ACCOUNTING FOR PARTNERSHIP

FORMATION
 Partnership Accounting
In general, the accounting principles and procedures used in
recording partnership and transactions wit 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. On the other hand, capital and
withdrawal accounts of a partnership business are more
than one depending on the number of partners in the
association.
 Partnership Accounting
The corporation’s equity section, however, does
not contain the capital and drawings account of
individual stockholders. Instead it contains the
capital stock and retained earnings accounts.
Summary of Accounting Treatment
Accounting Sole Proprietorship Partnership Corporation
Elements
Assets/Liabilities Same Same Same
Equity: Proprietor’s Capital Partners’ Capital Share Capital
Owner/s’ (One for each
Investment partner)
Owner/s’ Drawings Charge to Owner’s Charge to Partners’ Not accounted in
Drawings Drawings (One for Corporation’s books
each partner) because the current
stockholder could
transfer or sell his
investment without
notifying the issuing
Corporation
Summary of Accounting Treatment
Accounting Sole Proprietorship Partnership Corporation
Elements
Revenues and Finally closed to Finally closed to Finally closed to
Expenses Proprietor’s Capital individual Partner’s Retained Earnings
at the end of each capital at the end of at the end of each
accounting period each accounting accounting period
period. (According
to capital balance,
or profit or loss
ratio
 Accounting Equation
ASSETS = LIABILITIES + CAPITAL
 Illustration:
Assume that Abel and Cain formed a partnership.
They agreed that the total capital of the
partnership is 120,000, 2/3 of which is to be
contributed by Abel. Abel will contribute 80,000
in cash while Cain will contribute cash aside from
30,000 worth of merchandise taken from his
business with outstanding accounts payable for
5,000 to be assumed by the partnership. How
much would be the cash contribution by Cain?
 Assets = Liabilities + Capital
80,000 + x + 30,000 = 5,000 + 120,000
X + 110,000 = 125,000
X = 125,000 – 110,000
X = 15,000
Therefore, the cash contribution of Cain is 15,000
 Partnership Accounts
As a rule, the account titles used in the accounting
for sole proprietorship’s operation are also used in
the accounting for partnerships. However, some
accounts of a partnership differ from those of a
sole proprietorship in following ways:
(a) Partner’s capital and drawing account
(b) Loans receivable from partners
(c) Loans payable to partners
Partner’s Capital Account
- is a permanent account. Each partner has his own capital
account which has a normal credit balance. The balance in
the capital account represents the partner’s share in the net
assets of the partnership.
Partner’s Capital
(1) Permanent withdrawals (1) Original Investment
of capital (usually in excess (2) Additional Investment
of a specific amount (3) Closing of net credit
(2) Closing of the net debit balance of the income
balance of the drawing summary account
account
(3) Closing of the net debit
balance of the income summary account
 Illustration
Assume that the capital accounts of Mary after
closing entries of net loss and withdrawals to the
capital account show a debit balance of 3,000
and the partnership agreement provides that at
least 50,000 of the partner’s capital must be
maintained before the start of the new business
year.
What would be the journal entry to eliminate
deficit and meet capitalization requirement?
 DATE DESCRIPTION DR CR
12/31 Cash 53,000
Mary, Capital 53,000
To eliminate Mary’s capital
deficiency and maintain the required capital
balance
Partner’s Drawing Account
- is a temporary account and is periodically closed to the partner’s
capital account. Each partner has his own drawing account and
other minor amounts taken by the partner from the partnership in
anticipation of his share in the partnership income.

Partner’s Drawing
(1) Temporary withdrawals (1) Periodic partner’s salaries
(2) Partner’s personal debt paid (2) Partnership debts assumed

or assumed by the partnership or paid by the partner

(3) Funds or claims of partnership (3) Personal funds or claims
collected and retained by the of partner collected and
partner retained by the partnership
(4) Share in partnership losses (4) Share in partnership profits
col
 Illustration
Assume that the partnership paid the personal
electric bill of partners Joseph and Mary
amounting to 500 and 700, respectively. The
journal entry in the books of partnership would
be:
 Illustration
Assume that the partnership paid the personal
electric bill of partners Joseph and Mary
amounting to 500 and 700, respectively. The
journal entry in the books of partnership would
be:
Joseph, Drawings 500
Mary, Drawings 700
Cash 1,200
 Loans Receivable from Partners
- Also called “loans to partner” or “due from
partner”. It represent the substantial advances
made by the partners from the partnership with the
intention of repaying it.
Illustration:
Assume that Joseph, a partner, borrowed money from
the partnership amounting 20,000 for a money cost of
12% per year. He promised to settle his obligation
within 3months. The journal entry would be:
• Loans receivable from partner – Joseph 20,000
Cash 20,000
To record payment partner’s advances

NOTE: The loans receivable from partner account is generally classified

as part of current assets except when the agreed collection period
extends beyond the one-year period.

The subsequent payment of Joseph to settle his obligation to the

partnership would be:
• Cash 20,600
Loans receivable from partner – Joseph 20,000
Interest Income 600
To record collection of loans to partner

Interest Income = (20,000*.12*3/12)

 Loans Payable to Partners
- Also called “loans from partner” or “due to
partner”, these amounts lent to the partnership by
the partner which the partnership is obliged to pay
Illustration:
Assume that Mary, a partner, lent money to the
partnership amounting to 50,000 with an interest
of 6% per year. The loan agreement provides that
the partnership will pay the entire amount due
within 6 months. The related entry would be:
• Cash 50,000
Loans payable to partner- Mary 50,000
To record loans from partner

The subsequent payment of the partnership to

partner Mary is as follows:
• Cash 50,000
Loans payable to partner- Mary 50,000
To record loans from partner

The subsequent payment of the partnership to partner Mary is as

follows:
• Loans payable to partner – Mary 50,000
Interest Expense 1,500
Cash 51,500
To record payment of due from partner
 Initial Investment by Partners
• The following rules shall then be observed
when capital contribution arise:
1. Amount of contribution
The amount of contribution shall be based
on the partner’s agreement. In absence of
any agreement, it shall be contributed
equally.
 Illustration – with agreement on individual
contribution
A & B form a partnership with a total agreed
capitalization of 150,000 to be contributed in
cash of 40% and 60% by A and B, respectively,
through the issuance of their personal checks.
The amount contributed and capital credit to be
recorded per agreement would be:
 Illustration – with agreement on individual
contribution
A & B form a partnership with a total agreed capitalization
of 150,000 to be contributed in cash of 40% and 60% by A
and B, respectively, through the issuance of their personal
checks. The amount contributed and capital credit to be
recorded per agreement would be:

Cash 150,000
A, Capital 60,000
B, Capital 90,000
To record initial investment by A & B
 Illustration – without agreement on
individual contribution
A & B form a partnership with a total agreed capitalization
of 200,000 to be contributed in cash.

The above agreement, standing alone, shall mean that

equal amount of cash shall be collected from each partner
and to be recorded in the partnership’s books as:
Cash 200,000
A, Capital 100,000
B, Capital 100,000
To record initial investment by A & B