5,000 partners is done only after all the noncash assets have been
B, Capital 15,000 realized and all the liabilities have been paid.
Cash 75,000 a. Sell all the noncash assets
Asset 25,000 b. Allocate any gain (loss) from the sale to the capital
accounts of the partners in accordance with their P/L ratio
Settlement is more than interest c. Satisfy all the liabilities owing to creditors other than
Illustrative: The partnership paid C P85,000 for his interest of P80,000. partners
A, B, and C P/L ratio is 1:3:1 d. Satisfy all the liabilities owing to partners other than
Bonus method capital and profit
Entry: e. Distribute any cash remaining to the partners for capital
C, Capital 80,000 and profit
A, Capital 1,250
B, Capital 3,750 PIECE-MEAL LIQUIDATION- assets are realized piecemeal and
Cash 85,000 cash is distributed to the partners on a periodic basis; It may
be made to partners on the basis of a Schedule Safe Payment
Asset Revaluation or Cash Priority Program, in conjunction with a Liquidation
Entry: Schedule,
C, Capital 80,000
Asset 25,000
A, Capital 5,000 Any deficiency in a solvent partner's capital will require that partner to
B, Capital 15,000 contribute cash equal to the debit balance. However, if that partner is
Cash 85,000 insolvent, the deficiency must be absorbed by the remaining partners.

·DEATH OR INCAPACITY OF A PARTNER- the interest of the

deceased or incapacitated partner must be determined by the
partnership in order to make a necessary settlement with his
legal representatives. The accounting for settlement to the
deceased or incapacitated partner is the same as that of
withdrawal or retirement.

LIQUIDATION
LIQUIDATION the process of converting partnerships assets into
cash and distributing the cash to creditors and partners.

2 CONCEPTS INVOLVE IN LIQUIDATION

MARSHALING OF ASSETS- involves the order of creditors'

rights against the partnership's assets and the personal
assets of the individual partners.
Order of claims against the partnership's assets:
Partnership creditors other than partners
Partners' claims other than capital and profit
Partners' claim to capital or profit
References: Accounting for Partnership Corporation 2018 (Baysa & Lupisan),
Advanced Accounting 1 2017 (Guerrero), and Advance Financial Accounting
and Reporting 2019 (Dayag)