Accounting for

Partnerships
Basic Considerations and Formation
Chapter 1

Accounting for
Partnerships
After studying this chapter, you should be able to:
Know the meaning of partnership, its basic
features, contract, and articles of co-partnership.
Know the advantages and disadvantages of the
partnership.
Identify the different kinds of partnership and
classes of partners.
Make entries to record the partners investment.

Partnership
Two or more persons bind themselves to
contribute money, property, or industry
to a common fund, with the intention of
dividing the profit among themselves.
Two or more persons may also form a
partnership for the exercise of profession.
An association of two or more persons to
carry on, as co-owners, a business for profit.
Has a juridical personality separate and
distinct from that of each of the partners

Partnership
Each owner is called a partner.
Often formed to bring together various talents
and knowledge.
Provide a means of obtaining more equity
capital than a single individual can obtain and
allow the sharing of risks for rapidly growing
business.

General Professional
Partnerships
Partnership associated with the
practice of profession.
For example: the practice of law, public
accounting, medicine and other
professions.

Characteristics of a
Partnership
1. Mutual Contribution contribution of
money, property or industry to a common
fund
2. Division of Profits or Losses each
partner must share in the profits or losses of
the venture
3. Co-Ownership of Contributed Assets
all assets contributed into the partnership
are owned by the partnership
4. Mutual Agency any partner can bind the
other partners to a contract if he is acting
within his express or implied authority

Characteristics of a
Partnership
5. Limited Life it may be dissolved by the
admission, death, insolvency, incapacity,
withdrawal of a partner or expiration of the
term specified in the partnership
agreement.
6. Unlimited Liability all partners (except
limited partners), including industrial
partners, are personally liable for all the
debts incurred by the partnership
7. Income Taxes Partnerships, except
general professional partnerships, are
subject to tax at the rate of 30% of taxable
income

Advantages of a
Partnership
Advantages vs. Proprietorships
1. Brings greater financial capability to the
business
2. Combines special skills, expertise and
experience of the partners
3. Offers relative freedom and flexibility of action
in decision-making.

Advantages vs. Corporations

4. Easier and less expensive to organize
5. More personal and informal

Disadvantages of a
Partnership
1. Easily dissolved and thus unstable compared to
a corporation.
2. Mutual agency and unlimited liability may create
personal obligations to partners.
3. Less effective than a corporation in raising large
amounts of capital.

Partnership Distinguished
from Corporation
Partnership

Corporation

Manner of
Creation

Created y mere
agreement of partners

Created by operation of
law

Number of
Persons

Two or more persons

At least 5 not exceeding

15

Commenceme
nt of Juridical
Personality

From the execution of

the articles of
partnership

From the issuance of

certificate of
incorporation by the
SEC

Management

If there is no
managing partner,
every partner is an
agent of the
partnership

Board of Directors

Partnership Distinguished
from Corporation
Partnership

Corporation

Extent of
Liability

Each partner except a

limited partner is liable to
the extent of his personal
assets

Stockholders are
liable only to the
extent of their
interest or
investment in the
corporation

Right of
Succession

No right of succession

Right of Succession

Terms of
Existence

Any period of time

stipulated by the partners

Not to exceed 50 yrs.

but subject to
extension

Classifications of
Partnerships
1. According to object:
a. Universal partnership of all present
property
- All contributions become part of the
partnership fund.

b. Universal partnership of profits

- All that the partners may acquire by their
industry or work during the existence of the
partnership and the use of whatever the
partners contributed at the time of the
institution of the contract belong to the
partnership

c. Particular partnership
- The object of the partnership is determinate

Classifications of
Partnerships
2. According to liability:
a. General All partners are liable to the
extent of their separate properties
b. Limited the limited partners are liable
only to the extent of their personal
contributions. In a limited partnership, the
law states that there shall be at least one
general partner
3. According to duration:
a. Partnership with a fixed term or for a
particular undertaking.
b. Partnership at will (no term is specified
and is not formed for any particular

Classifications of
Partnerships
4. According to purpose:
a. Commercial or trading partnership
formed for the transaction of business
b. Professional or non-trading partnership
formed for the exercise of profession
5. According to legality of existence:
a. De jure partnership One which has
complied with all the requirements for its
establishment
b. De facto partnership One which as
failed to comply with all the legal
requirements for its establishment.

Kinds of Partners
1. General Partner one who is liable to the
extent of his separate property after all the
assets of the partnership are exhausted
2. Limited Partner one who is liable only to the
extent of his capital contribution
3. Capitalist Partner one who contributes
money or property to the common fund of the
partnership
4. Industrial Partner one who contributes his
knowledge or personal service to the partnership
5. Managing Partner one whom the partners
has appointed as manager of the partnership

Kinds of Partners
6. Liquidating Partner one who is designated to wind
up or settle the affairs of the partnership after
dissolution.
7. Dormant Partner one who does not take active part
in the business of the partnership and is not known as a
partner.
8. Silent Partner one who does not take active part in
the business of the partnership though may be known
as a partner.
9. Secret Partner one who takes active part in the
business but is not known to be a partner by outside
parties.
10.Nominal partner or partner by estoppel one who
is actually not a partner but represents himself as one.

Limited Liability
Partnerships
Have features of both general partnerships
and professional corporations.
Individual partners are personally responsible
for their own actions and for the actions of
partnership employees under their
supervision.
They are not responsible for the actions of
other partners.
The LLPs as a whole, like a general
partnership, is responsible for the actions of
all partners and employees.

Articles of Partnership
A partnership may be constituted orally or
in writing. However, a good business
practice requires the partnership contract in
writing.
Partnership agreements are embodied in the
Articles of Partnership.

SEC Registration
When the partnership capital is P3,000 or
more, in money or property, the public
instrument must be recorded with the
Securities and Exchange Commission (SEC).
Even if it is not registered, the partnership
having a capital of P3,000 or more is still valid
and therefore has legal personality.

Assignment: Nov. 13, 2015

(By Group)
1. Get a sample of a partnership
agreement (Articles of Partnership)
2. Determine the essential provisions
that may be contained in the
agreement.
3. Basic steps to register a partnership
with the SEC

Seatwork (by pair)

Answer the ff. questions (1whole):
1. Define partnership.
2. Angel and Rik are partners in a drilling
operation. Angel purchased a drilling rig to be
used in the entitys operations. Is this purchase
binding on Rik even though he was not involved
in it? Explain.
3. What are the advantages of a partnership form
of business organization?
4. What are the disadvantages of a partnership
form of business organization?

Accounting for
Partnerships
Recording of assets, liabilities, income and
expenses is consistent for both
proprietorships and partnerships.
Differences only arise between proprietorship
and partnership concerning owners equity.
In a partnership, separate capital and drawing
accounts are established for each partner.

Owners Equity Accounts

Partners Capital Account

Owners Equity Accounts

Partners Drawing Account

Note: Permanent withdrawals are made with the

intention of permanently decreasing the partners
capital while temporary withdrawals are regular
advances made by the partners in anticipation of
their share in profit.

Loans Receivable from or

Payable to Partners
Loans Receivable from Partners the account
debited wen a partner withdraws a substantial
amount of money with the intention of repaying it.
This account is classified separately from the other
receivables of the partnership.
Loans Payable to Partners the account
credited when a partner lends amounts to the
partnership in excess of his intended permanent
investment. This must be paid after the claims of
outside creditors have been paid in full.

Partnership Formation
A partnership may be formed in any of the following
ways:
1. Individuals with no existing business form a
partnership
2. Conversion of a sole proprietorship to a
partnership
a. A sole proprietor and an individual without
an existing business form a partnership
b. Two or more sole proprietors form a
partnership
3. Admission or retirement of a partner (to be
covered in chapter 3)

Partnership Formation
Partners can invest both assets and
liabilities in the partnership.
Assets and liabilities are recorded at an
agreed-upon value.
In the absence of any agreement, the
contributions will be recognized at their fair
market values at the date of transfer to the
partnership.

Partnership Formation
Fair market value the estimated amount that a
willing seller would receive from a financially
capable buyer for the sale of the asset in a free
market.
Per International Financial Reporting Standards
(IFRS) No. 3, fair value is the price at which an
asset or liability could be exchanged in a current
transaction between knowledgeable, unrelated
willing parties.

Individuals with no existing

business form a partnership
Illustration:
On July 1, 2015, Jane Docto and Therese
Revilla agreed to form a partnership. The
agreement specified that Docto is to invest
cash of P700,000 and Revilla is to contribute
land with a fair market value of P1,300,000
with P300,000 mortgage to be assumed by
the partnership.

Journal Entries
July 1 Cash

700,000

Land

1,300,000

Mortgage Payable
300,000
Jane Docto, Capital
700,000
Therese Revilla, Capital
To record the initial
investment of partners

1,000,00
0

Individuals with no
existing business form a
partnership
Suppose that Docto and Revilla formed another
partnership with Rose Baylon. Docto and Revilla
considered Baylon who has a vast business network
in Southern Mindanao as an industrial partner.
The partnership did not receive any asset from
Baylon.
In this case, only a memorandum entry in the
general journal will be made.
For example:
July 1 Rose Baylon is considered as an industrial
partner
contributed his skills and knowledge
in managing the
partnership business.

Another Example
Illustration:
On January 1, 2015, Rubi, Kim and Aly agreed
to form Rukia Partnership. The agreement
specified that Rubi is to invest cash of
P500,000 and Kim is to contribute building
with a fair market value of P900,000 with
P90,000 mortgage which will not be
assumed by the partnership. Aly is to
contribute computer equipment worth
P400,000.

Journal Entries
Jan 1

Cash

500,000

Building

900,000

Computer Equipment

400,000

Rubi, Capital
500,000
Kim, Capital
900,000
Aly, Capital
400,000
To record the initial
investment of partners

Seatwork (by pair)

Prepare journal entries to record partners
investment and prepare Statement of Financial
Position. (Name the partnership)
1. On August 2, 2015, Tommy, Miho and Alden
agree to form a partnership. The agreement
specified that Tommy is to invest cash of
P650,000 and Miho is to contribute land with a
fair market value of P850,000 with P100,000
mortgage to be assumed by the partnership.
Alden is an industrial partner.
2. On December 8, 2015, Byuti and Dabist agree to
form a partnership to sell imported clothes. The
agreement specified that Byuti is to invest cash
of P150,000 and Dabist is to contribute
merchandise inventory with a fair market value

Seatwork (individual)
Prepare journal entries to record partners
investment and prepare Statement of Financial
Position. (Name the partnership)
1. Amor and Claudia agree to form a partnership
named VistaPowers on Dec. 15, 2015. Amor is to
invest a building worth P1,000,000 and Claudia
is to contribute cash of P600,000 and computer
equipment worth P350,000.
2. Fourtris Motorcycle Parts is formed by partners
Four and Tris on Nov. 13, 2015. The agreement
specified that Four is to invest inventory and Tris
is to contribute cash equal to Fours investment.
The inventory that Four contributed costs
P345,000 when he purchased it last month. The
fair market value of the inventory today is

Conversion of a Sole
Proprietorship to Partnership
Under this type of formation, the assets and
the liabilities of the proprietorship will be
transferred to the newly formed partnership
at values agreed upon by all the partners or
at their current fair prices.

Adjustment of Accounts
Prior to Formation
Applicable to prospective partners with existing
businesses.
The respective books of the prospective partners
will have to be adjusted to reflect the fair market
values of their asset or to correct misstatements
in the accounts.
If the adjustments will not be made, the initial
capital balances of the partners may be
inequitable.
When the adjustment involves a debit or credit to
a nominal account, the Capital account would
instead be debited or credited. This is so because
the business of has ceased to be going concern.