ACCOUNTING FOR

SPECIAL TRANSACTIONS
WELCOME TO THE NEW SCHOOL YEAR 2020-2021 !!!
FIRST TOPIC

Partnership Basic
Consideration and Formation
PARTNERSHIP DEFINITION

Under the Civil Code of the Philippines Art. 1767, a partnership

is defined as, ‘by the contract of partnership, two or more
persons bind themselves to contribute money, property or
industry to a common fund with intention of dividing profits
among themselves. Two or more persons may also form
partnership for the exercise of profession.’
A CONTRACT OF PARTNERSHIP IS CONSENSUAL.

So, how it becomes a consensual contract? Simply because it is

created by the agreement of the partners which may be
constitute in any form, it can be oral or written but subject to the
provisions of Philippine Civil Code Art. 1771 and 1772. Its legal
existence begins from the moment the contract is executed,
unless otherwise stipulated.
The following distinguish a partnership from other types of
entities:
• A partnership is owned by two or more individuals while a
sole proprietorship is owned by only one individual.
• A partnership is created by agreement between partners
while a corporation or cooperative is created by the
operation of law.
• A partnership is formed for a business undertaking that is
normally of continuing nature while a joint venture may or
may not be formed for an undertaking that is to be
continued over several years.
Now, let’s have a QUICK REVIEW what you
have learned before in your Financial Accounting
and Reporting when you are in first year about the
characteristics of a partnership and the different
class or kinds of partners.
CHARACTERISTICS OF PARTNERSHIP

1. Ease of formation
2. Separate legal personality
3. Mutual agency
4. Co-ownership of property
5. Co-ownership of profits
6. Limited life
7. Transfer of ownership
8. Unlimited liability (this is applicable to a general
partnership)
CLASSES OF PARTNERS

1. As to Contribution
a. Capitalist Partner – one who contributes capital in
money or property
b. Industrial Partner – one who contributes industry,
labor, skill or service
c. Capitalist Industrial Partner – one who contributes
money, property, and industry
2. As to Liability
a. General Partner – one whose liability to third persons
extends to his separate (private) property
b. Limited Partner – one whose liability to third persons is
limited only to the extent of his capital contribution to the
partnership

3. As to Management
a. Managing Partner – one who manages actively the
business of the partnership.
b. Silent Partner – one who does not participate in the
management of the partnership affairs
4. Other Classifications
a) Liquidating Partner
b) Nominal Partner
c) Ostensible Partner
d) Secret Partner
e) Dormant Partner
Partnership Formation

From the definition of partnership, formation happens when

the partners bind themselves to contribute money, property or
industry to a common fund. So the main issue in accounting
for partnership formation is on how we are going value the
contributions made by each partner.
So , to d e a l w ith th e issu e , w e a re g o in g to va lu e th e c o n trib u tio n s m a d e b y e a c h p a rtn e r in o rd e r o f
p rio rity:

1. All c o n trib u te d a sse ts MUST b e va lu e d a t th e AGREED VALUE.

2. In th e a b se n c e o f a g re e d va lue , u se FMV/ APPRAISED VALUE (* NO T a sse sse d va lue )
No te : Ad d ’l g u id a n c e fro m PFRS: a . C a sh & C .E = Fa c e Am o u n t
b . In ve n to ry = LC NRV

Th e n a n y lia b ility a ssu m e d b y th e p a rtn e rsh ip w ill b e in c lud e d in th e p a rtn e rsh ip b o o ks.
(* if th e p ro b le m is SILENT: Lia b ilitie s a re NO T a ssum e d )
Contributed Capital vs. Capital Credit

Contributed Capital
 These are the contributions made by each partner to the
partnerships.
 So here is how you are going to get the contributed capital of each
partner:

Contributed Asset (Agreed/FMV/Appraised) xxx

Less: Liabilities assumed by the partnership (xx)
Contributed Capital (CC) xxx
Capital Credit/Agreed Capital
 Initial capital of a partner to be recorded in the book of the
partnership
 Always based on agreed capital and to compute the capital
credit:

Total agreed capital

X Cap. Interest rati
Agreed Capital (AC)
 
Note: (*If the problem is SILENT: Contributed capital is equal to capital credit)
Now, problem arises again when the contributed capital is
not equal to the capital credit. So, how we are going to
account the difference?

 Ifsuch is the case, the difference between the capital credit

and contributed capital shall be accounted using the
BONUS METHOD.
BONUS METHOD

 -any increase or decrease from the contributed capital to

correspond with the capital credit or agreed capital shall be
deducted/added to the capital of the other partners.
-Under the bonus method, total agreed capital is equal to
total contributed capital (TAC=TCC)
Illustration Problem

A and B agreed to form a partnership. A shall contribute

P40,000 cash while B contribute P100,000 cash. However,
due to the expertise that A will be bringing to the partnership,
the partners agreed that they should initially have an equal
interest in the partnership capital.
Solution

Contributed Capital Agreed Capital Bonus Method

A 40,000 70,000 30,000
B 100,000 70,000 (30,000)
Total 140,000 = 140,000 0

As you can see above, Total Contributed Capital is equal to Total Agreed Capital and also you can
see how the contributed capital balances of each partner changes to correspond to the agreed
capital.
Journal Entries
C o n trib u tio n o f A
C a sh 40,000
A, C a p ita l 40,000

#
C o n trib u tio n o f B
C a sh 100,000
B, C a p ita l 100,000

#
Bo n us to Pa rtn e r
B, C a p ita l 30,000
A, C a p ita l 30,000
Variation to the Bonus Method

Instead of deduction/addition to the capital of the other

partners of the increase or decrease in the contributed capital
to correspond with the capital credit or agreed capital, the
capital adjustment is accounted for as either:
a. Cash settlement among the partners; or
b. Additional investment or withdrawal of a
partner
 Illustration Problem:
Cash settlement among the partners
A, B, a n d C fo rm e d a p a rtn e rsh ip . Th e ir c o n trib u tio n s a re a s fo llo w s:
A B C

C a sh 40,000 10,000 100,000

Eq u ip m e n t 80,000

To ta l 40,000 90,000 100,000

Ad d itio n a l in fo rm a tio n :
a . C w a s fo rc e d to b o rro w P40,000 ju st to h a ve th e fu ll a m o u n t o f P100,000 c o n trib u tio n
m a d e to th e p a rtn e rsh ip .
b . Th e e q uip m e n t c o n trib u te d b y B h a s a n u n p a id m o rtg a g e o f P20,000 w h ic h a ssu m e d
b y th e p a rtn e rsh ip .
c . Th e y a g re e d to h a ve e q u a l in itia l in te re st. C a sh se ttle m e n t a re to b e m a d e a m o n g th e
p a rtn e rs o u tsid e th e p a rtn e rsh ip .
Solution
A B C Pa rtne rship

C a sh 40,000 10,000 100,000 150,000

Eq u ip m e n t 80,000 80,000

Mo rtg a g e Pa ya b le (20,000) (20,000)

C o n trib ute d C a p ita l 40,000 70,000 100,000 210,000

Ag re e d C a p ita l 70,000 70,000 70,000 210,000

C a sh re c e ip t(p a ym e n t) (30,000) 0 30,000

 C sh a ll re c e iv e P30,000 fro m A .
 Th is c a sh se ttle m e n t a m o n g p a rtn e rs a re n o t re c o rd e d in th e p a rtn e rsh ip b o o ks
b e c a u se it is a p e rso n a l tra n sa c tio n b e tw e e n p a rtn e rs o n ly.
 Th e p e rso n a l lo a n o f C is ig n o re d b e c a u se it is n o t a ssu m e d b y th e p a rtn e rsh ip (Sile n t).
Journal Entry

C a sh 150,000

Eq uip m e n t 80,000

Mo rtg a g e Pa ya b le 20,000

A, C a p ita l 70,000

B, C a p ita l 70,000

C , C a p ita l 70,000
Illustration:
Additional investment or withdrawal of a partner

A and B agreed to form a partnership. The partnership agreement stipulates the

following:
• Initial Capital of P140,000.
• A 60:40 interest in the equity of the partnership.

A contributed P100,000 cash while B contributed P40,000 cash. The partners agreed
to provide additional investment or withdraw part of investment in order to bring the
partners’ capital credits equal to their respective interest in the partnership.
Solution
To ta l Ag re e d C a p ita l 140,000
A’s re q u ire d c a p ita l b a la n c e (140,000 x 60%) 84,000
B’s re q u ire d c a p ita l b a la n c e (140,000 x 40%) 56,000

A B To ta l
C o n trib u te d c a p ita l 100,000 40,000 140,000
Ag re e d c a p ita l 84,000 56,000 140,000
Ad d ’l In ve stm e n t (With d ra w a l) (16,000) 16,000 -

 A sh a ll w ith d ra w fro m in itia l c o n trib utio n o f P16,000 a n d B sh a ll m a ke a n a d d itio n a l

in ve stm e n t o f 16,000.
 END OF LESSON !!!

References:
 Millan, Z. V. (2018). Accounting for Special Transactions. Baguio City: Bandolin Enterprise.
 Dayag, A. (2019), Advanced Financial Accounting and Reporting: GIC Enterprises & Co., Inc.