Partnership Formation

A partnership is an unincorporated association of two or more individuals to carry on, as co-owners, a business with the intention
of dividing profits among themselves.

*a contract of partnership is consensual.

Two or more persons bind themselves together to contribute money, property or industry to a common fund, with the intention
of dividing profit among themselves.

A partnership is a business structure in which two or more individuals come together to carry out a business venture for profit.

In a partnership, the partners contribute resources such as capital, expertise, or labor to the business and share the profits and
losses according to a pre-agreed arrangement

Partnerships are typically formed by a partnership agreement.

 Oral / Verbal

 Written *

*Having a written agreement is highly recommended to avoid potential misunderstandings and conflicts.

Forms of Partnerships:

 General Partnership - All partners have equal responsibility and liability for the business’s debts and obligations. (Capital
Contributions & Personal Assets)

 Limited Partnership - at least one general partner must be in a limited partnership. Limited partners are liable only up to
their capital contributions. (Capital Contributions ONLY) General partners are liable up to their personal assets (Capital
Contributions & Personal Assets)

Characteristics of a Partnership.

1. Ease of formation – as compared to a corporation, formation of partnership requires less formality. (Easy to form)

2. Separate legal entity – the partnership has a judicial personality separate and distinct from the partners. Partnership can
transact and acquire properties under its name.

3. Mutual Agency – the partners are agents of the partnership for the purpose of its business. Therefore, a partner may legally
bind the partnership to a contract or agreement that is in line with the partnership’s operations.

4. Co-ownership of property- all invested properties into the business is now owned by the partners. (But any partner is
prohibited to use such assets without the consent of the other partners

5. Limited life – pag ayaw na ng isang partner, termination, death, etc etc.

6. Transfer of ownership – all partners must agree

7. Unlimited Liability - *General partneship

Advantages of a partnership

- Easy to Form
- Shared Responsibility of running a business.
- Flexibility in decision making
- Greater capital compared to a sole proprietorship.
- Relative lack of regulation by the government as compared to corporations.

Disadvantages of a partnership

- Easily dissolved / limited life

- Unlimited liability
- Lesser capital compared to a corporation
- Conflict among partners
- Taxed like a corporation.

Major Considerations in the Accounting for the Equity of a Partnership.

a. Formation c. Dissolutions

b. Operations d. Liquidations
Kinds of Partners

1. General Partner. One 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. He is not allowed to contribute to industry or
services only.

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 have appointed as a manager of the partnership.

6. Liquidating Partner. One who is designated to wind up or settle the affairs of the affairs after dissolution.

7. Dormant Partner. One who does not take an active part in the business of the partnership and is not known as a partner.

8. Silent Partner One who does not take an active part in the business of the partnership though may be known as a partner.

9. Secret Partner. One who takes an 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 who represents himself as one.

Valuation of contributions of partners.

Cash and cash equivalents – FACE AMOUNT

Inventory or PPEs –FAIR VALUE

Illustration 1:

Hera and Freya formed a partnership. Hera contributed cash of P1,200,000.00, while Freya contributed a land with carrying
amount of P1,400,000.00 and fair value of P2,000,000.00.

Cash P1,200,000.00

Land P2,000,000.00.

Hera, Capital P1,200,000.00

Freya, Capital P2,000,000.00.

Illustration 2:

Hera and Freya formed a partnership. Hera contributed cash of P1,200,000.00, while Freya contributed a land with carrying
amount of P1,400,000.00 and a fair value of P2,000,000.00.

The land has an unpaid mortgage of P300,000.00 which is not assumed by the partnership.

Cash P1,200,000.00

Land P2,000,000.00.

Hera, Capital P1,200,000.00

Freya, Capital P2,000,000.00.

Illustration 3:

Hera and Freya formed a partnership. Hera contributed cash of P1,200,000.00, while Freya contributed a land with carrying
amount of P1,400,000.00 and a fair value of P2,000,000.00. The land has an unpaid mortgage of P300,000.00 which is assumed
by the partnership.

Cash P1,200,000.00

Land P2,000,000.00.

Mortgage Payable P300,000.00

Hera, Capita P1,200,000.00

Freya, Capital P1,700,000.00

Illustration 4:
CONTRIBUTIONS Freya Arya
Cash ₱ 800,000.00
Accounts Receivable 100,000.00
Building ₱ 900,000.00
TOTAL CONTRIBUTIONS ₱ 900,000.00 ₱ 900,000.00

FREYA CAPITAL 900,000.00

ARYA CAPITAL ₱ 900,000.00
TOTAL CAPITAL ₱ 900,000.00 ₱ 900,000.00

A. Accounts Receivable include a P20,000.00 uncollectible account.

B. Building is under depreciated by P50,000.00

C. Building has an unpaid mortgage of P100,000.00 to be assumed by the partnership.

Determine the correct valuations of the Partner’s contributions in the partnership books of accounts.
CONTRIBUTIONS Freya Arya AMOUNT ADJUSTMENTS CORRECT AMOUNT Provide journal
Cash ₱ 800,000.00 800,000.00 - 800,000.00 entries.
Accounts Receivable 100,000.00 100,000.00 - 20,000.00 80,000.00
Building ₱ 900,000.00 900,000.00 - 50,000.00 850,000.00
TOTAL CONTRIBUTIONS ₱ 900,000.00 ₱ 900,000.00 1,800,000.00 - 70,000.00 1,730,000.00

Freya Capital Arya, Capital Freya Capital Arya, Capital Total

FREYA CAPITAL 900,000.00 880,000.00 880,000.00
ARYA CAPITAL ₱ 900,000.00 850,000.00 850,000.00
TOTAL CAPITAL ₱ 900,000.00 ₱ 900,000.00 ₱ 880,000.00 ₱ 850,000.00 ₱ 1,730,000.00

Cash ₱ 800,000.00 800,000.00 - 800,000.00

Accounts Receivable 100,000.00 100,000.00 - 20,000.00 80,000.00
Building ₱ 900,000.00 900,000.00 - 50,000.00 850,000.00
TOTAL CONTRIBUTIONS ₱ 900,000.00 ₱ 900,000.00 1,800,000.00 - 70,000.00 1,730,000.00

Freya, Capital Arya, Capital Freya, Capital Arya, Capital Total

FREYA CAPITAL 900,000.00 880,000.00 880,000.00
ARYA CAPITAL ₱ 900,000.00 850,000.00 850,000.00
TOTAL CAPITAL ₱ 900,000.00 ₱ 900,000.00 ₱ 880,000.00 ₱ 850,000.00 ₱ 1,730,000.00

Journal Entry:
Cash ₱ 800,000.00
Accounts Receivable 80,000.00
Building 850,000.00
Freya Capital ₱ 880,000.00
Arya Capital 850,000.00

Bonus on Initial Investment

An accounting problem exists when a partner’s capital account is credited for an amount greater than the fair value of his
contributions.

Illustration 5:

Arya & Hera agreed to form a partnership. Arya contributed P50,000.00 cash and Hera contributed equipment with a fair value of
P100,000.00

However, due to the expertise of Arya, the partnership agreed they should initially have an equal interest in the partnership
capital.
Actual
Partner Contributed 50% each partner Bonus Method
Capital
Arya ₱ 50,000.00 (150,000 * 50%) ₱ 75,000.00
Hera 100,000.00 (150,000 * 50%) 75,000.00
Total
Contributed
Capital ₱ 150,000.00 ₱ 150,000.00

Journal Entry:
Cash ₱ 50,000.00
Equipment 100,000.00
Arya Capital ₱ 75,000.00
Hera Capital 75,000.00
Illustration 6:

X Y Z TOTAL CC
Cash ₱ 40,000.00 ₱ 10,000.00 ₱ 100,000.00 ₱ 150,000.00
Equipment 80,000.00 80,000.00
Total ₱ 40,000.00 ₱ 90,000.00 ₱ 100,000.00 ₱ 230,000.00
Additional Information:
Equipment has an unpaid mortgage of P20,000.00 to be assumed by the partnership

The partners agreed to equalize their interests.

Cash settlements among the partners are to be made outside the partnership.

Question: Who among the partners shall receive cash payment from the other partners?
Question: Provide journal entry to record the contributions of the partners.

X Y Z TOTAL CC
Cash ₱ 40,000.00 ₱ 10,000.00 ₱ 100,000.00 150,000.00
Equipment 80,000.00 80,000.00
Mortage Payable - 20,000.00 - 20,000.00
Net Contribution 40,000.00 70,000.00 100,000.00 210,000.00
Equal Intrest (33.33%
each) 70,000.00 70,000.00 70,000.00 210,000.00
Cash receipt
(payment) - 30,000.00 - 30,000.00 -

Therefore: Partner Z shall received P30,000.00 from Partner X

Journal Entry:
Cash ₱ 150,000.00
Equipment 80,000.00
Mortgage
Payable ₱ 20,000.00
X Capital 70,000.00
Y Capital 70,000.00
Z Capital 70,000.00

Illustration 7:

J & T agreed to form a partnership. The partnership agreement stipulates the following:

Initial Capital is P140,000.00

A 60:40 interest in the equity of the partnership.

J contributed P100,000.00 cash while T contributed P40,000.00 cash.

Which partner should provide additional investment or withdraw part of his investment in order to bring the partner’s capital
credits equal to their respective interests in the equity of the partnership?

J T TOTAL CC
Cash ₱ 100,000.00 ₱ 40,000.00 140,000.00
*Agreed
Capital ₱ 84,000.00 ₱ 56,000.00 140,000.00
Adjustments 16,000.00 - 16,000.00

* J (60%) T (40%) AC
AGREED
CAPITAL ₱ 84,000.00 ₱ 56,000.00 140,000.00

Therefore: Partner J must withdraw P16,000.00 and

Partner T shall invest additional P16,000.00.
Two Sole Proprietors Form a Partnership
Calaguas and Dela Cruz formed a partnership and invested the following assets and liabilities:
Fair Market Value Carrying Value
Calaguas:
Cash P300,000 P300,000
Land 450,000 280,000
Dela Cruz
Cash 100,000 100,000
Building 600,000 520,000
Mortgage Payable (400,000) (400,000)

The partners will share profits and losses equally.

Req’d:
Prepare the opening journal entry in the books of the partnership.
Cash P400,000
Land 450,000
Building 600,000
Calaguas, Capital P750,000
Dela Cruz, Capital P300,000
Mortgage Payable P400,000
JOURNAL ENTRY
Cash P400,000
Land 450,000
Building 600,000
Calaguas, Capital P525,000
Dela Cruz, Capital P525,000
Mortgage Payable P400,000