Chapter 1

Review of Accounting Process

Nature of accounting

 Accounting is a service activity

 Accounting is the language of business

Function of accounting

 Main function – to provide quantitative information, primarily financial in nature, about

economic entities, that is intended to be useful in making economic decision.
 Basic function – to record and report accurately the economic reality of the business.
 Audit function – to test the truthfullness of the financial reports, to trace fraudelent
transactions and to locate and rectify accounting errors.

ACCOUNTING CYCLE
2 3
Transactions are Journal entries
recorded in the are posted to the 4
journal ledger Preparation of
1
the trial balance
Identification of
events to be
recorded 5

Preparation of
the
6 worksheet
including
10
adjusting entries
Preparation of
the financial Reversing journal
7
statements entries are
Adjusting journal journalized and
entries are journalized posted
and posted

8 9
Closing journal
Preparation of the
entries are
post-closing trial
journalized and
balance
posted
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 Chapter 2
Nature of Partnership Business
Definition of PARTNERSHIP:

“By the contract of the partnership, two or more persons bind themselves to contribute
money, property and industry to a common fund with the intention of deviding the profits
among themselves. Two or more persons may also form a partnership for the exercise of a
profession.

CHARACTERISTICS OF A PARTNERSHIP

Based on contract Mutual Agency

Association of individuals Income Participation

Ease of Formation Co-Ownership

Unlimited Liability Limited Life

Assignment of Interest

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 ADVANTAGES and DISADVANTAGES of PARTNERSHIP

Advantages Disadvantages

Ease of Formation Unlimited Liability

Joint Resources Mutual Agency

Tax Exemption Consensual

Less Govenrment Supervision Limited Life

Kinds of Partnerships
1. As to nature of business
 Trading Partnership
 Non-Trading
Partnership
2. As to Purpose
 Commercial
Partnership
 General
Professional
Partnership
3. As to Object
 Universal
Partnership
o Of all present
Partnership
o Of Profits
 Particular
Partnership
4. As to Liability
 General
Partnership
 Limited Partnership 3
5. As to Duration
 6. As to Legality
 De jure Partnership
 De facto artnership

Kinds of Partners

As to Contribution As to Liability As to Participation As to third Persons

Capitalist Partner General Partner Managing Partner Secret Partner

Industrial Partner
Limited Partner Silent Partner Dormant Partner

Capitalist-Industrial Liquidating Partner Nominal or Ostensible

Partner Partner

Chapter 3
Accounting for Partnership Formation

= LIABILITIES + CAPITAL
ASSETS

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Partnership Accounts

 Partner’s capital and drawing accounts

 Loans recievable from partners
 Loans payable to partners
 Loans to and from partners

Partner’s Capital Account

- It is a permanent account. Each partner has its own capital account which has a
normal credit balance. The balance in the capita account represents the partner’s
share in the net assets of the partnership.

Partner’s Drawing Account

- It is a temporary account and its periodically closed to the partner’s capital

account.
- Each partner has its own drawing account to reflect temporary withdrawals and other
minor amounts taken by the partner from the partnership in anticipation of his share
in the partnership income.

Loans Recievable from Partners

- Also called “loans to partner” or “due from partners,”

- It represent the substantial advances made by the partners from the partnership with
the intention of repaying it.

Loans Payable to Partners

- Also called “loans from partner” or :due to partner,”

- It represent the subtantial amounts lent to the partnership by the partner which the
partnership is obliged to pay.

Loans to and from Partners

- This account titles is a combination of loans receivable from partner and loans
payable to partners account.
- It represent both a claim and obligation. It is a claim when its balance is found on the
debit side. If its balance is found on the credit side, it represent a liability.

Note: any loans between a partner and the partnership should always be accompanied by
proper loan documentation, such as a promissory note. As in any other loan, a loan from
a partner is shown as a payable on the partnership’s books.

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 Partnership Formation

 Execution of partners’ agreement.

 Valuation of partners’ investments.
 Adjustment of accounts.
I. Initial Investments by partners

AMOUNT OF PARTNER’S CONTRIBUTION

Contribute and record as

Do partners agree upon YES per agreement.
their respective capital
contribution?
NO To be contributed
equally.

II. Valuation of partners’ contribution

VALUATION OF PARTNERS’ CONTRIBUTION

Is it cash

NO YES

To be recorded at ACTUAL
Is it
AMOUNT of cash contributed
property

N YE To be recorded at AGREED VALUE, otherwise at

FAIR VALUE

Industry Recorded in MEMORANDUM ENTRY form

(skill/labor)

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Recording Industrial Partner’s Contribution

Mendoza, Capital

Mendoza is an industrial partner to

share 10% in the Partnership profits.

Note: when the net income of the partnership has been distributed to the partners, the capital
account of an industrial partner would have a journal entry equivalent to his share in the profit.

STAGES FROM WHICH PARTNERSHIPS ARE FORMED

1. First time in business – individual persons without existing business form a partnership
2. Convertion of single propriertorship to a partnership – this could be made when:
 A sole proprietor admits into his business another individual who has no business of
is own.
 Two or more sole propriertorship converted into a partnership.
3. Admission of a new partner to an existing partnership – by nature, this is a form of
dissolution of an old partnership which gives rise to the formation of a new partnership.

Actual investment method

- When the agreed partners’ capital shares are credited with the same value as their
actual net contributed tangible assets, the approech of initial investment used is
called “Actual Investment Method.”

Bonus Method
BONUS METHOD
Partnership’s Total Agreed Capital (TAC) = Partners’ Total Contributed Capital (TCC)

Is any of the partner’s agreed Capital Credit

GREATER THAN his ACTUAL CONTRIBUTION?

YE
N
No Bonus

al Investments and Withdrawals

Additio There is a BONUS :
n
The bonus is equal to the INCREASE of his actual
capital contribution.
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The partnership agreement should include guidelines regarding additional investments and
withdrawals. The additional investment is recerded directly to the capital account. However, the
accounting treatment of withdrawals would depend on whether the withdrawn amount is
subtantial or irregular.

Withdrawals in Large Amounts

- It is charge directly to the capital account of a withdrawing partner.

Withdrawals of Allowances

- The business rewards of partners are not in the form of a salary as the take-home
pay of employees, but in the form of a share in the partnership profits.

Chapter 4
ACCOUNTING FOR PARTNERSHIP OPERATIONS

The accounting for partnership operation is concerned with the following activities:

1. Accounting treatment of profit and loss

- The profit and loss is subsequently distributed to the partners by closing the income
summary account to the respective partners’ capital accounts.
2. Proper distribution of profit and loss
Arbitrary agreements in Computing Profits and Losses
 Equally
 Specified ratio or percentage
 Capital ratio
o Original capital contribution
o Beginning capital balance
o Ending capital balance
o Average capital balace
 Simple average capital
 Weighted average capital
 Interest allowed on partner’s capitals, the remainder to be devided in an agreed
ratio
 Salaries or bonus allowed for partners’ services, the remainder to be devided in
an agreed ratio
 Multiple bases of allocation
3. Preparation of financial statements such as:
 Income statement (Statement of Recognized Income and Expenses)
 Statement of Financial Position
 Statement of Changes in Partners’ Equity

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Salaries or Bonus Allowed for Partner’s Services
Salaries
To recognize personal contribution by the partner to the business, they may agree to recieve
salary, and devide the remaining profit among themselves by the agreed specified ratio., salary
allowances are part of the net income / loss allocation to the partners.
Bonus
A partnership agreement may provide that a managing partner be allowed a bonus on the
earnings of the business to encourage profit maximination.
Bonus = Bonus rate x Base net income
(the base net income is always assumed to be 100%)
The bonus may be based on the following net income:
 Net income before deducting salaries, interest (if any) and
bonus
 Net income after deducting salaries and interest (if any) but
before bonus
 Net income after deducting salaries, interest (if any) and bonus

Distribution of Partnership Losses

If there were partnership net loss, the partners’ salaries and interests on capital shall still be
given to them. However the bonus to the managing partner shall be forfeited because bonuses
are given as incentives for earnings, not for losses.

General Professional Partnership

- exemted from income taxes.

Chapter 5

ACCOUNTING FOR PARTNERSHIP

DISSOLUTION

Nature Of Partnership Dissolution

“ The dissolution of the partnership is the change in the relation of the partners caused by
any partner ceasing to be associated in the carrying on of the business”

- dissolution terminates all the authority of any partner to act for the partnership.
- It does not necessarily mean an automatic terminaton of the business activities.
The
dissolved partnership may continue until the winding up or liquidation of partnership
affairs is completed.

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 Causes of Dissolution

Dissolution Formation of a New Partnership

Ends the original partnerships
agreement as caused by:
 Admission or withdrawal
of a partner
 Insolvency of a partner
 Death of a partner
 Incorporation of
partnership
Remaining partners may continue the business
operation under a new partnership agreement.
Liquidation
Partnership’s business activities are terminated and
noncash assets are converted into cash to pay
partnership’s creditors and distribute remaining assets
to the partners.

Asset Revaluation
The accounting process for the partnership dissolution requires that the existing
partners’ capital accounts be updated first before dissolution.
Accordingly, assets and liabilities of the partnership should be restated at thier fair
market values to determine the fair and equitable capital balances of the existing partners.

Negative Asset Revaluation

Decreases the old partners capital balances as an effect of decreasing the value of the
old partnership’s existing assets.
Possitive Asset Revaluation
Increases the old partners capital as an effect of increasing the value of the old
partnership’s existing assets.

Accounting for Dissolution

Admission of a New Partner
 By purchase of interest of existing partner(s)
 Purchase of interest from one partner
 Purchase of interest from all partners
 By direct investment to partnership
 Investment equals capital credits
 Bonus method

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 ADMISSION BY INVESTMENT
Partnership’s Total Agreed Capital (TAC) = Partners’ Total Contributed Capital (TCC)

Is the New Partner’s Agreed Capital Credit equal to his Actual

Contribution?

NO YES No Bonus

There is Bonus

Bonus to the New Partner if his Capital Credit is

GREATER THAN his Actual Contribution

Bonus to the Old Partner if the New Partner’s

Capital Credit is LESSER THAN his Actual

BONUS METHOD
Under this method, the total contributed capital is equal to the total partnership agreed
capital, but some individual partners’ contribution is not equal to their respective capital credit
because there is a transfer of capital from one partner to another.

Withdrawal or Retirement of a Partner

Whenever dissolution is made due to the withdrawal or retirement of a partner, he may
sell his interest to the:
 Outside Party
 Remaining Partner(s)
 Partnership

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Insolvency of Partnership or a Partner
It is commonly a result of excessive losses from operations, the over-extension of credit
to customers, or excessive investments in inventories or in plant assets.

Dissolution Procedures when Partnership is Insolvent

Insolvent Partnership Dissolution

Procedures

Are all general partners solvent?

NO YES

The solvent general partner will absorb the The general partners must invest
required payment to outside creditors and additional amount to pay the outside
will have existing claim against the other creditors.
general partners.

Dissolution due to Death of a Partner

Death is involuntary termination of one’s participation in the partnership which automatically
dissolves the partnersip.
The business activities of the partnership may continue with the remaining partners and an heir
to serve the lieu of a deceased partner as provided in the partnership contract.

Incorporation of a Partnership
If the partnership is incorporated, the partners will become the stockholders of the corporation.
The corporation then takes place over the assets and assumes the liabilities of the partnership.
As a result, the partnership is dissolved.

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