Lesson 1 - Basic Consideration and Formation

Lesson 1: Basic Considerations and Formation

Lesson:
1. Partnership, definition and characteristics
2. Advantages and disadvantages of a partnership
3. Partnership distinguished from a corporation
4. Classifications of Partnership
5. Kinds of Partners
6. Articles of Partnership
7. SEC Registration for Partnership
8. Accounting for Partnership
9. Partnership Formation
10. Prepare a statement of financial position at date of formation

In a contract of partnership, two or more persons combine themselves to contribute

money, property or industry, to a common fund, with the intention of dividing the profits
among themselves. Two or more persons may also form a partnership for the exercise
of a profession. (Civil Code of the Philippines, Article 1767)
Characteristics of a Partnership
1. Mutual contribution
2. Division of profits or losses
3. Co-ownership of contributed assets
4. Mutual agency
5. Limited life
6. Unlimited liability
7. Income taxes
8. Partners’ equity accounts
Advantages and disadvantages of a Partnership

Partnership distinguished from corporation:
1. Manner of creation
2. Number of persons
3. Commencement of juridical personality
4. Management
5. Extent of liability
6. Right of succession
7. Terms of existence
Classification of Partnership according to
1. Object
2. Liability
3. Duration
4. Purpose
5. Legality of existence
Kinds of Partners
1. General partner
2. Limited partner
3. Capitalist partner
4. Industrial partner
5. Managing partner
6. Liquidating partner
7. Dormant partner
8. Silent partner
9. Secret partner
10. Nominal partner or partner by estoppel
Articles of Partnership, content

SEC Registration, who are required to register
Accounting for Partnership

1. Owners’ equity accounts
2. Loans Receivable From or Loans Payable To
Partnership Formation
1. Valuation of investments by partners
a. Values agreed upon by partners
b. Fair market value
2. Adjustments of assets and liabilities prior to formation
3. Closing the books of sole proprietorship
4. Opening entries of a Partnership Upon Formation
a. Two or more individuals
b. An individual and a sole proprietorship
c. Two or more sole proprietorship
d. An individual and an existing partnership
e. A partner withdrawing or retiring from a partnership
f. Two or more partnerships forming as a partnership
Illustration 1. Two individuals forming a partnership

On May 1, 2020, Antonio Beltran and Carlos Domingo agreed to form a partnership. The
partnership agreement specified that Beltran is to invest P500,000 cash and Domingo is
to contribute land with a fair market value of P1,500,000 with P200,000 mortgage to be
assumed by the partnership., 2020, Antonio Beltran and Carlos Domingo agreed to form
a fair market value of P1,500,000 with P200,000 mortgage to be assumed by the

partnership.
Illustration 2. An individual and a sole proprietorship forming a partnership
The statement of financial position of Elena Flores on July 1, 2020 before accepting
Grace Hila as partner is shown below:
Elena Flores
Statement of Financial Position
July 1, 2020
Assets
Cash P 50,000
Accounts Receivable P 210,000
Less Allowance for Uncollectible Accounts ( 10,000) 200,000
Merchandise Inventory 60,000
Furniture and Fixtures 140,000
Total Assets P 450,000
Liabilities and Equity
Accounts Payable P 100,000
Flores, Capital 350,000
Total Liabilities and Equity P 450,000
Grace Hila offered to invest cash to get capital credit equal to one-half of Elena Flores’s
capital after giving effect to the adjustments below. Elena Flores accepted the offer.
1. The merchandise is to be valued at P55,000.
2. The accounts receivable is estimated to be 90% collectible.
3. The furniture and fixtures are to be valued at P130,000.
4. The office supplies on hand that have been charged to expense in the past
amounted to P5,000. These will be used by the partnership.
The following procedures may be used in recording the formation of the partnership:
Books of Elena Flores:
a. Adjust the assets and liabilities of Elena Flores in accordance with the
agreement.
b. Adjustments are to be made to her capital accounts.
c. Close the books of sole proprietorship.
Books of Partnership:
a. Record the investment of Elena Flores.
b. Record the investment of Grace Hila.

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Lesson 1 - Basic Consideration and Formation

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Lesson 1: Basic Considerations and Formation

In a contract of partnership, two or more persons combine themselves to contribute

Advantages and disadvantages of a Partnership

Classification of Partnership according to

Articles of Partnership, content

Accounting for Partnership

Illustration 1. Two individuals forming a partnership

a fair market value of P1,500,000 with P200,000 mortgage to be assumed by the

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