Financial Accounting and Reporting Part 1
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Financial Accounting and Reporting Part 1
Financial Accounting and Reporting Part 1
An Instructional Material
Compiled by:
Melinda S. Balbarino
Maria Teresa M. Corrales
Marietta M. Doquenia
Julieta G. Fonte
Leandro C. Fua
Editha A. Peralta
Andrea Rose E. Rimorin
Catherine D. Sotto
Financial Accounting and Reporting Part 1
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GENERAL INFORMATION ABOUT THE COURSE
Course Code and Title
:
ACCO 20033 - FINANCIAL ACCOUNTING AND REPORTING 1
Semester and Academic
Year
:
First Semester, Academic Year 2020- 2021
Course Credit
: 3 Units
Pre-Requisite
: ABM 1 and 2 from Senior High School/; Financial Accounting P1
and P2 for Non-ABM SHS graduates
Course Description
: This course provides overview of basic accounting taken up
during the students’ senior high school. The course comprises
topics such as the formation of a partnership, division of profit and
loss by the partners; accounting for the admission and
retirement/withdrawal of a partner
Course Outcomes
: Upon completion of the course, the students will be able to:
a. Have detailed knowledge and understanding of the
accounting process of a Single Proprietorship for both
service and merchandising;
b. Produce the required entries and financial records of a
partnership;
c. Competence and honesty in the performance of
accountancy service; and
d. Demonstrate the qualities of a future accountant skilled in
the use of a calculator, computer and other business
equipment
Faculty Email Contact
Details
: To help and guide you in your progress, you may get in touch with
your Faculty-In-Charge (FIC) in the following email addresses:
Prof. Melinda S. Balbarino – msbalbarino@pup.edu.ph
Prof. Maria Teresa M. Corrales – mtmcorrales@pup.edu.ph
Prof. Marietta M. Doquenia - mmdoquenia@pup.edu.ph
Prof. Julieta G. Fonte – jgfonte@pup.edu.ph
Prof. Leandro C. Fua – lcfua@pup.edu.ph
Prof. Editha A. Peralta – eaperalta@pup.edu.ph
Prof. Andrea Rose E. Rimorin – arerimorin@pup.edu.ph
Prof. Catherine D. Sotto – cdsotto@pup.edu.ph
Financial Accounting and Reporting Part 1
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TABLE OF CONTENTS
Content
Page Number
Cover Page
1
Title Page
2
General Information About the Course
3
Module 1 – Review of Accounting Process
5
Module 2 - Nature and Formation of A Partnership
38
Module 3 - Partnership Operations
53
Module 4 - Partnership Dissolution
75
Module 5 - Dissolution of Partnership By
Disassociation Of A Partner Due To Withdrawal,
Retirement, Insolvency, Incapacity Or Death Of A
Partner
85
Financial Accounting and Reporting Part 1
MODULE 1
REVIEW OF THE ACCOUNTING PROCESS
Overview
The module gives us a review of the accounting process for single proprietorship both in
service and merchandising business.
Module Objectives
At the end of this module, the students should be able to:
1.
2.
3.
4.
Understand the definition of accounting and identify the users of accounting information.
Identify and explain the steps in the accounting process
Prepare adjusting entries and understand the rationale for their preparation.
Prepares closing and reversing entries and understand the rationale for their
preparation.
5. Prepare a financial statement for service and merchandising business.
ACCOUNTING DEFINED
Accounting is a service activity. Its function is to provide quantitative information,
primarily financial in nature, about economic entities, that is intended to be useful in making
economic decisions, in making reasoned choices among alternative courses of action. This
definition stipulates the nature and purpose of accounting. An accountant provides services
and furnishes quantitative information expressed in terms of money that is useful to the users of
the accounting information. The information are outlined into reports called financial statements
and served as a basis for making important economic decisions.
The users of the accounting information are categorized as either internal or external
users. External users are decision makers who have no direct access to the information
provided by the operations of the company. Internal users represent the managers or the
decision makers of an entity and they need the accounting information for the continued
operation of their business.
Examples of users and their need for accounting information as the basis for their
decision making are:
a. Investors are influenced with the returns from their investments and to decide whether
to make additional investments, hold or sell their shares of stocks.
b. Creditors/Suppliers/Lenders need accounting information to help in their decision
whether to extend credit or loans being applied by businesses.
c.
Government and their agencies need to know if an entity is abiding the implemented
government rules and regulations.
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d. Employees/Labor unions are interested in the stability and profitability of the company
they are working with and for the assurance of their security of tenure.
e. General Public and Customers need to know if the company would provide them
continuity of their services and updates on improvements of their products and
services.
BRANCHES OF ACCOUNTING
There are two main branches of accounting: Financial Accounting and Management
Accounting.
Financial Accounting is designed in providing accounting information for all parties
external to the operating responsibility of the company. It is the process of preparing accounting
reports known as financial statements that show the company’s financial performance and
position to people outside the company like creditors and customers.
Management or Managerial Accounting is designed in providing accounting information
and operational needs for use by the internal users, the management. It involves financial
analysis, budgeting and forecasting, cost analysis, and evaluation of business decisions.
AREAS OF ACCOUNTING
Accounting is commonly misinterpreted and understood as just the recording of business
transactions, known as bookkeeping. However, bookkeeping is only one of the functions of
accounting while accounting is a diversified profession. Accountants can be employed in four
broad or specialized areas:
Public Accounting
Public accounting offers accounting and related services to its clients on a fee basis.
Some of the services being offered include preparation, review and audit of the company’s
financial statements, tax services, and consultation involving accounting systems, mergers and
acquisitions. Accountants practicing public accounting are licensed professionals known as
Certified Public Accountants
Private Accounting
Private accounting offers accounting services for a specific company and is an important
part to the success of any organization. Private accountants offer a higher level of services
through familiarity with the full workings of the company’s business interests. They are
concerned with the collection and analysis of financial data within a specific company. They are
also involved with strategic planning and developing new products and services.
Government Accounting
Under Section 109, of the PD No. 1445, Government Accounting is defined as one that
encompasses the process of analyzing, classifying, summarizing and communicating all
transactions that are involved in the receipt and disbursement of all government funds and
properties, and interpreting the results thereof. Its objectives were set to include several areas
Financial Accounting and Reporting Part 1
in government operations.
The accounting data should show how government funds were
used and should indicate the outflow and inflow of funds and the need for a study of fund
management and control, if necessary.
Accounting Education
Accounting Education is an area of accounting that covers the upgrading, researching
and teaching accounting knowledge to students, aspiring accountants or accounting
professionals seeking continuous education and updates.
This area is composed of
accountants (Certified Public Accountants) who are into teaching, training and development,
including research.
Accountants in education pursue a career as a faculty member in a
school, an author of an accounting book, a researcher, a trainer, or a reviewer.
FORMS OF BUSINESS ORGANIZATION
The most common forms of business organization are the following:
Sole Proprietorship
Sole or Single Proprietorship is organized and owned by only one person. It is easy to
form and offers complete control to the owner. However, he is also personally liable for all
financial obligations and debts of his business.
Partnership
A partnership is formed by two or more individuals who agreed to carry on a trade or
business. Each individual contributes money, property, labor or skill, and expects to share in
the profits of the business.
Corporation
A Corporation is a more complex form of business organization as differentiated from a
sole proprietorship and a partnership. It is a separate legal entity whose ownership is divided
into shares of stocks. Its owners are known as shareholders. It is also subject to more legal
requirements and government regulations.
TYPES OF BUSINESS ACTIVITIES
A business is an organization that uses basic resources (inputs) like materials and labor
to provide goods or services to customers or clients. There are three major types of business:
Service Business
A service type of business provides services rather than products to customers or clients
for a fee. Examples are salons, repair shops, hotels and restaurants, and professional firms like
law and accounting.
Merchandising Business
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This type of business is also called a trading business. Merchandising companies buy
goods in salable form and sell them to their customers at a higher cost to make a profit.
Examples are department stores, bookstores, appliance stores and other resellers.
Manufacturing Business
This type of business buys raw materials with the intention of using them in making a
new product. Manufacturing companies converts these raw materials into finished products
before selling them to their customers.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
Generally accepted accounting principles are a common set of accounting principles,
standards and procedures that must be followed when preparing financial statements.
Because it is important that all who will receive accounting reports be able to interpret
them, a set of practices were developed that will provide guidelines for financial accounting.
The term used to describe these practices is generally accepted accounting principles
(GAAP).
Generally accepted accounting principles encompass the conventions, rules, and
procedures necessary to define accepted accounting practice at a particular time. These
“principles” are not like the unchangeable laws of nature found in chemistry or physics. They
are developed by accountants and businesses to serve the needs of decision makers, and they
can be changed or altered as better methods are developed or as circumstances change.
A few examples of these generally accepted accounting principles are:
1. Business Entity Concept
Under the business entity concept, the activities of a business are recorded separately from the
activities of the owner or owners. This concept is important because it limits the economic data
in the accounting system to data related directly to the activities of the business. Thus, the
accountant for a business with one owner (a proprietorship) would record the activities of the
business only, not the personal activities, property, or debts of the owner.
2. Going Concern or Continuity Assumption
To prepare financial statements for an accounting period, the accountant must make an
assumption about the ability of the business to continue. Specifically, the accountant assumes
that unless there is evidence to the contrary, the business entity will continue to operate for an
indefinite period. This method of dealing with the issue is called the going concern or continuity
assumption. The justification for all the techniques of income measurement rests on this
assumption of continuity.
3. Time Period Assumption
The operating results of any business cannot be known with certainty until the company
has completed its life span and ceased doing business. But financial reports covering shorter
time periods are needed because external decision makers require timely accounting
Financial Accounting and Reporting Part 1
information to satisfy their analytical needs. Because of this, businesses have imposed the
time-period assumption, requiring that changes in a business’s financial position be reported
over a series of shorter time periods like annually, semi-annually, quarterly or monthly. An
annual accounting period is the most common which can be a calendar year or a fiscal year.
Example: January 1, 2017 to December 31, 2017 is a calendar year; July 1, 2017 to June 30,
2018 is a fiscal year.
4. Unit-of-Measure Assumption
The unit-of-measure assumption specifies that accounting should measure and report
the results of a business’s economic activities in terms of a monetary unit such as the Philippine
peso. The assumption recognizes that the use of a standard monetary unit throughout all
financial statements is an effective means for aggregating and communicating accounting
information. It is a standard practice to ignore changes in the purchasing power of a peso.
ACCRUAL BASIS AND CASH BASIS OF ACCOUNTING
The difference between accrual basis and cash basis of accounting lies in the timing of
when is revenues and expenses are recognized and incurred when recorded in the books.
Under the cash basis of accounting, revenues are recognized and recorded when cash
is received or collected and expenses when cash is paid. No adjusting entries are needed in
this method of accounting.
Under the accrual basis of accounting, revenues are recognized and recorded when
earned regardless of when cash is received or collected. Expenses incurred are recorded
whether or not cash is paid. Adjusting entries are needed under this method to update the
account balances at the end of the accounting period.
THE ACCOUNTING CYCLE
The accounting cycle, also known as the accounting process, refers to a series of steps
accountants perform during an accounting period for the orderly accumulation, reporting and
interpretation of data pertaining to the financial operations of the business. The functions of
accounting can be summarized as the recording, classifying, summarizing and interpreting of
business data. The first three functions represent the process by which accounting information
is developed. These steps are applied in accordance with generally accepted accounting
principles and practices developed by the accounting profession. The interpreting function
involves the use of analytical techniques and procedures as a base for management decisions.
The steps in the accounting cycle include the following:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Documentation
Journalizing
Posting
Preparation of the trial balance
Compilation of data needed for adjustments
Preparation of the worksheet
Preparation of the Financial Statements
Adjusting entries are journalized and posted to the ledger
Closing entries are journalized and posted to the ledger
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10. Preparation of the post-closing trial balance
11. Reversing entries are journalized and posted to the ledger
The first three steps constitute the recording phase of accounting. The summarizing
phase begins with the trial balance preparation up to the post-closing trial balance. Reversing
entries prepared on the first day of the next accounting period is considered to be an optional
step.
RECORDING PHASE
Accounting is based on a double entry system which means that a business transaction
has a dual effect when recorded. Business transactions are recorded in at least two accounts.
Documents are needed to serve as a basis for recording the transactions. The two books of
accounts where transactions are recorded are the journal and the ledger. The double-entry
accounting system has specific rules of debit and credit for recording the transactions in the
accounts. Debit is the left side of an account while credit is the right side.
To summarize the rules of debit and credit:
Debit:
Increases
in assets
•
Decreases
in liabilities
•
Decreases
in equity/capital
•
• drawings
• decrease in revenue
• increase in expense
Credit:
•
•
•
Decreases in assets
Increases in liabilities
Increases in equity/capital
• investments
• increase in revenue
• decrease in expense
Applying the rules of debit and credit, transactions are first recorded in the book of
original entry called the general journal and the process is known as journalizing. The chart of
accounts should show the elements of the financial statements which shall be used in recording
the transactions. Special journals are sometimes used by businesses that are designed for
recording a single type of transaction that occurs frequently. The format and the number of
special journals used will depend on the nature of the business. The most common special
journals include the cash payments journal, cash receipts journal, revenue/sales journal and the
purchases journal. The general journal will be used for entries that cannot be recorded in the
special journals such as adjusting and closing entries.
The information from the journal is then transferred to the book of final entry called the
general ledger and the process is called posting. The ledger is a complete listing of all the
accounts as found in the chart of accounts of a business. The purpose of this process is to
classify the effects of transactions on the elements of the financial statements. Businesses may
have control accounts and subsidiary ledgers that will show their balances are the same.
Subsidiary ledger is a group of related accounts showing the details of the balance in the control
account. Examples of control accounts are Accounts receivable and Accounts payable
accounts.
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SUMMARIZING PHASE
After all the transactions are posted in the ledger, the account balances are then
computed and must show the normal balances of each individual account. The preparation of
the trial balance will mathematically prove the equality of the debit and credit balances of each
account but will not give the assurance that no errors have been made during the journalizing
and posting process in case the total debit and credit amounts are shown as equal. Inequality
in the debit and credit totals would automatically prove the presence of an error. The most
common examples of errors showing inequality of total debit and credit amounts are
transposition and slide.
Transposition is the erroneous rearrangement of writing an amount like P 1,250 written
as P 1,520. Slide is an error in which the whole amount is moved one or more spaces to the
right or the left, like P 1,000 written as P 100 or P 10,000.
At the end of the accounting period, some of the account balances presented in the trial
balance are not yet updated and may require adjustments before financial statements are
prepared. Data for adjustments are then compiled for such updating. The types of
accounts that require adjustment are as follows:
1. Prepaid Expenses – These are expenses paid by the business in advance; or these are
expenses already paid in cash by the business but the expenses are not yet incurred or
only a portion of the amount paid was used up as expense. Prepaid expenses are also
termed as deferred expenses.
There are two methods of accounting for prepaid expenses:
a. Asset method – if at the date of payment, the business debited an asset account.
The pro-forma adjustment is:
Expense Account
Asset Account
xxx
Compute used or expense
portion
xxx
b. Expense method – if at the date of payment, the business debited an expense
account.
The pro-forma adjustment is:
Asset Account
Expense Account
xxx
xxx
Compute unused or asset
portion
To illustrate, assume that Lakers Company is using a monthly accounting period. On
January 1, 2017, the company paid P 30,000 representing 3-month rent beginning January 1,
2017. The company adjusts and closes its books every month. The entry to record the
prepayment and the adjusting entry at the end of the month will be:
Asset Method
2017
Expense Method
Financial Accounting and Reporting Part 1
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Jan
1
Prepaid Rent
Cash
31
30,000
Rent Expense
Prepaid Rent
30,000
10,000
10,000
Rent Expense
Cash
30,000
Prepaid Rent
Rent Expense
30,000
20,000
20,000
Since P 30,000 is for 3 months, the monthly rent is P 10,000. For January, the used or
expense portion is one month or P 10,000; therefore the unused or asset portion will be two
months or P 20,000 as of January 31.
Regardless of which method a business used in any particular case, the amount
reported as expense in the income statement and the amount reported as asset in the balance
sheet will be the same.
Both methods of accounting for prepayment are acceptable although most companies
employ the expense method due to its simplicity. A business must also use a method
consistently for a particular type of prepayment, say asset method for rent while expense
method for supplies.
2. Unearned Revenues – These are revenues collected or received by the business in
advance; or these are revenues already collected in cash by the business but the
revenues are not yet earned or only a portion of the amount received was earned or
became revenue. Unearned revenues are also termed as deferred revenues.
There are two methods of accounting for unearned revenues:
a.
Liability method – if at the date of collection, the business credited a liability
account.
The pro-forma adjustment is:
Liability Account
Revenue Account
b.
xxx
xxx
Compute earned or income
portion
Revenue method – if at the date of collection, the business credited a revenue
account.
The pro-forma adjustment is:
Revenue Account
Liability Account
xxx
xxx
Compute unearned or liability
portion
To illustrate, assume that Miami Company is using a monthly accounting period. On
January 1, 2017, the company collected or received P 30,000 representing 3-month rent
beginning January 1, 2017. The company adjusts and closes its books every month. The entry
to record the advance collection and the adjusting entry at the end of the month will be:
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Liability Method
2017
Jan 1
31
Revenue Method
Cash
Unearned Rent
Unearned Rent
Rent Income
30,000
Cash
Rent Income
30,000
10,000
10,000
Rent Income
Unearned Rent
30,000
30,000
20,000
20,000
Since P 30,000 is for 3 months, the monthly rent is P 10,000. For January, the earned
or income portion is one month or P 10,000; therefore the unearned or liability portion will be
two months or P 20,000 as of January 31.
Regardless of which method a business used in any particular case, the amount
reported as income in the income statement and the amount reported as liability in the balance
sheet will be the same.
Both methods of accounting for unearned or deferred revenues are acceptable although
most companies employ the revenue or income method due to its simplicity. A business must
also use a method consistently for a particular type of unearned or deferred revenue, say
liability method for rent while income or revenue method for subscription.
3. Accrued Expenses – These are expenses incurred in one period but remain
unrecorded and unpaid as of the end of the period. They are also called accrued
liabilities or unrecorded expenses.
The pro-forma adjustment is:
Expense account
Liability account
xxx
xxx
For example: A company’s accounting period is monthly, January 1-31, 2017. All
expenses incurred during the month of January must be recorded in January. Let us say,
telephone bill for the month of January amounting to P 5,000 will be paid on February 5, 2017,
the adjusting entry will be:
2017
Jan
31 Utilities Expense
Utilities Payable
5,000
5,000
So, since we are using the accrual basis of accounting, the question is when did the
company incur the expense? The answer of course is for the month of January, therefore we
will record the expense in January. And since this will still be paid in February, we will record a
liability in January.
Another example is, assume a small business is paying a total of P 10,000 for the wages
of its employees for a 5-day work week. Payday is every Friday. Accounting period is monthly.
The Wages Expense during the month of March is shown below:
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Wages Expense
Mar. 5
10,000
12
10,000
19
10,000
26
10,000
40,000
If March 26 is a Friday, then the last day of the month (March 31) falls on a Wednesday.
Therefore the adjusting entry to be made will be:
Mar. 31 Wages Expense
Wages Payable
6,000
6,000
If financial statements are prepared on March 31, the Wages Expense to be shown in
the income statement totaled P 46,000 and the balance sheet will show Wages Payable
amounting to P 6,000.
4. Accrued Revenues – These are revenues earned in one period but remain unrecorded
and not received as of the end of the period. They are also called accrued assets or
unrecorded revenues.
The pro-forma adjustment is:
Asset account
Revenue account
xxx
xxx
For example: ABC Company’s accounting period is monthly, August 1-31, 2017. All
revenues earned during the month of August must be recorded in August. If the company is in
the business of renting apartments and one of its tenants has not paid the August rent for
P 8,000, then the adjusting entry of ABC Company will be:
2017
Aug.
31 Rent Receivable
Rent Revenue
8,000
8,000
5. Depreciation of Property, Plant and Equipment
Physical resources that are owned and used by a business which are permanent in
nature or have a long useful life are called fixed assets or plant assets. Examples are land,
building, equipment, trucks, automobiles, a computer, store fixtures, or office furniture. These
assets help generate income for the business. Therefore it is important and proper that a
portion of the asset be recorded as expense in each accounting period.
Fixed assets, with the exception of land have limited useful lives and as such are subject
to depreciation.
Depreciation is the systematic allocation of the cost of the fixed asset over its useful life.
Depreciation is not a process of asset valuation.
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The pro-forma adjustment for depreciation is:
Depreciation Expense – Name of asset
Accumulated Depreciation – Name of asset
xxx
xxx
There are different methods of computing depreciation. We will discuss here only the
simplest and the most commonly used method which is the straight-line method. This method
will result into equal periodic charges for depreciation. Also take note that in the adjusting entry
for depreciation, the account credited is the account Accumulated Depreciation. This is a
contra-asset account which will be deducted from the related fixed asset account in the balance
sheet. The credit is not made directly to the fixed asset account in order to preserve the original
cost of the fixed asset in the balance sheet.
To illustrate, assume that on January 1, 2017, Knicks Company bought a delivery truck
for a total cost of P 500,000. Its estimated life is 10 years and the estimated residual value is
P 50,000. The company is using the straight-line method of computing depreciation and it is
using an annual accounting period. The entries of Knicks Company for the above transactions
are:
2017
Jan
1
Delivery Truck
Cash
To record the purchase of delivery truck
500,000
500,000
The adjusting entry on December 31, 2017:
2017
Dec 31 Depreciation Expense-Delivery Truck
Accumulated Depreciation-Delivery Truck
45,000
Computations will be:
Annual depreciation
=
Cost – Residual Value
Estimated Life
=
P 500,000 – 50,000
10
=
P 45,000
===========
Other computation for straight-line method is:
Annual depreciation
=
=
=
(Cost – Residual Value) x Depreciation Rate
(P 500,000 – 50,000) x 10%
P 45,000
==========
45,000
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The depreciation rate can be computed by getting the reciprocal of the life. Example:
10 years is equal to 1/10 or 10%.
The balance of the Depreciation Expense account is shown in the income statement. In
the balance sheet as of December 31, 2017, the carrying amount or the book value of the asset
is P 455,000, as shown below:
Delivery Truck
Less Accumulated Depreciation
P 500,000
45,000
Carrying amount or Book value
P 455,000
The depreciation of the fixed asset will be recorded at the end of each year (for ten
years). The same adjusting entry will be recorded for 10 years. Assuming a balance sheet will
be made on December 31, 2022:
Delivery Truck
Less Accumulated Depreciation
P 500,000
270,000
Carrying amount or Book value
P 230,000
At the end of ten years, the Accumulated Depreciation account will have a balance of
P 450,000. At this point, the book value of the asset will be equal to the residual value of
P 50,000.
6. Uncollectible accounts – these are estimated amounts due from customers that may
no longer be collected and are considered to be as bad debts. The allowance method
estimates the amount of uncollectible accounts receivable and will be recorded as an
adjusting entry at the end of the accounting period and follows the matching principle.
The pro-forma adjustment is:
Doubtful Accounts Expense
Allowance for Doubtful Accounts
xxx
xxx
Since the loss is an estimate only and the specific customer cannot be identified at this
point, the Accounts Receivable may not be credited. Instead a contra asset account, Allowance
for Doubtful Accounts, is credited. The Doubtful Accounts Expense is also called Bad Debts
Expense or Uncollectible Accounts Expense. The Allowance for Doubtful Accounts is also
called Allowance for Bad Debts or Allowance for Uncollectible Accounts.
The estimate of uncollectible amount at the end of the accounting period is based on
past experience and forecasts of the future. This is computed based on the Accounts
Receivable balance wherein:
a. Single rate is applied to outstanding accounts receivable or
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b. Aging of accounts receivable where accounts are classified according to how long
they remain outstanding
The computation for the estimated Doubtful Accounts Expense is shown as:
Required ending balance of Allowance for Doubtful
Accounts
Allowance for Doubtful Accounts before adjustment
*add if debit balance/deduct if credit balance)
Doubtful Accounts Expense for the period
P xxx
xxx
P xxx
==========
As an example, the following accounts were found in the ledger of Cavs Red Enterprises
on December 31 of the current year:
Accounts Receivable
Allowance for Doubtful Accounts
Net Sales
Debit
187,520
Credit
10,680
4,272,000
The estimated doubtful accounts at the end of the current year is 10% of the outstanding
Accounts Receivable. The adjusting entry on December 31 is as follows:
Doubtful Accounts Expense
Allowance for Doubtful Accounts
8,072
8,072
Required ending balance of Allowance for Doubtful Accounts
(10% x P 187,520)
Less credit balance of allowance before adjustment
Doubtful Accounts Expense for the period
P18,752
10,680
P 8,072
==============
7. Merchandise Inventory– these represents good on hand and available for sale in the
ordinary course of the business. If the company is using the periodic inventory system,
adjusting entries are required to replace or remove the beginning balance of the
merchandise inventory with the balance at the end of the accounting period. The
adjusting entries to record the replacement of the beginning merchandise inventory
balance and to enter the ending inventory balance would be:
Income Summary
Merchandise Inventory
To close the beginning inventory
Merchandise inventory
Income Summary
To record the ending inventory
xxx
xxx
xxx
xxx
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Financial Accounting and Reporting Part 1
Under the perpetual inventory method, purchases and sale of goods are recorded in the
merchandise inventory account and the cost of goods sold account. As a result, the balances of
the merchandise inventory and the cost of goods accounts are always updated.
After all the adjustments are compiled, the next step is the preparation of the
worksheet. This is an optional step in the accounting cycle. However, it is useful in showing
the flow of the accounting information from the unadjusted trial balance to the adjusted trial
balance and in analyzing the impact of such adjustments on the financial statements. A
worksheet is a working paper prepared by an accountant to facilitate the preparation of the
financial statements.
After the completion of the worksheet, financial statements are prepared and serve as
the primary means of communicating important accounting information to users. These are
accounting reports that quantify the financial strength, performance and liquidity of a business.
Financial statements represent the final output in the work of an accountant. They include
Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Financial
Position, the Cash Flow Statement and Notes to the Financial Statements.
The Statement of Comprehensive Income, also known as the Profit and Loss Statement,
presents the income, expenses and the operating result (profit or loss) during an accounting
period.
The Statement of Changes in Equity shows the summary of changes (increases or
decreases) affecting the equity of the owner/s during an accounting period.
The Statement of Financial Position, also known as the Balance Sheet, shows the
financial condition of the business as of a specific date. It helps the users in assessing the
financial soundness of business in terms of liquidity risk, financial risk, credit risk and business
risk.
The Cash flow Statement presents the movement of cash (input and output) over a
period and is classified as either under operating, financing or investing activities.
The Notes to the Financial Statements are an integral part of an entity’s financial
statements. They are for complying with the full disclosure principle.
The adjusting and closing entries are entries prepared and posted in the ledger at the
end of the accounting period. The adjusting entries are prepared after the data for adjustments
are compiled and presented in the worksheet. Accounts in the ledger are classified as nominal
or temporary accounts and real or permanent accounts. Nominal accounts include revenue,
expense, owner’s drawing and income summary accounts. Real or permanent accounts include
the assets, liability and the owner’s equity (capital) accounts.
Closing entries are prepared to reduce the nominal account balances to zero on the
general ledger. The revenue and expense account balances are transferred to the Income
Summary account. The Income Summary balance is then transferred to the owner’s equity or
capital account. A credit balance in the Income Summary indicates the profit while a debit
balance indicates a net loss. The owner’s drawing account is also transferred in the owner’s
capital account. The following entries show how the closing process is made:
Financial Accounting and Reporting Part 1
19
1. Revenue
Income Summary
To close revenue accounts
xxx
2. Income Summary
Expenses
To close expense accounts
xxx
xxx
xxx
*3. Income Summary with a credit balance:
Income Summary
Owner’s Capital
To close income summary account
xxx
xxx
*Income Summary with a debit balance:
Owner’s Capital
xxx
Income Summary
To close income summary
account
xxx
4. Owner’s Capital
Owner’s Drawing
To close drawing account
xxx
xxx
The post-closing trial balance is a list of accounts and their balances after the closing
entries have been journalized and posted to the ledger. It includes all the real accounts since
the nominal account balances have been reduced to zero. The purpose of the post-closing trial
balance is to verify that all nominal accounts have been closed properly and the total debits and
credits in the accounting system are equal after the closing process.
Reversing entries are journal entries prepared on the first day of the next accounting
period which reverses certain types of adjusting entries immediately made in the preceding
period. The adjusting entries that may be reversed include the accruals, prepaid expense using
the expense method and unearned revenue using the revenue method. This step is an optional
procedure and is useful to simplify record keeping in the next accounting period. The rule to
follow is all adjusting entries that increase an asset or liability will be reversed. Whether
reversing entries are made or not, the same result is achieved. The following show reversing
entries that are made on the first day of the next accounting period:
1. Prepaid expense using expense method
Expense
xxx
Prepaid
Expense/Asset
2. Unearned revenue using revenue method
Unearned revenue
xxx
Revenue
xxx
xxx
Financial Accounting and Reporting Part 1
20
3. Accrued expense
Payable
Expense
xxx
4. Accrued Revenue
Revenue
Receivable
xxx
xxx
xxx
THE ACCOUNTING PROCESS
Business
Transactions
Reversing
entries
Documentatio
n
Journalizing
- General
journal
- Special
journals
Post- closing
trial balance
preparation
Posting
- General
ledger
- Subsidiary
ledgers
Journalizing
and posting of
adjusting and
closing entries
Financial
statements
preparation
Trial Balance
preparation
Work sheet
preparation
Adjustments
Financial Accounting and Reporting Part 1
21
MERCHANDISING BUSINESS
The activities of a service business differ from that of a merchandising business. A
service business earns revenue by rendering services to customers or clients. The revenue
activities of a merchandising business involve the buying and selling of goods or merchandise to
its customers. However, except for the merchandise related accounts, the accounting cycle for
both types of business activities are the same. Because of the differences in their revenue
activities, the general format of the condensed statements of comprehensive income of service
and merchandising companies are illustrated below:
Service Business
Service Revenue
P
xxx
Less
Operating
Expenses
Net Income
Merchandising Business
P
xxx
Less Cost of Merchandise
Sold
xxx
Gross Profit
xxx
Less Operating Expenses
xxx
Net Income
xxx
Sales
xxx
xxx
INVENTORY SYSTEMS
The two main types of inventory systems are the periodic inventory system and the
perpetual inventory system. Companies that sell goods of low unit value or inexpensive items
use the periodic inventory system. The periodic system relies upon the physical count of the
inventory to determine the ending inventory balance. Merchandise bought intended for sale are
recorded in the Purchases account. The balance in the Purchases account is then added to the
beginning balance of the inventory account to arrive at the cost of merchandise available for
sale. When a physical inventory count is done, the amount of the ending inventory balance will
then be deducted from the cost of merchandise available for sale to arrive at the cost of
merchandise sold. Sale of merchandise is recorded in a revenue account, Sales. However, the
cost is not recorded.
Under the perpetual inventory system, purchases and sale of merchandise is recorded in
the Merchandise Inventory account and the Cost of the Merchandise Sold account. This system
is used by companies that sell goods of high unit value like automobiles, jewelry, and other
large home appliances. The business keeps track of its cost of merchandise sold on a
continuous basis, thus, at any given time, there is an estimate of the company’s inventory level.
At the end of the accounting period, an actual count is taken on the number of units still on hand
and is compared with the records showing the ending inventory balance.
VALUE ADDED TAX
Value Added Tax (VAT) is a type of sales tax which is levied on the consumption on the
sale of goods, services or properties, as well as goods imported in the Philippines.
Financial Accounting and Reporting Part 1
22
A 12% value added tax rate is levied on goods and is recorded as a separate account in
recording the sale and purchase transactions. It is an indirect tax that is passed on to the buyer
and is added to the selling price. The amount paid by the customer, known as the invoice price,
will include the selling price and the 12% value added tax.
Output Vat refers to the value added tax the seller passed on to the buyer and is
classified as a liability account. Input Vat refers to the value added tax the buyer paid on the
purchase. The excess of output tax over input tax is the Value added tax due and payable to
the Bureau of Internal Revenue and is to be remitted by the company within 25 days of the
following month.
The following transactions illustrate the accounting for value added tax using the periodic
system:
Mar 5
A Company sold merchandise to B Company for cash, P 22,400 vat inclusive.
A Company
Cash
22,400
Sales
Output tax
Mar 6
20,000
2,400
B Company
20,000
2,400
22,400
A Company sold merchandise on account to X Company, P 28,000 vat inclusive.
A Company
Accounts Receivable
28,000
Sales
25,000
Output tax
3,000
Mar 9
Purchases
Input tax
Cash
X Company
Purchases
25,000
Input tax
3,000
Accounts Payable
28,000
A Company issued a credit memorandum to X Company for defective
merchandise returned sold on March 6, invoice price P 2,800
A Company
Sales
returns
and 2,500
allowances
Output tax
300
Accounts Payable
X Company
2,800
Purchase ret. and
2,500
Input tax
300
allow.
Accounts
Receivable
Mar 15
2,800
A Company collected amount due from X Company
A Company
Cash
Accounts
Receivable
25,200
25,200
Accounts Payable
Cash
X Company
25,200
25,200
SPECIAL JOURNALS
We have used the general journal to record all types of business transactions. However,
as the transactions of a company increase, there is a need to change to a more efficient and
timesaving manner. Accountants have developed an accounting system for an orderly and
effective processing of data. They have developed special journals. Each special journal
Financial Accounting and Reporting Part 1
23
records one particular type of transaction that occurs frequently, such as sales on account, cash
receipts, purchases on account, or cash disbursements.
The special journals are designed to systematize the original recording of major recurring types
of transactions. The number and format of the special journals actually used in a company
depend primarily on the nature of the company’s business transactions. The special journals
commonly used by merchandising companies include the sales, cash receipts, purchases, cash
disbursements journals.
•
•
•
•
The Sales Journal is used to record all sales of merchandise on account (on credit).
The Cash Receipts Journal is used to record all inflows or receipts of cash into the
business.
The Purchases Journal is used to record all purchases of merchandise and other items
on account (on credit).
The Cash Payments Journal is used to record all payments (or outflows) of cash by the
business.
Although all these four special journals are being used, the General Journal is still needed.
The General Journal is used to record all transactions that cannot be recorded in any one of
the special journals. All five of these journals are books of original entry. If a transaction is
recorded in the journal, it is posted to the ledger and made part of the accounting records.
Therefore, if a transaction is recorded in a special journal, it should not be recorded in the
general journal because this would record the transaction twice.
Since the journal entries are posted to the ledger accounts, the posting reference column in
the ledger should indicate the source of the posting. The following abbreviations are used for
the five journals:
Journal
Sales Journal
Cash Receipts Journal
Purchases Journal
Cash Payments Journal
General Journal
Transactions
Merchandise sold on account
Cash receipts from all sources
Merchandise and other items purchased on account
Cash payments for various purposes
Any transaction that is not included in the special
journals.
Abbreviation
S
CR
P
CD
G
CONTROL ACCOUNTS AND SUBSIDIARY LEDGERS
A control account is an account in the general ledger that shows the total balance of all
the subsidiary accounts related to it. An example of a control account is the general ledger
Accounts Receivable account, which summarizes all of the amounts owed to the company.
The subsidiary ledger accounts show the details supporting the related general ledger
control account balance. The company may use subsidiary accounts for receivables to send out
customer statements. They may use the subsidiary accounts for payables to determine the
amount payable to each supplier. These accounts are normally arranged alphabetically by the
name of the customer or supplier. The sum of the subsidiary accounts in a subsidiary ledger
should agree with the balance in the related general ledger control account when the company
prepares the financial statements.
Financial Accounting and Reporting Part 1
24
A subsidiary ledger, then, is a group of related accounts showing the details of the
balance of a general ledger control account. The subsidiary ledger is separated from the
general ledger in order to relieve the general ledger of a mass of details and thereby shorten the
general ledger trial balance. Also, having separate ledger promotes a division of labor.
SCHEDULE OF ACCOUNTS PAYABLE
A schedule of accounts payable is prepared to make certain that the total of the
balances in the subsidiary ledger accounts agrees with the control account.
SCHEDULE OF ACCOUNTS RECEIVABLE
A schedule of accounts receivable is prepared to ensure that the total of the balances
in the subsidiary ledger account agrees with the control account. This schedule is merely a
listing of open account balances.
Readings
•
Chapter 1, Accounting for Partnership and Corporation, 2011 Edition, Gloria J.
Tolentino- Baysa and Ma. Concepcion Yamat Lupisan
Cash
Accounts Receivable
Allowance for Bad Debts
Office Supplies
Store Supplies
Merchandise Inventory, beg
Prepaid Insurance
Prepaid Rent
Office Equipment
Accumulated Depreciation - Office Equipment
Store Equipment
Accumulated Depreciation - Store Equipment
Accounts Payable
Notes Payable
Salaries Payable
Utilities Payable
Interest Payable
Baha, Capital
Baha, Drawing
Purchases
Freight-In
Purchases Returns & Allowances
Purchase Discount
Sales
Sales Returns and Allowances
Sales Discount
Store Supplies Expense
Office Supplies Expense
Store Salaries Expense
Office Salaries Expense
Rent Expense - Store
Depreciation Expense - office
Depreciation Expense - Store
Utilities Expense - Office
Bad debts Expese
Insurance Expense
Interest Expense
972,773.00
53,000.00
61,000.00
4,063.00
8,540.00
7,500.00
155,240.00
23,286.00
972,773.00
2,300.00
5,434.00
451,530.00
167,475.00
TRIAL BALANCE
debit
credit
56,030.00
110,400.00
9,384.00
9,300.00
8,231.00
98,500.00
6,083.00
25,200.00
142,300.00
13,730.00
204,100.00
40,820.00
32,100.00
250,000.00
LEPTOWS MERCHANDISING
WORKSHEET
FOR THE YEAR ENDED DECEMBER 31, 2016
ADJUSTMENTS
ADJUSTED TRIAL BALANCE
debit
credit
debit
credit
INCOME STATEMENT
debit
credit
BALANCE SHEET
debit
credit
Financial Accounting and Reporting Part 1
25
Assessment
Instructions:
1. Give the adjusting entries.
2. Complete the worksheet
3. Prepare the financial statements
Financial Accounting and Reporting Part 1
26
NAME ______________________________________
SECTION _________________
GENERAL JOURNAL
Date
Description
Page 1
PR
debit
credit
Financial Accounting and Reporting Part 1
27
GENERAL JOURNAL
Date
Description
Page 2
PR
debit
Data for Adjusments
1 Merchandise inventory at the end of the year, P84,400
2 Office Supplies used amounted to P3,450
Unused store supplies amounted to P6,000
3 25% of the Prepaid Rent is used as of the end of the year
Half of the Prepaid Insurance has expired
4 Office Equipment were depreciated at 10% per year
Store Equipment has a useful life of 5 years
5 Accrued Expenses
Utilities P4,320; Store Salaries, P3,500; Interest P16,250
6 Allowance of Uncollectible accounts is to be 10% of Receivables
credit
Financial Accounting and Reporting Part 1
28
NAME _________________________________________
DATE ______________
SECTION _________________
PROF. M. DOQUENIA
LEPTOWS MERCHANDISING
WORKSHEET
FOR THE YEAR ENDED DECEMBER 31, 2017
Sales
xxx
Sales Returns and Allowances
Sales Discount
Net Sales
Less: Cost of Goods Sold
Merchandise Inventory, beg
Add: Purchases
Add: Freight-In
Total
Less: Purchases Returns & Allowances
Purchase Discount
Net Purchases
Merchandise (Goods) Available for sale
Less: Merchandise Inventory, end
Cost of Goods Sold
Gross Profit
Less: Operating Expenses
Selling Expenses
Store Supplies Expense
Store Salaries Expense
Rent Expense - Store
Depreciation Expense - Store Equipment
Administrative (General) Expense
Office Supplies Expense
Office Salaries Expense
Depreciation Expense - office equipment
Utilities Expense - Office
Bad debts Expese
Insurance Expense
Other Expenses
Interest Expense
Total Expenses
Net Income
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Financial Accounting and Reporting Part 1
CUMMULATIVE EXAMINATION
INSTRUCTIONS:
Complete the accounting Cyle of Apol Company
1
2
3
4
5
6
6
7
Enter the beginning balances of the Balance Sheet accounts in the ledger
Journalize the entries for the month of March (see transactions below)
Post the entries for the month of March…..use PENCIL for temporary balance (items column)
Complete the Worksheet of APOL COMPANY for the month ended March 31, 2020
Journalize and post Adjusting and Closing entries.
Rule and Balance, see sample below
Prepare a post-closing Trial balance
Journalize and post the reversing entries.
The following are the Ledger Balances as of February 28, 2020
know the correct normal balance of each of the account
Cash
98,500.00
Accounts Receivable
21,000.00
Supplies
8,200.00
Software & Programs
25,000.00
Accumulated Depreciation - Software & Programs
208.00
Hardwares & Equipments
197,500.00
Accumulated Depreciation - Hardware & Equipments
3,292.00
Accounts Payable
101,800.00
Unearned Service Income
3,250.00
Utilities Payable
850.00
Apol, Capital
240,800.00
Complete the Accounting Cycle for the month ended March, 2020
March 1 Paid one year insurance, P2,400
2 Paid past month's utilities, P850
3 collected from credit customer, P11,000
5 rendered services on account, P7,000
7 Apol withdrew P4,500
9 Paid rent, P9,500
10 Purchased supplies, P623
11 Rendered services for cash P17,000
12 Returned supplies purchased on March 10, P623
13 Paid an account, P10,000
15 Paid salalries P12,500
17 Received bill for utilities, P 2,815
20 Rendered services amounting to P30,000, half was for cash half on account
21 Rendered services previously collected from the customer, P3,250
29
Financial Accounting and Reporting Part 1
30
NAME _______________________________________________________
Student Number _________________________
SECTION ________________________
PROF. __________________________
GENERAL LEDGER
CASH
DATE
ITEMS
PR
DEBIT
ITEMS
PR
SUPPLIES
DATE
ITEMS
DATE
ITEMS
DATE
ITEMS
DATE
ITEMS
PR
DEBIT
DATE
DEBIT
DATE
ITEMS
PR
ITEMS
DEBIT
DATE
DEBIT
DATE
ITEMS
PR
ITEMS
PR
DATE
ITEMS
DATE
ITEMS
DATE
ITEMS
DATE
ITEMS
`
DATE
Acct No. 102
ITEMS
PR
PR
DEBIT
DATE
PR
DEBIT
DATE
PR
DEBIT
DATE
ITEMS
PR
ITEMS
ITEMS
DEBIT
DATE
ITEMS
CREDIT
Acct No. 105
PR
CREDIT
Acct No. 108
PR
UNEARNED SERVICE INCOME
PR
CREDIT
Acct No 106
Accumulated Depreciatin H & E
Acct No 201
CREDIT
DEBIT
Accumulated Depreciation -S & P
CREDIT
CREDIT
PR
PREPAID INSURANCE
CREDIT
Acct No. 107
ITEMS
ACCOUNTS PAYABLE
PR
DATE
Acct No. 104
PR
HARDWARES & EQUIPMENTS
PR
CREDIT
Acct No 103
SOFTWARE & PROGRAMS
PR
ACCOUNTS RECEIVABLE
Acct No 101
DATE
CREDIT
Acct No. 202
PR
CREDIT
Financial Accounting and Reporting Part 1
UTILITIES PAYABLE
DATE
ITEMS
PR
DATE
ITEMS
PR
DATE
ITEMS
DATE
ITEMS
DATE
ITEMS
DATE
ITEMS
DATE
ITEMS
DEBIT
DATE
DATE
PR
ITEMS
PR
DEBIT
DATE
ITEMS
PR
DEBIT
DATE
ITEMS
PR
DEBIT
DATE
DEBIT
DATE
PR
ITEMS
PR
DEBIT
DATE
CREDIT
ITEMS
PR
CREDIT
DATE
ITEMS
PR
CREDIT
DATE
ITEMS
PR
ITEMS
PR
CREDIT
DATE
ITEMS
PR
CREDIT
DATE
ITEMS
PR
DATE
ITEMS
DATE
Acct No 204
ITEMS
PR
DEBIT
DATE
ITEMS
PR
DEBIT
DATE
ITEMS
PR
DATE
ITEMS
PR
DATE
DATE
PR
ITEMS
PR
DEBIT
DATE
CREDIT
Acct No. 202
MISCELLANEOUS EXPENSE
PR
CREDIT
Acct No. 106
ITEMS
INSURANCE EXPENSE
DEBIT
CREDIT
Acct No. 106
DEPRECIATION EXPENSE F & E
DEBIT
CREDIT
Acct No. 401
RENT EXPENSE
DEBIT
CREDIT
Acct No 302
SERVICE INCOME
Acct No 203
CREDIT
DEBIT
APOL, DRAWING
DATE
Acct No 201
SUPPLIES EXPENSE
PR
PR
Acct No 501
ITEMS
UTILITIES EXPENSE
PR
ITEMS
Acct No 501
DEPRECIATION EXPENSE S & P
PR
DATE
Acct No 303
SALARIES EXPENSE
PR
CREDIT
Acct No. 301
INCOME SUMMARY
PR
SALARIES PAYABLE
Acct No 203
ITEMS
APOL, CAPITAL
DEBIT
31
ITEMS
CREDIT
Acct No. 301
PR
CREDIT
Financial Accounting and Reporting Part 1
32
Data for Adjustment
March 31 Recorded expired portion of Insurance, P200
31 Recorded used portion of Supplies, P4,000
31 Recorded depreciation of S & P for the month, P208
31 Recorded depreciation of H & E for the month, P3,292
31 Recorded accrued salaries P1,200
31 Recorded accrued miscellaneous Expense, P344.
SUPPLIES
DATE
ITEMS
PR
DEBIT
ITEMS
PR
March 1 beg bal ✓ 8,200 March 12
G2
10
G2
623
31 adjusting
G3
4,200
8,823
end bal
8,823
April
1 beg bal
MISCELLANEOUS EXPENSE
Acct No 103
DATE
CREDIT
623
4,000
4,200
DATE
ITEMS
PR
March 29
G3
31 adjusting G3
DEBIT
DATE
ITEMS
1,099 March 31 closing
344
1,443
8,823
4,200
use pencil for PENCIL FOOTING
total debits minus total credits
INSTRUCTIONS:
A Prepare a Trial balance for the month ended March 31, 2013 for the Apol Computer Services
APOL COMPUTER SERVICES
Trial Balance
As of March 31, 2013
Debit
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Software & Programs
Accumulated Depreciation S & P
Hardwares & Equipments
Accumulated Depreciation H & E
Accounts Payable
Unearned Service Income
Utilities Payable
Salaries Payable
Apol, Capital
Apol, Drawing
Service Income
Salaries Expense
Rent Expense
Utilities Expense
Insurance Expense
supplies Expense
Miscellaneous Expense
Credit
Acct No. 301
PR
CREDIT
1,443
1,443
Date
GENERAL JOURNAL
Description
PR
Page ___
debit
credit
Date
GENERAL JOURNAL
Description
PR
Page ___
debit
credit
Financial Accounting and Reporting Part 1
33
Date
GENERAL JOURNAL
Description
PR
Page ___
debit
credit
Date
GENERAL JOURNAL
Description
PR
Page ___
debit
credit
34
Financial Accounting and Reporting Part 1
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Software & Programs
Accumulated Depreciation - S & P
Hardwares & Equipments
Accumulated Depreciation - H & E
Accounts Payable
Unearned Service Income
Utilities Payable
Salaries Payable
Apol, Capital
Apol, Drawing
Service Income
Salaries Expense
Rent Expense
Depreciation Expense - S & P
Depreciation Expense - H & E
Utilities Expense
Insurance Expense
Supplies Expense
Miscellaneous Expense
Total
COMPLETE THE WORKSHEET
debit
credit
TRIAL BALANCE
debit
credit
ADJUSMENTS
debit
credit
ADJUSTED TRIAL BALANCE
debit
credit
INCOME STATEMENT
debit
credit
BALANCE SHEET
Financial Accounting and Reporting Part 1
35
Capital, March 31
Less:
Capital, March 1
Add:
Total Expenses
Net Income (Loss)
Service Revenue
Less Operating Expenses
heading
Apol, Capital
TOTAL LIABILITIES AND CAPITAL
TOTAL ASSETS
COMPLETE THE FINANCIAL STATEMENTS BELOW: Income Statement, Capital Statement and Balance Sheet
CAPITAL
LIABILITIES
ASSETS
36
Financial Accounting and Reporting Part 1
Financial Accounting and Reporting Part 1
MODULE 2
NATURE AND FORMATION OF A PARTNERSHIP
Overview
This module introduces us to the definition and concepts about partnership form of
business. It also includes the different kind of partnership, how to form a partnership, and its
accounting entries.
Module Objectives
At the end of this module, the students should be able to:
1. Define and describe the nature and characteristics of a partnership -its advantages and
disadvantages.
2. Identify the different kinds of partnerships and the classes of partners.
3. Discuss the requirements in the formation of a partnership.
4. Discuss accounting for partners’ initial investments in a partnership.
Course Materials
A partnership is defined in Article 1767 of the Civil Code of the Philippines as “a contract
whereby two or more persons bind themselves to contribute money, property or industry into a
common fund with the intention of dividing profits among themselves.”
CHARACTERICTICS AND ELEMENTS OF A PARTNERSHIP
1. Mutual contribution – by its definition, the partners must contribute money, property and/or
industry to the common fund.
2. Mutual agency. Any partner can bind the other partners to a contract if he is acting within
the express or implied authority. may act as agent of the partnership in conducting its affairs.
3. Unlimited liability. The personal assets of any partner may be used to satisfy the
partnership creditors’ claims upon liquidation, if partnership assets are not enough to settle
the liabilities to outsiders.
4. Limited life. A partnership may be dissolved at any time by admission, death, incapacity, or
withdrawal of any partner or by expiration of the term specified in the partnership
agreement.
5. Division of profits and losses. It is the reason why a partnership was formed. The
element that distinguishes the partnership contract from a voluntary religious or social
37
Financial Accounting and Reporting Part 1
38
organization. A stipulation which excludes one or more partners from any share in the
profits or losses is void.
6. Legal entity. A partnership has legal personality separate and distinct from that of each the
partners.
7. Co-ownership of contributed assets. Property contributed to the partnerships are owned
by the partnership by virtue of its separate legal personality. Assets contributed by each
partner are joint assets of all partners.
8. Income tax. Partnerships, other than general professional partnerships (GPP) are subject
to the same tax of a corporation, 30% income tax. GPP are those organized for the exercise
of professions like CPA’s lawyers, engineers, etc. are exempt from income tax.
ADVANTAGES OF A PARTNERSHIP
1. It is easy to organize and less expensive than a corporation, as it is formed by a mere
agreement between two or more persons.
2. The unlimited liability of the partners makes it attractive to creditors.
3. With two or more partners will be a better opportunity to obtain additional funds than does a
single proprietorship.
4. More partners of different skills and expertise makes it possible to manage all the
partnership activities.
DISADVANTAGES OF A PARTNERSHIP
1. It is less stable because it can easily be dissolved (limited life).
2. Business partners are jointly and individually liable for the actions of the other partners
(Mutual agency).
3. The liability of the partnership will extend to the personal property of the partners (unlimited
liability).
4. Since decisions are shared, disagreement among partners may lead to dissolution.
5. A partner has to consult the other partners before a decision can be arrived at.
KINDS OF PARTNERSHIPS
1. As to liability of partners
a. General partnership – one consisting of general partners who are liable to the
extent of their separate properties for partnership debts.
b. Limited partnership – one formed by two or more persons having as members one
or more general partners and one or more limited partners. The limited partners are
not personally liable for the obligations of the partnership.
Financial Accounting and Reporting Part 1
The word “LIMITED” or “LTD.” Is added to the name of the partnership to inform the
public that it is a limited partnership. There should be at least one general partner in
a limited partnership.
2. As to duration
a. Partnership at will – one for which no term is specified and is not formed for a
particular undertaking and which may be terminated any time by mutual agreement
of the partners or at the will of any one partner.
b. Partnership with fixed term – one in which the term for the existence of the
partnership is fixed or is agreed upon or one formed for a particular undertaking.
3. As to legality of existence
a. De jure partnership – one that has complied with all the requirements for its
establishments.
b. De facto partnership – one which has failed to comply with one or more of the legal
requirements for its establishment.
4. As to purpose or activity
a. Commercial or trading partnership – one whose main activity is the manufacture
and sale or the purchase and sale of goods.
b. Professional or Non-trading partnership – one formed for the exercise of
profession or for the purpose of rendering services.
5. As to object
a. Universal partnership
1. Universal partnership of all present property – one in which each partners
contribute to the partnership at the time of its constitution. The properties were
contributed to a common fund with the intention of dividing the same among
themselves including it’s profits which they may acquire therewith.
All assets contributed to the partnership and subsequent acquisitions become
partnership assets.
2. Universal partnership of all profit – one which the usufruct or use of assets only
was contributed to the partnership, either at the time of it’s formation and/or during
the life of the partnership by which the partner may acquire thru industry or work. The
original movable or immovable property contributed do not become the common
partnership assets.
b. Particular partnership – one which has for its object a determinate thing, their use
or fruits, or a specific undertaking or the exercise of a profession or vocation.
6. As to representation to others
a. Ordinary partnership – one which actually exists among the partners and to the
third parties.
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Financial Accounting and Reporting Part 1
40
b.
Partnership by estoppel – one which on reality is not a partnership but is
considered as one only in relation to those who, by their conduct or omissions are
precluded to deny or disprove it’s partnership existence.
7. As to publicity
a. Secret partnership – one wherein the existence of certain person as partners is not
made known to the public by any of the partners.
b. Open partnership – one wherein the existence of certain persons as partners is
made known to the public by the members of the firm.
CLASS OF PARTNERS
1. As to contribution
a. Capitalist partner – one who contributes capital in cash (money) or property.
b. Industrial partner – one who contributes industry, labor, skill, talent or service.
c. Capitalist-industrial partner – one who contributes cash, property, and industry.
2. As to liability
a. General partner – one whose liability to third persons extends to his separate (private)
property.
b. Limited partner – one whose liability to third persons is limited only to the extent of his
capital contribution to the partnership.
3. As to management
a. Managing partner – one who manages actively the business of the partnership.
b. Silent partner - one who does not participate in the management of the partnership
affairs.
4. Other classifications
a. Liquidating partner – one who takes charge of the winding up of partnership affairs
upon dissolution.
b. Nominal partner – one who is not really a partner, not being a party to the partnership
agreement, but is made liable as a partner for the protection of innocent persons.
c. Ostensible partner –.one who takes active part int the management of the firm and is
known to the public as a partner in the business.
d. Secret partner - one who takes active part in the management of the business but
whose connection with the partnership is concealed or unknown to the public.
e. Dormant partner – one who does not take active part in the management of the
business and is nit known to the public as a partner; he is both a silent a secret partner.
Financial Accounting and Reporting Part 1
PARTNERSHIP CONTRACT
A partnership is created by an oral or a written agreement. Since partnerships are required to be
registered with the Securities and Exchange Commissions, it is necessary that the agreement
be in writing. In this case misunderstandings and disputes among the partners relative to the
nature and terms of the contract may be avoided or minimized. The written agreement between
or among the partners governing the formation, operation and dissolution of the partnership is
referred to as the Articles of Co-Partnership.
The Articles of Co-Partnership contains the following information:
1. The name of the partnership;
2. The names and address of the partners, classes of partners, stating whether the partner is a
general or a limited partner;
3. The effective date of contract;
4. The purpose or purposes and principal office of the business;
5. The capital of the partnership stating the contributions of individual partners, their
description and agreed values;
6. The rights and duties of each partner;
7. The manner of dividing net income or loss among the partners, including salary allowance
and interest on capital;
8. The conditions under which the partners may withdraw money or other assets for personal
use;
9. The manner of keeping the books of accounts;
10. The causes for dissolution; and
11. The provision for arbitration in settling disputes.
ORGANIZING A PARTNERSHIP
To operate legally, the partnership has to comply with the registration requirements of the
following government offices:
Government Agencies
Securities and Exchange
commissions (SEC)
City or Municipality Mayor’s
Office
a duly filled-up Articles of Co-Partnership shall be filed to
SEC to secure license to operate a business
To secure Mayor’s Permit and License to Operate that the
business are in compliance with their ordinances and
standards.(renewable annually).
ACCOUNTING FOR PARTNERSHIPS
Accounting for a partnership is the same as with single proprietorship except that there are
more owners. There should be as many any capital accounts and as many drawing accounts as
there are partners. (meaning, one capital account and one drawing account is maintained for
each partner).
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Financial Accounting and Reporting Part 1
42
PARTNER’S CAPITAL ACCOUNT
1. Permanent withdrawal (decrease) of
1. Original investment by a partner
capital
2. Share in partnership loss from partner
2. Additional investment by a partner
3. Closing entry of drawing account
3. Share in partnership profits from
operations
PARTNER’S DRAWING ACCOUNT
1. Personal withdrawal by a partner
1. Share in partnership profits from
2. Share in partnership loss form
operations (this may be credited
operations (this may be deducted
directly to the partner’s capital account
directly to the partner’s capital account)
OPENING ENTRIES
Partners may contribute cash, property, or industry to the partnership. Appropriate asset
accounts are debited for the assets contributed and partner’s capital accounts are credited for the
total amount of assets contributed.
If the assets contributed is in the form of cash, it is recorded on the partnership books at face
value, if the asset contributed is in the form of property or non-cash asset, it is recorded at
agreed value, or in the absence of an agreement, at fair market value. When industry is
contributed into the partnership, a memorandum entry is prepared.
PARTNERSHIP FORMATION
A. TWO OR MORE PERSONS FORM A PARTNESHIP FOR THE FIRST TIME.
ALL PARTNERS ARE NEW IN THE BUSINESS.
1. Cash Contributions (Capitalist Partners)
Amado and Agustin agreed to form a partnership by contributing P200,000 cash each.
The entry to record the contributions in the partnership is:
Cash
800,000
Amado, capital
Agustin, capital
400,000
400,000
2. Cash and Non-cash Contributions (Capitalist Partners)
Bicen and Bunque made the following contributions in the partnership:
Cash
Inventories
Equipment
Bicen
P200,000
300,000
Bunque
P300,000
400,000
Financial Accounting and Reporting Part 1
43
The entry to record the contributions of the partners follows:
Cash
Inventories
Equipment
Bicen, capital
Bunque, capital
500,000
300,000
400,000
500,000
700,000
3. Contributions in the form of Cash, Non-cash Assets, and Industry (Capital and Industrial
Partners)
Cindy, Carla, and Carmen formed a partnership. Cindy contributed P200,000 cash, Carla
contributed P150,000 cash and equipment valued at P350,000; Carmen is an industrial
partner to contribute her special skills and talents to the partnership. Profit or loss to be shared
equally among the partners.
The entry to record the contributions of partners Cindy and Carla follows:
Cash
Equipment
Cindy, capital
Carla, capital
350,000
350,000
200,000
500,000
The memorandum entry to record the contribution of partner Carmen follows:
Carmen is admitted into the partnership as an industrial partner to share one-third
in the partnership profit.
B.
A SOLE PROPRIETOR AND AN INDIVIDUAL FORM A PARTNERSHIP
When one of the prospective partners is already engaged in business prior to the formation of
the partnership. That partner may transfer his/ her net assets (assets net of liabilities) to the
partnerships at agreed values or at fair market values if no agreed values. The partnership may
either: (1) use the books of the sole proprietor, (2) open a new set of books.
It is a common practice that a new sets of books be opened for any new business undertaking.
When the individual set of books are kept by each partner or by any of the partners, adjusting
entries are made on the separate books of the partners to update the recorded values. These are
made through the capital accounts. The capital account is credited for any increase in the value of
net assets and is debited for any decrease in the value of net assets.
Alternatively, a Capital Adjustment Account may also be used. The balance of this account,
after recording all the necessary adjustments is transferred to the capital accounts.
Illustrative Problem 1.) Mejia and Reyes formed a partnership wherein Mejia is to contribute
cash while Reyes is to transfer the assets and liabilities (net assets) of his business. Account
balances on the books of Reyes are as follows:
Debit
Credit
Cash
300,000
Financial Accounting and Reporting Part 1
44
Accounts Receivable
Inventories
Accounts Payable
Reyes, Capital
250,000
200,000
80,000
670,000
The partners agreed on the following conditions:
1. An allowance for uncollectible accounts of P12,000 is to be established.
2. The inventories are to be valued at their current replacement cost of P220,000.
3. Prepaid expenses of P7,000 and accrued expenses of P4,000 are to be recognized.
4. Reyes is to be credited for an amount equal to the net assets transferred.
5. Mejia is to contribute sufficient cash to have an equal interest in the partnership.
Assumption 1 – The partnership will use the books of the sole proprietor
The following procedures should be followed in accounting for this type of formation:
1. Adjust the books of the sole proprietor to bring account balances to agreed values.
2. Record the investment of the other partner.
The adjusting entries necessary to update the balances to agreed values upon partnership
formation are recorded through the capital accounts of the partners. A capital adjustment account
may also be used and its balance is transferred to the capital accounts after all adjustments in the
net assets are made.
The following rules will be helpful in making the necessary adjusting entries:
Debit asset and credit capital for increase in asset values
Debit capital and credit asset for decreases in asset values
Debit capital and credit liabilities for increases in liability balances
Debit liabilities and credit capital for decreases in liability balances
In the case of contra asset accounts, the following rules shall apply:
Debit contra asset account and credit capital for increases in asset values
Debit capital and credit contra asset account for decreases in asset values
Hence, the information on the partnership of Mejia and Reyes will be accounted for as follows:
Step 1: Adjust the books of the sole proprietor Reyes to agreed values
a. Reyes, Capital
Allowance for Uncollectible Accounts
12,000
12,000
b. Inventories
Reyes, Capital
20,000
c. Prepaid Expenses
7,000
20,000
Financial Accounting and Reporting Part 1
45
Expenses Payable
Reyes, Capital
4,000
3,000
The balance of the capital account of Angeles after the three adjusting entries are posted is
P681,000 (P670,000 –P12,000 + P20,000 + 3,000).
Step 2: Record the investment of the other partner, Aguilar
Cash
Mejia, Capital
681,000
681,000
Assumption 2: - The partnership will open a new set of books
When a new set of books are opened for the partnership, the entry required on the new books
of the firm is the recording of the investment of the partners at agreed values. The opening
entries on the new partnership book using the data given in Illustrative Problem A are shown as
follows:
a. Cash
Accounts Receivable
Inventories
Prepaid Expenses
Allowance for Uncollectible Accounts
Accounts Payable
Expenses Payable
Reyes, capital
To record the investment if Angeles
300,000
250,000
220,000
b. Cash
681,000
7,000
12,000
80,000
4,000
681,000
Mejia, Capital
To record the investment of Aguilar
681,000
Alternatively, a compound entry may be prepared to record the investments of the two partners.
Entries to adjust and close the accounts are made in the separate books of the sole proprietor
but not in the new books of the partnership. Using the same illustrative problem, the adjusting
and closing entries on the books of Reyes are as follows:
a. Reyes, Capital
Allowance for Uncollectible Accounts
12,000
12,000
b. Inventories
20,000
Reyes, Capital
c. Prepaid Expense
Expense Payable
Reyes, capita
d. Reyes, Capital
Expense Payable
20,000
7,000
4,000
3,000
681,000
4,000
Financial Accounting and Reporting Part 1
46
Accounts Payable
Allowance for Uncollectible Accounts
Cash
Accounts Receivable
Inventories
Prepaid Expenses
To close the books of Reyes
C.
80,000
12,000
300,000
250,000
220,000
7,000
TWO OR MORE SOLE PROPRIETORS FORM A PARTNERSHIP
When all the prospective partners are already in business, they made decide to transfer their
asset and liabilities (net assets) to the partnership at value agreed upon or at fair market values,
in the absence of agreed values, The partnership may either: (1) use the books of the sole
proprietors, or (2) open a new set of books for the partnership. As mentioned earlier,
however, it is more common to open a new set of books for the partnership.
Illustrative Problem B: Villegas, owner of Villegas Variety Store, and Valdez, owner of Valdez
Trading decided to combine their business on July 1, 2020. Each is to transfer business assets
and liabilities (net assets) at agreed values. Statements of financial position for two proprietors
are presented below.
Villegas Variety Store
Statement of Financial Position
July 1, 2020
Assets
Cash
Accounts Receivable
Less Allowance for Uncollectible Accounts
Merchandise Inventory
Store Equipment
Less Accumulated Depreciation
Total Assets
Liabilities and Capital
Accounts Payable
Villegas, Capital
Total Liabilities and Capital
P 130,000
P 75,000
5,000
P 630,000
35,000
70,000
300,000
595,000
P1,095,000
P 150,000
945,000
P1,095,000
Financial Accounting and Reporting Part 1
47
Valdez Trading
Statement of Financial Position
July 1, 2020
Assets
Cash
Accounts Receivable
Less Allowance for Uncollectible Accounts
Merchandise Inventory
Delivery Equipment
Less Accumulated Depreciation
Total Assets
Liabilities and Capital
Accounts Payable
Valdez, Capital
Total Liabilities and Capital
P 35,000
P350,000
25,000
325,000
1,250,000
P 470,000
8,000
462,000
P2,072,000
P 345,000
1,727,000
P 2,072,000
The partners Villegas and Valdez agreed on the following conditions, respectively:
1. Partner’s capital in the partnership shall be equal to the adjusted net assets transferred.
2. Adjustments are to be made as follows:
a. Allowance for Uncollectible Accounts shall be P7,500 and P32,000, respectively.
b. Inventories are to be valued at 110% of their recorded values.
c. Both store and delivery equipment are 5% depreciated.
Assumption 1 – The partnership will use the books of the sole proprietor
The procedures to be followed under his assumption are similar to the procedures discussed
under Formation B – Assumption 1. Thus, if the books of Valdez Trading will be used by the
partnership, the following procedures will be followed:
1. Adjust the books of Valdez Trading to bring the balances of accounts to agreed values.
2. Record the investment of Villegas.
Step 1: Adjust the books of Valdez Trading
a. Valdez, Capital
Allowance for Uncollectible Accounts
P32,000 – P25,000 = P7,000
b. Merchandise Inventory
Valdez, Capital
P1,250,000 x 10%= P125,000
7,000
7,000
125,000
c. Valdez, Capital
15,500
Accumulated Depreciation – Delivery Equipment
8,000
Delivery Equipment
P470,000 x 5% = P23,500
P462,000 NBV old – (P470,000 x 95%)NBV new = P15,500
125,000
23,500
Financial Accounting and Reporting Part 1
48
Step 2: Record the investment of Villegas
a. Cash
Accounts Receivable
Merchandise Inventory (P300,000 x 110%)
Store Equipment (P630,000 x 95%)
Allowance for Uncollectible Accounts
Accounts Payable
Villegas, Capital
130,000
75,000
330,000
598,500
7,500
150,000
976,000
The Adjustments on the account balances of Villegas Variety Store are not taken up on the
books of Valdez Trading which are now the partnership books. Instead the following adjusting
and
closing entries are prepared separately on the books of Villegas Variety Store:
a. Villegas, Capital
Allowance for Uncollectible Accounts
P7,500 - P5,000 =P2,500
b. Merchandising Inventory
Villegas, Capital
2,500
2,500
30,000
30,000
Accumulated depreciation-Store equipment
35,000
Store equip
Villegas, capital
P630,000 x 5% = P31,500
P595,000 nbv old – (P630,000 x 95%) nbv new = P3,500
c. Allowances for Uncollectible Accounts
Accounts Payable
Villegas, Capital
Cash
Accounts Receivable
Merchandise Inventory
Store Equipment
31,500
3,500
7,500
150,000
976,000
130,000
75,000
330,000
598,500
Assumption 2: The partnership will use a new sets of books
When a new set of books are opened for the partnership, entries are prepared to record the
investment of the partners at agreed values. The opening entries on the new partnership books
using the data given in Illustrative Problem B are shown below:
a. Cash
Accounts Receivable
Merchandise Inventory (P300,000 x 110%)
Store Equipment (P630,000 x 95%)
Allowance for Uncollectible Accounts
Accounts Payable
130,000
75,000
330,000
598,500
7,500
150,000
Financial Accounting and Reporting Part 1
49
Villegas. Capital
To record the investment of Villegas
b. Cash
Accounts Receivable
Merchandise Inventory (P1,250,000 x 110%)
Delivery equipment (470,000 x 95%)
Allowance for Uncollectible Accounts
Accounts Payable
Valdez, Capital
976,000
35,000
350,000
1,375,000
446,500
32,000
345,000
1,829,500
The new partnership may prepare a separate entry for each partner’s contribution as shown or a
compound entry that shows the contributions of all the partners.
The plant assets transferred to the books of the new partnership are recorded net of
depreciation. The account accumulated depreciation is not carried on the partnership books. The
net amount, being the agreed value, represents the cost of the plant assets to the partnership and
such amount becomes the basis for the future depreciation of the partnership.
On the other hand, both accounts receivable and the corresponding allowance for uncollectible
accounts are recorded on the partnership books. The allowance for uncollectible accounts is
carried on the partnership books because of the possibility of collection. However, if there are
specific accounts receivable which are deemed worthless, such must be written off and removed
permanently from the outstanding accounts receivable.
A statement of financial position prepared immediately after the formation of the partnership of
Antonio and Albano is shown below.
Villegas And Valdez
Statement of Financial Position
July 1, 2020
Assets
Cash
Accounts Receivable
Less Allowance for Uncollectible Accounts
Merchandise Inventory
Store Equipment
Delivery Equipment
Total Assets
Liabilities and Capital
Accounts Payable
Villegas, capital
Valdez, capital
Total Liabilities and Capital
P 165,000
P 425,000
39,500
385,500
1,705,000
598,500
446,500
P3,300,500
P 495,000
,976,000
1,829,500
P3,300,500
Readings:
• Chapter 2, Accounting for Partnership and Corporation, 2011 Edition, Gloria J.
Tolentino- Baysa and Ma. Concepcion Yamat Lupisan
Financial Accounting and Reporting Part 1
50
Assessment:
Exercise 2 – 1 (Cash and Non-cash Contributions)
Journalize the investment of Marco into the partnership under the following independent
assumptions:
a.
Cash of P250,000
b. Inventories that cost P200,000 using the moving average method accepted by the
partnership at its FIFO value of 750% of average cost.
c. Accounts receivable of P450,000 with an allowance for uncollectible accounts of P20,000.
d. Equipment that cost P800,000 with a book value of P300,000 after four years of use without
salvage value. The equipment should have been over a 10-year useful life.
Exercise 2 – 2 (Cash and Net Asset Contribution)
Elma and Lara have decided to form a partnership. Elma invests the assets presented below at
their agreed valuation, and also transfers his liabilities to the new firm.
Ledger
Agreed
Balances
Valuation
Cash
P400,000
P400,000
Accounts Receivable
170,000
170,000
Allowance for Uncollectible Accounts
(13,000)
(10,000)
Merchandise Inventory
320,000
280,000
Equipment
175,000
125,000
Accumulated Depreciation
30,000
-----Accounts Payable
102,000
102,000
Notes Payable
95,000
95,000
Lara agrees to invest cash for a one-third interest in the firm.
Instructions:
1. Prepare the entries to record the investments of Elma and Lara in the partnership’s new set
of books.
2. Prepare the entries to adjust and close the balances of accounts on the books of Elma.
Exercise 2 – 3 (An Individual and a Previous Sole Proprietor)
Amor admits Andrea to a partnership interest in his business. Accounts in the ledger of Amor on
January 1, 2020 before the admission Andrea, show the following:
Debit
Credit
Cash
P 205,000
Accounts Receivable
450,000
Merchandise Inventory
1,450,000
Accounts Payable
P 495,000
Amores, Capital
1,610,000
Financial Accounting and Reporting Part 1
It is agreed that for the purpose of establishing the interest if Amor, the following adjustment
shall be made:
a. An allowance for uncollectible accounts of P22,000 is to be established.
b. The merchandise is to be valued at P1,500,000.
c. Prepaid expenses of P70,000 and unrecorded liability of P98,000 are to be recognized.
Andrea is to invest sufficient cash for an equal interest in the partnership.
Instructions:
1. Assuming the new partnership will use the books of Amor, give the entries to adjust the
account balances of Amor and to record the investment of Andrea.
2. Assuming the new partnership will open new set of books, give the entries to record the
investment of Amor and Andrea.
3. Prepare a statement of financial position for the new partnership.
Exercise 2 – 4 (Cash and Non-cash Contributions; Bonus)
Aguas and Ara have decided to form a partnership. Aguirre contributes cash of
P800,000 and Ara contributes land with a fair market value of P600,000 and a building with a
fair market value of P1,300,000. Ara purchased the land and building five years ago for
P750,000. Aras’ book value of the land is P275,000 and the book value of the building is
P650,000. The P1,300,000 mortgage on the land and building is to be assumed by the
partnership. The partners agree to share profits and losses in the ratio of 3:2 respectively.
Instructions: Prepare the journal entries to record the formation of the partnership under each
of the following independent assumptions:
1. Each partner is credited for the full amount of net assets invested.
2. Each partner initially is to have equal interest in partnership capital.
3. Each partner is credited in accordance with their P& L ratio.
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Financial Accounting and Reporting Part 1
52
MODULE 3
PARTNERSHIP OPERATIONS
Overview
This module gives us a background on how the partnership divides its profits and losses
to partners.
Module Objectives
After studying this module, the students should be able to
1. Differentiate the closing entries in a partnership and in a sole proprietorship.
2. Determine the factors affecting the distribution of profits and losses.
3. Identify the different methods and rules of dividing partnership profits and losses
among partners.
4. Understanding on how to prepare the financial statements of a partnership.
NATURE OF PARTNERSHIP OPERATION
Basically accounting for partnership operations and accounting for the operations of a
sole proprietorship is essentially the same. Steps of the accounting cycle and the rule of debit
and credit to record the transactions are also the same for both sole proprietorship and
partnership. Purchased of office chairs and table on account is debited to Furniture and Fixtures
and credited to Accounts Payable. Payment of expenses is debited to Expenses and credited to
Cash. Sale of merchandise on account is debited to Accounts Receivable and credited to Sales.
Collection of accounts is debited to Cash and credited to Accounts Receivable.
At the end of the accounting period, adjustments are made for merchandise inventory,
accruals, prepayments, provision for uncollectible accounts, and provision for depreciation.
Profit or loss is determined in the usual manner, that is, by matching periodic income and
expense.
However, special problems are encountered in accounting for partnership operations.
These problems include:
1.
2.
3.
4.
Closing entries of a partnership
Distribution of profits and losses
Preparation of a work sheet
Preparation of financial statements
a. Statement of income / statement of comprehensive income
b. Statement of financial position
c. Statement of changes in partners’ equity
Financial Accounting and Reporting Part 1
53
CLOSING ENTRIES OF A PARTNERSHIP
The procedures for the preparation of closing entries for a partnership are similar to that
of a sole proprietorship. First, all revenue and other nominal accounts with credit balances
(such as Purchases Discounts and Purchases Returns and Allowances) are debited and
Income Summary is credited. Second, income Summary is debited and all expense and other
nominal accounts with debit balances (such as Sales Discounts and Sales Returns and
Allowances) are credited. Third, the balance of the Income Summary account, which
represents profit or loss of the partners. Finally, the balance of the drawing account of each
partner is transferred to his/her capital account.
The balance of the Income Summary account is transferred to the drawing accounts of the
partners if the partners’ intention is to keep the capital account intact for investments and
permanent withdrawals of capital. A credit balance in the Income Summary account represents
a profit and its balance is transferred to the drawing accounts of the partners based on their
profit and loss sharing ratio. The entry is as follows:
Income Summary
X, Drawing
Y, Drawing
xxx
xxx
xxx
Any resulting credit balance in the drawing account of a partner may be withdrawn by the
partner or reinvested into the firm. If the balance in the drawing accounts is withdrawn in cas,
the entry is as follows:
X, Drawing
X, Cash
xxx
xxx
However if the partner decides to reinvest into the firm this balance in his drawing account, the
entry is as follows:
X, Drawing
X, Capital
xxx
xxx
A debit balance in the Income Summary account represents a loss and its balance is
transferred to the drawing accounts of the partners based on their profit and loss sharing ratio.
The entry is as follows:
X, Drawing
Y, Drawing
Income Summary
xxx
xxx
xxx
The resulting debit balance in the drawing account of a partner is charged against his capital
with the following entry:
X, Capital
X, Drawing
xxx
xxx
Financial Accounting and Reporting Part 1
54
On the other hand, the balance of the Income Summary account may be transferred directly to
the capital accounts of the partners if the partners’ intention is to make the profit or loss a part of
permanent capital. It should be noted, however, that either treatment will result to the same net
effect on partners’ ending capital balances. All illustrations mentioned, pertaining to distribution
of profit or loss are recorded directly to the capital accounts with the assumption that partners
intend to make their respective share on the profit loss as a direct part of their permanent
capital.
A credit balance in the Income Summary account represent a profit and its balance is
transferred to the capital accounts of the partners based on their profit and loss sharing ratio.
The entry is as follows:
Income Summary
X, Capital
Y, Capital
xxx
xxx
xxx
A debit balance in the Income Summary account represents a loss and its balance is transferred
to the capital accounts of the partners based on their profit and loss sharing ratio. The entry is
as follows:
X, Capital
Y, Capital
Income Summary
xxx
xxx
xxx
DISTRIBUTION OF PROFIT AND LOSSES
To make distribution of partnership profits and losses equitable, the following factors are
considered:
1. Services rendered by the partners to the partnership
2. Amount of capital contributed by the partners to the business
3. Entrepreneurial ability or managerial skill of the partners
RULES FOR DIVIDING PROFITS AND LOSSES
Profits and losses in general shall be divided in accordance with the agreement among the
partners. In the absence of an agreement, the partners shall share in the profits in proportion to
their capital contributions after satisfying the share of the industrial partner on such profit.
The following is the list of rules in the division of profits and losses of the partnership
based on the provision of the New Civil Code:
1. As to Capital Partners
a. Division of profits
1. in accordance with agreement
2. in the absence of an agreement, division of profits is in accordance with capital
contributions
Financial Accounting and Reporting Part 1
b. Division of losses
1. In accordance with agreement
2. If only division of profits is agreed upon, the division of losses will be the same as
the agreement on the division of profits
3. In the absence of an agreement, division of losses is in accordance with capital
contributions
2. As to Industrial Partners
a. Division of profits
1. In accordance with agreement
2. In the absence of an agreement, the industrial partner shall receive a just and
equitable share of the profits and the capitalist partners shall receive profits in
accordance with their capital contributions
b. Division of losses
1. In accordance with agreement
2. In the absence of an agreement, the capitalist- industrial partner in his/her character
as industrial partner shall have no share in the losses, but in his/her character as a
capitalist partner will share in proportion to the capital contribution
METHODS OF DISTRIBUTING PROFITS BASED ON PARTNERS’ AGREEMENT
1. Arbitrary ratio (Percentage, Decimal, Fraction, Ratio)- it is simple to apply but does not
give recognition on the disparity of capital contributions nor does it recognize the time
and effort that a partner may devote in running the firm’s business operations.
2. Capital ratio (Original, Beginning, Ending, Average) – this method recognizes the
differences in the capital contributions but does not take into account the time and effort
that a partner may devote in running the firm’s business operations.
3. Interest on capital and the balance on agreed ratio- this method recognizes the
differences in the capital contributions but does not take into account the time and effort
that partner may devote in running the firm’s business operations. Interest is allowed to
partners for the use of invested capital. Interest as agreed by the partners shall be
allowed in proportion over the period such capital was actually used. Moreover, the
interest shall be provided whether profit is sufficient or insufficient or there is a net loss
unless otherwise agreed upon by the partners.
4. Salary allowances to partners and the balance on agreed ratio- this method recognizes
the time and effort that a partner may devote in running the firm’s business operations
but does not take into consideration the differences in capital contributions.
Salaries are allowed to partners as a compensation for their time devoted in the
business. Salaries as agreed by the partners shall be allowed in proportion to the time
the partners actually rendered services to the firm. Such salaries shall be provided
whether the profit is sufficient or insufficient or there is net a loss unless otherwise
agreed upon by the partners.
55
Financial Accounting and Reporting Part 1
56
5. Bonus to managing partner and the balance on agreed ratio- this method allows a
bonus, as an incentive, to the managing partner. It is usually a percentage of the profit.
Bonus, therefore, is allowed only when there is a profit. It may be computed using
any one of the following as basis:
a.
b.
c.
d.
Bonus is based on profit before deducting bonus and income tax
Bonus is based on profit after deducting bonus but before deducting income tax
Bonus is based on profit after deducting income tax but before deducting bonus
Bonus is based on profit after deducting both bonus and income tax.
6. Interest on capital, salaries to partners, bonus to managing partner, and the balance on
agreed ratio.
Illustrative Problem : The following accounts and balances are available in the books of
Ciara and Dolly Partnership for the year 2019.
May 1
Ciara, Capital
P150,000
Jan.1
Apr. 1
Oct. 1
Beg’g. Balance
P2,200,000
250,000
500,000
Bal. P2,800,000
Jan. 1 – Dec. 31
Ciara, Drawing
P300,000
May 1
Dec.1
Dolly, Capital
P150,000
Jan.1
Beg’g. Balance
P1,500,000
50,000
Oct. 1
500,000
Balance- P1,800,000
Jan. 1 – Dec. 31
Dolly, Drawing
P225,000
Income Summary
Dec. 31
P800,000
Case 1- Profit is divided in the ratio of 75% and 25% to Ciara and Dolly
Income Summary
Ciara, Capital
Dolly, Capital
P800,000 x 70% = P600,000
P800,000 x 25% = P200,000
800,000
600,000
200,000
Financial Accounting and Reporting Part 1
57
Case 2- Profit is allocated based on the beginning capital ratio
Income Summary
Ciara, Capital
Dolly, Capital
P800,000 x 2,200/3,700 = P475,676
P800,000 x 1,500/3,700 = P324,324
800,000
476,676
324,324
Case 3- Profit is allocated based on the ending capital ratio
Income Summary
Ciara, Capital
Dolly, Capital
P800,000 x 2,800/4,600 = P486,957
P800,000 x 1,800/4,600 = P313,043
800,000
486,957
313,043
Case 4 - Profit is allocated based on the average capital ratio.
Income Summary
800,000
Ciara, Capital
Dolly, Capital
P800,000 x 2,412,500/ 3,933,333.33 = P490,678
P800,000 x 1,520,833.33/ 3,933,333.33 = P309,322
490,678
309,322
Average capital ratio is a method of dividing profits based on the amount of capital
invested and the time during which such capital is actually used in the business.
The following steps are to be followed in determining the average capital of each partner using
the peso month method; thus, arriving at the average capital ratio:
1. Multiply beginning capital by the number of months that it remained unchanged.
2. Determine each new capital balance in chronological order and multiply by the number
of months it remained unchanged.
3. Add the products which represents peso month and divide the total by twelve (12) to
obtain the average monthly capital.
By following the steps given, the average capital of each partner can be calculated as follows:
Ciara, Average Capital
Period
Capital Balance
No. of Mos.
Unchanged
Peso Months
Average
Capital
Jan.1 – Mar.31
Apr. 1 – Apr.30
May 1 – Sept.30
Oct. 1 – Dec. 31
Dolly, Average Capital
P2,200,000
2,450,000
2,300,000
2,800,000
1
5
3
12
3
P 6,600,000
2,450,000
11,500,000
8,400,000
P28,950,000
P2,412,500
Financial Accounting and Reporting Part 1
58
Jan.1 – Apr. 30
P1,500,000
May 1– Sept. 30
1,350,000
5
Oct. 1 – Nov. 30
1,850,000
2
Dec. – Dec. 31
1,800,000
1
12
P1,520,833.33
4
P 6,000,000
6,750,000
3,700,000
1,800,000
P18,250,000
P3,933,333.33
Case 5- Each partner is allowed 12% interest on ending capital and the remaining profit is
divided equally.
Income Summary
Ciara, Capital
Dolly, Capital
800,000
460,000
340,000
Alternative entry to record the distribution of profits may be recorded separately as follows:
Income Summary
Ciara, Capital
Dolly, Capital
Interest on ending capital.
552,000
336,000
216,000
Income Summary
Ciara, Capital
Dolly, Capital
Remaining income divided equally
248,000
124,000
124,000
Division of profit
Ciara
Interest on ending capital
P2,800,000 x 12%
P1,800,000 x 12%
Remainder-equally
P248,000 /2
Totals
Dolly
Total
P336,000
124,000
P460,000
P216,000
P552,000
124,000
248,000
P340,000
P800,000
Case 6- Ciara is allowed a salaries of P600,000 and the remaining profit is divided in the ratio of
1:4
Income Summary
Ciara, Capital
Dolly, Capital
800,000
640,000
160,000
Division of profit
Ciara
Dolly
Total
Financial Accounting and Reporting Part 1
59
Salaries
Remainder- 1:4
P200,000 x 1/5
P200,000 x 4/5
Total
P600,000
P600,000
P 40,000
P640,000
160,000
200,000
P160,000
P800,000
Case 7- Dolly, the managing partner, is allowed a bonus of 20% of profit BEFORE bonus and
income tax and the remainder is divided in the ratio of beginning capital.
Using the income tax rate of 30%, the partnership income before income tax is P1,142,857, that
is, net profit of P800,000 divided by 70%.
Income Summary
Ciara, Capital
Dolly, Capital
800,000
267,857
332,143
Division of profit
Ciara
Bonus(1,142,857x20%)
Remainder:
P571,429 x 2,200/3,700
P571,429 x 1,500/3,700
Total
Dolly
P228,571
Total
P228,571
231,660
P460,231
571,429
P800,000
P339,769
P339,769
Case 8- The partners are allowed P5,000 and P10,000 weekly salaries, respectively, 10%
interest on average capital, and the remainder is divided in the ratio of 2:3.
Income Summary
Ciara, Capital
Dolly, Capital
Division of profit
Salaries to partners
P 5,000 x 52weeks
P10,000 x 52weeks
Interest on average capital
P2,412,500 x10%
P1,520,833.33 x 10%
Remainder – (P373,333.33)
(P373,333.33) x 2/5
(P373,333.33) x 3/5
Total
800,000
339,769
460,231
Ciara
Dolly
Total
P260,000
P520,000
P780,000
241,250
152,083
393,333
(224,000)
P448,083
(373,333)
P800,000
( 149,333)
P 351,917
The sum of the salary allowance and interest allowed on the average capital of the
partners exceeded the profit of P800,000 resulting in a negative remainder (loss or deficit).
Such loss is distributed as provided in the profit and loss sharing agreement.
Financial Accounting and Reporting Part 1
60
Case 9- Assume the same agreement as in Case 8 except that instead of a profit, the
partnership has incurred a loss of P100,000. The allowance for salaries and interest will still be
provided, thereby resulting in a total loss to be divided as agreed.
Dolly, Capital
Ciara, Capital
Income Summary
109,750
9,750
100,000
Division of profit
Ciara
Salaries to partners
P 5,000 x 52
P10,000 x 52
Interest on average capital
P2,412,500 x10%
P1,520,833.33 x 10%
Remainder–(P1,273,333)
(P1,273,333) x 2/5
(P1,273,333) x 3/5
Total
Dolly
P260,000
P520,000
Total
P780,000
241,250
152,083
393,333
( 509,333)
(P 8,083)
(764,000) (1,273,333)
(P 91,917) (P100,000)
The allocation of partnership profit follows the order of the profit sharing agreement in allocating
the bonus, the salary allowances, the interests and the remainder to individual partners.
The bonus is computed on the basis of the partnership profit as the concept of “partnership
profit” is generally understood in accounting practice. Partners may, however, intend for salary
and interest allowances to be deducted in determining the base for computing the bonus. In
such case, no bonus is allowed if there is insufficient profit after distribution of salaries and
interests.
The interests of the partners may not be apparent when technical accounting terms are used;
so, the partnership agreement should be precise in specifying measurement procedures to be
used in determining the amount of a bonus.
Illustrations on the computation of bonus using other assumptions. The same data in Illustrative
Problem A shall be used. Bonus rate is 20%
1. Bonus is based on profit after deducting bonus but before deducting income tax.
B
B
B + .20B
B
B
= .20 x (P P1,142,857– B)
= P228,571 - .20B
= P228,571
= P228,571 / 1.20
= P190,475.83
2. Bonus is based on profit before deducting bonus but after deducting income tax
B
= .20 (P1,142,857 – T)
T
= .30 x P1,142,857
= P342,857
Financial Accounting and Reporting Part 1
Substituting for T in the first equation and solving for B
B
B
B
= .20 x (P1,142,857 – P342,857)
= .20 x P800,000
= P160,000
Key Points. The bonus was not deducted from the profit subject to income tax. The
bonus being computed is not an expense but a distribution of profit after income tax.
3. Bonus is based on profit after deducting bonus and income tax
B
= .20 (P1,142,857 – B-T)
T
= .30 x P P1,142,857
= P342,857
Substituting for T in the first equation and solving for B
B
B
B
B + .20B
B
B
= .20 x (P1,142,857 – B – P342,857)
= .20 (P800,000 – B)
= P160,000 - .20 B
= P160,000
= P160,000 / 1.20
= P133,333
Key Points. In the preceding examples, bonus is treated as distribution of partnership profit,
and therefore such bonus is not deductible as an expense in determining the amount of taxable
profit. The same is true for salaries and interest allowed on capital.
The partnership form of business allows a wide selection of profit distribution ratios to meet the
individual desires of the partners. Ratios for profit distributions may be based on the percentage
of total partnership capital, time and effort invested in the partnership, or a variety of other
factors. Some partnerships, however, have a profit sharing ratio that is different from their loss
sharing ratio.
PREPARATION OF WORK SHEET and FINANCIAL STATEMENTS
At the end of each accounting period, the partnership books are adjusted and closed and
financial statements are prepared. In order to classify accounting data in a convenient and
orderly manner and to facilitate the preparation of financial statements, a work sheet is
prepared. The form or columns of the worksheet may vary depending on the needs of the
company. The following illustrative problem will use the simplest form of worksheet with
emphasis not on the form but the underlying principles and procedures in preparing such
worksheet.
61
Financial Accounting and Reporting Part 1
62
Illustrative Problem: The trial balance for EXCEL CORPORATION as at December 31, 2019 is
presented below:
EXCEL CORPORATION
Trial balance
December 31, 2019
Cash
Notes Receivable
Accounts Receivable
Allowance for Uncollectible Accounts
Merchandise Inventory
Furniture and Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
FERNANDO, Capital
FERNANDO, Drawing
GOMEZ, Capital
GOMEZ, Drawing
Sales
Sales Returns and Allowances
Sales Discounts
Purchases
Purchases Returns and Allowances
Purchase Discounts
Freight- In
Selling Expenses
General Expenses
Interest Income
Interest Expense
Debit
1,900,000
625,000
1,125,000
Credit
50,000
1,250,000
1,500,000
200,000
500,000
375,000
1,250,000
155,000
3,125,000
250,000
5,000,000
50,000
75,000
2,412,500
100,000
62,500
125,000
825,000
362,500
17,500
25,000
10,680,000
10,680,000
Data for adjustments as of December 31, 2019:
a. Merchandise inventory, P1,000,000.
b. Depreciation of furniture and equipment, 10% per year, 40% of which us considered part
of general expenses.
c. Unpaid sales salaries, P25,000
d. Accrued interest on notes receivable, P2,500
e. Accrued interest on notes payable, P1,500
f. Allowance for uncollectible accounts to be increased to P112,500
g. Unused supplies: office-P10,000, store- P15,000
h. Income tax, 30% of profit before income tax
The Articles of Co-Partnership contain the following provisions regarding the division of profits
and losses:
1. Annual salaries of P400,000 and P500,000, respectively.
Financial Accounting and Reporting Part 1
2. Interest of 10% on beginning capital
3. The remainder is divided in the ratio of 3:2.
A work sheet prepared for the partnership and the related statement of financial position and
income statement are presented.
63
25,000.00
10,680,000.00
362,500.00
Computation of income tax and profit :
Total credit per income statement before income tax
Total debit per income statement before income tax
Profit before tax
Income tax (P843,500 x 30%)
Profit
Interest Income
Interest Expense
Total
Salaries Payable
Interest Receivable
Interest payable
Supplies on Hand
Income tax Expense
Income Tax Payable
TOTALS
PROFIT
TOTALS
Selling Expenses
General Expenses
Cash
Notes Receivable
Accounts Receivable
Allowance for Uncollectible Accounts
Merchandise Inventory
Furniture and Equipment
Accumulated Depreciation
Notes Payable
Accounts Payable
Fernando, Capital
Fernando, drawing
Gomez, Capital
Gomez, Drawing
Sales
Sales Returns and Allowances
Sales Discount
Purchases
Purchases Returns and Allowances
Purchase Discounts
Freight- In
10,680,000.00
17,500.00
Trial Balance
Debit
Credit
1,900,000.00
625,000.00
1,125,000.00
50,000.00
1,250,000.00
1,500,000.00
200,000.00
500,000.00
375,000.00
1,250,000.00
155,000.00
3,125,000.00
250,000.00
5,000,000.00
50,000.00
75,000.00
2,412,500.00
100,000.00
62,500.00
125,000.00
825,000.00
h. 253,050
519,550.00
519,550.00
e. 1,500
c. 25,000
90,000 g.
15,000
25,000
60,000 g.
10,000
62,500
d. 2,500
g. 25,000
h. 253,050
d. 2,500
e. 1,500
b.
c.
b.
c.
62,500
b. 150,000
f.
Adjustments
Debit
Credit
₱
₱
₱
EXCEL CORPORATION
Work Sheet
For the Year Ended December 31, 2019
590,450.00
253,050
843,500.00
5,339,000
6,182,500.00
5,592,050.00
590,450.00
590,450.00
253,050.00
26,500.00
475,000.00
125,000.00
925,000.00
50,000.00
75,000.00
2,412,500.00
1,250,000.00
6,582,500.00
6,582,500.00
6,182,500.00
25,000.00
2,500.00
253,050.00
5,992,050.00
590,450.00
6,582,500.00
1,500.00
25,000.00
Statement of Financial Position
Debit
Credit
1,900,000.00
625,000.00
1,125,000.00
112,500.00
1,000,000.00
1,500,000.00
350,000.00
500,000.00
375,000.00
1,250,000.00
155,000.00
3,125,000.00
250,000.00
6,182,500.00
20,000.00
100,000.00
62,500.00
5,000,000.00
1,000,000.00
Statement of Income
Debit
Credit
64
Financial Accounting and Reporting Part 1
Financial Accounting and Reporting Part 1
65
EXCEL CORPORATION
Statement of Changes in Partner’s Equity
For the Year Ended December 31, 2019
Fernando
Gomez
Total
P1,250,000
P3,125,000
P4,375,000
Equity, January 1
Add Profit for 2019:
Salaries
Interest on beginning capital
Balance – 3:2 (P747,050)
P747,050 x 3/5
P747,050 x 2/5
Total share profit
Total
Less Withdrawals
Equity, December 31
P 400,000
125,000
P 500,000
312,500
P 900,000
437,500
( 298,820)
P 513,680
P3,638,680
250,000
P3,388,680
(747,050)
P 590,450
P4,965,450
405,000
P4,560,450
( 448,230)
P 76,770
P1,326,770
155,000
P1,171,770
EXCEL CORPORATION
Comprehensive Statement of Income
For the Year Ended December 31, 2019
Net Sales
Cost of Sales
Gross Profit
Other Operating Income- Interest
Operating Expenses:
Selling
General
Operating Profit
Interest Expense
Profit before tax
Income Tax Expense (30%)
Profit for the Period
Schedule
1
2
P4,875,000
2,625,000
P2,250,000
20,000
P925,000
475,000
(1,400,000)
P 870,000
( 26,500)
P 843,500
( 253,050)
P 590,450
Division of profit
Salaries
Interest on beginning capital
Balance – 3:2 (P747,050)
P747,050 x 3/5
P747,050 x 2/5
Total share in profit
Fernando
P400,000
125,000
Gomez
P500,000
312,500
Total
P900,000
437,500
(298,820)
P 513,680
(747,050)
P 590,450
(448,230)
P 76,770
Schedule 1- Net Sales
Sales
Less: Sales Returns and Allowances
Sales Discounts
Net Sales
P5,000,000
P50,000
75,000
125,000
P4,875,000
Financial Accounting and Reporting Part 1
66
Schedule 2- Cost of Sales
Merchandise Inventory, January 1
Net Purchases
Purchases
Add Freight In
Total
Less: Purchases Returns and Allowances
Purchases Discounts
Cost of Goods Available for Sale
Less Merchandise Inventory, December 3
Cost of Sales
P1,1250,000
P2,412,500
125,000
P2,537,500
P100,000
62,500
162,500
2,375,000
P3,625,000
1,000,000
P2,625,000
Key points. The Statement of Income of a partnership is similar to that of a sole proprietorship except
that it includes a schedule showing the division or distribution of profit to partners.
EXCEL CORPORATION
Statement of Financial Position
December 31, 2019
Assets
Current Assets:
Cash
Notes Receivable
Accounts Receivable
Less Allowance for Uncollectible Accounts
Interest Receivable
Merchandise Inventory
Supplies
P1,900,000
625,000
P1,125,000
112,500
Furniture and Equipment
Less Accumulated Depreciation
1,012,500
2,500
1,000,000
25,000
P1,500,000
350,000
Total Assets
P4,565,000
1,150,000
P5,715,000
Liabilities
Current Liabilities:
Notes Payable
Accounts Payable
Salaries Payable
Interest Payable
Income Tax Payable
Total Liabilities
P 500,000
375,000
25,000
1,500
253,050
P1,154,550
Partners’ Equity
Fernando, Capital
G0mez, Capital
Totals Partners’ Equity
Total Liabilities and Partners’ Equity
P1,171,770
3,388,680
4,560,450
P5,715,000
Financial Accounting and Reporting Part 1
67
JOURNALIZING CLOSING ENTRIES IN THE PARTNERSHIP BOOKS
DATE
DESCRIPTIONS
Sales
Interest Income
Purchase Returns and Allowances
Purchase Discounts
DEBIT
5,000,000
20,000
100,000
62,500
Income Summary
To close the revenue and other nominal
accounts with credit balance.
Income Summary
Sales Returns and Allowances
Sales Discounts
General Expenses
Selling Expenses
Purchases
Freight In
CREDIT
5,182,500
4,342,050
50,000
75,000
475,000
925,000
2,412,500
125,000
Interest Expense
Income Tax Expense
To close the expenses and other
nominal accounts with debit balance.
26,500
253,050
Income Summary
Fernando, Capital
Gomez, Capital
To close the income summary account.
590,450
Fernando, Drawing
Gomez, Drawing
Fernando, Capital
Gomez, Capital
To close the drawing accounts.
155,000
250,000
513,680
76,770
155,000
250,000
CORRECTION IN PROFIT FOR ERRORS AND OMISSIONS PRIOR TO DISTRIBUTION
The partnership books may show an incorrect profit because of errors and omissions. Such include
failure to record prepaid expenses, accrued expenses, accrued income, unearned income and also
overstatement or understatement in purchases, inventories, and depreciation. The reported profit should
be corrected before it is distributed to the partners. The required corrections may be summarized as
follows:
Financial Accounting and Reporting Part 1
68
Correction to profit of current year for
errors made in
Prior Year
Current Year
1. Unrecorded prepaid expenses
2. Unrecorded accrued expenses
3. Unrecorded accrued income
4. Unrecorded unearned income
5. Overstatement of inventories
6. Understatement of inventories
7. Understatement of purchases
8. Understatement of purchases
9. Overstatement of depreciation
10. Understatement of depreciation
+
+
+
+
none
none
+
+
+
+
+
-
It is understood that the tax implications of these corrections are properly accounted for particularly if the
partnership is not a general professional partnership.
Illustrative Problem : Honey, Ina, and Juan are partners sharing profits on a 2:3:5 ratio. On January 1,
2019, Kent was admitted into the partnership with a 20% share in profits. The old partners shall continue
to participate in profits in proportion to their original ratios.
For the year 2019, the partnership books showed a profit of P450,000. It was ascertained, however, that
the following errors were made:
1. Accrued expenses not recorded at the end of 2018
2. Overstatement of 2019 ending inventory
3. Goods received and inventoried in 2019 but related purchases
not recorded
4. Income received in advance (unearned income), not recorded
at the end of 2018
5. Prepaid expenses not recorded at the end of 2018
P 5,000
48,000
The correct profit of 2019 based on a 30% income tax rate shall be computed as follows:
Reported profit
Corrections:
Unrecorded accrued expense, 2018
Unrecorded unearned income, 2018
Overstatement of ending inventory, 2019
Unrecorded purchases, 2019
Unrecorded prepaid expenses, 2018
Total corrections before income tax
Total corrections after income tax
Corrected profit
P450,000
P 5,000
10,000
(48,000)
( 20,000)
( 3,000)
P(56,000)
x 70%
(39,200)
P358,800
20,000
10,000
3,000
Financial Accounting and Reporting Part 1
69
The corrected profit shall be divided among partners as follows:
Honey
Ina
Juan
Kent
P450,000 x (20% x 80%)
P450,000 x (30% x 80%)
P450,000 x (50% x 80%)
P450,000 x 20%
P57,408
86,112
143,520
71,760
P358,800
REVIEW of the LEARNING OBJECTIVES
1. Discuss the closing entries in a partnership and differentiate them form the
closing entries in a sole proprietorship. The closing entries of a partnership
are almost similar to those of a sole proprietorship. However, the profit or loss of
the partnership is transferred to the individual drawing account or capital account
of the partners and is distributed according to the profit and loss sharing
agreement.
2. Identify and discuss the different methods and rules of dividing partnership
profits and losses to the partners. The distribution of partnership profits and
losses to the partners may be expresses in any of the following ways: (1) by
percentage; (2) by fraction; (3) by decimal; or (4) by ratio. The Civil Code of the
Philippines provides rules on how partnership profits and losses be divided
among the partners. As a general rule, profits or losses should be divided in
accordance with the partner’s agreement. In the absence of an agreement, the
division shall be made in accordance with capital contributions. To give
recognition to the services rendered by the partners or to the differences in the
amount contributed in the partnership or to the entrepreneurial ability or
managerial skill of the partners, salaries, interest and bonuses may be allowed to
partners as part of the division of profits and losses.
3. Discuss and understand the preparation of financial statements of a
partnership. The financial statements are prepared after the work sheet is
completed ( or after journalizing and posting the adjusting entries if a work sheet
is not prepared). These financial statements include the income statement, the
statement of financial position, and the statement of changes in partners equity.
The income statement includes a schedule showing the division of the
partnership profit or loss to the “Partner’s Equity” and it shows capital balances of
individual partners. The statement of changes in partners equity shows the
division of profit or loss to the partners, the amount of withdrawals during the
period, and the partner’s capital balances at the end of the period.
Financial Accounting and Reporting Part 1
70
Readings
•
Chapter 3, Accounting for Partnership and Corporation, 2011 Edition, Gloria J.
Tolentino- Baysa and Ma. Concepcion Yamat Lupisan
Assessment
EXERCISES
Exercise 3-1 (Division of Profit using Ratios)
Bong, Bueno, and Bunny formed a partnership and have capital balances of P350,000,
P250,000 and P200,000, respectively. They devoted time to personally managed their
partnership as follows:
Bong
Bueno
Bunny
-
three-fourths time
one-half time
one-fourth time
Instructions: Determine the participation of the partners in the profit of P1,000,000 if profit is
divided:
1. In the ratio of capital investments
2. In the ratio of time devoted in the business
Exercise 3-2 (Division of Profit; Interest on Average Capital)
Danica and Jenson are partners. Their capital accounts during the fiscal year 2019 were as
follows:
9/1
Danica, Capital
120,000 1/1
800,000
4/1
160,000
11/1
60,000
3/1
180,000
J enson, Capital
1/1 1,200,000
7/1
140,000
10/1
100,000
Profit of the partnership is P250,000 for the year. Determine the partners shared profit under
the following assumptions:
1. Each partner is to be credited 12% interest on his average capital.
2. Any remaining profit or loss is to be divided equally.
Exercise 3-3 (Division of Profit; Interest on Capital and Salaries to Partners)
Ruel and Renan have a capital balances at the beginning of the year of P600,000 and
P675,000, respectively. They share profit as follows:
Financial Accounting and Reporting Part 1
1. Interest of 8% on beginning capital balances
2. Salary allowances of P225,000 to Bueno and P115,000 to Renan
3. Balance in the ratio of 3:2.
The partnership realized a profit of P375,000 during the current year before interest and salary
allowances to partners.
Instructions:
1. Show how the profit of P375,000 should be divided between Ruel and Renan
2. Assuming that Ruel and Renan simply agree to share profit in a 3:2 ratio with a minimum
of P175,000 guaranteed to Renan, show the profit of P375,000 should be divided.
Exercise 3-4 (Division of Profit under Various Assumptions)
Blessing and Linda formed a partnership by investing P220,000 and P380,000, respectively. At
the end of its first year of operations , the partnership has realized a profit of P400,000.
Instructions: determine the distribution of profit under each of the following independent
assumptions:
1. The partnership agreement does not mention profit sharing
2. Profit is divided in the ratio of the original investments.
3. Interest at 10% is to be allowed on the original capital investments and the balance to be
divided equally.
4. Salaries of P75,000 and P55,000 respectively and the balance to be divided equally.
5. Interest at 12% is to be allowed on the original capital investments, salaries of P225,000
and P275,000 to partners, respectively and the balance to be divided in the ratio 2:3. In
case of insufficient net income, however, this has to be distributed in the salary ratio.
While if there is a net loss, then it has to be distributed equally.
Exercises 3-5 (Division of Profit; Interest on Average Capital and Salaries to Partners)
The partnership of Ben and Ban has the following provisions in the partnership agreement:
1. A partner earns 10% interest on the excess of his average capital over the other
partner.
2. Ben and Ban are allowed annual salaries of P300,000 and P200,000, respectively.
3. Any remaining profit or loss is to be divided in the ratio of 40:60.
The average capital of Ben is P1,000,000 and that of Bunye is P500,000.
Instructions: Prepare a profit distribution schedule assuming the profit of the partnership is (a)
P800,000; and (b) P400,000.
71
Financial Accounting and Reporting Part 1
72
Exercise 3-6 (Division of Profit; Interest on Capital, Salary Allowance, and Bonus to
Managing Partner)
Becky and Lala formed a partnership on January 2, 2019 and agreed to share profit 90% and
10%, respectively. Becky invested cash of P200,000. Lala invested no assets but has a
specialized expertise and manages the firm full time. There were no withdrawals during the
year. The partnership contract provides for the following:
1. Capital accounts are to be credited annually with the interest at 10% of beginning
capital.
2. Lala is to be paid a salary of P8,000 a month.
3. Lala is to receive a bonus of 25% of profit calculated before deduction of salary and
interest on capital accounts.
4. Bonus, interest, and Lala’s salary are to be considered as expenses.
The fiscal year 2014 income statement for the partnership includes the following:
Revenue
Expenses (including salary, interest and bonus)
Profit
P701,600
379,600
P322,000
Instructions: Determine the amount of bonus to be credited to Lala.
Exercise 3-7 (Calculation of Bonus)
Powell is the managing partner of Power Partnership. He is given an incentive of 5% bonus on
profit. The profit of the partnership id P400,000 and income tax rate is 30%.
Instruction: Determine the amount of bonus under each of the following assumptions:
1. Bonus is computed based on profit before deduction for bonus and income tax.
2. Bonus is computed based on profit after deduction for bonus but before deduction for
income tax.
3. Bonus is computed based on profit before deduction for bonus but after deduction for
income tax.
4. Bonus is computed based on profit after deduction for both bonus and income tax.
Exercise 3-8 ( Computation of Partnership Profit)
Marte, a partner in the Triple M Partnership, has a 25% participation in profit. Marte’s capital
account had a net decrease of P240,000 during the year 2019. During 2019, Marte withdrew
P520,000 (charged against his capital account) and invested in the partnership a property with a
fair value of P100,000.
Instructions: Determine the profit of the Triple M Partnership for the year 2019.
Financial Accounting and Reporting Part 1
73
Exercise 3-9 (Division of Profit under Various Assumptions)
The capital accounts of Bondoc and Barba at the end of the fiscal year 2014 are as follows:
Barbie, Capital
January 1
May
1
October 1
Balance
Investment
Withdrawal
P210,000
90,000
P 60,000
Carla, Capital
January 1
October 1
Balance
Withdrawal
P150,000
P30,000
The partnership profit for the year ended December 31, 2014 is P300,000.
Instructions: Give the journal entries to record the transfer of profit to the capital accounts under
each of the following assumptions: (Show the necessary computations after the journal entries
as an explanation for each entry).
1. Profit is divided 60% to Carla and 40% to Barbie.
2. Profit is divided in the ratio of capital balances at the beginning of the period.
3. Profit is divided in the ratio of average capital.
4. Interest at 10% is allowed on average capital and the balance of profit is divided in the
ratio of 40% and 60% for Barbie and Carla respectively.
5. Salaries of P60,000 and P48,000 are allowed to Carla and Barbie, respectively, and the
balance of profit is divided in the ratio of capital balances at the end of the period.
6. Carla is allowed a bonus of 33 1/3% of profit after bonus, and the balance of the profit is
divided in the ratio of the average capital.
Financial Accounting and Reporting Part 1
74
MODULE 4
PARTNERSHIP DISSOLUTION
Overview
Partnership is an agreement between two or more persons (called partners) for sharing
the profits of a business carried on by all or any of them acting for all. Any change in the existing
agreement amounts to changes in partnership ownership. This results in an end of the existing
agreement and a new agreement comes into being with a changed relationship among the
members of the partnership firm and/or their composition. The partners often resort to
admission of a new partner, change in profit sharing ratio, retirement of a partner, death or
insolvency of a partner.
In this Module, we shall have a brief idea about all these and in detail about the
accounting implications of admission of a new partner or an on change in the profit sharing ratio.
Additional capital may be required by firms in an attempt to compete within a business
environment where the firm operates. The existing partners may consider to invite additional
person/s to infuse capital into the firm.
Under Article 1830 of the New Civil Code of the Philippines, the legal partnership
dissolution may be caused by any of the following:
1, Admission of a new partner;
2. Withdrawal of an old partner;
3. Involuntary dissolution of a partnership by the partners;
4. Involuntary dissolution through bankruptcy proceedings;
5. Termination of the definite term or particular undertaking specified in the agreement;
6. Civil interdiction of any partner;
7. Any event which makes it unlawful for the business of the partnership to be carried on
or for the members to carry it on in the partnership.
There is a difference between a dissolution and a liquidation. Partnership dissolution is
defined in Article 1825 of the Civil Code of the Philippines as the change in the relation of the
partners caused by any partner ceasing to be associated in the carrying out of the business.
Dissolution refers to the termination of the life of an existing partnership. This process does not,
however, take into account whether or not the partnership will resume its operations. When a
partner is admitted into a partnership, the original relationship between or among the existing
partners ends and a new relationship between the old and new partners is created. It will be
noted dissolution is not always followed by liquidation. Partnership liquidation is the process of
winding up the affairs of the partnership and affects the interest of third parties. There are
numerous reasons for the changes in partnership ownership. Under this Module, it discusses
Admission of a New Partner.
Module Objectives:
After studying this module, the students should be able to
Financial Accounting and Reporting Part 1
1. Identify the causes of changes in partnership ownership particularly on account for
admission of a new partner in a partnership;
2. Differentiate between partnership dissolution and partnership liquidation
3. Explain the concept and the ways of admission of a partner into a partnership firm;
4. Identify the matters that need adjustments in the books of firm when a new partner is
admitted
5. Determine the profit and loss ratio before and after admission of a partner
6. Make necessary adjustments for revaluation of assets
Admission of a new partner
A new partner may be admitted when the firm needs additional capital or managerial
help. According to the provisions of Partnership Act 1932 unless it is otherwise provided in the
partnership deed a new partner can be admitted only when the existing partners unanimously
agree for it. A new partner may be admitted in a partnership by (a) purchase of interest from one
or more of the original or existing or old partner/s; or (b) investment or contribution of asset to
the partnership.
According to the Partnership Act 1932, a new partner can be admitted into the firm only
with the consent of all the existing partners unless otherwise agreed upon. With the admission
of a new partner, a newly admitted partner acquires two main rights in the firm, namely:
1. Right to share the assets of the partnership firm; and
2. Right to share the profits of the partnership firm.
For the right to acquire share in the assets and profits of the partnership firm, the partner
brings an agreed amount of capital either in cash or in kind. Moreover, in the case of an
established firm which may be earning more profits than the normal rate of return on its capital
the new partner is required to contribute some additional amount known as premium or
goodwill.
Admission of a Partner is primarily to compensate the existing partners for loss of their
share in the profits of the firm.
Following are the other important points which require attention at the time of admission
of a new partner:
1. New profit sharing ratio;
2. Revaluation of assets;
3. Distribution of accumulated profits prior to admission of a partner; and
4. Adjustment of partners’ capitals.
New Profit Sharing Ratio occurs when new partner is admitted as he acquires his share
in profits from the old partners. In other words, on the admission of a new partner, the old
partners sacrifice a share of their profit in favor of the new partner. What will be the share of
new partner and how he will acquire it from the existing partners is decided mutually among the
old partners and the new partner. However, if nothing is specified as to how does the new
partner acquire his share from the old partners; it may be assumed that he gets it from them in
their profit sharing ratio. In any case, on admission of a new partner, the profit sharing ratio
among the old partners will change keeping in view their respective contribution to the profit
75
Financial Accounting and Reporting Part 1
76
sharing ratio of the incoming partner. Hence, there is a need to ascertain the new profit sharing
ratio among all the partners. This depends upon how does the new partner acquires his share
from the old partners for which there are many possibilities. Let us understand it with the help of
the following examples:
The profit ratio will likewise be affected upon the admission of a partner.
Example No. 1: Perry and Penny are partners sharing profits in the ratio of 3:2. On April 1,
20XX, they admitted Pedro as a new partner with 1/6 share in profits of the firm. With this
change, there are three partners of the firm. Hence, there must be a change in the profit sharing
ratio among the existing partners to include the new partner. Sometimes the partners of a firm
may decide to change their existing profit sharing ratio. This may happen an account of a
change in the existing partners’ role in the firm.
Example No. 2: Amy, Annie and Angie are partners in a firm sharing profits in the ratio of 3:2:1.
They decided to share profits equally as Apolla brings in additional capital. This results in a
change in the existing agreement leading to the admission of Apolla into the firm.
Example No.3: Annie and Vic are partners sharing profits in the ratio of 3:2. They admitted Mel
as a new partner for 1/5 share in the future profits of the partnership firm. Calculate new profit
sharing ratio of Annie, Vic and Mel
Solution:
Mel’s share = 1/5
Remaining share = 4/5
Annie’s new share = 3/5 of 4/5 = 12/25
Vic’s new share = 2/5 of 4/5 = 8/25
New profit sharing ratio of Annie, Vic and Mel will be 12:8:5.
Note: It has been assumed that the new partner acquired his share from old partners in old
ratio.
Example No. 2: Amie and Maria are partners sharing profits in the ratio of 3:2. They admit Delia
as a new partner for 1/5th share in the future profits of the firm which he gets equally from Amie
and Maria.
Calculate new profit and loss ratio of Amie, Maria and Delia.
Solution:
Delia’s share = 1/5 or 2/10
Amie’s share = 3/5-1/10 = 5/10
Maria’s share = 2/5-1/10= 3/10
New profit sharing ratio between, Amie, Maria and Delia will be 5:3:2.
Admission of a New Partner by Purchase
Since a partnership is based on contract, any changes in the composition of the partners will
dissolve the partnership.
Dissolution may take place without disrupting the regular operation of the business. It will
only involve a change in the partnership contract to cover the changes in the association of
the partners.
CAUSES OF DISSOLUTION:
A. Admission of a new partner
B. Retirement of a partner
C. Withdrawal of a partner
Financial Accounting and Reporting Part 1
77
D. Incapacity of a partner
E. Death of a partner
A. Admission By Purchase of Interest
This is a private transaction between the selling partner and the buying partner.
A.
The cash payment given directly to the selling partner. The partnership will simply record the change in
ownership. Also, take note that the
assets and equity before and after admission is the same.
Entry on the books of the partnership:
Selling Partner's Capital.............................................xx
Buying partner's Capital ................................................xx
To record the admission of new partner.
Capital of the new partner to be recorded is equal to the capital of the selling partner
multiplies by the interest acquired by buying partner.
ILLUSTRATIONS:
Case 1. The new partner purchases from one of the partners at book value.
Gan and Ban are partners with capital balances of P200,000 and P100,000, respectively.
They share profits and losses equally. San will be admitted as a new partner by purchasing
1/5 interest from Gan paying P40,000.
Entry on the books of the partnership
Gan, Capital............................................ P40,000
San, Capital ..........................................................P40,000
To record the admission of the new partner.
P200,000 X 1/5 = P40,000
The partnership will only record the transfer of the 1/5 interest from Gan to San.
The payment of P40,000 cash by San to Gan is not recorded in the company books
because it is a personal transaction. The amount paid is equal to the book value of the
acquired interest.
After the admission of San, the total capital of the partnership will still be at P300,000
as shown below:
Gan, Capital (P200,000-P40,000). . . . . . . . . . . . . . P160,000
Ban, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
San, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Total Capital. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . P300,000
Case 2. The new partner purchases from the partnership more than the book value.
Financial Accounting and Reporting Part 1
78
Gan and Ban are partners with capital balances of P200,000 and P100,000, respectively.
They share profits and losses equally. San will be admitted as a new partner by purchasing
1/5 interest from the partnership by paying P100,000.
Entry on the books of the partnership
Gan, Capital............................................ P40,000
Ban, Capital............................................ 20,000
San, Capital………………………………………….P60,000
P200,000 X 1/5 = P40,000
P100,000 X 1/5 = P20,000
The partnership will only record the transfer of the 1/5 interest from Gan and Ban to San.
The payment of P100,000 cash by San to Gan and Ban is not recorded in the company books
because it is a personal transaction. The amount paid is more than the book value of the
acquired interest, therefore San incurred a personal loss of P40,000 but it is recorded in
the partnership books.
After the admission of San, the total capital of the partnership will still be at P300,000
as shown below:
Gan, Capital (P200,000-P40,000). . . . . . . . . . . . . . P160,000
Ban, Capital. (100,000 -20,000) . . . . . . . . . . . . . . .
80,000
San, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Total Capital. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . P300,000
Case 3. The new partner purchases from the partnership less than the book value.
Gan and Ban are partners with capital balances of P200,000 and P100,000, respectively.
They share profits and losses equally. San will be admitted as a new partner by purchasing
1/5 interest from the partnership by paying P50,000.
Entry on the books of the partnership
Gan, Capital............................................ P40,000
Ban, Capital............................................ 20,000
San, Capital………………………………………….P60,000
P200,000 X 1/5 = P40,000
P100,000 X 1/5 = P20,000
The partnership will only record the transfer of the 1/5 interest from Gan and Ban to San.
The payment of P50,000 cash by San to Gan and Ban is not recorded in the company books
because it is a personal transaction. The amount paid is less than the book value of the
acquired interest, therefore San incurred a personal gain of P10,000 but it is recorded in
the partnership books.
After the admission of San, the total capital of the partnership will still be at P300,000
as shown below:
Gan, Capital (P200,000-P40,000). . . . . . . . . . . . . . P160,000
Ban, Capital. (100,000 -20,000) . . . . . . . . . . . . . . .
80,000
San, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Total Capital. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . P300,000
Financial Accounting and Reporting Part 1
79
Case 4. Admission of a Partner by Purchase with Positive Asset Revaluation
Positive revaluation of assets of the old partnership is being done before admission of
new partner. The result of the revaluation of assets is carried to the capital accounts of the
old partners. The adjusted capital of the old partners becomes the basis for the interest
transferred to the new partner.
Illustration:
Partners
Capital Balances Before Profit and Loss Ratio
Admission
Antonio
150,000
40%
Pascua
100,000
30%
Mendiola
50,000
30%
Total
300,000
100%
Santos, the new partner, is to purchase ¼ interest from the partners paying P80,000.
Prior to the admission of Santos, the assets of the partnership will be revalued.
The amount to be paid by Santos, P80,000 will be applied as the basis for the revaluation.
DR
CR
Other Assets
20,000
Antonio, Capital (20,000 x 40%)
8,000
Pascua, Capital (20,000 x 30%)
6,000
Mendiola, Capital (20,000 x 30%)
6,000
Computation:
New Partnership Capital
Old Partnership Capital
Positive Asset Revaluation
320,000
300,000
20,000
Antonio,
Pascua,
Mendiola,
Total
Capital
Capital
Capital
before
150,000
100,000
50,000
300,000
Capital
balances
revaluation
Share in asset revaluation
Capital
balances
after
revaluation
Interest purchased
Capital transferred to Santos
8,000
158,000
6,000
106,000
6,000
56,000
20,000
320,000
1/4
39,500
1/4
26,500
1/4
14,000
1/4
80,000
Antonio,
Pascua,
Mendiola,
Total
Capital
Capital
Capital
after
158,000
106,000
56,000
320,000
Capital
balances
revaluation
Capital transferred to Santos
Capital balances after admission
of Santos
Antonio, Capital
Pascua, Capital
39,500
118,500
26,500
79,500
DR
39,500
26,500
14,000
42,000
80,000
240,000
CR
Financial Accounting and Reporting Part 1
80
Mendiola, Capital
Santos, Capital
14,000
80,000
Case 5. Admission of a Partner by Purchase with Negative Asset Revaluation
Negative Revaluation of assets of the old partnership is being done before admission of
new partner. The result of the revaluation of assets is carried to the capital accounts of the
old partners. The adjusted capital of the old partners becomes the basis for the interest
transferred to the new partner.
Illustration:
Partners
Capital Balances
Admission
150,000
100,000
50,000
300,000
Antonio
Pascua
Mendiola
Total
Before Profit and Loss Ratio
40%
30%
30%
100%
Santos, the new partner, is to purchase ¼ interest from the partners paying P50,000.
Prior to the admission of Santos, the assets of the partnership will be revalued. The amount
to be paid by Santos, P50,000 will be applied as the basis for the revaluation.
The entry to record the negative revaluation
DR
40,000
30,000
30,000
Antonio, Capital (100,000 x 40%)
Pascua, Capital (100,000 x 30%)
Mendiola, Capital (100,000 x 30%)
Other Assets
CR
100,000
Computation:
New Partnership Capital
Old Partnership Capital
Negative Asset Revaluation
200,000
300,000
(100,000)
Antonio,
Capital
before 150,000
Capital
balances
revaluation
Share in asset revaluation
Capital
balances
after
revaluation
Interest purchased
Capital transferred to Santos
Pascua,
Capital
100,000
Mendiola,
Capital
50,000
Total
40,000
110,000
30,000
70,000
30,000
20,000
100,000
200,000
¼
27,500
¼
17,500
¼
5,000
1/4
50,000
Pascua,
Capital
70,000
Mendiola,
Capital
20,000
Total
17,500
52,500
5,000
15,000
50,000
150,000
Antonio,
Capital
after 110,000
Capital
balances
revaluation
Capital transferred to Santos
27,500
Capital balances after admission 82,500
300,000
200,000
Financial Accounting and Reporting Part 1
81
of Santos
Antonio, Capital
Pascua, Capital
Mendiola, Capital
Santos, Capital
DR
27,500
17,500
5,000
CR
50,000
In the event that there is no agreed profit and loss ratio, it is assumed that ¼ or 25% will be
Shared by the new partner and the remaining ¾ or 75% will be distributed to the old
partners.
Santos
Antonio (75% x 40%)
Pascua (75% x 30%)
Mendiola (75% x 30%)
Total
25.0%
30.0%
22.5%
22.5%
100.0%
B. Admission by Investment
The admission of a new partner by investment constitutes the entry of a new partner with a
corresponding increase in assets and increase in total capital of the partnership. A person may
be admitted into s partnership by investing cash or non-cash assets to the firm. The terms such
as invests and contributes are used to indicate the admission of a new partner by investment.
Illustration:
Partners
Capital balances before Profit and Loss
admission
Ratio
Gomez
250,000
40%
Tan
100,000
35%
Uy
150,000
25%
Total Capital
500,000
100%
Case 1. Ong, the new partner will invest P150,000 for 30% interest in equity and in profit in the
new partnership capital of P650,000. As per agreement, upon admission of Ong, the new partnership
capital would be P650,000, which is equal to the actual contribution of the old partners and new partner.
Partners
Total Actual
New
Contribution
Partnership
Capital
Old Partners
500,000
500,000
New Partner (Ong)
150,000
150,000
Total Capital
650,000
650,000
The entry to record the admission of a new partner
Cash
150,000
Ong, Capital
150,000
Case 2. Ong, the new partner will invest P100,000 for 30% interest in equity and in profit in the new
partnership capital of P400,000. (Bonus to New Partner). As per agreement, upon admission of Ong,
the new partnership capital would be P400,000, which is equal to the actual contribution of the old
Financial Accounting and Reporting Part 1
82
partners and new partner.
Partners
Total
Actual Bonus to New New
Contribution
partner
Partnership
Capital
Old Partners
300,000
(20,000)
280,000
New Partner (Ong)
100,000
20,000
120,000
Total Capital
400,000
400,000
The entry to record the admission of a new partner by investment with bonus to new partner
Cash
100,000
Gomez, Capital (20,000 x 40%)
8,000
Tan, Capital (20,000 x 35%)
7,000
Uy, Capital (20,000 x 25%)
5,000
Ong, Capital
120,000
Case 3. Ong, the new partner will invest P100,000 for 20% interest in equity and in profit in the
new partnership capital of P400,000. (Bonus to Old Partner). As per agreement, upon admission
of Ong, the new partnership capital would be P400,000, which is equal to the actual contribution of
the old partners and new partner.
Partners
Total
Actual Bonus to Old New
Contribution
partner
Partnership
Capital
Old Partners
300,000
20,000
320,000
New Partner (Ong)
100,000
(20,000)
80,000
Total Capital
400,000
400,000
The bonus to the old partners will be distributed based on their profit and loss ratio.
The entry to record the admission of a new partner by investment with bonus to old partner.
Cash
100,000
Gomez, Capital (20,000 x 40%)
8,000
Tan, Capital (20,000 x 35%)
7,000
Uy, Capital (20,000 x 25%)
5,000
Ong, Capital
80,000
Case 4. Ong, the new partner will invest P100,000 for 20% interest in equity and in profit in
the new partnership capital of P500,000. (Revaluation of Asset where old partners’ capital
are affected). After the admission of Ong, the total contributed capital would be P500,000, prompting
a Revaluation of Assets worth P100,000. This would result with Ong, being credited by P100,000
which is 20% of the new partnership capital of P500,000 which is the same as is original/actual
contribution. The older partners should have a capital credit of P400,000 (80% of the new partners’
capital of P500,000) after admission thus the revaluation will be effected on the old partners’
capital and will be divided based on the old profit and loss ratio.
.
Partners
Total
Actual Asset
New
Contribution
Revaluation
Partnership
Capital
Old Partners
300,000
100,000
400,000
New Partner (Ong)
100,000
100,000
Total Capital
400,000
100,000
500,000
The revaluation of assets amounting to P100,000 will be distributed to old partners based on their profit and loss
Financial Accounting and Reporting Part 1
83
The entry to record the admission of a new partner by investment with revaluation of asset to old partners.
Cash
100,000
Other Assets
100,000
Gomez, Capital (100,000 x 40%)
40,000
Tan, Capital (100,000 x 35%)
35,000
Uy, Capital (100,000 x 25%)
25,000
Ong, Capital
100,000
Case 5. Ong, the new partner will invest P70,000 for 20% interest in equity and in profit in the new partnership
invested P70,000 which is 20% of the new partnership capital of P350,000 (that is the same as his original/actu
will be effected on their capital accounts and will be distributed based on the profit and loss ratio.
Partners
Total
Actual Negative Asset New
Contribution
Revaluation
Partnership
Capital
Old Partners
300,000
(20,000)
280,000
New Partner (Ong)
70,000
70,000
Total Capital
370,000
(20,000)
350,000
The decreases in assets amounting to P20,000 was a result of a negative revaluation and will be distributed to o
The entry to record the admission of a new partner by investment with negative revaluation of asset to old partn
Cash
70,000
Antonio, Capital (20,000 x 40%)
8,000
Gomez, Capital (20,000 x 35%)
7,000
Tan, Capital (20,000 x 25%)
5,000
Other Assets
20,000
Ong, Capital
70,000
Case 6. Ong, the new partner will invest P75,000 for 15% interest in equity and in profit in the new partnership c
The entry to record the admission
Cash
75,000
Other assets
25,000
Antonio, Capital
16,000
Gomez, Capital
12,000
Tan, Capital
12,000
Ong, Capital
60,000
New capital credit
Old capital credit
Interest Share
Old Partners
New Partners
Total
85%
15%
400,000 x 15%
400,000 x 85%
New partnership
capital
340,000
60,000
400,000
60,000
340,000
Asset
revaluation
40,000
(15,000)
25,000
The revaluation of assets = 400,000 – 375,000 = 25,000
Bonus to older partners from new partners = 60,000 – 75,000 = (15,000)
Revaluation of assets of new partners = P40,000 – 15,000 = 25,000
Total
Actual
Contribution
300,000
75,000
375,000
Financial Accounting and Reporting Part 1
84
Readings
• Chapter 4, Accounting for Partnership and Corporation, 2011 Edition, Gloria J.
Tolentino- Baysa and Ma. Concepcion Yamat Lupisan
Assessment
Financial Accounting and Reporting Part 1
MODULE 5
DISSOLUTION OF PARTNERSHIP BY DISASSOCIATION OF A PARTNER DUE TO
WITHDRAWAL, RETIREMENT, INSOLVENCY, INCAPACITY OR DEATH OF A PARTNER
OVERVIEW
A partner may leave or depart from the partnership whenever he wants to if that is
allowed in a partnership agreement. Upon reaching a certain age provided for in the articles of
co partnership or by-laws, a partner may retire from the partnership. Insolvency, incapacity and
death naturally disassociate a partner from the partnership.
The withdrawal, retirement, insolvency, incapacity and death (WRIID) of any partner
result to a change in the partnership relationship and partnership may be dissolved or liquidated
by any of these events. Dissolution merely changes the relationship among the remaining
partners, but the business operations continue, liquidation on the other hand terminates the
affairs of the partnership and capital interest of each partner is determined and paid out.
No matter what may be the reason for disassociation, the computation of the capital
interests at the end of the partnership relation or at the time of dissolution the same computation
will be applied, however the withdrawing partner, insolvent partner, the retiring partner may still
exercise in their personal capacity the right to sell their shares in the partnership, the
incapacitated partner and the dead partner may exercise this right only thru their agent in case
of incapacitated partner and thru the estate administrator in the case of a dead partner.
Module Objectives:
After studying this module, the students should be able to
1. The learner should understand the accounting procedures for the dissolution of the
Partnership by reason of disassociation due to withdrawal, retirement, insolvency,
incapacity or death (WRIID) of a partner.
2. The learner should be able to compute for the share of the disassociated partner’s
capital interest at the time of disassociation
3. The learner should be able to record the transaction in different situations of
disassociation.
4. The learner should be able to distinguish the bonus method and asset revaluation
method in recording sale of disassociating partner’s interest to the partnership
Disassociation of a Partner due to Withdrawal, Retirement, Insolvency, Incapacity or
Death (WRIID)
85
86
Financial Accounting and Reporting Part 1
A partner may leave or depart from the partnership whenever he wants to if that is
allowed in a partnership agreement. Upon reaching a certain age provided for in the articles of
co partnership or by-laws, a partner may retire from the partnership. Insolvency, incapacity and
death, naturally disassociate a partner from the partnership.
The withdrawal, retirement, insolvency, incapacity and death (WRIID) of any partner
result to a change in the partnership relationship and partnership may be dissolved or liquidated
by any of these events. Dissolution merely changes the relationship among the remaining
partners but the business operations continue, liquidation on the other hand terminates the
affairs of the partnership and capital interest of each partner is determined and paid out.
No matter what may be the reason for disassociation, the computation of the capital
interests at the end of the partnership relation or at the time of dissolution the same computation
will be applied, however the withdrawing partner, insolvent partner, the retiring partner may still
exercise in their personal capacity the right to sell their shares in the partnership, the
incapacitated partner and the dead partner may exercise this right only thru their agent in case
of incapacitated partner and thru the estate administrator in the case of a dead partner.
When the disassociation of a partner merely dissolves but does not liquidate the
partnership, some considerations must be noted to give effect to the terms and agreement of
disassociation and to compute for the fair and reasonable share that the disassociating partner
may take as his capital interest upon date of disassociation.
These are the special considerations in accounting for the capital interests of the
disassociating partner:
1. The actual amount of investment the disassociating partner has at the time of
disassociation.
2. The actual amount of drawings the disassociated partner has at the time of
disassociation.
3. The amount of loans granted to the disassociating partner or amount he has taken as a
loan from the partnership.
4. The share in the profit or loss from the beginning of the accounting period up to the date
of disassociation.
5. The revaluation of assets as of time of disassociation.
6. The capital interest of a partner at the time of disassociation.
The actual amount of investment the disassociated partner has at the time of
disassociation should be determined from available records. All the investments made by this
partner must be verified if these have been actually recorded.
The amount of drawings made by him during the period shall likewise be updated to
reduce the amount of his investment. The amount of loans granted to him should be collected
from him or deducted from his capital interest, on the other hand, the amount of loan he
extended to the partnership must be paid to him or added to his capital interest.
The net income or net loss from the beginning of the period up to the date of
disassociation must be determined and the share of the disassociating partner must be properly
recorded as part of his capital interest.
If the disassociating partner will sell his interest to the partnership itself, revaluation of
assets at the time of disassociation must be established so as to determine the actual share of
Financial Accounting and Reporting Part 1
87
the disassociated partner in the assets and liabilities of the business and to fairly state the
values of the assets at the time of disassociation. There is positive revaluation if the revaluation
results in the increase of assets value and there is a negative revaluation if the assets decrease
in value.
The actual capital interest of the partner at the time of disassociation and the mode of its
payment must be established to finally settle the partnership’s responsibility to the leaving
partner and that he may get what is fair and reasonable under the circumstances.
Accounting for the Dissolution of Partnership by Reason of Disassociation
There are a lot of situations that disassociation may involve and each situation must be
evaluated thoroughly to properly record the actual interest of the disassociated partner. There
is no single formula to compute for the actual interest of the disassociated partner but the
schedule presented below may help in determining the actual interest of the partner upon
disassociation.
Capital interest of the disassociating partner:
Actual capital or investment to the business
Less: withdrawals or drawings
Net capital or net investment
Add/deduct the following items:
Share in the net profit/loss as of date of disassociation
Loans to or from the partnership
Positive/negative effects of revaluation
Total capital adjustments
Capital interest upon disassociation
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Let us take a case to illustrate the computation of the capital interest of a disassociating partner.
For example, the statement of financial position of NOTECH Partnership as of December 31,
2019 reveals the following information:
Assets
Cash
Machinery and equipment
Land
Other assets
115,000
240,000
400,000
100,000
Total Assets
855,000
Liabilities and Capital
Accounts Payable
50,000
Mortgage Payable
250,000
Total Liabilities
300,000
Noel, Capital
200,000
Teresa, Capital
250,000
Choana, Capital
105,000
Total Capital
555,000
Total Liabilities and Capital
855,000
Financial Accounting and Reporting Part 1
88
The partners share profits and losses in the ratio of 3:2:1. On July 1, 2020 Choana
decides to leave the country and wants to withdraw from the partnership since she can no
longer attend to the needs of the business. As a withdrawing partner she has the following
options:
1.
Sell to an outsider her share in the partnership
2.
Sell to Noel or Teresa or both her share in the partnership or
3.
Sell to NOTECH her share in the partnership
1.
SELL TO AN OUTSIDER THE SHARE IN THE PARTNERSHIP
The share of the discontinuing partner may be sold to an outsider for as long as the
remaining partner approves of that sale to an outsider. The sale is recorded in the same
manner as in the admission of a new partner who purchases an interest of a partner. If on July
1, 2020 when Choana asked to leave the partnership, she informed Noel and Teresa that she is
going to sell for 200,000, her share to Annabelle who is a common friend to them, the partners
upon this notice will close the books as of this date so as to determine the capital interest of
Choana.
Profit for the six months ended amounted to 120,000 while drawings of Noel, Teresa and
Choana amount to 20,000,30,000 and 10,000, respectively. Profits and losses shall be shared
equally after the sale to Annabelle of Choana’s share.
To record the sale to Annabelle of Choana’s capital interest in the partnership, the share
in the profit of all the partners from Jan 1-July 1 must be first computed and recorded in their
respective capital account as well as their drawings or withdrawals for the said period to update
their capital accounts. The entry to record these transactions will be:
Income summary
120,000
Noel, capital
Teresa, capital
Choana, capital
to record net income from 1/1-7/1,2020
Noel, capital
Teresa, capital
Choana, capital
Noel, drawing
Teresa, drawing
Choana, drawing
to record drawings of the partners
from 1/1-7/1,2020
60,000
40,000
20,000
20,000
30,000
10,000
20,000
30,000
10,000
Financial Accounting and Reporting Part 1
89
The preceding entries updated the capital balances of all the partners as of July 1, 2020.
After these entries, the next thing to do is to determine the capital interests of the partners as of
same date and this will be as follows:
Capital balance, Dec. 31, 2019
Add: Share in profit from Jan 1-July 1, 2020
Total available capital
Less: Drawings
Capital balance, July 1, 2020
Noel
200,000
60,000
260,000
20,000
240,000
Teresa
250,000
40,000
290,000
30,000
260,000
Choana
105,000
20,000
125,000
10,000
115,000
To record the sale of Choana’s interest to Annabelle, the following journal entry is
necessary to remove Choana from the partnership and include Annabelle instead.
Choana, capital
Annabelle, capital
to record sale of Choana's Interest
to Annabelle
115,000
115,000
Whether Choana sells her share above or below her actual capital interest in the
partnership, the entry remains because her transaction with Annabelle and the Partnership is
not interested in her personal transaction.
2.
SELL TO REMAINING PARTNERS (NOEL AND TERESA) THE SHARE IN THE
PARTNERSHIP
In the previous example, with the same pertinent facts and data, Choana instead of selling her
share to Annabelle, sold it to Noel and Teresa. The two bought her share for 250,000 and both
agreed to divide this equally between them. To record this transaction the entry will be:
Choana, capital
Teresa, capital
Noel, capital
to record sale of Choana's Interest
to Annabelle
115,000
57,500
57,500
Again, the partnership is not interested in the personal gain of Choana and the only
information needed by the partnership is to whom she sold the interest and in what proportion if
there are two or more buyers.
3.
SELL TO THE PARTNERSHIP (NOTECH) ITSELF
90
Financial Accounting and Reporting Part 1
Instead of selling to Teresa and Noel, Choana chose to sell her share to the partnership
itself, the NOTECH Partnership. Under the business entity concept of the Generally Accepted
Accounting Principles, NOTECH Partnership is distinct from its owners, Noel and Teresa, how
then will the sale to partnership be recorded?
When the sale of a capital interest by a disassociating partner is for the account of the
Partnership itself, there should be revaluation of assets as to current market price as of date of
disassociation. If the 250,000-selling price of Choana, was accepted by both Noel and Teresa
for the account of NOTECH Partnership, the entry would depend on whether bonus method or
asset revaluation method will be used.
In bonus method, the individual account of the remaining partners will be increased or
decreased by the difference between the selling price and the actual value of Choana’s interest
based on their existing profit and loss sharing ratio.
In asset revaluation method however, the Asset accounts affected by the revaluation will
be increased or decreased and the corresponding accounts of the remaining partners will
likewise be increased or decreased depending upon the results of the revaluation. If the
revaluation increases in value of the assets the increase will be added to the respective capital
accounts of all the partners including the disassociating partner, if the revaluation decreases the
difference should be subtracted from their capital accounts.
Bonus or Revaluation method, if you are going to make a deep analysis, there was no actual
increase in the amount of the capital of the remaining partners, it was just the fair market value
increased, the effect remains that a leaving partner will either get less or more for what she
actual own as partner
In the case of NOTECH Partnership, Choana benefited 135,000 from the Partnership because
she was paid more than her actual share.
The entry to record the transaction using both methods will be as follows:
Financial Accounting and Reporting Part 1
Bonus Method
Choana, capital
Teresa, capital
Noel, capital
Cash
to record sale of Choana's Interest
to NOTECH Partnership
Asset Revaluation Method
Other assets
Choana, capital
Teresa, capital
Noel, capital
Cash
to record sale of Choana's Interest
to NOTECH Partnership
91
115,000
81,000
54,000
250,000
810,000
115,000
270,000
405,000
250,000
Under the bonus method, the difference between the selling price and the actual interest
of the disassociating partner will be born or enjoyed by the remaining partners, depending on
whether the leaving partner gets more or lesser payment for his actual capital interest.
In this case where Choana receives more than her actual share, its effect is to decrease the
capital of Noel and Teresa based on their original profit and loss sharing ratio which is 3:2:1,
considering that Choana is already out of the partnership the ratio will be 3:2 between Noel and
Teresa. The 81,000 decrease in Teresa’s share and the 54,000 decrease in Noel’s share is
computed as follows:
Noel
3
Amount Received by Choana from the partnership
Choana's actual share in the partnership
Gain of Choana but loss of Noel and Teresa
81,000
Teresa
2
Choana
1
250,000
115,000
54,000 135,000
Financial Accounting and Reporting Part 1
92
Bonus Method
Choana, capital
Teresa, capital
Noel, capital
Cash
to record sale of Choana's Interest
to NOTECH Partnership
115,000
81,000
54,000
250,000
The asset revaluation method recognizes the increase or decrease in the fair value of
the assets as of date of disassociation. If Choana was paid more than her actual capital
interest, there is positive asset revaluation which will increase the value of other assets and
increase the capital of the partners.
The basis of the revaluation will be the difference between the cash paid out and the actual
interest
of
Choana.
Noel
3
Amount Received by Choana from the partnership
Choana's actual share in the partnership
Gain of Choana , Noel and Teresa
405,000
Teresa
2
270,000
Choana Total Asset Increase
1
by Revaluation
250,000
115,000
135,000
810,000
The 135,000 difference between the capital interest of Choana and the amount paid out by the
partnership to her is 1/6 of the total increase in revaluation considering that Choana’s interest in
the partnership is 1/6, to get the total revaluation increase will be to divide the difference by 1/6
and the resulting amount will be the total increase in revaluation that will be shared among the 3
partners, the share of Chona however will no longer be identified in the journal entry considering
that her account will be removed from the records, her share can be inferred from the difference
between her capital interest and the amount she receives as payment therefor.
Asset Revaluation Method
Other assets
Choana, capital
Teresa, capital
Noel, capital
Cash
to record sale of Choana's Interest
to NOTECH Partnership
810,000
115,000
270,000
405,000
250,000
Let us take another example, this time the selling price is lower than the actual interest
of the disassociating partner. Let us consider the same facts and data in the forgoing example
Financial Accounting and Reporting Part 1
93
but this time the selling price will now be 100,000. Choana sold her capital interest to NOTECH
Partnership for 100,000. The following entries will be necessary to record the sale of interest to
the partnership.
Bonus Method- Computation
Computation
Amount Received by Choana from the partnership
Choana's actual share in the partnership
Loss of Choana and gain of Noel and Teresa
Noel
3
9,000
Bonus Method- Journal entry
Choana, capital
Teresa, capital
Noel, capital
Cash
to record sale of Choana's Interest
to NOTECH Partnership
Revaluation Method- Computation
Amount Received by Choana from the partnership
Choana's actual share in the partnership
Loss of Choana , Noel and Teresa
Noel
3
Teresa
2
6,000
Choana
1
100,000
115,000
15,000
115,000
6,000
9,000
100,000
Teresa
2
45,000
Asset Revaluation Method - Journal entry
Choana, capital
Teresa, capital
Noel, capital
Other assets
Cash
to record sale of Choana's Interest
to NOTECH Partnership
Choana Total Asset Decrease
1
by Revaluation
100,000
115,000
30,000 15,000
90,000
115,000
30,000
45,000
90,000
100,000
Financial Accounting and Reporting Part 1
94
Readings
• Chapter 5, Accounting for Partnership and Corporation, 2011 Edition, Gloria J.
Tolentino- Baysa and Ma. Concepcion Yamat Lupisan
•
The Civil Code of the Philippines
Assessment
A. The ABC Partnership has the following information and A, a partner
died:
Exercise No. 1
Capital interest of the disassociating partner:
Profit and loss sharing ratio is based on capital contribution
Actual capital or investment to the business before disassociation
Withdrawals or drawings
Share in the net profit as of date of disassociation
Loans from the partnership
Sold to outsider
Sold to partners
Sold to partnership
A
50,000
10,000
5,000
3,000
40,000
45,000
35,000
B
100,000
20,000
10,000
6,000
1. Show the computation of capital interest as of date of disassociation
a. Compute for the capital interest of A
b. Compute for the capital interest of B
c. Compute for the capital interest of C
2. Compute for the asset revaluation
a. If A’s property administrator sells his share to an outsider
b. If A ‘s property administrator sells his share to B and C, B paid for
4/5 of A’s capital interest and C, 1/5
c. If A’s property administrator sells his share to ABC Partnership
B. The ABC Partnership has the following information when B, a partner
became incapacitated:
C
150,000
30,000
15,000
9,000
Financial Accounting and Reporting Part 1
95
Exercise No. 2
Capital interest of the disassociating partner:
Profit and loss sharing ratio is based on capital contribution
Actual capital or investment to the business before disassociation
Withdrawals or drawings
Share in the net loss as of date of disassociation
Loans to the partnership
Sold to partners
Sold to outsider
Sold to partnership
A
50,000
10,000
1,000
2,000
B
100,000
20,000
2,000
4,000
100,000
100,000
100,000
C
150,000
30,000
3,000
6,000
3. Show the computation of capital interest as of date of disassociation
a. Compute for the capital interest of A
b. Compute for the capital interest of B
c. Compute for the capital interest of C
4. Compute for the asset revaluation
a. If B’s agent sells his share to an outsider
b. If B ‘s agent sells his share to B and C, B paid for the 30% and C
the remaining 70%.
c. If B’s agent sells his share to ABC Partnership
C. The ABC Partnership has the following information when B, a partner became
insolvent:
Exercise No. 3
Capital interest of the disassociating partner:
Actual capital or investment to the business before disassociation
Withdrawals or drawings
Share in the net profit as of date of disassociation
Loans to the partnership
Loans from the partnership
Sold to partners
Sold to outsider
Sold to partnership
A
50,000
10,000
5,000
B
100,000
20,000
10,000
4,000
3,000
5. Show the computation of capital interest as of date of disassociation
a. Compute for the capital interest of A
b. Compute for the capital interest of B
c. Compute for the capital interest of C
6. Compute for the asset revaluation
a. If C sells his share to an outsider
b. If C sells his share to B and C, B and C divide the share equally.
C
150,000
30,000
15,000
9,000
200,000
200,000
200,000
96
Financial Accounting and Reporting Part 1
c. If C sells his share to ABC Partnership
7. Journalize all the entries to update the capital account of C
8. Journalize the selling of C’s capital interest to outsider
9. Journalize the selling of C’s capital to A and B
10. Journalize the selling C’s capital to ABC Partnership