INTRODUCTION TO PARTNERSHIP ACCOUNTING

Partnership a contract whereby two or more persons bind themselves to

contribute money, property or industry into a common fund with the intention of
dividing the profit among themselves (Article 1767 of the Civil Code of the
Philippines). The persons are usually individuals. Any natural person who
possesses the right to enter into a contract can become a partner. Partnerships
must attempt to make a profit. Non-profit organizations may not be partnerships.

Characteristics of a Partnership

1. 1. Mutual agency any partner may act as an agent of the

partnership in conducting its affairs. Each partner has an equal right to
act for the partnership and to enter into contracts binding upon it, as long
as he acts within the normal scope of business operations.

1. 2. Limited life a partnership may be dissolved at any time by action

of the partners or by operation of law. The withdrawal, death, retirement,
bankruptcy, incapacity of a partner and the admission of a new partner
dissolves the partnership.

1. 3. Unlimited liability the personal assets of a general partner may

be used to satisfy the claims of the creditors of the partnership if the
partnership assets are not enough to settle the liabilities to outsiders upon
liquidation.

1. 4. Co-ownership of property properties contributed to the

partnership are owned by the partnership. Properties invested by a partner
cease to be his own personal property.

1. 5. Co-ownership of profit a partner has the right to share in

partnership profits. The partners are entitled to share in the firms profits
as a return on their investment.

1. 6. Legal entity a partnership has a legal personality separate and

distinct from that of each of the partners. A partnership may, therefore,
 acquire property in its own name and may enter into contracts.

Advantages of a Partnership

1. 1. It is easy to form and to dissolve. A partnership is ended whenever

there are changes in the ownership structure such as withdrawal of a
partner or admission of a new partner.

1. 2. Greater amount of capital may be raised compared to a sole

proprietorship. The source of capital investment comes from 2 or more
persons.

1. 3. There is relative freedom and flexibility in decision-making

compared to a corporation. Decisions are effected simply by agreement
among the partners without the formalities necessary under a corporation.

1. 4. It is better managed because business affairs are supervised by

more than one person. Better management results from the combined
experience and ability of several individuals.

1. 5. The unlimited liability of a general partner makes it reliable from the

point of view of creditors.

Disadvantages of a Partnership

1. 1. The unlimited liability of a partnership deters many from investing in

a partnership.

1. 2. There is lack of business continuity because it can be easily

dissolved.
 1. 3. There is difficulty in transferring ownership interest because
ownership interest in the partnership cannot be transferred without the
consent of all the partners.

1. 4. Limited amount of capital may be raised compared to a corporation.

1. 5. There is likelihood of dissension and disagreement when each of

the partners has the same authority in the management of the firm.

Kinds of Partnerships

1. 1. According to activity

a. a. Service main activity is the rendering of services

b. b. Merchandising or Trading main activity is the purchase or
sale of goods
c. c. Manufacturing main activity is the production of goods

a. 2. According to liability

a. a. General one consisting of general partners who are liable

prorata and sometimes solidarily with their separate property for
partnership liabilities.
b. b. Limited one consisting of one or more general partners
and one or more limited partners. LTD is added to the name of
the partnership.

a. 3. According to object
 a. a. Universal partnership of all present property one in which
the partners contribute all the property which actually belong to
each of them, at the time of the constitution of the partnership, to a
common fund with the intention of dividing the same among them
as well as the profits which they may acquire therewith. All assets
contributed to the partnership and subsequent acquisitions become
common partnership assets.

a. b. Universal partnership of profits one which comprises all

that the partners may acquire by their industry or work during the
existence of the partnership and the usufruct of movable or
immovable property which each of the partners may possess at the
time of the institution of the contract. The original movable or
immovable property contributed do not become common
partnership assets.

a. c. Particular partnership one which has for its object

determinate things, their use or fruits or a specific undertaking or
the exercise of a profession of vocation.

Kinds of Partners

a. According to Investment

a. 1. Capitalist one who contributes capital in money or property.

b. 2. Industrial one who contributes industry, labor, skill or service.
c. 3. Capitalist-Industrial one who contributes money, property and
industry
b. According to Liability

a. 1. General one whose liability to third persons extends to his private

property
b. 2. Limited one whose liability to third persons is limited only to the
extent of his capital contribution to the partnership.

c. According to Participation

a. 1. Nominal- a partner in name only.

b. 2. Secret one who takes active part in the business but whose
connection with the partnership is concealed or unknown to the public.
c. 3. Silent one who does not participate actively in the management of
partnership affairs.
d. 4. Managing Partner one who manages actively the business of the
partnership

Articles of Co-Partnership agreement in writing among the partners

governing the nature and terms of the partnership contract. This agreement is
the framework within which the partners are to operate or conduct partnership
business from formation to operations then to the eventual dissolution and
liquidation of the partnership. Observations of these details will help minimize, if
not eliminate, the confusion and disputes that may arise between or among the
partners.

The written agreement among the partners governs the formation, operation and
dissolution of the partnership and is required to be registered with SEC. It
contains the following information:

1. 1. The name of the partnership;

2. 2. The names, addresses of the partners, classes of partners stating
whether the partner is a general or a limited partner;
3. 3. The effective date of the contract;
4. 4. The purpose and principal place of business of the business;
5. 5. The capital of the partnership stating the contributions of each of
the partners;
6. 6. The rights and duties of each of the partners;
 7. 7. The manner of dividing profit or loss among the partners;
8. 8. The conditions under which the partners may withdraw money or
other assets;
9. 9. The manner of keeping the books of accounts;
10. 10. The causes for dissolution and the provision for arbitration in
settling disputes.

Features of Partnership Accounting

1. 1. Plurality of capital and drawing accounts there will be as many

capital accounts and as many drawing accounts as there are partners

1. 2. Partners loans partners may advance money to the partnership

in the form of loans when the business is in need of additional funds.

1. 3. Partners borrowings the partnership may advance money to

partners other than withdrawals in the form of loans.

1. 4. Partners salaries partners are paid salaries for services rendered

in the conduct of partnership business.

1. 5. Interest on investment interest is allowed to earn on the asset

investment of the partners.

1. 6. Division of profit and losses net profit or net loss is to be divided

among the partners based on their agreement.

PARTNERSHIP FORMATION

Accounting entries to record the formation of a partnership will depend upon how
the partnership is formed. A partnership may be formed in the following ways,
namely:
 1. 1. Formation of a partnership for the first time by individuals.
2. 2. Conversion of a sole proprietorship to a partnership
b. a. A sole proprietor allows another individual who has no
business of his own to join the business.
c. b. Two or more sole proprietors form a partnership.

General Guidelines
a. 1. Cash investments are recorded using their face values.

a. 2. Non-cash asset investment is recorded at the current fair value of

the property at the time of investment. Independent professional
appraisals should be made to determine the fair value. Fair value is the
amount to be obtained when the asset is sold at the present time in its
present condition.

a. 3. Accounts receivable are recorded in the books of the partnership

at gross amount. Allowance for bad debts is carried forward to the
partnership.

a. 4. Depreciable property assets are recorded in the books of the

partnership at carrying value. Accumulated depreciation is not carried
forward to the partnership.

a. 5. When a sole proprietorship is converted into a partnership, the

following books may be used:

a. a. Books of the sole proprietorship may be used as books of

the partnership.

a. b. Books of the sole proprietorship will be closed and a new set

of books will be used for the partnership.

Two Kinds of Partnership Formation

 1. 1. Formed by individuals

Cash Cash xxx

investment X, Capital xxx

Non-cash Asset xxx

asset X, Capital xxx
investment
Note: Use the
fair value of the
asset.

Non-cash Asset xxx

asset Liability xxx
investment X, Capital xxx
with assumption
of liability
Note: Debit the
asset account
using its fair
value; credit the
liability account
using the loan
balance to be
assumed by the
partnership; and
credit the capital
account of the
partner using the
net amount.

Service or Memo Entry

Industry Mr. X is admitted
as an industrial
partner with a
____ share in
profits.
 1. 2. Sole proprietorship(s) converted into a
partnership accounting procedures are as follows:

a. Adjust the books of the sole proprietorship(s).

Increase in value Asset xxx
of an asset X, Capital xxx
without a contra-
asset account

Decrease in value X, Capital xxx

of an asset Asset xxx
without a contra
asset account

Increase in value Contra- asset xxx

of an asset X, Capital xxx
with a contra
asset account

Decrease in value X, Capital xxx

of an asset Contra- asset xxx
with a contra
asset account

Increase in value X, Capital xxx

of a liability Liability xxx

Decrease in value Liability xxx

of a liability X, Capital xxx

Note: These
adjustments are
similar to the
year-end
adjusting entries.
Only, replace the
nominal accounts
with the Owner,
Capital account.