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Accounting for

Partnerships
Basic Considerations and Formation

DEFINITION
In a contract of 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.
For the exercise of profession
Juridical personality
Owner called Partner

General Professional P/ship


Profession an occupation that involves a
higher education or its equivalent, and
mental rather than manual labor.
GPP not a business or an enterprise for
profit; the law allows 2 or more persons to
act as partners in the practice of their
profession

Characteristics of P/ship

Mutual contribution
Division of profits or losses
Co-ownership of contributed assets
Mutual agency
Limited life
Unlimited liability
Income taxes
Partners' equity accounts

Advantages vs. Proprietorship


Brings greater financial capability to the
business
Combines special skills, expertise and
experience of the partners
Offers relative freedom and flexibility of
action in decision-making

Advantages vs. Corporation


Easier and less expensive to organize
More personal and informal

Disadvantages
Easily dissolved and thus unstable
compared to a corporation
Mutual agency and unlimited liability may
create personal obligation to partners
Less effective than a corporation in raising
large amounts of capital

P/ship vs. Corporation

Manner of creation
Number of persons
Commencement of juridical personality
Management
Extent of liability
Right of succession
Terms of existence

Classifications of P/ships
According to...
Object
Universal p/ship of all present property
Universal p/ship of profits
Particular p/ship

Liability
General
Limited

Classifications of P/ships
According to...
Duration
With a fixed term
At will

Purpose
Commercial or trading
Professional or non-trading

Classifications of P/ships
According to...
Legality of existence
De jure
De facto

Kinds of partners

General
Limited
Capitalist
Industrial
Managing
Liquidating
Dormant

Kinds of partners
Silent
Secret
Nominal / partner by estoppel

Limited Liability P/ships (LLP)


Features of both general p/ships and
professional corporations
Individual partners of LLPs are personally
responsible for their own actions and for
the actions of partnership employees
under their supervision. The LLP as a
whole is responsible for the actions of all
partners and employees.

Articles of Partnership
P/ship name, nature, purpose and location
Names, citizenship and residences of
partners
Date of formation and the duration of the
partnership

Articles of Partnership
Capital contribution of each partner, the
procedure for valuing non-cash
investments, treatment of excess
contribution (as capital or as loan) and the
penalties for failure to invest and maintain
the agreed capital
Rights and duties of each partner

Articles of Partnership
Accounting period to be adopted, nature of
accounting records, financial statements
and external audits
Method of sharing profit or loss, frequency
of income measurement and distribution
Drawings or salaries to be allowed to
partners
Provision for arbitration of disputes,
dissolution and liquidation

A contract of partnership is VOID whenever


immovable property or real rights are
contributed and a signed inventory of the
said property is not made and attached to
a public instrument.

SEC Registration
Partnership capital is P3,000 or more, in
money or property

Accounting for Partnerships


Similar to sole proprietorship
Difference owner's equity

Partner's capital account


Debit:
Permanent withdrawals
Debit balance of the drawing account at the
end of the period

Credit:
Original investment
Additional investment
Credit balance of the drawing account at the
end of the period

Partner's drawing account


Debit:
Temporary withdrawals
Share in losses

Credit:
Share in profits

Loans receivable from and payable to


Partners
Partner withdraws substantial amount of
money with the intention of REPAYING:
(dr) Loans Receivable - Partner
(cr) Cash / a more appropriate account

Partner lends money to the partnership


other than his intended permanent
investment:
(dr) Cash / a more appropriate account
(cr) Loans Payable - Partner

Distinction is important in case of liquidation.


Loans payable to partners must be paid
after the claims of outside creditors have
been paid in full. These loans have priority
over partners' equity.

FORMATION
Entry to open p/ship books:
Debit assets
Credit Liabilities
Credit partners capital account

Formation
Valuation of Investment by Partners
Cash or non-cash assets
For non-cash assets values agreed upon by
the partners OR fair values
Fair value the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date.

Formation
Adjustment of Accounts Prior to Formation
Example:
Book value of equipment P730,000
Fair market value P800,000
What amount will be recorded in the partnership
for the asset contributed and the capital of the
contributing partner?

Increases in asset values accruing BEFORE


formation should be for the benefit of the
contributing partner.

When the adjustment involves a debit or


credit to a nominal account, the Capital
account would instead be debited or
credited because the business has ceased
to be a going concern.

Formation Ways of forming p/ships


Individuals with no existing business
Conversion of a sole proprietorship to a
p/ship
A sole proprietor and an individual without an
existing business
Two or more sole proprietors

Admission or retirement of a partner


(Ch.3)

Individuals with no existing business


On December 1, 2013, Jack and Jill agreed to
form a p/ship. Jack will invest cash of P300,000
and Jill will invest computer equipment with a total
carrying amount of P288,000. Prior to formation,
the partners agreed to value the computer
equipment at P300,000.
Required:
Prepare the entry to open the books of Jack&Jill Co.

Individuals with no existing business


Cash
Computer Equipment
Jack, Capital
Jill, Capital

300,000
300,000
300,000
300,000

A sole proprietor and an individual with


no existing business
On December 1, 2013, Jack and Jill agreed to form a
p/ship. Jack had an existing business with the following
information: Cash 25,000; Accounts Receivable 46,000;
Furniture and Fixtures 37,000; Accounts Payable 32,000;
and Jack, Capital 76,000. Prior to p/ship formation, it was
determined that P5,000 of the Accounts Receivable was
doubtful of collection and a P2,000 payment for Accounts
Payable was unrecorded. Jill will invest cash to get a
capital credit equal to one half of Jacks adjusted capital.
Required: Prepare the entry to open the books of Jack&Jill Co.

Individuals with no existing business


Cash
23,000
Accounts Receivable
46,000
Furniture and Fixture
37,000
Allow. for Uncoll. Accts
Accounts Payable
Jack, Capital
Cash

5,000
30,000
71,000

35,500

Jill, Capital

35,500

Two or more sole proprietors form a


partnership
On December 1, 2013, Jack and Jill agreed to form a
p/ship. Both had existing business prior to formation.
Jack

Jill

Cash

25,000

40,000

Accounts Receivable

46,000

18,000

Furniture and Fixture

37,000

Equipment

45,000

Accumulated Depreciation - Equipment

2,250

Accounts Payable

32,000

Jack, Capital

76,000

Jill, Capital

29,000
71,750

Two or more sole proprietors form a


partnership
Adjustments prior to formation:
JACK
P5,000 of the Accounts Receivable was doubtful of
collection
P2,000 payment for Accounts Payable was unrecorded.

JILL
Additional depreciation to be recognized, P2,250.
Required: Prepare the entry to open the books of Jack&Jill Co.

Individuals with no existing business


Cash
23,000
Accounts Receivable
46,000
Furniture and Fixture
37,000
Allow. for Uncoll. Accts
Accounts Payable
Jack, Capital

5,000
30,000
71,000

Individuals with no existing business


Cash
Accounts Receivable
Equipment
Accounts Payable
Jill, Capital

40,000
18,000
40,500
29,000
69,500