UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
Academic Year 2021-2022

ONLINE LEARNING MODULE

ACCT 1026- Financial Accounting and Reporting

Lesson 8: Partnership Formation

Topic: a. Basic Considerations

b. Partners’ Ledger Accounts
c. Valuation of investments of Partners
d. Adjustment of accounts prior to formation
e. Opening Entries upon partnership formation

Learning Outcomes: At the end of this module, you are expected to:
1. Enumerate the characteristics of a partnership and the different kinds
of partners
2. Enumerate the contents of the Articles of Partnership
3. Compute and record correctly the partners’ initial investment
4. Master the correct valuation of contributions involving cash and non-
cash investments
5. Prepare journal entries to record partnership formation

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The following topics will be discussed here:

 Introduction – definition and features of partnership

 Partnership formation and partners’ capital accounts
 Accounting for initial contribution for cash and noncash investments
 And many more

ACCT 1026 - FINANCIAL ACCOUNTING AND REPORTING 1

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Basic Considerations

Let’s start with the definition of a partnership.

By the contract of partnership, two (2) 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 may also form a partnership for the exercise of a profession. (Civil Code of the
Philippines Article 1767)

ACCT 1026 - FINANCIAL ACCOUNTING AND REPORTING 2

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Advantages and disadvantages of a partnership

ACCT 1026 - FINANCIAL ACCOUNTING AND REPORTING 3

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Characteristics of a partnership:

1. Mutual Contribution – may be in the form of money, property or industry. Industry can be work or
services, either personal manual efforts or intellectual in nature.

2. Division of Profits and Losses - a stipulation in the contract that a certain partner will share in the
profits only is null and void. Sharing must be as to profits and losses.

3. Mutual Agency – every partner is an agent of the partnership for the purposes of its business unless
the partner so acting has no authority.

4. Limited Life – a partnership has limited life. It may be dissolved with the admission of a new partner,
death, insolvency, incapacity, withdrawal of a partner or the expiration of the term specified in the
partnership contract.

5. Unlimited Liability – all partners, with exception of the limited partner, including the industrial
partners are personally liable for all debts incurred by the partnership to the extent of their personal
properties.

6. Income taxes – for general professional partnerships, 0% (exempt. For business partnership, a final
tax rate of 30% is imposed.

7. Partners’ Equity accounts – accounting for capital accounts is the same as a sole proprietorship.
The difference lies in the number of partners. There are as many capital and drawing accounts as
there are partners. Each partner has a separate ledger for capital and withdrawal account.

Different Kinds of partners:

• General Partner - is one who is liable to the extent of his personal property once partnership assets
are exhausted.
• Limited partner – one who is liable only to the extent of his capital contribution. He is not allowed
to contribute industry or services only.
• Capitalist partner – one who contributes money or property to the common fund of the partnership.
• Industrial partner – one who contributes knowledge or personal services to the partnership
• Managing Partner – one whom the other partners have appointed as manager of the partnership.
• Liquidating Partner – one who is designated to wind up or settle the affairs of the partnership in the
event of dissolution.
• Dormant partner – one who does not take active part in the business of the partnership and is not
known as a partner.
• Silent partner - - one who does not take active part in the business though may be known as a
partner.
• Secret partner – one who takes active part in the business but is not known to be a partner by
outsiders.
• Nominal partner or partner by estoppel – one who is actually not a partner but who represents
himself as such.

ACCT 1026 - FINANCIAL ACCOUNTING AND REPORTING 4

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Articles of Partnership – the partnership agreement in written form.
Important provisions in the Articles of Partnership
1. The partnership name, nature, purpose and location.
2. The names, citizenship and residences of the partners.
3. The date of formation and duration of the partnership.
4. The capital contribution of each partner, the procedure for valuing non-cash investments, treatment
of excess contribution (as capital or as a loan) and the penalties for a partner’s failure to invest and
maintain the agreed capital.
5. The rights and duties of each partner.
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, dissolution, and liquidation.

ACCOUNTING FOR PARTNERSHIP FORMATIONS

Important points to remember in the study of this topic:

 All assets contributed to the partnership are recorded by the partnership at their agreed values (at
fair market values in the absence of agreed values).

 All liabilities that the partnership assumes are recorded are recorded at their net present values.

Example;
If a partner contributes a noncash asset to the partnership such as land or equipment subject to a
mortgage, the contributing partner’s capital account is credited for the agreed value (or fair value) of
the noncash asset less or n the mortgage assumed by the partnership.

 The capital account is an equity account similar to the sole proprietorship capital accounts. It is
used to account for permanent withdrawals and additional contributions.

 Other important accounts include a drawing account and a loans to or from partners.

The drawing account is used to account for Net Income or loss and personal normal withdrawals
from share in net income. It is closed at the end of the accounting period into the capital account.

Loans to and from accounts are set up for amounts intended as loans, rather than as additional
capital investments.

Note: In liquidation proceedings, a loan to or loan from partner is treated as increase or decrease in
a partner’s capital account.

ACCT 1026 - FINANCIAL ACCOUNTING AND REPORTING 5

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 Uses of the Partner’s Capital Account:

Partner's Capital Account

Debit
1. Permanent Withdrawals
2. Debit balance of the drawing
account at the end of the period
Credit
1. Original Investment
2. Additional Investment
3. Credit balance of the drawing
account at the end of the period

Uses of the Partner’s Drawing Account:

Partner's Drawing Account

Debit
1. Permanent Withdrawals
2. Debit balance of the drawing
account at the end of the period
Credit
1. Original Investment
2. Additional Investment
3. Credit balance of the drawing
account at the end of the period

Illustrative Example 01.

On March 01, 2021, AA and BB formed a partnership with each contributing the following assets:

AA BB
Cash 300,000 700,000
Machinery and equipment 250,000 750,000
Building 0 2,250,000
Furniture and Fixtures 100,000 0

The building is subject to a mortgage loan of P800,000 which is to be assumed by the partnership. Per
agreement, partners AA and BB will share profits and losses 30% and 70%, respectively.
Required a) What is the balances in the partners’ capital accounts on March 01, 2021?
b) Journalize the initial investments of the partners in the partnership books.
Requirement A: Computation of Partners’ Capital Balances:

AA BB TOTAL
Cash 300,000 700,000 1,000,000
Machinery and equipment 250,000 750,000 1,000,000
Building 0 2,250,000 2,250,000
Furniture and Fixtures 100,000 0 100,000
Total Assets Invested 650,000 3,700,000 4,350,000
Less Mortgage Payable (800,000) (800,000)
Capital Balances, March 01, 2021 650,000 2,900,000 3,550,000

ACCT 1026 - FINANCIAL ACCOUNTING AND REPORTING 6

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Requirement B: Journal Entry on March 01, 2021 in Partnership books:

Account Titles DEBIT CREDIT

Cash 1,000,000
Machinery and equipment 1,000,000
Building 2,250,000
Furniture and Fixtures 100,000
Mortgage Payable 800,000
AA, Capital 650,000
BB, Capital 2,900,000

Illustrative Example No 02
On August 01, 2021, CC and DD pooled their assets to form a partnership with the firm to take over the
assets and assume the liabilities. Partners’ capitals are to be based on net assets transferred after the
following adjustments. (Profits and losses are allocated equally).
CC’s inventory is to be increased by P4,000; an allowance for doubtful accounts of P1,000 and P1,500 are
to be setup in the books of CC and DD, respectively. An Accounts Payable of P4,000 is to be recognized in
CC’s books. The individual trial balances on August 01 before adjustments follow:

CC DD
ASSETS 75,000 113,000
LIABILITES 5,000 34,500

Required a) What is the balances in the partners’ capital accounts on August 01, 2021?

CC DD TOTAL
Assets 75,000 113,000 188,000
Less: Liabilities -5,000 -34,500 -39,500
Unadjusted Capital Accounts 70,000 78,500 148,500
Add (deduct) adjustments:
Increase in Inventory 4,000 4000
Allowance for Doubtful Accounts (1000) (1500) (2500)
Accounts Payable (4000) 0 (4000)
Adjusted Capital Balances 69,000 77,000 146,000

ACCT 1026 - FINANCIAL ACCOUNTING AND REPORTING 7

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Drill No 01 (Solve this in you Journal of Learning)

The business assets of RR and QQ appear below:

Account Titles QQ RR
Cash 11,000 22,354
Accounts Receivable 234,536 567,890
Inventories 120,035 260,102
Land 603,000 0
Building 0 428,267
Furniture and Fixtures 50,345 34,789
Other Assets 2,000 3,600
Total 1,020,916 1,317,002
Accounts Payable 178,940 243,650
Notes Payable 200,000 345,000
RR, Capital 641,976 0
QQ, Capital 0 728,352
Total 1,020,916 1,317,002

QQ and RR agreed to form a partnership by contributing their respective assets and equities subject to the
following adjustments:

a) Accounts Receivable of P20,000 in QQ’s books and P35,000 in RR’s books are uncollectible.

b) Inventories of P5,500 and P6,700 are worthless in QQ’s and RR’s books, respectively.

c) Other assets of P2,000 and P3,600in QQ’s and RR’s books are to be written off.

Required: Compute for the following:

The capital accounts of the partners after adjustments are:

a) QQ: _____________

b) RR _____________

c) The total assets of the partnership just after formation is P_____________

REFERENCES:

Textbooks

1. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
2. Cabrera, E. (2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
3. Cabrera, E. (2018) Financial Accounting and Reporting Fundamentals, GIC Enterprises & Co., Inc.,
Manila
4. Dayag, A. (2016). Advance Financial Accounting Volume 1. Manila: Lajara Publishing House

ACCT 1026 - FINANCIAL ACCOUNTING AND REPORTING 8

WARNING: No part of this E-module or LMS content can be reproduced or transported or shared
to others without permission from the University of Saint Louis. Unauthorized use of the
materials, other than personal learning use, will be penalized. Please be guided accordingly.
 5. Millan, Z. V. (2020). Financial Accounting and Reporting (Fundamentals). Baguio City: Bandolin
Enterprise.
6. Valencia, E. and Roxas, G. (2017), Partnership and Corporation Accounting, Valencia Educational
Supply
7. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I GIC Enterprises & Co., Inc., Manila
8. Porter, G. and Norton, C. (2017), Financial Accounting- The Impact on Decision Makers: Cengage
Learning.

Online Reference

1.
2.

ACCT 1026 - FINANCIAL ACCOUNTING AND REPORTING 9

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