When two or more persons bind themselves to contribute money, property or industry to a common fund with the intension of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession

CHARACTERISTIC OF A PARTNERSHIP

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KINDS OF PARTNERSHIP
General partnership
Limited partnership
As to Liability
Commercial Partnership
General Professional Partnership
As to Purpose
De jure Partnership
De Facto Partnership
As to legality of existence
Partnership at will
As to duration
Partnership with fixed term
Partnership by estoppel As to representation to others

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KINDS OF PARTNERS
Capitalist partner
Industrial partner
Capitalist-Industrial partner
General partner
As to Liability
Limited partner
Managing partner
Silent partner
As to contribution
As to participation
Liquidating partner
Secret partner
Dormant partner
Ostensible partner
As to third person

ARTICLES OF PARTNERSHIP
A written contract made by the partners. It is needed to appear in a public instrument and to be registered with the SEC if partners contributed a real property or real rights or if total partnership capital amounted toP3,000 or more.

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Partnership Formation
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Partnership Operation
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Partnership Dissolution
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Partnership Liquidation

PARTNERSHIP FORMATION
It refers to the perfection of the partnership contract by the partners.
When a partnership is formed, partners commonly observe the following to effect fair and honest business
1.
2.
Execution of partners’ agreement
Valuation of partners’ investments
3.
Adjustments of the accounts

INITIAL INVESTMENT BY PARTNERS
Rules to be observed:
Amount of contribution. The amount of contribution shall be based on the partner’s agreement . In the absence of any agreement, it shall be contributed equally.

ILLUSTRATION (PARTNER’S AGREEMENT)
A and B form a partnership with the total agreed capitalization of P150, 000 to be contributed in cash of 40% and
60% by A and B, respectively, through the issuance of their personal checks. The amount contributed and capital credited to be recorded per agreement would be:

ILLUSTRATION (NO AGREEMENT)
A and B form a partnership with the total agreed capitalization of P150, 000 to be contributed in cash through the issuance of their personal checks. The amount contributed and capital credited to be recorded per agreement would be:

VALUATION OF PARTNER’S CONTRIBUTIONS
If cash contribution – based on face value
If non cash – based on agreed value, in the absence of agreed value it shall be based on fair value.
*Fair value or fair market value – represents the estimated amount in which the seller and buyer would be willing to exchange value in an open market.

ILLUSTRATION (VALUATION)
C, D and E formed a partnership with agreed total capitalization of P300, 000 which should be contributed equally by C and D.
Meanwhile, E was designated to manage the operation of the partnership as industrial partner with a share of 20% from partnership profits. C and D contribute the following assets:

Partner C
Land
Equipment
Notes Payable assumed by the partners
Partner D
Cash
Equipment
Supplies
At cost
P50,000
70,000
20,000
At cost
P100,000
50,000
20,000
At fair value
P 110,000
60,000
20,000
At fair value
P 100,000
40,000
10,000

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FORMATION OF PARTNERSHIP
Actual investment method
- amount credited to capital account is equal to the actual contributed assets.
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Bonus Method
- actual contribution is not the same as the agreed capital credited to him as recorded in the partnership books.

ILLUSTRATION( BONUS METHOD)
Scott, a sole proprietor, allows Ann to join his business to form a partnership, provided that the latter would contribute cash amounting to P70,000.
Scott’s contribution comprised the following:
P10,000 cash, P30,000 Accounts Receivable,
P20,000 merchandise and Accounts Payable of
P8,000 to be assumed by the partnership. They agreed that their initial capital balances would be of equal amount upon the formation. Assume that
Scott and Ann agreed that the capital would be
P122,000.

EXERCISES:
Acosta and Beltran, both sole proprietors, agreed to form a partnership. Account balances per ledger and respective agreed values upon formation are shown below :
Cash
Acosta
150,000
As agreed Beltran
150,000 140,000
As agreed
140,000
Accounts Receivable 140,000 140,000 135,000 135,000
Allow. For Bad Debts (50,000) (40,000) (30,000) (40,000)
Equipment, Cost 300,000 150,000 200,000 175,000
Accum. Depreciation (60,000)
Accounts Payable 100,000 100,000
(20,000)
150,000 150,000

Adam, a single proprietorship has the following balances: Cash P10,000, Equipment
P90,000 and Notes Payable P15,000. Eve is invited to invest P40,000 cash to convert the sole proprietorship into partnership. The non cash assets of sole proprietorship can be sold in an open market for P50,000. Adam and Eve agreed that their respective capital balances would be 60% and 40% of the total partnership capitalization .

PARTNERSHIP OPERATION
Distribution of Profits and Losses
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Art. 1799 of the New Civil Code provides that any stipulation that excludes one or more partners from any share in the profits or losses is null and void.
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Art. 1797 provides the following guidelines on how partnership profits and losses shall be distributed among the partners :

Rules for dividing profits and losses:
I . As to Capitalist Partner
1. Division of profits a. In accordance with agreement b. In the absence of an agreement, in accordance with capital contributions.
2. Division of losses a. In accordance with agreement b. If only the division of profits is agreed upon, the division of losses will be the same as the agreement on the division of losses c. In the absence of agreement, based on capital contribution

II. As to Industrial Partner
1. Division of profits a. In accordance with agreement b. In the absence of an agreement, industrial partner shall receive a just and equitable share of the profits.
2. Division of losses a. In accordance with agreement b. In the absence of agreement, industrial partner shall have no share in the losses.

ILLUSTRATION: (W/ AGREEMENT)
Assume that Adam and Eve formed a partnership with original capital contributions of P60,000 and
P30,000 respectively. The profit agreement is 60% and 40% respectively. During the year, the partnership generated an income of
P100,000.

ILLUSTRATION: (NO AGREEMENT)
Assume that Adam and Eve formed a partnership with original capital contributions of P60,000 and P30,000 respectively. During the year, the partnership generated an income of
P100,000.

ARBITRARY AGREEMENT IN COMPUTING
1.
PROFITS AND LOSSES
Equally
2.
3.
4.
Specified ratio
Capital ratio
Interest allowed on partner’s capitals, the remainder to be divided equally in an agreed ratio.
5.
6.
Salaries or Bonus allowed for partner’s services, the remainder to be divided in an agreed ratio
Multiple bases of allocation

ILLUSTRATION:
Assume that Adam and Eve formed a partnership with original capital contributions of P60,000 and P30,000 respectively. General ledger for their capital accounts before closing entries are shown below:

During the year Net Income of P100,000 was earned by the partnership. They agreed that profit will be divided:
1. Equally
2. 60% to Adam and 40% to Eve
3. Based on capital ratio:
- original capital contribution
- beginning capital balance
- ending capital balance

4. 10% Interest on beginning capital and the balance will be distributed equally
5. Salary to Eve for P10,000 and the balance distributed 60% for Adam and 40% to Eve.
6. 10% interest on ending capital, salary to
Eve for 10,000, 10% bonus based on Net
Income before salaries and interest for
Adam. The balance will be divided equally.
7. 10% interest on ending capital, salary to
Eve for 10,000, 10% bonus based on Net
Income after salaries and interest for
Adam. The balance will be divided equally.

INSUFFICIENT INCOME
As a rule. The prescribed allocation for salaries and/or interest should still be given in spite of the insufficiency of partnership’s net income to cover them. The earnings deficiency resulted for giving salaries and/or interest shall be allocated among the partners based on their profit and loss sharing.

ILLUSTRATION
Using the same example above, only the operations resulted from P10,000 net income. The partnership agreement is:
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10% interest on ending capital, salary to
Eve for 10,000, 10% bonus based on Net
Income before salaries and interest for
Adam. The balance will be divided
60%Adam and 40% to Eve.

PARTNERSHIP DISSOLUTION
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The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business.
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The change of partners in the partnership ends their original agreement, thus terminating the partnership.

ACCOUNTING FOR DISSOLUTION
1. Admission of a New Partner
 admission by purchasing a partner’s interest directly from one or more of the current partners.
The selling partner could sell his interest in the partnership at an amount: a.) equal to book value of his interest b.) less than the book value of his interest c.) more than the book value of his interest
Note: gain or loss in the purchase of interest transaction is a personal gain or loss of the partner/s involved.

ILLUSTRATION:
The capital balances and agreed profit and loss distribution of B1 and B2 partnership prior to dissolution are as follows:
Partners Capital Balances P&L Ratio
B1
B2
250,000
750,000
25%
75%
Doding Daga wants to buy 50% of the interest of
B2 to give him interest of 37.5% in the partnership’s asset and in the partnership’s profit and loss.

Case 1: Purchase at Book Value: Assume that
Dodi paid P375,000 directly to B2.
Case 2: Purchase Lesser than Book Value:
Assume that Dodi paid P350,000 directly to B2.
Case 3: Purchase More than Book Value:
Assume that Dodi paid P400,000 directly to B2.
What is the journal entry for the admission and what is the new profit and loss ratio of new partnership?

ILLUSTRATION:
The capital balances and agreed profit and loss distribution of Pat and Sponge partnership prior to dissolution are as follows:
Partners Capital Balances P&L Ratio
Pat
Sponge
150,000
350,000
30%
70%
Mr. Crab wants to buy 20% of the interest in the partnership’s asset and profit by paying directly to each of the existing partners.

Case 1: Purchase at Book Value: Assume that
Mr. Crab paid P100,000 directly to the partners.
Case 2: Purchase Lesser than Book Value:
Assume that Mr. Crab paid P60,000 directly to the partners.
Case 3: Purchase More than Book Value:
Assume that Mr. Crab paid P150,000 directly to the partners.

ADMISSION BY DIRECT INVESTMENT
This manner of admitting a new partner is a transaction between the incoming partner and the partnership. To acquire interest in the partnership, the incoming partner directly invests cash and/or other non cash assets to the partnership, thereby increasing the total assets of the partnership.
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Investment equals capital credits
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Bonus method

ILLUSTRATION
Triple A partnership has the following adjusted accounts prior to the acceptance of Nimrod as a new partner:
Aaron, Capital
Ahab, Capital
150,000
150,000
Amber, Capital 150,000
The partners have been dividing profit equally. They approved admission of Nimrod provided that the latter will contribute to the partnership equipment with fair value of P100,000 and cash of P50,000/
They further agreed that they would received capital interest equal to their actual contributions

ILLUSTRATION (BONUS METHOD)
The capital balances and agreed profit and loss distribution ratio of the partners before admitting
Judy are as follows:
Capital
Balances
Profit & Loss
Ratio
Job John Jun
120,000 240,000 240,000
20% 40% 40%
Total
600,000
100%
Judy admitted by investing cash of P200,000 for
30% interest in the partnership assets and profits

Required:
1.) Journalized admission of new partner
Judy
2.) What is the new profit and loss sharing of the partners?
3.) Assume that Judy admitted by investing cash of P200,000 for 20% interest in the partnership.

PARTNERSHIP LIQUIDATION
Liquidation is the process of converting all assets of the business into cash (realization), followed by the final payments of the creditors’ claims and the partners’ capital balances in the partnership (liquidation). This process is usually called “winding up of business activities.”

ACCOUNTING TERMS AND ACCOUNT TITLES
1)
Capital deficiency
2)
Solvent or Insolvent partners
3)
Gain or Loss on Realization
4)
Loans to partners and Loans from partners
5)
Statement of Liquidation

ILLUSTRATION:
On October 31, 2011, the partners dissolved and liquidated the partnership. The trade accounts receivable, merchandise inventory, equipment and other non cash assets were sold for
P130,000

EXERCISE:
Suppose that the non cash assets were realized at a total lump sum amount of P195,000. and all partners are solvent.
Prepare statement of liquidation.