Parcor-Concepts, Formation & Operation

PAC101
PARTNERSHIP AND CORPORATION ACCOUNTING
Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

STUDENT
Name:
Student Number:
Program:
Section:
Home Address:
Email Address:
Contact Number:
PROFESSOR
Name: ELLEN C. ALMORO; ANNIELEAH D. DEBASA;
Academic Department: DEPARTMENT OF BUSINESS AND ACCOUNTANCY
Consultation Schedule:
Email Address: ecalmoro@ccc.edu.ph; addebasa@ccc.edu.ph
Contact Number:

GENERAL INSTRUCTIONS
MODE OF STUDY AND ATTENDANCE

The City College has adopted a blended study program for this school year – a mix of virtual and
nonvirtual instructions. This learning modality entails that there shall be scheduled online and on-campus classes
requiring student attendance and interaction for the entire semester. Likewise, the College crafted modular
materials in three (3) correlated modules designed for synchronous and asynchronous instructions to be given to
the student through e-Guro--the in-house Learning Management System adopted by the school as the primary
delivery conduit of instruction of the College to the student.
LEARNING MATERIALS AND REFERENCES

The inclusive topics of this module shall also be the basic flow of virtual and nonvirtual discussion. The
students are encouraged to read the module before joining the scheduled online/offline interaction. As for study
references and materials, several textbooks are available in the college library, wherein you can collectively or
individually request an electronic/physical copy. Alternatively, you can source related references available in
the web portal. However, when looking for study resources and materials either offline or across the net, please
be reminded of the so-called law on Data Privacy Act of 2012. The City College of Calamba owns the content
of the modular materials provided to you, henceforth the author of the books, websites, journals/videos content,
etcetera, unless tolerable for learning duplication. Please do not upload modular materials provided to you
unless a written consent is course through the college and approved the same for learning purposes. You shall
be mindful and practice due diligence in dealing with exclusive rights issues, especially our modular materials, to
avoid mishaps on your part.
GRADING SYSTEM
The student's learning progress shall be measured through output activities in the form of enrichment and
assessment. These activities are pre-formatted and designed by your respective instructor, which can be given
to the student synchronously or asynchronously. You can expect a combination of fill-in-the-blank, true-or-false,
traditional multiple-choice, analytical illustrations, and essays in a time-bounded manner. The outputs, including
the virtual performance, shall be the basis for your grade. The grading scheme for these activities shall be 40%
for quizzes, task reporting, and seat works, 40% for assessment/major examinations, and 20% for virtual and
nonvirtual performance and attendance, and the grades shall be uploaded per activity per student which can
be viewed through the LMS or other convenient mode to inform the student with their ranking performance. For
final grade merit, the following are the weight of each Module: Module 1, 30%; Module 2, 30%; and 40% for
Module 3.
Note: A student who cannot complete and pass the abovementioned evaluation activities, with or without a
valid reason, given during the term in the prescribed manner by the professor will be marked as failed.
COMMITMENT OF INTEGRITY
As an enrolled student in this institution, you shall always uphold and perform your task with utmost honesty
and integrity. The City College will NOT tolerate any misconduct or misbehavior, especially any protocol violation
in the implemented learning modality. Whoever is found guilty of these shall be given sanctions written in your
student's manual.

LEARNING MODULE INFORMATION
I. Course Code PAC101
II. Course Title PARTNERSHIP AND CORPORATION ACCOUNTING
III. Module No. (Intended for) 1 (Prelim)
IV. Module Title Partnership Formation and Operations
V. Overview of the Module The preliminary period will cover two (2) lessons for theories and
concepts of partnership business. Lesson 1 will cover ways on how
partnership may be formed. On the other hand, Lesson 2 will discuss
the different methods on dividing the results of operations among
the partners.
VI. Module Outcomes The ways on how partnership may be formed and the methods of
distributing the results of the partnership operation shall be identified
clearly in this Module. The measurement and manner of how to
record a qualified partnership transaction shown as journal entries
and the preparation of Statement of Partners' Equity effecting all
the changes such as investments, withdrawals, and the sharing of
profit and loss shall be demonstrated by the student by the end of
preliminary term.

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Lesson 1: PARTNERSHIP FORMATION

Lesson Objectives
At the end of the lesson, the student will be able to:

❖ To identify and define the different concepts related to partnership,
❖ To formulate the journal entries related to various ways in forming a partnership, and
❖ To prepare the statement of financial position for partnership.
Getting Started
Aside from single proprietorship, another form of business organization is a partnership. So, this time,
there may be two or more owners of the business. Just like in the single proprietorship, the partners may
invest cash, property, and industry or labor to mutual trust.
Discussion
DEFINITION OF PARTNERSHIP
A partnership is an association where two or more persons bind themselves to contribute money,
property, or industry into a common fund with the intention of dividing the profits among themselves
(New Civil Code, Article 1767).
CHARACTERISTICS OF PARTNERSHIP
▪ Voluntary agreement. A partnership agreement is perfected by mere consent, that is, upon express
or implied agreement of two or more persons.
▪ Mutual contribution of money, property or industry to a common fund. In order to become a partner
in a partnership, one must contribute money and/or property to a common fund. An individual may
also be a partner by investing his services to the firm. Without the element of mutual contribution,
there can be no partnership.
▪ Co-ownership of property. The assets contributed by each partner in a partnership become the
common property of all partners. No partner owns any particular piece of a partnership property.
▪ Mutual agency. Each partner acts as an agent for the other partners. This means that the partnership
is legally held responsible for the acts of any partner as long as those acts relate to the normal
partnership activities. However, the partnership is not bound by an act committed by the partner
that is considered beyond the scope of partnership business.
▪ Unlimited life. Each partner is held personally liable for all the debts of the firm. Partnership obligations
can be satisfied not only with partnership assets but also with personal holding or assets of each
partner. When all partnership assets are exhausted and there are still partnership obligations that
have not been settle, the partnership creditors can claim from the personal assets of the partners.
▪ Limited life. The legal life of the partnership terminates with the admission of a new partner, death,
bankruptcy or withdrawal of any partner, voluntary dissolution by the partners, or by involuntary
dissolution such as through bankruptcy proceedings. A partnership may also come to an end upon
completion of the objective or goal for which the partnership was formed. However, the dissolution
of the partnership does not necessarily terminate the partnership as a reporting entity.

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▪ Division of profits among partners. Based on the definition of a partnership from the New Civil Code,
it is deemed that the primary purpose of a partnership is to earn profits and to divide the same
among the partners in conformity with the terms of the partnership.
KINDS OF PARTNERS
As to the nature of contributions:

▪ Capitalist partner. One who contributes money or property into the partnership; or
▪ Industrial partner. One who contributes only his industry or services to the partnership; or
▪ Capitalist-industrial partner. One who contributes money or property as well as his services to the
partnership
As to liabilities to the third person:

▪ General partner. One whose liability to partnership creditors extends to his separate personal
property; or
▪ Limited partner. One whose liability to third persons is limited to his capital contributions.
As to their interest in or obligations to the business, partners may be classified as:

▪ Managing partner. One who manages the affairs of the business
▪ Secret partner. One who is not known by third parties to be a partner in the business but takes an
active part.
▪ Silent partner. One who does not take an active part in the business but is known by third parties to
be a partner in the business.
▪ Dormant partner. One who does not take an active part in the business and is not known by third
parties to be a partner.
▪ Ostensible partner. One who takes an active part and is known to the public as a partner in the
business, whether or not he has an actual interest in the firm.
KINDS OF PARTNERSHIP
As to liability of the partners:

▪ General partnership. One in which all partners are general partners, which means that the liability
of all partners to the partnership creditors extends to their separate personal property.
▪ Limited partnership. One which is composed of one or more general partners and one or more
limited partners. A limited partnership shall bear the word "Limited" (or LTD) in its firm name.
As to either universal or particular:

▪ A universal partnership of all present property is that in which the partners contribute all the property
which actually belongs to them to a common fund, with the intention of dividing the same among
themselves and all the profits they may acquire therewith.
▪ A universal partnership of profits comprises all that the partners may acquire by their industry or work
during the existence of the partnership.
▪ A particular partnership has for its object determinate things, their use or fruits, or a specific
undertaking, or the exercise of a profession or vocation.

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As to duration:
▪ A partnership at will is one in which no time or period is specified for its existence and is not formed
for a particular undertaking or venture. This may be terminated anytime by mutual agreement of
the partners or by the will of any one partner alone.
▪ A partnership with a fixed term is one which the term for which the partnership will exist is fixed or
agreed upon. This also applies to a partnership that is formed for a particular objective or
undertaking.
As to purpose:
▪ A commercial or trading partnership is organized to undertake business transactions such as
merchandising or manufacturing transactions.
▪ A professional partnership is formed for the practice of a profession, such as auditing firm (for CPAs),
law firm (for lawyers), medical clinic (for medical practitioners), and similar professions.
ARTICLES OF CO-PARTNERSHIP
The written contract of partnership is called Articles of Co-Partnership. Among others, the Articles of
Co-Partnership contain the following information:
✓ The name of the partnership,
✓ The names, citizenship and residences of the partners,
✓ The effective date of the contract,
✓ The nature of the business, purpose and principal office of the business,
✓ The Capital of the partnership, stating the contributions of individual partners, their description
and agreed values,
✓ The rights and duties of each of the partners,
✓ The provisions for additional investments and withdrawals,
✓ The manner in which profits and losses are to be shared,
✓ The manner of keeping the books of accounts,
✓ The procedures for dissolving the partnership, and
✓ The provision for arbitration in settling disputes.
The detailed features, elements, and kinds of partnership and of partners as well as the details of
partnership contract are further discussed in the references provided at the end of the module.
DIFFERENT WAYS (CASES) OF PARTNERSHIP FORMATION

❖ Partners investing money, property or industry (CASE 1)
❖ A partner investing his/her business (CASE 2)
❖ Both partners investing businesses (CASE 3)
Application
The following illustrations show the different cases of forming a partnership, including some of the
what-if-case transactions, related journal entries, and the partnership's statement of financial position
upon the formation.

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CASE 1: PARTNERS INVESTING MONEY, PROPERTY or INDUSTRY

1A: Partners Investing MONEY
On Sept. 1, Mr. Reyes invested P100,000 cash in the partnership.
Date Particulars Ref No. Dr Cr
Sept. 1 Cash 1 0 0 0 0 0
Reyes, Capital 1 0 0 0 0 0
To record investment of Mr. Reyes in the partnership
1B: Partners Investing PROPERTY

On Sept. 1, Mr. Santos invested equipment with an original cost of P150,000 and accumulated
depreciation of P20,000 in the partnership. The current fair value of the equipment is P100,000.
Sept. 1 Equipment 1 0 0 0 0 0
Santos, Capital 1 0 0 0 0 0
To record investment of M r. Santos in the partnership
Note: The non-cash investment should be recorded at FAIR VALUE if determinable. Otherwise, the book
value shall be considered.
WHAT-IF-CASE of investing PROPERTY with an obligation

1B-i: The equipment has an attached liability of P50,000, and the partnership will shoulder liability.
The journal entry to record the investment of Mr. Santos then would be:
Accounts Payable 5 0 0 0 0
Santos, Capital 5 0 0 0 0
1B-ii: The equipment has an attached liability of P50,000, and the partnership will NOT shoulder
liability. The journal entry to record the investment of Mr. Santos then would be:
Santos, Capital* 1 0 0 0 0 0
* credited for the full fair value of the equipment
1C: Partners Investing INDUSTRY (LABOR)

On Sept. 1, Mr. Alvarez was admitted to the partnership as a managing partner.

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Date Particulars REF No. Dr Cr
Sept. 1 NO JOURNAL ENTRY

Instead, a MEMORANDUM to record admission of Mr. Alvarez as industrial partner shall be done.
The Statement of Financial Position upon formation of the partnership, CASE No.1 (1A, 1B, 1C):
RSA Partnership
Statement of Financial Position (In Peso)
as of September 1, 2022
ASSETS
Cash 100,000
Equipment 100,000
Total Assets 200,000
LIABILITIES
Total liabilities 0
PARTNERS' EQUITY
Reyes, Capital 100,000
Santos, Capital 100,000
Alvarez, Capital 0
Total Partners' Equity 200,000
Total Liabilities and Partners' Equity 200,000
TRANSACTIONS and its journal entries affecting the capital account in the conduct of partnership.
RECEIVABLE (Due from) Partner
Assuming on Sept. 5, Mr. Alvarez was given a cash advance of P3,000 by the partnership.
Sept. 5 Receivable from Alvarez 3 0 0 0
Cash 3 0 0 0
To record cash advance of M r. Alvarez
PAYABLE (Due to) Partner
Assuming on Sept. 10, Mr. Santos extended a loan to the partnership amounting to P10,000.
Sept. 10 Cash 1 0 0 0 0
Payable to Mr. Santos 1 0 0 0 0
To record loan proceeds, M r. Santos
PERMANENT WITHDRAWAL OF CAPITAL

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Assuming on Sept. 15, Mr. Reyes permanently withdrew ¼ of his capital investment in the partnership.
Sept. 15 Reyes, Capital (100,000 x 1/4) 2 5 0 0 0
Cash 2 5 0 0 0
To record permanent withdrawal of investmet of M r. Reyes
DISTRIBUTION AND WITHDRAWAL OF SHARE IN PROFIT
Assuming on Sept. 30, the partnership had a total P15,000 net profit to be divided equally among
the partners. Assume further that half of share in the profits are all withdrawn by the partners.
Sept. 30 Income Summary 1 5 0 0 0
Reyes, Drawing (15,000 x 1/3) 5 0 0 0
Santos, Drawing (15,000 x 1/3) 5 0 0 0
Alvarez, Drawing (15,000 x 1/3) 5 0 0 0
To record distribution of profits
Reyes, Drawing (5,000 x 1/2) 2 5 0 0

Santos, Drawing (5,000 x 1/2) 2 5 0 0
Alvarez, Drawing (5,000 x 1/2) 2 5 0 0
Cash 7 5 0 0
To record withdrawal of profits
Note: Each partner shall have individual drawing accounts to be closed on their capital accounts at
the end of each accounting period.
CASE 2: A PARTNER INVESTING HIS/HER BUSINESS
If the investment is in the form of business, the following STEPS in recording are to be done:
Step 1: Adjust the old books of the business,

Step 2: Close the old books of the business, and
Step 3: Record the investments of the partner(s) in the new partnership books.
Assume on Sept. 1, Mr. Gomez has the following assets and liabilities in his merchandising business.
He invited Mr. Aquino to form a partnership with him investing an equal share in the capitalization.
Books of Mr. Gomez:
ASSETS LIABILITIES AND CAPITAL

Cash ₱ 200,000 Accounts payable ₱ 50,000
M erchandise Inventory 250,000 Capital 550,000
Equipment 200,000
Accumulated depreciation (50,000)
Total Assets ₱ 600,000 Total Liabilities and Capital ₱ 600,000

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Data for adjustments on Mr. Gomez’s books:

a. Merchandise fair market value. P300,000
b. Equipment appraised value, P180,000
Requirements:
I. Adjust and close the books of Mr. Gomez.
II. Record the investment in the new partnership books.
Let's do the STEPS 1 and 2 for Requirement I
Step 1: Adjust the books of Mr. Gomez

Sept. 1 M erchandise Inventory 5 0 0 0 0

Capital 5 0 0 0 0
To record fair value adjustment - merchandise inventory
(P300,000 - P250,000 = P50,000 Increase in value)
Accumulated depreciation 3 0 0 0 0
Capital 3 0 0 0 0
To record appraised value adjustment - equipment
(Cost P200,000 - AD P50,000 = P150,000 Book value vs. P180,000 Appraised value =
P30,000 Increase in value, to be adjusted though accumulated depreciation)
Step 2: Close the books of Mr. Gomez

Sept. 1 Accounts payable 5 0 0 0 0
Accumulated depreciation (50,000 - 30,000) 2 0 0 0 0
Capital (550,000 + 50,000 + 30,000) 6 3 0 0 0 0
Cash 2 0 0 0 0 0
M erchandise inventory (250,000 + 50,000) 3 0 0 0 0 0
Equipment 2 0 0 0 0 0
To record closing of books
Then, do the Step 3 for Requirement II
Step 3: Record the investments of Mr. Gomez and Mr. Aquino in the new partnership books.
Books of Partnerships:

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Sept. 1 Cash 2 0 0 0 0 0
Equipment [200,000 Less (50,000 - 30,000)] 1 8 0 0 0 0
Accounts payable 5 0 0 0 0
Gomez, Capital (550,000 + 50,000 + 30,000) 6 3 0 0 0 0
To record initial investment of M r. Gomez in the partnership
Cash 6 3 0 0 0 0
Aquino, Capital 6 3 0 0 0 0
To record initial investment of M r. Aquino in the partnership
CASE 3: BOTH PARTNERS INVESTING HIS/HER BUSINESS
If both partners had existing businesses and agreed to form a partnership, the same STEPS done in
Case No.2 shall be followed.
Step 1: Adjust the old books of the business,

Step 2: Close the old books of the business, and
Step 3: Record the investments of the partners in the new partnership books.
Assume on Sept. 1, Mr. Gomez has a merchandising business, and Mr. Aquino has a service business.
Both entrepreneurs agreed to combine their resources and form a partnership.
Data for merchandising business of Mr. Gomez:

M erchandise Inventory 250,000 Capital 550,000
Equipment 200,000
Accumulated depreciation (50,000)
For adjustments on Mr. Gomez’s books:

a. Merchandise fair market value. P300,000.
b. Equipment appraised value, P180,000.
Data for service business of Mr. Aquino:

Accounts Receivable 100,000 Capital 350,000
Supplies 50,000
Equipment (net) 50,000

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For adjustments on Mr. Aquino’s books:

a. Provision for uncollectible accounts, 5% of accounts receivable.
b. Obsolete supplies, P10,000.
c. 10% increase in equipment.
Requirements:
I. Adjust and close the books of Mr. Gomez
II. Adjust and close the books of Mr. Aquino
III. Record the investment in the new partnership books
IV. Prepare a Statement of Financial Position upon partnership formation
Requirement I: BOOKS of Mr. Gomez
Do, steps 1 and 2, as computed in Case No.2

Sept. 1 M erchandise Inventory 5 0 0 0 0

Capital 5 0 0 0 0
To record fair value adjustment - merchandise inventory
(P300,000 - P250,000 = P50,000 Increase in value)
Capital 3 0 0 0 0
To record increase in fair value of equipment
(Cost P200,000 - AD P50,000 = P150,000 Book value vs. P180,000 Appraised value =
P30,000 Increase in value, to be adjusted though accumulated depreciation)
Accumulated depreciation (50,000 - 30,000) 2 0 0 0 0
Capital (550,000 + 50,000 + 30,000) 6 3 0 0 0 0
Cash 2 0 0 0 0 0
Equipment 2 0 0 0 0 0
Requirement II: BOOKS of Mr. Aquino

Step 1: Adjust the books of Mr. Aquino

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Sept. 1 Capital 5 0 0 0
Allowance for uncollectible accounts 5 0 0 0
To record allowance for uncollectible accounts
(P100,000 x 5% = P5,000 A/R allowance)
Capital 1 0 0 0 0
Supplies 1 0 0 0 0
To record obselete supplies
Equipment 5 0 0 0
Capital 5 0 0 0
To record adjustment fair value of equipment
[Current value 55,000 (P50,000x110%) Less Book value 50,000 = P5,000 Increase]
Step 2: Close the books of Mr. Aquino

Sept. 1 Accounts payable 1 0 0 0 0 0
Capital (350,000 - 5,000 - 10,000 + 5,000) 3 4 0 0 0 0
Cash 2 5 0 0 0 0
Accounts receivable 1 0 0 0 0 0
Supplies ( 50,000 - 10,000) 4 0 0 0 0
Equipment (50,000 + 5,000) 5 5 0 0 0
Requirement III: Partnership Books

Step 3: Record the investments of partners in the new partnership books
Books of Partnership:
Sept. 1 Cash 2 0 0 0 0 0
Merchandise inventory (250,000 + 50,000) 3 0 0 0 0 0
Equipment [200,000 Less (50,000 - 30,000)] 1 8 0 0 0 0
Gomez, Capital (550,000 + 50,000 + 30,000) 6 3 0 0 0 0
To record initial investment of Mr. Gomez in the partnership

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Sept. 1 Cash 2 5 0 0 0 0
Supplies 4 0 0 0 0
Equipment 5 5 0 0 0
Accounts payable 1 0 0 0 0 0
To record initial investment of Mr. Aquino in the partnership
Requirement IV: Prepare a Statement of Financial Position

Computations:
Cash = 450,000 (200,000 + 250,000)
Accounts receivable, net = 95,000 (100,000 – 5,000)
Equipment = 235,000 (180,000 + 55,000)
Accounts payable = 150,000 (50,000 + 100,000)
AQUINO AND GOMEZ Partnership

Statement of Financial Position (In Peso)
as of September 1, 2022
ASSETS
Cash 450,000
Accounts Receivable, net 95,000
Merchandise Inventory 300,000
Supplies 40,000
Equipment 235,000
Total Assets 1,120,000
LIABILITIES
Accounts Payable 150,000
Total liabilities 150,000
PARTNERS' EQUITY
Aquino, Capital 340,000
Gomez, Capital 630,000
Total Partners' Equity 970,000
Total Liabilities and Partners' Equity 1,120,000
WHAT-IF-CASE of forming a partnership using one of the partner's books (OLD BOOKS)
With facts of Case No.3, except for Mr. Gomez's books to retain as his books will be used in the
partnership formation. Only STEP 1 is applicable to Mr. Gomez but Mr. Aquino's books shall undergo
STEPs 1,2&3. However, there are slight changes in Mr. Gomez's books. Do both partners shall adjust their
books? Yes, but to effect nominal account only for Mr. Gomez. Should we both close the books? Yes

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for Mr. Aquino, while No for Mr. Gomez books. The records of partnership on Mr. Gomez books will be
as shown instead as follows:
Sept. 1 M erchandise inventory 5 0 0 0 0
Capital Cost of sales  5 0 0 0 0
To record fair value adjustment of inventories
Capital Depreciation expense 3 0 0 0 0
To record increase in fair value of equipment
Cash 2 5 0 0 0 0
Supplies 4 0 0 0 0
Equipment 5 5 0 0 0
Accounts payable 1 0 0 0 0 0
To record initial investment of M r. Aquino in the partnership
Summary of the Lesson

❖ A partnership is an association where two or more persons bind themselves to contribute money,
property, or industry into a common fund to divide the profits among themselves.
❖ Different ways of forming a partnership; (1) Partners are investing cash, property, or industry, (2)
Partner investing his/her own business, and (3) Both partners investing their businesses.
❖ Receivable to (Due from) Partner is debited when a partner advances from the partnership.
❖ Payable to (Due to) Partner is used to account loan extended to the partnership.
❖ Permanent withdrawal of Capital resulted in an outright debiting of the Capital account.
❖ Share in earnings' withdrawal uses Drawing account to which eventually close to capital account.
Suggested Links
1. https://books.google.com.ph/books?id=UtAat916438C&pg=PA1&source=gbs_toc_r&cad=3#v=on
epage&q&f=false
2. https://www.thebalancesmb.com/selecting-a-business-partnership-398880
References
1. Manuel, Z.V.C, (2019), 21st Century Financial Accounting and Reporting for: Partnership and
Corporation. (2019 Edition) Manila: Zenaida Vera Cruz Manuel.
2. Ballada, W. & Ballada, S. (2019). Partnership and Corporation Accounting: Made Easy. (2019 ed.)
Manila: DomDane Pub.: Made Easy Books.
3. Empleo, Robles, German (2016) Fundamentals of Accounting Volume 2 Partnership and Corporation
(2016 Ed.) Mandaluyong City Millennium Books Inc.
4. Frias, Fajardo (2018), Elementary Accounting (Partnership and Corporation) (2018 Ed.), Manila,
Unlimited Books Library Services & Publishing Inc.

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Lesson 2: PARTNERSHIP OPERATIONS

Lesson Objectives
At the end of the lesson, the students will be able to:

❖ To compute the share in profit/loss to partners,
❖ To journalize the share of the result of operation, and
❖ To prepare a Statement of Changes in Partners' Equity.
Getting Started
After the formation of partnership is the operations. The operations may result in either net income
or net loss and entry these in the books.
When it has net income: When it has a net loss:
Income Summary XX Partner A, Drawing XX

Partner A, Drawing XX Partner B, Drawing XX
Partner B, Drawing XX Income Summary XX
Discussion
FACTORS TO CONSIDER when dividing the profit or loss
❖ Invested Capital
❖ Time or labor given
❖ Expertise contributed
CAPITAL BALANCES may be based on:

▪ Beginning balances
▪ Ending balances
▪ Average balances
METHODS (CASES) OF DIVIDING PROFIT OR LOSS AMONG THE PARTNERS

❖ Arbitrary ratio - equally, percentages, fractions, or ratios (Case 1)
❖ Providing interest on Capital, balance in an agreed ratio (Case 2)
❖ Providing salary to partner(s), balance in an agreed ratio (Case 3)
❖ Providing both interest on Capital & salaries to partner(s) and balance in agreed ratio (Case 4)
❖ Providing interest on Capital, salaries, bonus to partner(s), and balance as agreed upon (Case 5)
However, suppose there is no agreement on how to divide the profit or loss. In that case, the capital
balance will be the basis of division. The industrial partner will only share with the profit and will have
no share in the loss.

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Application
The following illustrations show the different cases of dividing the partnership profits or losses to
partners, related journal entries, and the changes in partners’ equity statement upon distribution.
CASE 1: ARBITRARY RATIO
Assume partners, Mr. Reyes and Mr. Santos have the following changes in their capital accounts.
The partnership had a net income of P300,000 at the end of the current year.
Reyes, Capital Santos, Capital
Oct. 1 ₱ 200,000 Jan. 1 ₱ 400,000 Jan. 1 ₱ 200,000
Apr. 1 100,000
1A: Distribute based on BEGINNING CAPITAL

Oct. 1 ₱ 200,000 Jan. 1 ₱ 400,000 Jan. 1 ₱ 200,000
Apr. 1 100,000
Dec. 31 Income Summary 3 0 0 0 0 0

Reyes, Drawing 2 0 0 0 0 0
Santos, Drawing 1 0 0 0 0 0
To record distribution of profits to partners
Basis: P600,000 (P400,000 + P200,000) Profits: P300,000
Reyes = P200,000 (P400,000 / P600,000 x P300,000 profits)
Santos = P100,000 (P200,000 / P600,000 x P300,000 profits)
1B: Distribute based on ENDING CAPITAL

Oct. 1 ₱ 200,000 Jan. 1 ₱ 400,000 Jan. 1 ₱ 200,000
Apr. 1 100,000
Ending ₱ 200,000 Ending ₱ 300,000


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1C: Distribute based on AVERAGE CAPITAL
Computation of Average Capital:

No. of Divided by
Investment Capital Multiply Months (A-Cycle) Average
Partner Date (Withdrawal) Balance by UNUSED TOTAL 12 Capital
Jan. 1 ₱ 400,000 ₱ 400,000 x 9 ₱ 3,600,000 / 12 ₱ 300,000
Oct. 1 ( 200,000 ) 200,000 x 3 600,000 / 12 50,000
Reyes ₱ 350,000
Jan. 1 ₱ 200,000 ₱ 200,000 X 3 ₱ 600,000 / 12 ₱ 50,000
Apr. 1 100,000 300,000 X 9 2,700,000 / 12 225,000
Santos ₱ 275,000

CASE 2: PROVIDING INTEREST ON CAPITAL, BALANCE IN AN AGREED RATIO
Assume that Mr. Reyes and Mr. Santos are partners with capital balances of P400,000 and P200,000
respectively. They agreed to distribute profit of P300,000 as follows: 10% interest on capital and the
residual profit equally.
Distribution Schedule:
PARTNERS REYES SANTOS TOTAL Profit/(Loss)
CAPITAL BALANCES (Basis) ₱ 400,000 ₱ 200,000 ₱ 600,000 ₱ 300,000
INTEREST on Capital,10% (10% x 400,000) 40,000 (10% x 200,000) 20,000 60,000 240,000
REMAINDER: Equally (240,000x1/2) 120,000 (240,000x1/2) 120,000 240,000 -
160,000 140,000 ₱ 300,000

CASE 3: PROVIDING SALARY TO PARTNER(S), BALANCE IN AN AGREED RATIO
respectively. They agreed to distribute profit of P300,000 by allowing P12,000 monthly salary to Mr. Reyes
and the residual profit equally.

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CAPITAL BALANCES (Basis) ₱400,000 ₱200,000 ₱600,000 ₱300,000
SALARIES to Reyes,12K (12,000X12) 144,000 - 144,000 156,000
REMAINDER: Equally (156,000x1/2) 78,000 (156,000x1/2) 78,000 156,000 -
222,000 78,000 ₱300,000

Santos, Drawing 7 8 0 0 0
CASE 4: NET LOSS BUT PROVIDING BOTH INTEREST ON CAPITAL & SALARIES TO PARTNER(S) AND BALANCE
IN AN AGREED RATIO
respectively. They agreed to distribute loss of P200,000 by allowing P12,000 monthly salary to Mr. Reyes,
10% interest on capital and the residual profit equally.
CAPITAL BALANCES (Basis) ₱ 400,000 ₱ 200,000 ₱ 600,000 ( ₱ 200,000 )
INTEREST,10% on capital (400,000X10%) ₱ 40,000 (200,000X10%) ₱ 20,000 ₱ 60,000 ( 260,000 )
SALARIES to Reyes,12K (12,000X12) 144,000 - 144,000 ( 404,000 )
REM AINDER: Equally (404,000x1/2) ( 202,000 ) (404,000x1/2) ( 202,000 ) ( 404,000 ) -
( ₱ 18,000 ) ( ₱182,000 ) ( ₱ 200,000 )
Dec. 31 Reyes, Drawing 1 8 0 0 0
Income Summary 2 0 0 0 0 0
To record distribution of loss to partners
CASE 5: Providing interest on Capital, salaries, bonus to partner(s), and balance as agreed upon
respectively. They agreed to distribute profit of P300,000, as follows: P12,000 monthly salary to Mr. Reyes,
10% interest on capital, a bonus of P20,000 to Mr. Reyes, and residual profit will be distributed as 30:70.
PARTNERS REYES TOTAL Profit/(Loss)
CAPITAL BALANCES (Basis) 400,000 200,000 600,000 300,000
INTEREST,10% on capital (400,000X10%) 40,000 (200,000X10%) 20,000 60,000 240,000
SALARIES to Reyes,12K (12,000X12) 144,000 - 144,000 96,000
BONUS to Reyes,20K 20,000 - 20,000 76,000
REMAINDER: 30:70 (76,000x30%) 22,800 (76,000x70%) 53,200 76,000 -
226,800 73,200 300,000

17

Santos, Drawing 7 3 2 0 0
WHAT-IF-CASE 5: Providing interest on Capital, Salaries, Bonus to partner(s), and balance as agreed
upon resulting to a loss. Please observe the following computation on treatment to bonus.
5A: Assume that Mr. Reyes and Mr. Santos are partners with average capital balances of P350,000 and
P275,000 respectively. They agreed to distribute profit of P166,500, as follows: P12,000 monthly salary to
Mr. Reyes starting month of March, 10% interest on average capital, a 5% bonus to Mr. Reyes and any
remaining profits shall be distributed equally.
AVERAGE CAPITAL (Basis) ₱ 350,000 ₱ 275,000 ₱ 625,000 ₱ 166,500
INTEREST,10% on capital (350,000X10%) ₱ 35,000 (275,000X10%) ₱ 27,500 ₱ 62,500 104,000
BONUS to Reyes, 5% - - - ( 16,000 )
REM AINDER: 50:50 (16,000x50%) ( 8,000 ) (16,000x50%) ( 8,000 ) ( 16,000 ) -
₱ 147,000 ₱ 19,500 ₱ 166,500
5B: Assume that Mr. Reyes and Mr. Santos are partners with ending capital balances of P200,000 and
P300,000 respectively. They agreed to provide the following: Mr. Reyes is entitled to a 5% bonus on
profit after bonus, P12,000 monthly salary to Mr. Reyes starting month of March, 10% interest on their
ending capital, and a ¾ share on remaining profit for Mr. Santos. The partnership net profit is P166,500.
ENDING CAPITAL (Basis) ₱ 200,000 ₱ 300,000 ₱ 500,000 ₱ 166,500
INTEREST,10% on capital (200,000X10%) ₱ 20,000 (300,000X10%) ₱ 30,000 ₱ 50,000 116,500
BONUS to Reyes, 5% of Profit* 8,325 - 8,325 ( 11,825 )
REM AINDER: 25:75 (11,825x25%) ( 2,956 ) (11,825x75%) ( 8,869 ) ( 11,825 ) -
₱ 145,369 ₱ 21,131 ₱ 166,500
*P166,500 is 100% profit less bonus,
So, you need to add back the bonus of 5% and the difference will be the bonus,
P166,500 x 105% = P174,825 - P166,500 = P8,325 Bonus on profit after bonus
5C: Assume that Mr. Reyes and Mr. Santos agreed to distribute profit and loss as follows: P120,000 salary
to Mr. Reyes, a 5% bonus after salaries, and a ¼ share on remaining profit for Mr. Reyes and allow both
partners 10% interest on ending capital balances. The partnership suffered loss of P22,500.

18
ENDING CAPITAL (Basis) ₱ 200,000 ₱ 300,000 ₱ 500,000 ( ₱ 22,500 )
INTEREST,10% on capital (200,000X10%) ₱ 20,000 (300,000X10%) ₱ 30,000 ₱ 50,000 ( 72,500 )
SALARIES to Reyes,120K 120,000 - 120,000 ( 192,500 )
BONUS to Reyes, 5% after Salaries* - - - ( 192,500 )
REM AINDER: 50:50 (192,500x50%) ( 96,250 ) (192,500x50%) ( 96,250 ) ( 192,500 ) -
₱ 43,750 ( ₱ 66,250 ) ( ₱ 22,500 )
* No bonus will be given to partner(s) when the results of operation is loss.
The STATEMENT OF CHANGES IN PARTNERS’ EQUITY is presented based on data of changes in the capital
on Case No. I and in the Profit/Loss distribution of Case5.c
REYES AND SANTOS Partnership

Statement of Changes in Partners' Equity
as of December 31, 2022
REYES SANTOS TOTAL

CAPITAL BALANCES, Beginning ₱ 400,000 ₱ 200,000 ₱ 600,000
Add/(Less) Permanent changes:
Investments/(Withdrawals) ( 200,000 ) 100,000 ( 100,000 )
Add/(Less) Drawings:
Share in Profit/(Loss) 43,750 ( 66,250 ) ( 22,500 )
CAPITAL BALANCES, Ending ₱ 243,750 ₱ 233,750 ₱ 477,500
Summary of the Lesson
❖ Partnership operations may result to either net income or loss.

❖ Partners may agree on how to distribute the net income or loss namely:
▪ Arbitrary ratio (equally, percentages, fractions or ratios)
▪ Providing interest on Capital, balance in an agreed ratio
▪ Providing salary to partner(s), balance in an agreed ratio
▪ Providing both interest on Capital and salaries to partners, balance in an agreed ratio
▪ Providing interest on Capital, salaries and bonuses to partners, balance as agreed upon
❖ The Partners' Equity Statement shows the changes in the capital accounts of the partners.
Suggested Links
1. https://books.google.com.ph/books?id=UtAat916438C&pg=PA1&source=gbs_toc_r&cad=3#v=on
epage&q&f=false
2. https://www.thebalancesmb.com/selecting-a-business-partnership-398880

19
References
1. Manuel, Z.V.C, (2019), 21st Century Financial Accounting and Reporting for: Partnership and
Corporation. (2019 Edition) Manila: Zenaida Vera Cruz Manuel.
2. Ballada, W. & Ballada, S. (2019). Partnership and Corporation Accounting: Made Easy. (2019 ed.)
Manila: Dom Dane Pub.: Made Easy Books.
3. Empleo, Robles, German (2019) Fundamentals of Accounting Volume 2 Partnership and Corporation
(2016 Ed.) Mandaluyong City Millennium Books Inc.
4. Frias, Fajardo (2018), Elementary Accounting (Partnership and Corporation) (2018 Ed.), Manila,
Unlimited Books Library Services & Publishing Inc.

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PAC101

PARTNERSHIP AND CORPORATION ACCOUNTING

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

MODE OF STUDY AND ATTENDANCE

LEARNING MATERIALS AND REFERENCES

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

Lesson 1: PARTNERSHIP FORMATION

At the end of the lesson, the student will be able to:

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

As to the nature of contributions:

As to liabilities to the third person:

As to their interest in or obligations to the business, partners may be classified as:

As to liability of the partners:

As to either universal or particular:

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

DIFFERENT WAYS (CASES) OF PARTNERSHIP FORMATION

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

CASE 1: PARTNERS INVESTING MONEY, PROPERTY or INDUSTRY

1B: Partners Investing PROPERTY

WHAT-IF-CASE of investing PROPERTY with an obligation

* credited for the full fair value of the equipment

1C: Partners Investing INDUSTRY (LABOR)

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

Date Particulars REF No. Dr Cr

Sept. 1 NO JOURNAL ENTRY

RECEIVABLE (Due from) Partner

PAYABLE (Due to) Partner

PERMANENT WITHDRAWAL OF CAPITAL

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

DISTRIBUTION AND WITHDRAWAL OF SHARE IN PROFIT

Reyes, Drawing (5,000 x 1/2) 2 5 0 0

CASE 2: A PARTNER INVESTING HIS/HER BUSINESS

Step 1: Adjust the old books of the business,

Books of Mr. Gomez:

ASSETS LIABILITIES AND CAPITAL

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

Data for adjustments on Mr. Gomez’s books:

Let's do the STEPS 1 and 2 for Requirement I

Step 1: Adjust the books of Mr. Gomez

Sept. 1 M erchandise Inventory 5 0 0 0 0

Step 2: Close the books of Mr. Gomez

Then, do the Step 3 for Requirement II

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

CASE 3: BOTH PARTNERS INVESTING HIS/HER BUSINESS

Step 1: Adjust the old books of the business,

Data for merchandising business of Mr. Gomez:

ASSETS LIABILITIES AND CAPITAL

For adjustments on Mr. Gomez’s books:

Data for service business of Mr. Aquino:

ASSETS LIABILITIES AND CAPITAL

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

For adjustments on Mr. Aquino’s books:

Requirement I: BOOKS of Mr. Gomez

Do, steps 1 and 2, as computed in Case No.2

Sept. 1 M erchandise Inventory 5 0 0 0 0

Requirement II: BOOKS of Mr. Aquino

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING

Date Particulars Ref No. Dr Cr

Step 2: Close the books of Mr. Aquino

Requirement III: Partnership Books

Learning Module on PAC101 – PARTNERSHIP AND CORPORATION ACCOUNTING