Learning Outcomes

1. Record the investments of each

partner to the partnership.
2. Prepare a statement of financial
position upon formation.
3. Solve problems on the formation of
partnership.
PARTNERSHIP
ACCOUNTING
DEFINITION AND NATURE OF PARTNERSHIP
 Partnership (Art. 1767 of New Civil Code of the
Philippines)
- a contract whereby two or more persons
bind themselves to contribute money, property
or industry to a common fund, with the intention
of dividing the profits among themselves.

Forms of a partnership:
1. General professional partnership
2. Co-partnership or non-general professional
partnership
Distinction Between Proprietorship and
Partnership
 A proprietorship is a business owned by
one person, while a partnership is an
association of two or more persons to
operate an unincorporated business for
profit as co-owners.
 From an accounting perspective,
proprietorships and partnerships must
comply with the business entity
principle that requires that business
records must be kept separate and
distinct from owners’ personal records.
Advantages and disadvantages of a
partnership over proprietorship

 Advantages:
1. A bigger source of capital
2. Two or more people are running the
affairs of the business.
3. Combined expertise of the partners
resulting to a better management.
4. There is sharing of losses.
Disadvantages:
1. Possible divisiveness in reaching a
decision.
2. Conflict may arise.
3. There is sharing of profits.
SIMILARITIES OF SOLE
PROPRIETORSHIP AND PARTNERSHIP
1. Accounting of assets and liabilities
 - basically the same
2. Equity
- sole proprietorship: Owner’s Equity
- partnership : Partners’ Equity
3. Accounting for contributed and
earned
capital: there is no distinction
4. Proprietorships and partnerships capital
account and withdrawals account.

- capital account is credited for owner

investments and accumulated profits.
- withdrawals account is closed to the capital
account at the end of each accounting
period
- proprietorships employ one Capital and
Drawing account
- partnerships have more than one depending
on the number of partners in the partnership.
Characteristics of Partnership

1.Mutual Agency – every partners has

the authority to act for the partnership
and become binding if such act is
within his express or implied authority.

2.Limited Life – can be dissolved

anytime the partners so desire
3. Unlimited Liability – the partnership
creditors
can run after the personal assets of
the
partners after all partnership assets
have been
exhausted in payment of its
obligations.

4. Co-ownership – partners are co-

owners of the
property invested in the partnership.
KINDS OF PARTNERSHIP
 1. According to activities:

a) Trading partnership – engaged in

manufacturing or buying and
selling of goods.

b) Non-trading partnership – engaged in

rendering of services to clients.
2. According to liability of the
partners:
a) General partnership – all partners are
personally liable for the partnership
debts to the extent of their personal
assets in case partnership assets are not
sufficient to pay the said obligations.
b) Limited partnership – there is at least
one unlimited partner to absorb the
partnership’s unpaid obligations after
partnership assets are all exhausted.
KINDS OF PARTNERS

A. As to contribution:
1. Capitalist partner– money or property
2. Industrial partner– personal services
3. Capitalist-Industrial partner– both
money or property and personal
services
B. As to liability:
1. General partner – liable up to the
extent of his personal assets
2. Limited partner – liable up to the
extent of his investment in the
partnership
C. Other classifications:

1. Nominal partner – partner in name

only.
2. Secret partner – not known as a
partner but actively participate
in running the partnership
affairs.
3. Silent partner – a general partner but
does not take active part in
running the
partnership affairs.
4. Dormant partner – a general partner
but does not take part in running the
partnership business and is not
known as partner.
Articles of Co-Partnership

- written contract by the partners

which requires registration with the
Securities and Exchange Commission
(SEC).
Ledger Accounts for Partners
 The following types of accounts are
used for each partner:
1. Capital accounts.
2. Drawing accounts.
3. Loans to Partners and Loans from
Partners.
Valuation of contributions to the
partnership:
1. Cash - amount of cash invested to the
partnership.
2. Property – fair market value

Ways of Forming a Partnership

3. Individuals with no existing businesses
form a partnership
4. A proprietor and an individual with no
existing business form a partnership
5. Two or more proprietors form a partnership
Individuals with no existing businesses
form a partnership

Procedures:
1. Record the investments of each partner in
the books of the partnership.

2. If property contributed is with attached

liability and the liability is to be assumed by
the partnership, the liability is to credited
and the partner’s capital account for the
difference.

3. For an industrial partner, his contribution of

personal services is made through a
Example: Alfredo Salat and Sonny Gabut
are best friends. They agreed to form a
partnership engaged in buying and
selling of car accessories with the
following contributions:
Salat: Cash ₱ 100,000
Display cases
50,000

Gabut: Cash ₱
100,000
Furniture and fixtures: cost
60,000
Required:
1. Record the investments of each
partner in the books of the
partnership assuming the partnership
will not assume the liability of
the delivery car.
2. Record the investments of each
partner in the books of the
partnership assuming the partnership
will assume the liability of the delivery
car.
Solution: Requirement 1
1. Record the investments of each partner in
the books of the partnership assuming
the partnership will not assume the liability
of the delivery car.
Salat: Cash ₱ 100,000
Furniture & Fixtures 50,000
Salat, Capital ₱ 150,000

Gabut: Cash ₱ 100,000

Furniture & Fixtures 75,000
Delivery Equipment 150,000
Gabut, Capital ₱ 325,000
Upon formation:
Salbut Partnership
Statement of Financial Position
January 1, 2023
Assets
Current Assets
Cash ₱200,000

Property and Equipment

Furniture & Fixtures ₱125,000
Delivery Equipment 150,000
275,000
Total Assets ₱
475,000
========
Partners’ Equity
Salat, Capital ₱150,000
Gabut, Capital 325,000
Total Partners’ Equity ₱475,000
Requirement 2: Record the investments of each
partner in the books of the partnership
assuming the partnership will assumed the
liability of the delivery car.

Salat: Cash ₱ 100,000

Furniture & Fixtures 50,000
Salat, Capital ₱ 150,000

Gabut: Cash ₱ 100,000

Furniture & Fixtures 75,000
Delivery Equipment 150,000
Accounts Payable ₱
35,000
Upon formation: Salbut Partnership
Statement of Financial Position
January 1, 2023

Assets
Current Assets
Cash
₱200,000

Property and Equipment

Furniture & Fixtures ₱125,000
Delivery Equipment 150,000
275,000
Total Assets ₱ 475,000
========
Liabilities and Partners’ Equity
Current Liabilities
Accounts Payable ₱
35,000
Partners’ Equity
Salat, Capital ₱ 150,000
Gabut, Capital 290,000
A Sole Proprietor and An Individual With No
Existing Business Form a Partnership
Procedures:
1. Adjust the book values of the assets
and liabilities of the sole proprietor
through the Capital account.
2. Close the books of the sole
proprietorship.
3. Record the investments of each partner.
4. Prepare Statement of Financial Position
of the partnership upon formation.
A Sole Proprietor and An Individual With No
Existing Business Form a Partnership
Example: Lucia B. was in trading business already.
She offered Bernadette to join her in the business
for the first time. The ledger account balance of
Lucia B. prior to partnership formation follows:
Cash ₱ 125,000
Account Receivable 80,000
Merchandise Inventory 120,000
Equipment 175,000
Accounts Payable 50,000
Lucia B., Capital ?
The following are the agreements of two to adjust
the capital of Lucia B:
a. Accounts Receivable should have an estimated
realizable value of ₱75,000.
b.Merchandise Inventory should be reduced by
₱10,000.
c. Equipment should be depreciated and should
have a net book value of ₱ 50,000.
Bernadette should contribute cash equal to a 1/4
interest in the partnership.
Required:
1) Determine the capital balance of Lucia
B. prior to formation.
2) Prepare the adjusting entries necessary to
adjust the capital balance of Lucia B.
3) Close the books of Lucia B.
4) Record the investments of Lucia B. and
Bernadette in the books of the partnership.
Solution:
1) Determine the capital balance of Lucia B. prior to
formation.
Cash ₱ 125,000
Account Receivable 80,000 ₱ 500,000
Merchandise Inventory 120,000
Equipment 175,000
Accounts Payable 50,000 - 50,000
Lucia B., Capital ? ₱450,000
========
2) Prepare the adjusting entries necessary to adjust
the capital balance of Lucia B.
a) Lucia B., Capital ₱5,000
Est. Uncollectible Accounts ₱5,000

b) Lucia B., Capital 10,000

Merchandise Inventory 10,000
c) Lucia B., Capital 125,000
Accumulated Depreciation 125,000

Lucia B., Capital

Unadj. Bal. ₱ 450,000
a) ₱ 5,000
b) 10,000
c) 125,000
₱140,000 Adj. Bal. ₱310,000
After adjustments, the balances now are as follow:
Cash ₱ 125,000
Account Receivable 80,000
Est. Uncollectible Accounts ₱ 5,000
Merchandise Inventory 110,000
Equipment 175,000
Accum. Depreciation 125,000
Accounts Payable 50,000
Lucia B., Capital 310,000
3) Close the books of Lucia B.
Est. Uncollectible Accounts ₱ 5,000
Accum. Depreciation 125,000
Accounts Payable 50,000
Lucia B., Capital 310,000
Cash ₱125,000
Accounts Receivable 80,000
Merchandise Inventory 110,000
Equipment 175,000
4) Record the investments of Lucia B. and Bernadette in
the books of the partnership.
Lucia B.
Cash ₱125,000
Accounts Receivable 80,000
Merchandise Inventory 110,000
Equipment 50,000
Est. Uncollectible Accounts ₱ 5,000
Accounts Payable 50,000
Lucia B., Capital 310,000
Bernadette:
Cash 103,333
Bernadette, Capital 103,333
Total PE (₱310,000/.75) = 413,333
Lucia B. capital - ₱310,000
Berndette’s investment 103,333
=======
Upon formation: Lube Partnership
Statement of Financial Position
January 1, 2023
Assets
Current Assets
Cash ₱228,333
Accounts Receivable ₱80,000
Less: Est. Uncollectible Accounts 5,000
75,000
Merchandise Inventory 110,000
Total Current Assets
₱413,333
Property and Equipment
Equipment
50,000
Total Assets ₱463,333
=======
Liabilities and Partners’ Equity
Current Liabilities
Accounts Payable ₱ 50,000

Partners’ Equity
Lucia B., Capital ₱ 310,000