Partnership: Basic Concepts and

Formation
Module 1

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Objective 1

 Characteristics.
 Advantages/disadvantages
 Partnership Agreement

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Objective 1
• Prevalent in service shops and offices where two or more skilled
workers or professionals join together in the practice of their skill
or profession. Examples SYCIP, GORRES, VELAYO & Co;
ISLA LIPANA & Co or the law firm of ACCRALAW.
• A partnership is a legal entity guided by the New Civil Code of
the Philippines
• It is also a taxable entity and as such is guided by National
Internal Revenue Code for the different taxes it is required to
pay.
• PARTNERSHIP DEFINED- it is an organization 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).

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Characteristics of a Partnership

• Itwhois anco-own
association of two or more persons
a business for a profit.
• A partnership combines: capital, talent, skill
• Unlimited liability of partners
• Mutual agency and partners
act as agents

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 ELEMENTS OF A PARTNERSHIP

• Valid contract, whether oral or written

• Legal capacity to contract.
• Contributions in the form of money,
property or service.
• Purpose
the firm.
is to share in the profits earned by

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Types of Partnerships

•There are two basic types of partnerships.

1.General partnerships- all partners are general
partners with unlimited
2.Limited partnerships- least one general partner with
the others as limited partners or merely contributions.

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Kinds of partners

•General
•Limited
•Capitalist
•Industrial
An industrial partner is also a general partner.

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Partnership Contract

• An agreement concerning formation,

operation, dissolution, and liquidation of the
partnership is embodied in a contract called
Articles of Co-Partnership.
• The contract acts as a form of governance
of partnership activities and clearly reflects
the relationships of the partners among each
other and with third parties.
PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL
 Compare Partnership and Sole Proprietorship

• Similarities-
Unlimited liability of owners
Owners can actively manage the business.
Both businesses have limited life because its
continuity depends upon the decision of the
proprietor or the partners. Death or incapacity
of proprietor or anyone of the partners may
also cause its termination.

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Compare Partnership and
Corporation
• Difference:Unlike a sole proprietorship, a
partnership is a taxable and a juridical entity.
• Advantages- greater amount of capital because of
the number of persons involved, better
management due to shared managerial skills,
efforts and experiences.
• Disadvantages: number of persons involved may
delay matters involving prompt and immediate
attention, conflicts and disagreements may easily
arise adversely affecting business operation.
PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL
 Compare Partnership and Corporation

• Similarities- Both are taxable entities (except a general

professional partnership) and legal entities.
• Differences:
Life- a corporation has perpetual existence while a
partnership has an indefinite life but easy to dissolve
Personal Liability- unlike partners, shareholders have no
unlimited liability.
Management in a corporation is vested in a few shareholders
but partners in general may actively manage the business.

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Compare Partnership and
Corporation
• Advantages:
 ease in formation,
 lesser legal requirements,
 accessibility to records,
 active management.
• Disadvantages:
 difficult to transfer ownership,
 easy to dissolve,
 unlimited liability  
PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL
 Rights of a partner

A partner has a right

• over specific partnership property.
• to share in the profits resulting from business operation.
• to share in the remaining assets upon partnership liquidation
after the partnership creditors have been paid.
• to co-manage the partnership.
• to ask that the books be kept in the principal place of
business subject to inspection at a reasonable time.

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Entity Concept

A business unit such as a partnership, sole proprietorship

or a corporation should be treated as a distinct and separate
from personality from the owner, partners or shareholders.
As such, only transactions of the business are recorded in its
books. A partnership acquires, holds, disposes properties in
its own name; it enters into contracts with others through
the partners who are merely acting as its agents.

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Accounting for a partnership

• Accounting procedures for assets, liabilities,

revenues and expenses (as discussed in
Financial Accounting and Reporting Part 1-
Chapter 1) follow a normal standard
whatever is the legal form of organization
using the accounting equation:
• Assets = Liabilities + Partners’ Equity.

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Partners’ equity

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Partners’ Equity

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Partners’ Equity

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Partners’ equity

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Partners’ Equity

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Partners’ Equity

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Partners’ Equity

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 STATEMENT OF CHANGES
IN PARTNERS’ EQUITY

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 The Partnership Start-up

• David’s contribution is in cash P200,000 and an

equipment costing P90,000 which has a book value
of P45,000 and a current market value of P30,000.
• Grace’s contribution is in cash equal to David’s
cash contribution.
• Earl contributes his time and experience for a 20%
share in the profits.
• What is the journal entry?
PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL
 The Partnership Start-up

Journal Entry:
June 1, 2019
Cash 400,000
Equipment 30,000
David, Capital 230,000
Grace, Capital 200,000
To record investments in the partnership
Memo entry:
Admitted Earl as industrial partner to serve
as general manager for a 20% profit share.
PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL
 The Partnership Start-up

David and Jane

Statement of Financial Position
June 1, 2019
Assets Partners’ Equity
Cash P400,000 Grace, Capital P200,000
Equipment 30,000 David, Capital 230,000
Total Partners’ _______
Total assets P430,000 Equity P430,000

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 The Partnership Start-up
June 1
David invested equipment with a book value of P45,000 and a
fair market value of P30,000. There is a mortgage balance of
P5,000 on this property which is be assumed by the
partnership. The entry will appear, thus:
Equipment 30,000
Mortgage Payable 5,000
David, Capital 25,000
A liability of an investing partner assumed by the partnership
decreases the capital account of the investing partner.
PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL
 The Partnership Start up
Peter invested his bookstore in a partnership with Pilar on March 1, 2019. Pilar
agrees to put up cash equal to half of the contribution of Peter. The following are the
assets and liabilities of the bookstore:
  Debit Credit
Cash P12,000  
Accounts Receivable 50,000  
Allowance for Bad Debts   P 5,500
Merchandise Inventory 25,000  
Furniture & Fixtures 10,000  
Accumulated Depreciation 2,000
1.The allowance for bad debts should be adjusted to 15% of the accounts receivable.
2. The furniture & fixtures should be 25% depreciated.
3. Obsolete merchandise amounting to P3,000 be written off
Analysis: 1. allowance should be adjusted to P7,500
2. furniture with a book value of P8,000 should be adjusted to market P7,500
3. inventory should be adjusted to P22,000
PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL
 Partnership start up

PARTNERSHIP BOOKS    
     
Cash P12,000  
Accounts Receivable 50,000  
Merchandise Inventory 22,000  
Furniture & Fixture 7,500  
Allowance for Bad Debts P 7,500
Peter, Capital 84,000
To record Peter’s investment.
Cash 42,000
42,000
Pilar, Capital
 
To record Pilar’s cash investment

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 Bonus- a transfer of interest
Contributions of the partners may include bonus or goodwill because of the skill,
expertise or good name of a partner. Under the bonus method, no additional asset
contribution may be required. Assuming that Pilar has a good reputation and a large
customer base, Peter may agree to an equal equity interest by transferring part of his
interest to Laredo:
Pilar Peter Total
Contributed Capital P42,000 P84,000 P126,000
Agreed Equity 63,000 63,000 126,000
Bonus to Pilar P21,000 (P21,000) -
Under this method, the good name and customer base cannot be recognized as asses
since there is no reliable measurement basis for this. Only the actual investments can
be recognized as assets, thus total contributed capital is also the total agreed capital.
3rd Entry: Peter, Capital 21,000
Pilar, Capital 21,000
To record bonus from Peter.
PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL
 Goodwill- intangible asset

Goodwill Method. Contributions made by Pilar are: cash of P42,000 and Goodwill.
Goodwill is an intangible asset representing ability to generate earnings more than
what is normal or expected because of good reputation, or good location, service or
product. Effects on the accounting values=Assets will increase (cash and goodwill)
and partner’s equity will increase (credit partner, capital). How much is the
goodwill? Assuming they agreed to an equal equity, it can be computed as follows:
  Pilar Peter Total
Agreed capital P84,000 P84,000 P168,000*
Actual 42,000 84,000 126,000
contributions
Goodwill P42,000 - P 46,000

* P168,000 is based on Peter’s contribution 84,000/50%= Total agreed of P168,000.

Entry for Pilar: Cash P42,000
Goodwill P42,000
Pilar, Capital P84,000
PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL
 Bonus or Goodwill

PAS 38 recognizes goodwill only as a result of

an acquisition of a business. Partnership goodwill
has no related acquisition cost since no funds have
been spent to acquire the goodwill. Partnership
goodwill is rare in actual practice. The bonus
capital is the preferable method.

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL

 End of Module

PARTNERSHIP ACCOUNTING BY PROF ZENAIDA VC MANUEL