Accounting 31: Financial Accounting and Reporting
Accounting for Partnership
Partnership: 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.
Characteristics of a partnership
1. Ease of Formation
2. Limited Life
3. Legal Entity
4. Mutual Agency
5. Unlimited Liability
6. Mutual Participation in Profits
7. Co-ownership of contributed assets
A. Accounting for Formation
 Main concern: Valuation of investments/contributions made by the partners.
 Initial investments shall be measured at fair value
o Cash at face value
o Property at fair market value
o Industry
 FAQ: Capital balance upon formation
Illustration: Ana and Bea formed a partnership by contributing the following:
Ana
Cash
100,000
Accounts Receivable
--Inventories
500,000
Land
800,000
Equipment
---
Bea
200,000
400,000
----700,000
Additional Information:
a. 10% of the accounts receivable is deemed uncollectible.
b. 50,000 worth of inventories is worthless
c. The land has a fair market value of one million. Attached to the land is a mortgage payable of 100,000 which
is to be assumed by the partnership.
d. The fair market value of the equipment is 500,000.
e. A note payable of Ana amounting to 150,000 is to be assumed by the partnership.
Required:
1. Prepare the journal entries to record the initial investment of Ana and Bea
2. Assuming Ana will also be investing her expertise into the business and as such the partners agreed that Ana
would have a 60% interest in the partnership capital. Determine the capital balances of Ana and Bea
immediately upon formation.
3. Assuming the partners agreed to equalize their interest and cash settlements will be made outside of the
partnership. Determine the capital balances of Ana and Bea immediately upon formation.
4. Assuming the partners agreed to have total capital of 2.5 million upon formation and equal capital interest.
How much shall each partner invest or withdraw to meet their agreement?
B. Accounting for Operation
 Main concern: Distribution/division of profits/loss to the partners
 Profits and losses shall be divided in accordance with the partnership agreement.
o With agreement
 Ratios
 With provision for Salaries, Interest and Bonus
 In the absence of an agreement, profits and losses shall be divided based on their capital contribution.
 FAQs: Share of a partner in the profits and capital balance after profit distribution
C. Accounting for Dissolution
 Admission of a new partner and withdrawal/retirement/death of a partner
D. Accounting for Liquidation
 Winding-up of affairs of the partnership