PARTNERSHI

P Kim Nicole M. Reyes,

FORMATION:
CPA, MBM

(A REVIEW)
 It is an association of two or
more persons who
PARTNER contribute money, property
or industry to a common
SHIP fund with the intention of
dividing the profits among
themselves. 
 1. General Partnership - those in which each
partner is personally liable to the
partnership's creditors if partnership
assets are not sufficient to pay such
TYPES OF creditors
PARTNERSHI 2. Limited Partnership – only one partner
needs to be a general partner. The
P remaining partners can be limited which
means that their obligations to creditors are
limited to their capital contributions.
FEATURES OF GENERAL
PARTNERSHIPS
Assignment
Ease of Unlimited
Limited life of partner's
formation liability
interest

Sharing
Mutual Separate legal
profits and
agency personality
losses
 Proprietary theory – looks at the entity through the eyes of the
owner. It view the assets of a business as belonging to the
proprietor. The liabilities of a business are debts of the proprietor. 
 Salaries to partners are considered as distribution of income
 Unlimited liability of general partners extends beyond the entity to the
individual partners
 Original partnership is dissolved upon the admission or withdrawal of a
partner

UNDERLYING EQUITY
THEORIES
 Entity Theory – views the business as a separate and distinct entity
possessing its own existence apart from the individual partners.
Profits earned by the partnership are usually viewed as profits to the
entity with which each partner entitled to a distributive share of the
profit. 
 The legal life of firms in this fashion transcends the death or admission
of a partner.

UNDERLYING EQUITY
THEORIES
  Name of the partnership

 The name, addresses of the partners, classes of partners,

stating whether the partners are general or limited
WRITTEN  The effective date of the contract

PARTNERSH
 The purpose/s and principal office of the business

 The capital of the partnership

IP  The rights and duties of each partner

 The manner of dividing nete income or loss among the

AGREEMEN partners
 The conditions under which the partners withdraw money
TS  The manner of keeping the book of accounts

 The causes of dissolution

 The provision for arbitration in settling disputes

Partnership cannot issue stocks,

ACCOUNTI
NG AND
FINANCIAL
Has more flexibility to select accounting
measurement and recognition methods REPORTING
REQUIREM
If the entity wishes to issue general purpose FS,
ENTS
they need to use GAAP and other standard
setting bodies so that the independent auditor
can give opinion that it is in accordance to
GAAP
PARTNERSHI
P
FORMATION
  A contract of partnership is consensual

 Created by an agreement of the partners which may be

constituted in any form such as oral or written
 The Civil Code of the Philippines (Articles 1771 and
1772) requires that a partnership agreement must be
made in a public instrument and recorded in the office

FORMATIO of the Securities and Exchange Commission when:

 Immovable property or real rights are
contributed to the partnership

N  Partnership has a capital of P3,000 or more.

 Art. 1773 of the Civil Code further requires that the

inventory of any immovable property contributed to
the partnership should be made, signed by the
partners, and attached to the public instrument,
otherwise, the partnership shall be deemed void
ACCOUNTIN  Three types of accounts are maintained by the
partnership
G FOR  Capital accounts
PARTNERSHI  Drawings or personal accounts
PS  Accounts for loans to and from partners
 Juan dela Cruz, Capital
Debit Credit
Permanent withdrawals of Initial investment
capital
Share in losses Additional investments
Debit balance of drawings Share in profits
account

CAPITAL
ACCOUNTS
 Juan dela Cruz, Drawings

Debit Credit

Temporary withdrawals during the Recurring reimbursable costs paid

period by the partner
Temporary funds held to be remitted
to the partnership

DRAWING
ACCOUNTS
 Capital withdrawal (permanent withdrawal) -
they directly affect the capital account balance
because they arise mostly from withdrawals of
investment be it original or additional
DRAWING
 Personal withdrawal (temporary withdrawal) -
these are initially recorded in a drawing ACCOUN
account. More often, these are drawings from
share of profits which will eventually be
closed to capital accounts.  TS
 LOAN
Loans Receivable from Partners – partner
loans from the partnership.  (assets) ACCO
UNTS
FOOTNOTE
Loans Payable to Partners – partnership DISCLOSURES ARE
loans money from the partner with intention NEEDED SINCE
to pay the principal amount and the THESE ARE
interest.  (liabilities) RELATED-PARTY
TRANSACTIONS
CAPITAL  Partner's capital interest – claim against the

INTEREST net assets of the partnership as shown by the

balance in the partner's capital accounts

VS
 Interest in profit and loss determines how the
partner's capital interest will increase or
decrease as a result of subsequent operations. 

PROFIT
Recorded at fair value

Fair value is the face value since it is cash CASH

INVESTM
Foreign currency is valued at current ENTS
exchange rate

Cash in bank under receivership is at

estimated recoverable amount
NONCASH INVESTMENTS

Recorded at agreed value which is commonly the fair value

Fair value is determined by agrement of all partners

If there is conflict between agreed value and fair value, agreed

value prevails
SERVICES

If services are contributed memorandum entry is If there is, journal entry is needed
required if there is no agreed value
 If assumed,
liabilities should be
LIABILITIES valued at present
value (fair value) of
the remaining cash
flows
 Two ways to account:

CAPITAL 1.
2.
Bonus method
Investment/Withdrawal
Method
 For the first time – individual vs.
Individual

Conversion of a sole proprietor to a

WAYS TO partnership (individual vs. Sole; sole vs.
Sole)
FORM
PARTNERSHI Conversion of an old partnership to a
PS new partnership (partnership vs. Sole;
partnership vs. Partnership)

Admission of new partners

THANK YOU!
See you in partnership formation guided
exercises!