COLLEGE OF BUSINESS AND ACCOUNTANCY
MODULE 1: PARTNERSHIP FORMATION
PARTNERSHIP
a. Contract between 2 or more persons
b. To contribute money, property, or industry
c. Dividing profits among themselves
Characteristics of a Partnership
a. Ease of Formation
b. Separate legal personality
c. Mutual agency
d. Co-ownership of properties
e. Co-ownership of profits
f. Limited life
• Express will
• Expiration of term
• Unlawful
• A contribution perishes before the delivery
• Expulsion, death, insolvency, or civil interdiction
g. Transfer of ownership
h. Unlimited liability
Advantages and Disadvantages of Partnership
Advantages
• Ease of formation
• Shared responsibility of running the
business
• Flexibility in decision making
• Greater capital compared to sole
proprietorship
• Relative lack of regulation by the
government as compared to
corporations
Disadvantages
• Limited life/ Easily dissolved
• Unlimited liability
•
•
•
Conflict among partners
Lesser capital compared to a
corporation
A partnership (other than a general
professional partnership) is taxed like a
corporation
Major Considerations in the Accounting for Partnerships
1. Formation
2. Operation
3. Dissolution
4. Liquidation
1. FORMATION – Accounting for initial investments to the partnership.
Partnership agreement must be made in public instrument and recorded with the Securities and Exchange
Commission when:
a. Immovable property or real rights are contributed
b. Partnership has a capital of more than P3000 or more.
Valuation of contributions of partners
1. Agreed value
2. Fair value
3. Carrying value
Partners’ Ledger Accounts
1. Capital accounts
2. Drawings accounts
3. Receivable from/ Payable to a partner
Capital and Drawings Accounts
Capital
Dr.
Permanent withdrawals
Share in losses
Debit balance
xx
xx
xx
xx
xx
xx
Cr.
Initial investment
Additional investment
Share in profits
Drawings
Dr.
Temporary withdrawals
Temporary funds held to be
remitted
Debit balance
xx
xx
xx
xx
Cr.
Recurring reimbursable costs
paid by the partner
Additional investment
xx
ILLUSTRATIONS:
Illustration: Formation of Partnership – (Valuation of capital)
A and B formed a partnership. The following are their contributions:
Cash
Accounts Receiv able
I nv entory
Land
Land
Building
Total
A
100,000.00
50,000.00
80,000.00
Note payable
A, Capital
B, Capital
Total
60,000.00
170,000.00
230,000.00
230,000.00
B
50,000.00
120,000.00
170,000.00
170,000.00
170,000.00
Additional information:
• Included in accounts receivable is an account amounting to P20,000 which is deemed uncollectible.
• The inventory has an estimated selling price of P100,000 and estimated costs to sell of P10,000.
• The partnership assumed a P10,000 unpaid mortgage on the land.
• The building is under-depreciated by P25,000.
• There is an unpaid mortgage of P15,000 on the building which B agreed to settle using his personal
funds.
•
•
The note payable is stated at face amount. A proper valuation requires the recognition of a P15,000
discount on the note payable.
A and B shall share in profits and losses in a 60:40 ratio, respectively.
Requirement (a): Compute for the adjusted balances of the partner’s capital accounts.
Requirement (b): Assume that a partner’s capital shall be increased accordingly by contributing additional cash
to bring the partners’ capital balances proportionate to their profit and loss ratio. Which partner should provide
additional cash and how much is the additional cash contribution?
Solution: Requirement (a)
Cash
Accounts Receiv able
I nv entory
Land
Land
Building
Total
Note payable
Mortgage payable - land
Adjusted Capital balances
Journal entries (Books of A)
A
B
Partnership
Journal entries (Books of B)
Journal entries (Books of Partnership)
Solution: Requirement (b)
Using A’s capital first, let us determine if B’s capital contribution has any deficiency.
A, capital
Div ide by: Profit (loss) sharing ratio of A
Total
Multiply by: B's profit (loss) sharing ratio
Minimum capital required of B
B's capital
Deficiency in B's capital contribution
Now using B’s capital, let us determine if A’s capital contribution has any deficiency.
B, capital
Div ide by: Profit (loss) sharing ratio of B
Total
Multiply by: A's profit (loss) sharing ratio
Minimum capital required of A
A's capital
Deficiency in A's capital contribution
BONUS ON INITIAL INVESTMENTS
Illustration:
A and B agreed to form a partnership. A contributed P40,000 cash while B contributed equipment with a fair
value of P100,000. However, due to the expertise that A will be bringing to the partnership, the partners agreed
that they should initially have an equal interest in the partnership capital.
Requirement: Provide the journal entry to record the initial investments of the partners.
Partner
A
B
Total
Journal Entry:
Actual contributions
Bonus method
VARIATIONS TO THE BONUS METHOD
Illustration 1: Cash settled between partners
A, B and C formed a partnership. Their contributions are as follows:
Cash
A
B
C
40,000.00
10,000.00
100,000.00
Equipment
Total
80,000.00
40,000.00
90,000.00
100,000.00
Additional information:
• The equipment has an unpaid mortgage of P20,000, which the partnership assumes to repay.
• The partners agreed to equalize their interests. Cash settlements among the partners are to be made
outside the partnership.
Requirements:
a. Which partner(s) shall receive cash payment from the other partner(S)?
b. Provide the entry to record the contributions of the partners.
A
Cash
Equipment
Mortgage payable
Net contribution
Equal interests
Cash receipt (payment)
B
C
Partnership
Journal entry:
Illustration 2: Additional investment or Withdrawal of investment
A and B agreed to form a partnership. The partnership agreement stipulates the following:
• Initial capital of P140,000.
• A 60:40 interest in the equity of the partnership.
A contributed P100,000 while B contributed P40,000 cash.
Requirement: Which partner shall provide additional investment (or withdraw part of his investment) in order to
bring the partners’ capital credits equal to their respective interests in the equity of the partnership?
Solution:
A
B
Total
Actual contributions
Required capital balances
Additional (Withdrawal)
References:
Partnership and Corporation Accounting 2024 Edition, Win Ballada, CPA, CBE, MBA
Accounting for Special Transactions (Advanced Financial Accounting 1) 2024 Edition, Zeus Vernon B. Millan