Notes owned by Janice Atiwag BLK 1C

1. Formation – accounting for initial investments to the partnership

2. Operations – divisions of profits or losses
3. Dissolution – admission of a new partner and withdrawal, retirement or death of a partner
4. Liquidation – winding-up of affairs

 Partnership is formed through a contract, which may be constituted in any form, such as oral or written.

How to register a partnership business? (This part is only an additional info. Thus, if not included in our lessons, it will be an optional discussion.)

Step 1: Making the Articles of Partnership – this contains the details of their business, such as the name of the business,
contributions, and how will they distribute their profit. Basically, it is a contract that forms an agreement among
business partners to pool labor and capital and share in profit, loss, and liability. Such a document acts as a rule book
for limited partnerships by outlining all the conditions under which parties enter into a partnership.

Step 2: Registration on SEC or Securities and Exchange Commission- The first thing you need to do is register your business
in the SEC. They are responsible for regulating partnerships and corporations in the Philippines. Here, you’ll need to
submit the following:

 Name Verification Slip

 Articles of Partnership
 Joint Affidavit (Not required if already stated in Articles of Partnership)

Step 3: Get a Barangay Clearance - This is required as you will be setting up a business in the barangay’s area. Thus, your
business should conform to the standards of the barangay. Fees and other requirements might be needed depending on your
barangay.

Step 4: Register your business and employees in Social Security System (SSS) - Registering your employees (whether
temporary or permanent) in the SSS is mandated by law. This ensures that you are lawfully remitting your employee’s
monthly contributions so they can reap the rewards later.
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Step 5: Obtain a Business Permit or Mayor’s Permit

Step 6: Register your business in BIR

Contributions can be done through an agreement value, wherein the partners will have a deal on how much will they share.
Also, noncash property is recorded at the agreed value, which is normally the fair value of the property at the time of
investment. However, this can often cause unequal share of value.

Thus, contributions of partnership are initially measured at fair value.

Fair value “is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.” (PFRS 13)

Measuring the contributions of partners (from PFRS):

Type of Contribution Measurement

Cash and Cash Equivalents Face amount
- Also, cash investments are  Legal definition: the amount of money payable
recorded at fair value. under an insurance policy at the time of a loss.
Inventory Lower of Cost and Net realizable value
 Net realizable value (NRV) is estimated selling
price less estimated costs of completion and
costs to sell.

What to remember?

 Each partner’s capital account is credited for the fair value of his net contribution (i.e., asset contribution less any
liability assumed by the partnership / A-L= Capital account).
 No contribution shall be valued at an amount greater than its fair value.
 A partner’s subsequent share in profits (losses) shall also be credited (debited) to his capital account.
 Permanent withdrawals of capital are debited to the partner’s capital account.
 Temporary withdrawals may be debited to the partner’s drawings account.
 The sum of the balances in the partners’ individual accounts represents the total equity of the partnership.

’
A. Capital accounts
- Each partner has his or her own capital account.
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- The partner’s capital account is a real account and has a normal credit balance.
- These accounts are equity accounts and are used to record the following transactions:
Juan dela Cruz,
Capital
Dr. Cr.
xx  Initial investment
xx  Additional investments
 Permanent withdrawals of capital xx
 Share in losses xx xx  Share in profits
 Debit balance of xx
B. Drawings accounts
- Each partner has his or her own drawings account.
- This account is a nominal account that is closed to the related capital account at the end of the period.
- It is a contra equity account and has a normal balance of debit balance.

Juana Bayon,
Drawings
Dr. Cr.
 Temporary withdrawals during xx xx  Recurring reimbursable costs paid by
the period the partner
 Temporary funds held to be xx
remitted to the partnership
C. Receivable from/ Payable to a partner
- In some instances, a partner may enter a loan transaction with a partner.
- Receivable from a partner. It is the loan extended by the partnership to a partner.
- Payable to a partner. It is the loan obtained by the partnership from a partner.

Who can form a partnership business? How does accounting apply?

1. Individuals with no existing business

- Two or more individuals may form a partnership business.
- Since they never had a previous business, journal entries and general ledger will be recorded in new set of
books.
- They will both contribute assets or liabilities.

Example problem:
On April 6, 2021, Catherine Briones and Eman Angelo Naynes agreed to form a partnership. The partnership
agreement specified that Briones is to invest cash of 1,850,000 and Naynes is to contribute land with a fair value of
2,500,000 with 300,000 mortgages to be assumed by the partnership. They agreed to share profit and losses equally.

Required:
1. Journal entries to record the partnership formation
2. Statement of financial position after partnership formation.
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April 6, 2021 Cash 1,850,000

Briones, Capital 1,850,000
To record the investment of Briones

Land
Mortgage Payable 300,000
Naynes, Capital 2,200,000
To record the investment of Naynes

Briones and Naynes Partnership

Statement of Financial Position
April 6, 2021

Assets
Cash ₧ 1,850,000
Land ₧ 2,500,000
TOTAL ASSETS ₧ 4,350,000

Liability
Mortgage Payable ₧ 300,000
TOTAL LIABILTY ₧ 300,000

Equity
Briones, Capital ₧ 1,850,000
Naynes, Capital ₧ 2,200,000
TOTAL EQUITY

TOTAL LIABILITY & EQUITY ₧ 4,350,000

2. A sole proprietorship and another individual

- An individual who has no business of his own may join another individual who is already operating his own
business.
- Both the assets and liabilities of the sole proprietor are transferred to the newly formed partnership. Normally,
the partners agree on the revaluation of some of the assets before the transfer.
- The journal entries to record this type of formation will depend on whether the books of the sole proprietorship
are to be used for the newly formed partnership or new books are to be opened.

Example problem: (From: https://youtu.be/CSjC40vCTlw?list=PLerzWq9nGRYfupmCNv4C-X_xiyqMhN2W0)

The statement of financial position of Veronica Jara on March 1, 2021 before accepting Russeth Quezon as partner
is shown as follows:
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Veronica Jara Shoes

Statement of Financial Position
March 1, 2021

Cash 150,000

Less: Allowance for bad debts (50,000) 230,000

Inventory 180,000
Land 300,000
Building 600,000
Less: Accum. Depr. – Building (60,000) 540,000
TOTAL ASSETS 1,400,000

Accounts Payable 250,000

Notes Payable 140,000
Jara, Capital 1,010,000
TOTAL LIABILITIES & OWNER’S EQUITY 1,400,000

Russeth Quezon offered to invest cash to get a capital credit equal to one-half of Veronica Jara capital after
giving effect to the adjustments as follows:
a. The inventory is to be valued at 150,000
b. The accounts receivable is estimated to be 90% collectible
c. Interest on notes payable will be recognized. The note is dated January 1, 2021 with 12% annual interest.
d. Land will be revalued at 500,000
e. Building is to be valued at 480,000
f. Office supplies on hand that have been charged to expense in the past amounted to 15,000. These will be used
by the partnership.
Required:
1. Journal entries to record the partnership formation
2. Statement of financial position after partnership formation.

Old Books of Jara : applying adjusting entry

March 1, 2021 Jara, Capital 30,000
Inventory 30,000

Allowance for bad debts 22,000

Jara, Capital 22,000

Jara, Capital 2,800

Interest Payable 2,800

Land 200,000
Jara, Capital 200,000
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Jara, Capital 60,000

Accum. Depr. – Building 60,000

Office Supplies 15,000

Jara, Capital 15,000

To close the books of Jara:

We then debit the following that were credited in the adjustment entries:
Date Dr.
March 1, 2021 Allowance for bad debts 28,000
Accum. Depr. – Building 120,000
Accounts Payable 250,000
Notes Payable 140,000
Interest Payable 2,800
Jara, Capital 1,154,200
TOTAL 1,695,000

Note: Accounts payable and notes payable does not have any adjustments. Therefore, their value is similar to
what is written in the SFP.
Next, we credit the following that were debited in the adjustment entries:
Date Cr.
March 1, 2021 Cash 150,000
Accounts Receivable 280,000
Inventory 150,000
Land 500,000
Building 600,000
Office Supplies 15,000
TOTAL 1,695,000

New set of Books – Partnership

Credit to debit:
Date Dr.
March 1, 2021 Cash 150,000
Accounts Receivable 280,000
Inventory 150,000
Land 500,000
Building 480,000
(600,000 – 120,000, accum.
Depr. – bldg.)
Office Supplies 15,000

Debit to credit:
Date Dr.
March 1, 2021 Allowance for bad debts 28,000
Accounts Payable 250,000
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Notes Payable 140,000

Interest Payable 2,800
Jara, Capital 1,154,200

And so, we record the offered investment of Russeth Quezon.

March 1, 2021 Cash 577,100
Quezon, Capital 577,100
(Jara,Capital/2 = 1,154,200/2=
577,100)

Preparing the statement of financial position after partnership formation.

Jara and Quezon Partnership
Statement of Financial Position
March 1, 2021

Assets
Cash 727,100
Accounts Receivable 280,000
Allowance for bad debts (28,000) 252,000
Inventory 150,000
Office Supplies 15,000
Land 500,000
Building 480,000

TOTAL ASSETS 2,124,100

Liabilities
Accounts Payable 250,000
Notes Payable 140,000
Interest Payable 2,800

Equity
Jara, Capital 1,154,200
Quezon, Capital 577,100

TOTAL LIABILITIES & EQUITY 2,124,100

3. Two or more sole proprietorships

- The accounting procedures described in the preceding section are also applicable when two or more businesses
join together to form a partnership.
- There should be an agreement on the determination of the partners' interest in the partnership.
- It is also important that the partners agree on the values of the assets to be assigned and the liabilities to be
assumed by the partnership.
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- Books of one of the sole proprietorship may be used for the newly formed partnership or a new set of books may
be opened.

Example problem: (From: https://www.youtube.com/watch?v=gDu5DJJjBMw&list=PLerzWq9nGRYfupmCNv4C-

X_xiyqMhN2W0&index=6)

On November 30, 2020, Angelyn Lique and Charles Kevin Sultan, friendly competitors in apparel business, decided to
combine their talents and capital to form a partnership. The partnership name will be Charles Angel Clothing Circles.
Their statement of financial positions before partnership formation are as follows:

Lique Clothing Lines

Statement of Financial Position
November 30,2021

Cash 100,000
Accounts Receivable 200,000
Inventory 160,000
Furniture and Fixtures 120,000
TOTAL ASSETS 580,000

Accounts Payable 100,000

Lique, Capital 480,000
TOTAL LIABILITIES & EQUITY 580,000

Sultan Clothing Curves

Statement of Financial Position
November 30,2021

Cash 100,000
Accounts Receivable 160,000
Inventory 200,000
Furniture and Fixtures 180,000
TOTAL ASSETS 640,000

Accounts Payable 250,000

Sultan, Capital 390,000
TOTAL LIABILITIES & EQUITY 640,000

The conditions and adjustments agreed upon by the partners for purposes of determining their interests in the
partnership are:

a. Establishment of a 15% allowance for uncollectible accounts in each book.

b. The inventory of Lique is to be increased by 20,000 while the inventory of Sultan is to be decreased to 185,000.
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c. The furniture and fixtures of Lique are to be depreciated by 15,000. The machineries of Sultan are to be depreciated
by 10%.

Required:

1. Journal entries to record the partnership formation

2. Statement of financial position after partnership formation.

Old books of Lique: adjustments

Nov. 30, 2020 Lique, Capital 30,000

Allowance for doubtful acc. 30,000

Inventory 20,000
Lique, Capital 20,000

Lique, Capital 15,000

Accum. Dep. –Furniture & 15,000
Fixtures

To close the books of Lique:

We then debit the following that were credited in the adjustment entries:

Date Dr.
Nov. 30, 2020 Accounts Payable 100,000
Allowance for doubtful acc. 30,000
Accum. Depr. – Building 15,000
Lique, Capital 455,000
TOTAL 600,000

Next, we credit the following that were debited in the adjustment entries:

Date Cr.
Nov. 30, 2020 Cash 100,000
Accounts Receivable 200,000
Inventory 180,000
Furniture and Fixtures 120,000
TOTAL 600,000

Old books of Sultan: adjustments

Nov. 30, 2020 Sultan, Capital 24,000

Allowance for doubtful acc. 24,000
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Inventory 15,000
Sultan, Capital 15,000

Sultan, Capital 18,000

Accum. Dep. –Machineries 18,000

To close the books of Sultan:

We then debit the following that were credited in the adjustment entries:

Date Dr.
Nov. 30, 2020 Accounts Payable 250,000
Allowance for doubtful acc. 24,000
Accum. Depr. – 18,000
Machineries
Sultan, Capital 333,000
TOTAL 600,000

Next, we credit the following that were debited in the adjustment entries:

Date Cr.
Nov. 30, 2020 Cash 100,000
Accounts Receivable 160,000
Inventory 185,000
Machineries 180,000
TOTAL 610,000

New set of books- partnership:

Lique

Credit to debit:
Date Dr.
Nov. 30, 2020 Cash 100,000
Accounts Receivable 200,000
Inventory 180,000
Furniture and Fixtures 105,000
(120,000 – 15,000, acc. Dep. )

Debit to credit:
Date Dr.
Nov. 30, 2020 Accounts Payable 100,000
Allowance for doubtful acc. 30,000
Lique, Capital 455,000
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Sultan

Credit to debit:
Date Dr.
Nov. 30, 2020 Cash 100,000
Accounts Receivable 160,000
Inventory 185,000
Machineries 162,000
(180,000 – 18,000, acc. Dep)

Debit to credit:
Date Dr.
Nov. 30, 2020 Accounts Payable 250,000
Allowance for doubtful acc. 24,000
Sultan, Capital 333,000

Preparing the statement of financial position after partnership formation.

Charles Angel Clothing Circles
Statement of Financial Position
November 30, 2020

Assets
Cash 200,000
Accounts Receivable 360,000
Allowance for bad debts (54,000) 306,000
Inventory 365,000
Furniture and Fixtures 105,000
Machineries 162,000

TOTAL ASSETS 1,138,000

Liabilities
Accounts Payable 350,000

Equity
Lique, Capital 455,000
Sultan, Capital 333,000

TOTAL LIABILITIES & EQUITY 1,138,000

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Bonus method

- Under this method, the new partner’s investment may or may not equal the book value of the capital interest that
has been purchased.
- If it exceeds the book value of the capital interest, then the difference, which is referred to as a bonus, will be
distributed to the old partners.
- If the investment made by the new partner is less than the book value of the capital interest that has been
purchased, then the bonus will be allocated to that new partner.
- Although, the credit to the partner’s capital may vary due to a ‘bonus’, the corresponding debit to the asset
account must still be equal to the fair value of contribution.

Illustration: Bonus method (Millan, 2020)

A and B agreed to form a partnership. A contributed P40, 000 cash while B contributed equipment with 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.

Solution:

Actual Contributions Bonus Method

A 40,000 (140,000 x 50%) 70,000
B 100,000 (140,000 x 50%) 70,000
Total 140,000 140,000

Date Cash 40,000

Equipment 100,000
A, Capital (40,000 + 30,000 bonus) 70,000
B, Capital (100,000 – 30,000 bonus) 70,000
 Notes:
 The bonus given to A, i.e., P30, 000 (P70, 000 capital credit - P40, 000 actual contribution) is treated as a reduction
to the capital credit of B.
 After applying the bonus method, the total capital of the partnership is still equal to the fair value of the partners’
contributions. The debits to "Cash" and "Equipment" are equal to their fair values. Only the amounts credited to the
partners' capital accounts have varied.
 Summary:

Asset contribution of a partner Liability assumed by the partnership Credit to partner's capital account
 Initially recorded at fair value  Initially recorded at fair value  Either at:

a. fair value (no bonus);

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b. above fair value (bonus to

the partner); or

c. below fair value (bonus to

the other. partner(s))
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Milan, Z.D. (2020). FINANCIAL ACCOUNTING & REPORTING (fundamentals): 3rd Edition. Bandolin Enterprise.

Lecture 03: Partnership Formation. [Partnership Accounting]. (2021, March 29). [Video]. YouTube.
https://www.youtube.com/watch?v=Od3DRlCNzis&list=PLerzWq9nGRYfupmCNv4C-X_xiyqMhN2W0&index=4

MALLARI, J. (2021, May 12). How to Register a Partnership Business in the Philippines. Security Bank.
https://www.securitybank.com/blog/how-to-register-a-partnership-business-in-the-philippines/

LaMarco, N. (2019, February 13). Accounting Methods Available to Partnerships. Chron.

https://smallbusiness.chron.com/accounting-methods-available-partnerships-43073.html

PARTNERSHIP FORMATION. (2009, October). Oocities.

http://www.oocities.org/upgroup01/formation.html#:~:text=SOLE%20PROPRIETOR%20AND%20ANOTHER%20INDIVI
DUAL,to%20the%20newly%20formed%20partnership.

Lecture 03: Partnership Formation. [Partnership Accounting]. (2021b, April 6). [Video]. YouTube.
https://www.youtube.com/watch?v=N9UE6rHHg7E&list=PLerzWq9nGRYfupmCNv4C-X_xiyqMhN2W0&index=4