22/11/2022
LEARNING OBJECTIVES:
Basic Considerations and Formation
PARTNERSHIPS
DEFINITION OF PARTNERSHIP
o 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 profit among
themselves.
o Two or more persons may also form a
partnership for the exercise of a common
profession.
1. Define partnership.
2. Identify the characteristics of a partnership.
3. Explain the advantages and disadvantages of a
partnership.
4. Distinguish between partnership and corporation.
5. Identify and describe the different classifications of
partnerships and the different kinds of partners.
6. Explain the accounting differences between a sole
proprietorship and a partnership.
7. Distinguish between partner’s capital and drawing
accounts.
8. Discuss the fair value concept.
9. Prepare and explain the entries for partnership formation.
DEFINITION OF PARTNERSHIP
o The partnership has a juridical personality
separate and distinct from that of each of the
partners.
o Partnerships resemble sole proprietorships,
except that there are two or more owners of the
business known as “partners”.
1
 22/11/2022

CHARACTERISTICS OF A PARTNERSHIP ADVANTAGES OF A PARTNERSHIP

Mutual Contribution  Advantages versus Proprietorships
Division of profits or Losses  Brings greater financial capability to the business
Co-ownership of Contributed Assets  Combines special skills, expertise, and experience

Mutual Agency of the partners

Limited Life  Offers relative freedom and flexibility of action in
decision-making
Unlimited Liability
Income taxes  Advantages versus Corporations
 Easierand less expensive to organize
Partners’ Equity Accounts
 More personal and informal

PARTNERSHIP DISTINGUISHED FROM

DISADVANTAGES OF A PARTNERSHIP CORPORATION
 Disadvantages  Manner of Creation
 Easilydissolved and thus unstable compared to a  Number of Persons
corporation
 Commencement of Juridical Personality
 Mutual agency and unlimited liability may create
personal obligation to partners  Management

 Less effective than a corporation in raising large  Extent of Liability

amounts of capital  Right of Succession

 Terms of Existence

2
 22/11/2022

CLASSIFICATIONS OF PARTNERSHIPS CLASSIFICATIONS OF PARTNERSHIPS

 According to object:  According to purpose:
 Universal partnership of all present properties  Commercial or trading partnership
 Universal partnership of profits
 Professional or non-trading
 According to liability:  According to legality of existence:
 General
 De jure partnership
 Limited. There shall be at least one general partner
 De facto partnership
 According to duration:
 Partnership with a fixed term or for a particular
undertaking
 Partnership at will

KINDS OF PARTNERS KINDS OF PARTNERS

1) General partner. One who is liable to the extent of his
separate property after all the 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
services or industry only
3) Capitalist partner. One who contributes money or
property to the common fund.
4) Industrial partner. One contributes his knowledge or
personal service to the partnership.
5) Managing partner. One whom the partners have
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 he may be known
as a partner.
9) Secret partner. One who takes active part in the
business of the partnership but is not known to be a
partner by outside parties.
10) Nominal partner or partner by estoppel. One who is
actually not a partner but who represents himself as
one.

3
 22/11/2022

FORM OF A PARTNERSHIP CONTRACT FORM OF A PARTNERSHIP CONTRACT

A partnership contract may be constituted in
any form, i.e., oral or written, except as follows:
1. Where immovable property or real rights are
contributed to the partnership (regardless of
the amount thereof)
a) The partnership contract must be in a public
instrument; and
b) An inventory of the said property must be made,
signed by the parties, and attached to the public
instrument.
2. Where the capital of the partnership is P3,000 or
more, in money or property
a) The partnership contract must be in a public
instrument; and
b) Registered with the Securities and Exchange
Commission.
3. If the partnership is a limited partnership, a
certificate signed under oath by the partners and
recorded with the SEC is required.
[The SEC shall NOT register any corporation
organized for the practice of public accountancy.]

ACCOUNTING FOR PARTNERSHIPS ACCOUNTING FOR PARTNERSHIPS

Temporary withdrawals are regular advances
With a partnership having two or more owners, made by the partners in anticipation of their share
separate capital and drawing accounts are in profit. PARTNER’S DRAWING ACCOUNT

established for each partner. Debit Credit

1. Temporary withdrawals 1. Share in profit (this may
PARTNER’S CAPITAL ACCOUNT 2. Share in loss (this may be be credited directly to
debited directly to Capital) Capital)
Debit Credit
1. Permanent withdrawals 1. Original investment
2. Debit balance of the 2. Additional investment The use of drawing accounts for temporary
drawing account at the 3. Credit balance of the
end of the period drawing account at the withdrawals provides a record of each partner’s
end of the period drawings during an accounting period. Hence,
drawings in excess of the allowed amounts as
stated in the partnership agreement may be
controlled.

4
 22/11/2022

PARTNERSHIP FORMATION: PARTNERSHIP FORMATION:

VALUATION OF INVESTMENTS ADJUSTMENT OF ACCOUNTS PRIOR TO
Non-cash assets FORMATION
1st – agreed value
Businesses ceasing to be going concerns:
2nd – fair market value
The adjustment of the assets and liabilities in
IFRS 13 defines fair value as the price that would the separate books of the contracting
be received to sell an asset or paid to transfer a businesses prior to formation shall directly
liability in an orderly transaction between affect the Capital account.
market participants at the measurement date
(an exit price).

OPENING ENTRIES OF A PARTNERSHIP UPON INDIVIDUALS WITH NO EXISTING BUSINESS

FORMATION FORM A PARTNERSHIP
1. Individuals with no existing business form a  On July 1, 2022, Vladi and Cindy agreed to form
partnership. a partnership. The partnership agreement
2. Conversion of a sole proprietorship to a specified that Vladi is to invest cash of
partnership: P700,000 and Cindy is to contribute land with
 A sole proprietor and an individual without an existing a fair market value of P1,200,000 with
business form a partnership P300,000 mortgage to be assumed by the
 Two or more proprietors form a partnership partnership. It was agreed upon by the partners
3. Admission or retirement of a partner. that the land shall be recorded at P1,300,000.

5
 22/11/2022

A SOLE PROPRIETOR AND ANOTHER INDIVIDUAL

FORM A PARTNERSHIP
The statement of financial position of Angelo, a sole proprietor, on
October 1, 2022, before accepting Sarah as partner is shown as follows:

Cash 700,000
Land 1,300,000
Mortgage payable 300,000
Vladi, Capital 700,000
Cindy, Capital 1,000,000

Book Agreed/ Adjustment to

Accounts (Angelo)
A SOLE PROPRIETOR AND ANOTHER INDIVIDUAL value Fair Value Angelo, Capital
FORM A PARTNERSHIP Cash 60,000 60,000 0

Sarah offered to invest cash to get a capital credit equal to Notes receivable 30,000 30,000 0
one-half of Angelo’s capital after giving effect to certain
adjustments, which Angelo accepted. Accounts receivable 240,000 240,000 0
1. The merchandise is to be valued at P74,000. Allowance for uncollectible 10,000 12,000 (2,000)
2. The accounts receivable is estimated to be 95% collectible. accounts
3. Interest accrued on the notes receivable will be recognized: Merchandise inventory 80,000 74,000 (6,000)
P10,000, 12% dated July 1, 2022 and P20,000, 12% dated Furniture and fixtures 60,000 60,000 0
August 1, 2022.
4. Interest on notes payable to be accrued at 14% annually Accumulated Depreciation 6,000 14,000 (8,000)
from April 1, 2022.
Office supplies 0 4,000 4,000
5. The furniture and fixtures are to be valued at P46,000.
6. Office supplies on hand that have been charged to expense Interest receivable 0 700 700
in the past amounted to P4,000. These will be used by the
partnership. Interest payable 0 2,800 (2,800)

Net effect on Angelo, Capital (14,100)

6
 22/11/2022

PROBLEM #1 PROBLEM #1
Froilan Labausa contributed land, inventory, and
P280,000 cash to a partnership. The land has a
book value of P650,000 and a market value of
P510,000. The inventory has a book value of
P600,0000 and a market value of P510,000. The
partnership also assumed a P350,000 note payable
owed by Labausa that was used to purchase the
land. Rosalie Balhag agreed to put up cash
equivalent to Labausa’s net investment.

Prepare the journal entry to record Labausa’s and

Balhag’s investment in the partnership.

7
 22/11/2022

PROBLEM #2 PROBLEM #2
Gogola and Paglinawan have just formed a partnership.
Gogola contributed cash of P1,260,000 and computer
equipment that cost P540,000. The fair value of the
computer is P360,000. Gogola has notes payable on the
computer of P120,000 to be assumed by the
partnership. Gogola is to have 60% capital interest in
the partnership. Paglinawan contributed only P900,000.
The partners agreed to share profit and loss equally. VS

Gogola should make an additional investment or Withdrawal = (150,000)

(withdrawal) of __________.