Partnership:
Basic Consideration
& Formation
A PARTNERSHIP is a contract
between two or more persons,
whereby, one binds himself, with
regards to the others to contribute
money, property or industry to a
common fund with the intention of
dividing the profit among
themselves.
CHARACTERISTICS :
1. Mutual contribution - no partnership w/o
contribution to a common fund
1. Division of profits or losses - each partner shares
in the profit or loss
1. Co-ownership of contributed assets - all assets
contributed are owned by the partnership
1. Mutual agency - any partner can bind the other
partners to a contract
CHARACTERISTICS :
5. Limited life - a partnership is easily dissolved
6. Unlimited liability - all partners (except limited) are
liable for all debts incurred by the partnership
7. Income taxes - partnerships are taxed like a
Corporation
8. Partners’ equity accounts - a capital account and
a drawing account for each partner
ADVANTAGES:
A.vs. Proprietorships
1. Brings greater financial capability to the business
2. Combines special skills, expertise and experience
of the partners
3. Other relative freedom and flexibility of action in
decision-making
B.vs. Corporations
1. Easier and less expensive to organize
2. More personal and informal
DISADVANTAGES:
1. Easily dissolved and thus unstable compared to a
corporation
2. Mutual agency and unlimited liability may create
personal obligations to partners
3. Less effective than a corporation in raising large
amounts of capital
PARTNERSHIP DISTINGUISHED FROM CORPORATION
PARTNERSHIP
1. Manner of creation
mere agreement
2. Number of persons
2 or more
3. Commencement of
certificate
juridical personality
execution of the
CORPORATION
operation of law
5 – 15
issuance of
articles of partnership
of incorporation by SEC
4. Management
every partner is an
agent of the partnership
vested on the Board
of Directors
5. Extent of liability
each partner, except a
limited partner, is liable
to the extent of his
personal assets.
shareholders are liable
to the extent of their
investment in the corp.
PARTNERSHIP DISTINGUISHED FROM CORPORATION
PARTNERSHIP
6. Right of succession
No right of succession
CORPORATION
has the capacity of
continued existence
regardless of death,
withdrawal, insolvency
or incapacity of its
directors or shareholders
7. Terms of existence
any period of time
stipulated by the partners
not to exceed 50 years
subject to extension
CLASSIFICATIONS OF PARTNERSHIPS:
1.According to object
- Universal partnership of all present property
- Universal partnership of profits
- Particular partnership
2. According to liability
- General
- Limited
3. According to duration
- Partnership with a fixed term/for a particular undertaking
- Partnership at will
4. According to purpose
- Commercial
- Professional
5.According to legality of existence
- De jure partnership - complied w/ all legal requirements
- De facto partnership - failed to comply
KINDS OF PARTNERS
1. General partner - liable to the extent of his separate
properties
2. Limited partner - liable only to the extent of his capital
contribution
3. Capitalist partner - contributes money or property
4. Industrial partner - contributes services/expertise
5. Managing partner - manages the business
KINDS OF PARTNERS
6. Liquidating partner - Settles the affairs of the
business
7. Dormant partner - does not take active part & not
known
8. Silent partner - does not take active part/ known
9. Secret partner - takes active part/ not known
10. Nominal partner or partner by estoppel - not a
partner but represents himself as one
ARTICLES OF PARTNERSHIP
1.Partnership name, nature, purpose and location
2.Names, citizenship and residences of the partners
3.Date of formation and duration of the partnership
4.The capital contribution of each partner, the procedure of valuing noncash investments, treatment of excess contribution (as capital or as loan)
and the penalties for a partner’s failure to invest and maintain the agreed
capital
5.The rights and duties of each partner
6.The accounting period to be adopted, the nature of accounting records,
financial statements and audits by independent public accountants
7.The methods of sharing profit or loss, frequency of income
measurement and distribution, including any provisions for the recognition
of differences in contributions
8.The drawings or salaries to be allowed to partners
9.The provision for arbitration of disputes, dissolution, and liquidation
A contract of partnership is void whenever
immovable property or real rights are
contributed and a signed inventory of the said
property is not made and attached to a public
instrument.
SEC REGISTRATION
When the partnership capital is P’3,000 or more, in
money or property, the public instrument must be
recorded with the Securities and Exchange
Commission (SEC).
Even if it is not registered, the partnership having a
capital of P’3,000 or more is still valid and therefore
has legal personality.
ACCOUNTING FOR PARTNERSHIPS
Partner’s Capital Account__________
Debit
Credit
1. Permanent withdrawals
2. Debit balance of the drawing
account t the end of the period
1. Original investment
2. Additional investment
3. Credit balance of the drawing
account the
end of the period
Partner’s Drawing Account________
Debit
1. Temporary withdrawals
2. Share in loss (maybe debited
directly to Capital)
Credit
1. Share in profit (maybe
credited directly to Capital)
PARTNERSHIP FORMATION:
A partnership may be formed in any of the following ways:
1. Individuals with no existing businesses form a partnership
1. Conversion of a sole proprietorship to a partnership
- a sole proprietor and an individual without an existing
business form a partnership
- two or more sole proprietors form a partnership
3. Admission or retirement of a partner
PARTNERSHIP FORMATION:
Valuation of Investment By Partners
♥ if the investment is cash, the capital account of the partner is
credited for the amount of cash received
♥ if the investment is non-cash asset, the non-cash asset is
debited at its fair market value and the capital account of the
partner is credited for the fair value of the non-cash asset
invested
♥ if the investment is non-cash asset and there is a liability
attached to the asset and the partnership assumes the
liability, the capital account of the partner is credited for the
amount of the net investment.
1. INDIVIDUALS WITH NO EXISTING BUSINESSES FORM A
PARTNERSHIP
Illustration:
A, B, C and D formed a partnership. They agreed to contribute
the ff:
A – Cash, P’200,000
B – Equipment with a carrying amount (book value) of
P’250,000 and a fair value of P’280,000
C – Service Vehicle with a fair market value of
P’300,000
and an unpaid mortgage with a bank for
P’80,000
D – Industrial partner, who will share 20% of the profit
1. INDIVIDUALS WITH NO EXISTING BUSINESSES FORM A
PARTNERSHIP
JOURNAL ENTRIES
1. Cash
A, Capital
200,000
200,000
2. Equipment
B, Capital
280,000
3. Service Vehicle
Mortgage Payable
C, Capital
300,000
280,000
80,000
220,000
4. Memorandum Entry Only
D, Capital____
D is an industrial partner
who shares 20% in the
profit
2. Conversion of a Sole Proprietorship to a Partnership
A sole proprietor and an individual without an existing
business form a partnership
PROCEDURES:
1. Adjust the books of the partner with a business
- nominal accounts are not allowed; instead, use the capital account
of the partner
- if the account to be adjusted is an asset account, and the asset
account has a contra-asset – ADJUST THE CONTRA-ASSET
- if the asset account to be adjusted does not have a contra-asset –
ADJUST THE ASSET ACCOUNT
2. Close the books of the partner with a business
2. Conversion of a Sole Proprietorship to a Partnership
A sole proprietor and an individual without an existing
business form a partnership
Illustration:
A and B agreed to form a partnership. A has an existing business
and B will contribute cash equal to the adjusted capital of A. Shown
below is the post-closing trial balance of A:
Cash
50,000
Accounts Receivable
Allowance for Doubtful Accounts
10,000
Merchandise Inventory
Equipment
Accumulated Depreciation
240,000
Accounts Payable
60,000
A, Capital
120,000
270,000
400,000
2. Conversion of a Sole Proprietorship to a Partnership
A sole proprietor and an individual without an existing
business form a partnership
Illustration:
Assume:
1.
2.
3.
4.
Accounts receivable is 90% collectible
Equipment has a fair value of P’300,000
Due to obsolescence, inventory should be valued at P’250,000
Unpaid utilities of P’5,000
equipment
LESS: AccumDepn
Carrying Amount/fmv
Given
400,000
240,000
AJjustments
400,000
100,000
160,000
300,000
A. BOOKS OF A
1.ADJUSTING ENTRIES
1. A, Capital
2,000
Allowance for Doubtful Accounts
2,000
2. Accumulated Depreciation
A, Capital
140,000
3. A, Capital
20,000
Merchandise Inventory
20,000
4. A, Capital
5,000
Utilities Payable
5,000
140,000
A. BOOKS OF A
2. CLOSING ENTRY
Allowance for Doubtful Accounts
Accumulated Depreciation
Accounts Payable
12,000
60,000
Utilities Payable
5,000
A, Capital
643,000
Cash
50,000
Accounts Receivable
120,000
Merchandise Inventory
250,000
Equipment
400,000
TO CLOSE THE BOOKS OF A
100,000
B. NEW BOOKS OF THE PARTNERSHIP
1. Cash
50,000
Accounts Receivable
Merchandise Inventory
Equipment
300,000
Allowance for Doubtful Accounts
120,000
250,000
12,000
Accounts Payable
60,000
Utilities Payable
5,000
A, Capital
643,000
TO RECORD INVESTMENT OF A
2. Cash
643,000
B, Capital
AB PARTNERSHIP
POST-CLOSING TRIAL BALANCE
DATE
DEBIT
CREDIT
Cash
693,000
Accounts Receivable
Allowance for Doubtful Accounts
12,000
Merchandise Inventory
Equipment
300,000
Accounts Payable
60,000
Utilities Payable
5,000
A, Capital
643,000
120,000
250,000
SEATWORK:
Medina contributed Land, inventory and P’280,000 cash to the
partnership. The land has a book value of P’650,000 and a market
value of P’1,350,000. the inventory has a book value of P’ 600,000
and a market value of P’510,000. The partnership also assumed a
P’350,000 note payable owed by Medina that was used to purchase
the land. Loqueloque agreed to invest cash equal to the net
investment of Medina.
ANSWER:
CASH
LAND
INVENTORY
NOTE PAYABLE
350,000
MEDINA, CAPITAL
1,790,000
280,000
1,350,000
510,000
CASH
1,790,000
LOQUELOQUE, CAPITAL
1,790,000
QUIZ
Espanol operated a specialty shop that sold fishing equipment and
accessories. Shown below is her post-closing trial balance:
FISH R’ US
POST-CLOSING TRIAL BALANCE
DECEMBER 31, 2020
DEBIT
CREDIT
CASH
4,000
ACCOUNTS RECEIVABLE
ALLOWANCE FOR DOUBTFUL ACCTS
INVENTORY
200,000
EQUIPMENT
135,000
ACCUM. DEPRECIATION
75,000
ACCOUNTS PAYABLE
160,000
16,000
Espanol and Italiano decided to form a partnership with profit and
loss ratio of 40:60.
Conditions agreed upon before the formation of the partnership:
1.Accounts receivable is 70% realizable
2.Equipment should be valued at P’124,000
3.Profit and loss ratio is 40:60
4.Italiano is to contribute cash in order to make the partners’
capital balance proportionate to the profit and loss ratio
REQUIRED:
A – Books of Espanol
1. Adjusting Journal Entries
2. Closing Journal Entry
B – NEW Books of the Partnership
1. Opening journal entries to record the investments of
- Espanol
- Italiano
Two or More Sole Proprietors Form a Partnership
Illustration: Similar to the previous lesson
(See Illustration for A & B slide #19)
THE END