PARTNERSHIP FORMATION

INTRODUCTION - Partnership (other than general professional partnership) is

 Partnership taxed like a corporation.
- Unincorporated association of 2 or more individuals to carry
on with the intention of dividing profits among themselves. ACCOUNTING FOR PARTNERSHIPS
- Owned by 2 or more individual.  Conceptual Framework for Financial Reporting and PFRS
- Created by agreement between the partners. - Applicable to all reporting entities regardless of the type of
- Formed for business that is normally of continuing nature. organization.
- Sole Proprietorship (owned by 1 individual). - Accounting for partnerships should also comply with Civil
- Corporation or Cooperative (created by the operation of Code of the Philippines.
law)  Major considerations in accounting for equity of
- Joint Venture (formed for a limited purpose and ends when partnership.
its goal is achieved) a. Formation – accounting for initial investments
b. Operations – division of profits or losses
CHARACTERISTICS OF A PARTNERSHIP c. Dissolution – admission of a new partner and withdrawal
a. Ease of formation d. Liquidation – winding-up of affairs
- Requires less formality.
b. Separate legal personality FORMATION
- Has juridical personality separate & distinct from partners.  Articles 1771 and 1772 of the Philippine Civil Code
- Can transact and acquire properties in its name. - partnership agreement must be made in public instrument
c. Mutual agency and recorded with SEC:
- Partners are agents of the partnership. o When immovable property or real rights are contributed.
- Partners may legally bind the partnership to a contract. o When the partnership has a capital of 3,000 or more.
d. Co-ownership of property  Article 1773
- Each partner is a co-owner of the properties invested. - Requires an inventory of any immovable property, signed by
- Each has an equal right with his partners. the parties, and attached to the public instrument.
- Partner has no right to possess a partnership property for - Partnership’s existence begins from execution of contract.
any other purpose without the consent of his partners.
e. Co-ownership of profits VALUATION OF CONTRIBUTIONS OF PARTNERS
- Each partner is entitled to his share in partnership profit.  Article 1787 of the Civil Code
f. Limited life - When capital to contribute consist of goods, appraisal must
- Dissolved by will of any partner. be made in the manner prescribed in contract of
- Dissolved by termination of term in contract. partnership.
- Dissolved by any event which makes it unlawful. - Appraisal (valuation of capital contributions at FV)
- Dissolved when a specific thing perishes before delivery. - All assets contributed are initially measured at FV.
- Dissolved by expulsion, death, insolvency. o Equity Instrument (any contract that evidences a residual
g. Transfer of ownership interest in the assets after deducting all its liabilities)
- Requires the approval of the remaining partners. o Fair Value (the price that would be received to sell an
h. Unlimited liability asset or paid to transfer a liability)
- Each partner, including industrial, may be held personally  PFRS 2 Share-based Payments
liable for partnership debt. - Equity instruments issued for non-cash items should be
- If partner is insolvent, his share in debt shall be assumed valued at FV of the non-cash items received.
by the other solvent partners.
 Additional guidance from PFRS
- General Partnership (all partners are individually liable).
o Cash and Cash Equivalents (face amount)
- Limited Partnership (at least, one partner is liable.
o Inventory (Lower of cost and net realizable value)
Includes at least 1 general partner who maintains
- Each partner’s capital account is CR for FV of his net contrib.
unlimited liability. Limited partners may limit their ability
- No contribution shall be valued at an amount that exceeds
up to the extent of their contributions and has LLP in its
the contribution’s recoverable amount.
name)
- Each partner’s contribution shall be adjusted accordingly.
o Recoverable amount (the higher between an asset’s FV
ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP
less cost to sell and value in use)
 Advantage
- Partner’s share in P/L is CR/DR to his capital account.
- Ease of formation.
- Permanent Withdrawals are DR to partner’s capital account.
- Shared responsibility.
- Temporary Withdrawals are DR to partner’s drawings acct.
- Flexibility in decision making.
- Total equity of partnership is the sum of the balances in
- Great capital compared to sole proprietorship.
partners’ individual capital accounts.
- Lack of regulation by government compared to
corporations.
PARTNERS’ LEDGER ACCOUNTS
 Disadvantage
a. Capital accounts.
- Limited life / easily dissolved.
b. Drawings accounts.
- Unlimited liability.
c. Receivable from / payable to a partner
- Conflict among partners
- Lesser capital compared to corporation.
 PARTNERSHIP FORMATION
CAPITAL AND DRAWINGS ACCOUNTS  ILLUSTRATION 2: Additional investment (Withdrawal of
 JB, Capital Investment)
- Dr.
o Permanent withdrawals of capital.
o Share in losses.
o Debit balance of drawings account.
- Cr.
o Initial Investment
o Additional Investments
o Share in Profits.
- Capital account is a real account & has a normal CR balance.
 JB, Drawings
- Dr.
o Temporary withdrawals during the period.
o Temporary funds held to be remitted to the partnership.
- Cr.
o Recurring reimbursable costs paid by the partner.
- Drawing account is a nominal account that is closed.
- This account is a contra equity account & normal DR.
balance.
 Corporate accounts
- paid in capital.
- retained earnings.
- dividends accounts.

RECEIVABLE FROM / PAYABLE TO A PARTNER

 A loan extended by the partnership to a partner is recorded
as a receivable from the partner.
 A loan obtained by the partnership from a partner is recorded
as a payable to the partner.
 ILLUSTRATION: Formation of Partnership – Valuation of
Capital

BONUS ON INITIAL INVESTMENTS

 Bonus Method
- Exists when partner’s capital account is CR for an amount
greater than FV of his contributions.
- Additional CR to the partner’s capital is accounted for as a
deduction from the capital of other partners.
- Corresponding DR to asset account must be equal to FV of
the contribution.
 ILLUSTRATION
- Asset contribution of a partner
o Initially recorded at FV.
- Liability assumed by the partnership.
o Initially recorded at FV.
- Credit to partner’s capital account.
o FV (no bonus)
o Above FV (bonus to the partner)
o Below FV (bonus to the other partners)

VARIATIONS TO THE BONUS METHOD

 A partnership agreement may stipulate a certain ratio to be
maintained by the partners representing interests in equity.
 Any increase or decrease to the capital credit of a partner is
not deducted from his co-partners’ capital accounts.
 Capital adjustment is accounted for as either:
a. Cash settlement among the partners
b. Additional investment or withdrawal of investments
 ILLUSTRATION 1: Cash settlement between partners