Definition of Partnership

• A partnership consists of two or more

persons who bind themselves to contribute
money or industry to a common fund, with
the intention of dividing the profits among
themselves.

1
 Features of Partnership

Voluntary
Association Taxable Entity Limited Life

Legal Entity Unlimited

Liability

Co-ownership of
Mutual Agency
Property
 Elements of a Partnership
A partnership firm has the following elements:
• There must be a valid contract, whether oral or
written.
• A partnership must be put up by persons having legal
capacity to contract
• Their contributions must be in the form of money,
property or service.
• The purpose of the business is to divide the profit
among them
 Role of Partners
1. The partners are co-owners of the partnership
property. It means that when a partner invests his
land or building, this ceases to be his personal
property. Instead, this becomes joint property of all
the partners.
2. The partners have unlimited liability. The partners
become individually liable for all partnership debts
in the event that the partnership assets are not
sufficient to cover up its liabilities.
3. The partnership is bound by the acts of any of the
partners since they are considered agents of the
partnership for the purpose of carrying its activities.
 Kinds of Partnerships
• As to nature of business
a. Trading Partnership – also known as “business
partnership”, it buys and sells finished merchandise or
manufacture goods as its primary operational activity.
Examples of these partnerships are groceries, stores and
factories.
b. Non-Trading Partnership – renders service only for
a fee.
Examples are vulcanizing service, computer rentals laundry
business or practice of profession.
 Kinds of Partnerships
• As to purpose
a. Commercial partnership – engages in trading,
merchandising or manufacturing of goods for a profit. A
partnership rendering service may be classified as a
commercial partnership if it engages in service activities other
than the practice of a profession.
b. General professional partnership – organized for
the exercise of a common professional, and usually renders
service based on the partner’s acquired profession. Examples
are CPAs, medical doctors, and lawyers.
 Kinds of Partnerships
• As to object
a. Universal partnership
1) Of all present property – partners contribute all
their present property to a common fund with the intention of
dividing among themselves the property and all the profits
they may acquire therewith.
2) Of profits – the partners retain ownership of the
things they have placed into the common fund. Their actual
contribution will be their industry and the use of the things
they have placed into the common fund. As a result, only the
profits that the partners may acquire by their industry
during the existence of the partnership will be divided among
themselves
b. Particular partnership – a partnership which has
for its object determinate things, their use or fruits, or a
specific undertaking or exercise of a profession or vocation.
 Kinds of Partnerships
• As to liability
a. General partnership – comprised of general
partners or a combination of general and industrial partners.
They are personally liable for the partnership’s debts after
the exhaustion of its assets.
b. Limited partnership – comprises both limited and
general partners. Only the limited partner shall be liable to
the extent of his contribution to the partnership. At least one
of the partners must be a general partner to assume the
partnership's unpaid liability.
 Kinds of Partnerships
• As to liability
a. General partnership – comprised of general
partners or a combination of general and industrial partners.
They are personally liable for the partnership’s debts after
the exhaustion of its assets.
b. Limited partnership – comprises both limited and
general partners. Only the limited partner shall be liable to
the extent of his contribution to the partnership. At least one
of the partners must be a general partner to assume the
partnership's unpaid liability.
 Kinds of Partnerships
• As to duration
a. Partnership at will – formed for a particular
undertaking and may be terminated any time by the will of
any of the partners or by mutual agreement of the partners.
In other words, this partnership has no fixed period of
existence.
b. Partnership with a fixed term – formed with a
specified period of existence.
 Kinds of Partnerships
• As to legality of existence
a. De jure partnership – established and organized in
accordance with all the legal requirements for its existence.
b. De facto partnership – established and organized
without complying with the legal requirements for its
existence.
 Kinds of Partners
• As to Contribution
a. Capitalist partner– contributes money or property
to the partnership
b. Industrial partner – contributes only his skills,
knowledge, industry or personal service to the partnership
c. Capitalist-Industrial partner – contributes only his
skills, knowledge, industry or personal service to the
partnership
 Kinds of Partners
• As to Liability
a. General partner – assumes unlimited liability, i.e.,
he is liable for the partnership debts to the extent of his
personal assets.
b. Limited partner – liable to the extent of his capital
contribution to the partnership
 Kinds of Partners
• As to Participation
a. Managing partner – appointed to run the business if
the partnership. His appointment may either be in the
Articles of Co-Partnership or may come after the formation
of the partnership
b. Silent partner – known as the partner but does not
take active participation in running the affairs of the
partnership
c. Liquidating partner – appointed to liquidate
partnership assets and settle unfinished transactions of the
partnership after dissolution.
 Kinds of Partners
• As to Third Persons
a. Secret partner – not known as partner but takes
active part in running the partnership business
b. Dormant partner – not known as partner and does
not take active part in the partnership business
c. Nominal partner or Ostensible partner – a partner
in name only by permitting the use of his name either
accommodation or for consideration. He is subject to liability
by the doctrine of estoppel
 Partnership Contract
The relation of partners arises from contract and not from
status, operation of law or inheritance. The agreement
of partnership – whether in oral or in writing – becomes
a contract that binds all the partners.

The contracts of partnership basically includes the following

agreement:
• Who the partners are
• What the business will do
• Where the business will be located
• When the partnership will begin
• Which job will be done by each partner
• How much a partner can invest or withdraw
• How the income or loss is to be shared
• What will happen if the business is to end
 Advantages of Partnership Firm
• Easy to form: Like sole proprietorships, partnership
businesses can be formed easily without any compulsory legal
formalities. It is not necessary to get the firm registered. A
simple agreement or partnership deed, either oral or in writing,
is sufficient to create a partnership.

• Availability of large resources: Since two or more partners

join hands to start a partnership business, it may be possible to
pool together more resources as compared to a sole
proprietorship. The partners can contribute more capital, more
effort and more time for the business

Contd.
Advantages contd.
• Better decisions: The partners are the owners of the business. Each of
them has equal right to participate in the management of the business. In
case of any conflict, they can sit together to solve the problem. Since all
partners participate in the decision-making process, there is less scope for
reckless and hasty decisions.

• Flexibility in operations: A partnership firm is a flexible

organization. At any time, the partners can decide to change the size or
nature of the business or area of it’s operation. There is no need to follow
any legal procedure. Only the consent of all the partners is required.

contd.
Contd.
• Sharing risks: In a partnership firm all the partners “share” the
business risks. For example, if there are three partners and the firm makes
a loss of Rs.12,000 in a particular period, then all partners may share it
and the individual burden will be Rs.4000 only. Because of this, the
partners may be encouraged to take up more risk and hence expand their
business more.

• Benefits of specialization:Since all the partners are owners of the

business, they can actively participate in every aspect of business as per
their specialization, knowledge and experience. If you want to start a firm
to provide legal consultancy to people, then one partner may deal with civil
cases, one in criminal cases, and another in labor cases and so on as per the
individual specialization. Similarly, two or more doctors of different
specialization may start a clinic in partnership.
Contd.
• Protection of interest of each partner: In a
partnership firm, every partner has an equal say in decision
making and the management of the business. If any decision
goes against the interest of any partner, he can prevent the
decision from being taken. In extreme cases an unsatisfied
partner may withdraw from the business and can dissolve it. In
such extreme cases the “partnership deed” is required. In
absence of the partnership deed, no legal protection is given to
the partners.
 Disadvantage of Partnership Firm
• Unlimited liability:All the partners are jointly liable for the debt of the
firm. They can share the liability among themselves or any one can be
asked to pay all the debts even from his personal properties depending on
the arrangement made between the partners.
• Uncertain life:The partnership firm has no legal existence separate
from it’s partners. It comes to an end with death, insolvency, incapacity or
the retirement of a partner. Further, any unsatisfied or discontent partner
can also give notice at any time for the dissolution of the partnership.
• No transferability of share:If you are a partner in any firm, you
cannot transfer your share or part of the company to outsiders, without the
consent of other partners. This creates inconvenience for the partner who
wants to leave the firm or sell part of his share to others.

Contd.
Contd.
• Lack of harmony: In a partnership firm every partner has an
equal right to participate in the management. Also, every
partner can place his or her opinion or viewpoint before the
management regarding any matter at any time. Because of this,
sometimes there is a possibility of friction and discontent
among the partners. Difference of opinion may lead to the end
of the partnership and the business.

• Limited capital: Since the total number of partners cannot

exceed 20, the capital to be raised is always limited. It may not
be possible to start a very large business in partnership form.
 Rights of Partners
1. Right over specific partnership property.
2. Right to share in the profits resulting from business operation.
3. Right to share in the remaining assets upon partnership
liquidation.
4. Right to co-manage the partnership.
5. Right to ask that the book be kept in the principal place of
business
 Accounting for Partnership Formation
• In general, the accounting principles and procedures used in
recording partnership transactions with outside parties are the
same as those of sole proprietorships and corporations.
• The difference, however, lies in the owners’ equity accounts.
In sole proprietorship, there is one capital account and one
withdrawal account because there is only one owner of the
business. On the other hand, the capital accounts and drawing
accounts of a partnership business are more than one
depending on the number of partners in the association. The
corporation’s equity section, however, does not contain the
capital and drawings accounts of individual stockholders.
Instead, it contains the capital stock and retained earnings
accounts.
 Partner’s Capital Account
• The capital accounts represent permanent
interest of a partner. The following
transactions affect this account:
1. Investments – contributions made a credited
to each partner’s capital account to increase
the partner’s equity and
2. Permanent Withdrawals – withdrawals of
capital are debited to each partner's capital
account to decrease the partner’s equity.
 Partner’s Drawing Account
• This is the account title used to reflect
temporary interest of a partner. Ordinarily,
there are also two transactions affecting this
account:
1. Share in the net profit ( the agreement as to
the manner of distribution is provided in the
Articles of Co-Partnership) is credited to the
drawing by the partner; or share in net loss is
debited to the drawing account to decrease
the partner’s equity and his source of
regulatory drawings.
 Partner’s Drawing Account
2. Personal drawings may be formal as provided
in the Articles of Co-Partnership. These are
oftentimes called salaries but are in fact
withdrawals of profit and are debited to the
drawing account to decrease the partner’s
equity. Informal withdrawals may also be
made by the partners when the need arises (
made with the consent of all partners and are
also debited to the drawing account and
viewed as decreases in the overall capital of
the individual partner.
Opening the Books of the Partnership
The first entries in the partnership books pertain
to the contribution made by the partners. The
contribution is in the form of cash or property,
the pro-forma entry is:
Cash ( or merchandise or building) xx
Partner, Capital xx

If the investment is in the form of service, a

memorandum entry should be prepared.
Opening the Books of the Partnership
A contribution in the form of property should be
recorded , as of investment date, at the
current fair value or appraised value. Fair
value is the amount for which an asset could
be exchanged between two knowledgeable
and willing parties in an arm’s length
transactions.
Liabilities attached to invested properties may
be assumed by the partnership, in which case
the capital of the partner will be credited only
at the net amount of the asset contribution.