PARTNERSHIP ACCOUNTING

MODULE 1
NATURE & FORMATION OF PARTNERSHIP
 Module 1:
NATURE &
FORMATION OF
PARTNERSHIP
Article 1767 of the Civil Code of the Philippines:

A PARTNERSHIP is…

….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

MUTUAL UNLIMITED
LIMITED LIFE
AGENCY LIABILITY

CO-OWNERSHIP
MUTUAL
OF
PARTICIPATION LEGAL ENTITY
CONTRIBUTED
IN PROFITS
ASSETS

INCOME TAX
ADVANTAGES OF A PARTNERSHIP
Easy & inexpensive to organize

Unlimited liability of partners makes it reliable for creditors

Combined personal credit of the partner offers a better opportunity

to obtain additional capital

Participation by more than one person allow closer supervision of

activities

The direct gain to the partners is an incentive for them to give

close attention to the business

The personal element in the characters of the partners is retained

DISADVANTAGES OF A PARTNERSHIP
The personal liability of a partner for firm debts deters
investors

A partner may be subject to personal liabilities for the wrongful

acts of his associates

Less stable because it can be easily dissolved

Divided Authority among partners

Constant likelihood of dissension and disagreement

KINDS OF PARTNERSHIP
According to ACTIVITY
TRADING NONTRADING
• Organized for the • Organized for the
manufacturing or purpose of
purchase and rendering
sale of goods services
KINDS OF PARTNERSHIP
According to OBJECT
Universal
Universal Partnership
Particular
Partnership of all
partnership
of profits present
properties
KINDS OF PARTNERSHIP
According to
LIABILITY OF PARTNERS

General Limited
co- Partnershi
partnership p
KINDS OF PARTNERSHIP
According to DURATION

Partnershi
Partnershi
p with a
p at will
fixed term
KINDS OF PARTNERSHIP
According to REPRESENTATION
TO OTHERS

Ordinary Partnershi
Partnershi p by
p Estoppel
KINDS OF PARTNERSHIP
According to LEGALITY OF
EXISTENCE

De Jure De Facto
Partnershi Partnershi
p p
KINDS OF PARTNERSHIP
According to PUBLICITY

Secret Open
Partnershi Partnershi
p p
CLASSES OF PARTNERS
OTHER
AS TO AS TO AS TO CLASSIFICATIONS
CONTRIBUTION LIABILITY MANAGEMENT

Liquidating
Capitalist General Managing Partner
Partner Partner Partner
Nominal
Partner
Industrial Limited Silent
Partner Partner Partner
Ostensible
Partner
Capitalist
Industrial
Secret
Partner Partner

Dormant
partner
 ARTICLES OF PARTNERSHIP
A partnership is created by an ORAL or WRITTEN AGREEMENT. The written
Agreement is known as the PARTNERSHIP CONTRACT.

WHEN IS A WRITTEN CONTRACT REQUIRED?

 When immovable property OR real rights are contributed
 When the partnership capital is three thousand pesos (PHP3,000) or more

The written agreement among partners is called as the ARTICLES OF CO-

PARTNERSHIP. This is filed with the office of the SECURITIES & EXCHANGE
COMMISSION.
ARTICLES OF PARTNERSHIP

Names, address and Effective date of the

Name of the partnership
classes of partners contract

Capital of partners (with

Principal office of the
Purpose or Purposes description and agreed
business
values)

Conditions under which

Rights & dues of Manner of dividing net
partners may withdraw
partners income/loss
for personal use

Manner of keeping the Provision for arbitration

Causes for dissolution
books of accounts in settling disputes
REASONS FOR PARTNERSHIP FORMATION
A larger amount
Easy to form a
of capital can be
partnership
raised

Partners
Workload is
contribute diverse
shared among
skills, expertise &
partners
ideas
 ESSENTIAL FEATURES OF A PARTNERSHIP
AGREEMENT
Partnership Deed

Distribution of profits & losses among partners

Interest on capital

Interest on drawing

Partnership salary
ACCOUNTING FOR PARTNERSHIPS
 PLURALITY OF CAPITAL AND DRAWING ACCOUNTS
 LOANS RECEIVABLE AND LOANS PAYABLE
 OPENING ENTRIES
 FORMATION A: 2 or more persons form a partnership
 FORMATION B: Sole Proprietor + Individual
 FORMATION C: Sole Proprietorship + Sole Proprietorship
o Partnership will use books of one of the Sole Proprietors
o Partnership will use a new set of books
 PROBLEMS ON ACCOUNTING
PLURALITY OF CAPITAL & DRAWING ACCOUNTS
CAPITAL ACCOUNT (Normal bal: CR) DRAWING ACCOUNT (Normal bal: DR)
DEBIT CREDIT DEBIT CREDIT
Share in partnership
Permanent Original investment Personal withdrawal profits from
withdrawal (temporary) operations
(Direct credit to the
partner’s capital
account)
Share in partnership
Share in partnership Additional investment loss
loss from operations from operations
(Direct DR from
partner’s capital
accounts)
Share in partnership
Debit balance of profits from
drawing account operations to be
closed to capital added to capital
 LOANS LOANS
RECEIVABLE PAYABLE
MONEY MONEY
ADVANCED BY ADVANCED BY
THE PARTNERS TO
PARTNERSHIP THE
TO PARTNERS PARTNERSHIP

PAYABLE WITH
PAYABLE WITH
INTEREST BY
INTEREST BY
THE
PARTNERS
PARTNERSHIP

DUE FROM DUE TO

PARTNERS PARTNERS
 FORMATION OF A PARTNERSHIP: 2 OR MORE PERSONS
CASE 1 CASE 2 CASE 3
CASH CONTRIBUTIONS ONLY CASH & NONCASH CASH, NONCASH & INDUSTRY
Jun & Jing agreed to form a Nikki Carol, Beth and Louella
partnership by contributing Vikki formed a partnership. Carol
P50,000 cash each. Cash P100,000 contributed cash of P100k,
P20,000 Beth contributed cash P50k
Inventory 50,000 and equipment valued
Equipment @P25k.
80,000 Louella is an industrial
patner. Profit or Loss to be
shared equally among
partners.

ENTRY: ENTRY: ENTRY:

Cash P100,000 Cash P120,000 Cash P150,000
Jun, Capital Inventories 50,000 Equipment 25,000
P50,000 Equipment 80,000 Carol , Capital.
Jing, Capital Nikki, Capital. P100,000
50,000 P150,000 Beth, Capital
Vikki Capital 75,000
100,000 Entry for Louella:
Louella is admitted into the
partnership as an industrial
partner for a 1/3 share in the
partnership profit
FORMATION OF A PARTNERSHIP:SOLE PROPRIETOR + INDIVIDUAL

ILLUSTRATIVE PROBLEM A:
John and Paul formed a partnership wherein John is to contribute cash while
Paul is to
transfer the assets and liabilities of his business.The partners agreed on the
following:
1. An allowance for doubtful accounts of 5% of A/R is to be established.
2. The inventories are to be valued at their current replacement cost of
P45,000.
3. Prepaid expenses of P2,000 and accrued expenses of P800 are to be
recognized. Account Debit Credit
4. Paul is to Cash
be credited for an amount
50,000 equal to the net assets transferred.
5. John is to contribute sufficient cash to have an equal interest in the
Accounts receivable 75,000
partnership.
AccountInventories
balances on the books 40,000
of Paul are as follows:
Accounts payable 15,000
Paul, Capital 150,000
 FORMATION OF A
PARTNERSHIP
GENERAL RULES/GUIDELINES ON CHANGES IN VALUES
DEBIT CREDIT

INCREASE IN ASSET Assets Capital

VALUES
Contra-asset account Capital

DECREASE IN ASSET Capital Assets

VALUES
Capital Contra asset account

DECREASE IN Liabilities Capital

LIABILITY BALANCES
INCREASE IN LIABILITY Capital Liabilities
FORMATION OF A PARTNERSHIP: SOLE PROPRIETOR + INDIVIDUAL
ASSUMPTION 1: PARTNERSHIP WILL USE THE BOOKS OF THE SOLE PROPRIETOR
PROCEDURE ADJUSTING ENTRIES
Step 1: Adjust the books of the sole Paul, Capital 3,750
Allowance for Doubtful Accts 3,750
proprietor to bring account balances to (P75,000 x 5%)
agreed values
Inventories 5,000
Paul, Capital 5,000
(P45,000-P40,000)

Prepaid expenses 2,000

Accrued Expenses Payable 800
Paul, capital 1,200
Balance of Paul capital P152,450

Step 2: Record the investment of John Cash 152,450

John capital 152,450
FORMATION OF A PARTNERSHIP: SOLE PROPRIETOR + INDIVIDUAL

ASSUMPTION 1: PARTNERSHIP WILL USE A NEW SET OF BOOKS

PROCEDURE ADJUSTING ENTRIES
THE ONLY ENTRY REQUIRED IS Cash 50,000
Accounts Receivable 750,00
RECORDING THE INVESTMENTS OF Inventories 45,000
PARTNERS AT AGREED VALUES Prepaid expenses 2,000
Allowance for coubtful 3,750
accounts 15,000
Accounts payable 800
Accrued expense payable 152,450
Paul, capital

To record the investment of Paul

(NOTE: In some instances, entries to Cash 152,45

0
adjust and close the books of the sole John capital 152,450
proprietor may be required in the problem.
Step 1: Pass the adjusting entries To record the investment of
Step 2: Close the accounts in the books John
of Paul)
FORMATION OF A PARTNERSHIP: SOLE PROPRIETOR + SOLE PROPRIETORSHIP

ILLUSTRATIVE PROBLEM:
Maricar, owner of Maricar Variety Store and Alexis, owner of Alexis
Trading, decided to
Combine their businesses on July 1, 2001. Each is to transfer
business assets and liabilities at
Agreed values. Balance sheets for the two proprietors as of July 1,
2001 are shown in the next slide.

The partners agreed on the following conditions:

Partners’ capital in the partnership shall be equal to the net assets
transferred
Adjustments to be made as follos:
Allowance for doubtful accounts shall be increased to 10% of
Accounts Receivable
Inventories are to be valued at 120% of book value
Fixed assets are 5% depreciated.
 MARICAR VARIETY STORE ALEXIS TRADING
ASSETS ASSETS
Cash 40,000 Cash 10,000
Accounts Receivable 24,000 Accounts Receivable 100,000
Less: Allowance for DA (2,000) 22,000 Less: Allowance for DA (7,000) 93,000
Merchandise Invty 110,000 Merchandise Invty 420,000
Store Equipment 200,000 Delivery Equipment 160,000
Less: Accu Depreciation (10,000) 190,000 Less; Accu Depreciation (2,000) 158,000
Total Assets 362,000 TOTAL ASSETS 681,000
======= =======
LIABILITIES & CAPITAL LIABILITIES & CAPITAL
Accounts payable 44,000 Accounts Payable 111,000
Maricar, capital 318,000 Alexis, capital 570,000
Total Liabilities & Capital 362,000 TOTAL LIABILITIES & 681,000
======= CAPITAL =======
 ASSUMPTION 1: PARTNERSHIP USES BOOKS OF ALEXIS
TRADING
STEP ENTRIES

STEP 1: Alexis, Capital 3,000

Adjust the books of Alexis Allowance for D/A 3,000
Trading according to agreement: To adjust ADA (100,000 X10%)-
 10% Allowance for Doubtful 7,000
Accounts
 120% Merchandise Inventory Merchandise Inventory 84,000
Value Alexis, Capital 84,000
 5% Accumulated Depreciation To adjust inventory (P420k x
20% = P84k)
Alexis, Capital 6,000
Accumulated Depreciation 6,000
To adjust net value of Fixed
Assets
Required depn @ 5%
(P160k x 5%)
P8,000
Less: Accu Depn bal.
2,000
For adjusting entry
P6,000
 ASSUMPTION 1: PARTNERSHIP USES BOOKS OF ALEXIS
TRADING
STEP ENTRIES
STEP 2: Cash 40,000
Record the investment of Maricar Accounts Receivable 24,000
Cash P Merchandise Inventory 132,000
40,000 Store Equipment 200,000
Accounts Receivable. 24,000 Accounts Payable 44,000
ADA @ 10% (. 2,400). Allowance for doubtful accounts 2400
21,600 Accumulated Depreciation 10,000
Inventory (P110k @120%) Maricar, Capital 339,600
132,000 To record Maricar, Capital
Store Equipment. P200,000
Less 5% Acc Dep. (. 10,000).
190,000
Total Assets
P383,600
Accounts Payable
( 44,000)
Value of Maricar capital
P339,600
 ASSUMPTION 1: PARTNERSHIP USES BOOKS OF ALEXIS
TRADING
ADJUSTING AND CLOSING ENTRIES IN MARICAR VARIETY
BOOKS
ENTRIES
ADJUSTING ENTRIES Maricar, Capital 400
To adjust the values of Maricar Allowance for Doubtful Accounts 400
Variety based on the agreement To adjust Allowance for doubtful
 10% allowance for doubtful Accounts
accounts (P240,000 x 10%) – P2k = P400
 120% Merchandise Inventory
Merchandise Inventory 22,000
value
Maricar, Capital 22,000
 5% Accumulated Depreciation
To adjust inventory value @ 120%
P110,000 x 20% = P22,000
CLOSING ENTRIES Allowance for Doubtful Accounts 2,400
Accumulated Depn – Store Equipt 10,000
Accounts Payable 44,000
Maricar, Capital 339,600
Cash 40,000
Accounts Receivable 24,000
Merchandise Inventory 132,000
Store Equipment 200,000
 ASSUMPTION 1: PARTNERSHIP OPENS A NEW SET OF
BOOKS
For a new set of books, the only entries required will be to record the investments of partners at
agreed values.
 NOTE:
 Plant assets are recorded at net amount because it represents the cost to the partnership
and becomes the basis for future depreciation by the partnership.
 AR is recorded at gross amount because some of the accounts receivable may eventually
be identified as definitely uncollectible. The net realizable value of accounts receivable will
depend on the agreement among the partners.

To record invest of Maricar To record investment of Alexis

Cash 40,000 Cash 10,000
Accounts Receivable 24,000 Accounts Receivable 100,000
Merchandise Inventory 132,000 Merchandise Inventory 504,000
Store Equipment 190,000 Delivery Equipment 152,000
Allowance for DA 2,400 Allowance for DA 10,000
Accounts payable 44,000 Accounts Payable 111,000
Maricar, capital 339,600 Alexis capital 645,000
PARTNERSHIP PRACTICE
PROBLEMS
FOR THIS SESSION, WE WILL DISCUSS EXAMPLES
4 AND 5.
EXAMPLE 4: RAJU, SANJAY & TENDULKAR PARTNERSHIP
PROBLEM
On Jan 1, 2017, Raju, Sanjay and Tendulkar formed a shoe manufacturing partnership. Each of the
partners has a strong reputation in the shoe industry and as a result, their venture could bring about
significant benefits for every partner. They agreed to share profit and loss in the ratio of 1:2:3,
respectively. The said ratio is based on the capital contribution of each partner.

Raju, who is the oldest among all partners contributed with cash money of 60,000 and machinery
costing 120,000.

Sanjay who has vast experience in supply chain management contributed with furniture of P100,000
and cash.

On the other hand, Tendulkar just contributed cash.

REQUIRED: Record entries in the general journal of the partnership.

 RAJU, SANJAY & TENDULKAR PARTNERSHIP
SOLUTION
STEP 1: Calculate the capital of each • Raju’s share is 1/6 of the total capital.
partner. • RAJU CAPITAL: P180,000
Computed at (Cash) 60,000 + (machinery) 120,000

If Raju’s share represents 1/6 of the total capital, then

total capital is 6x Raju’s share. (P180,000 x 6) Total
capital is therefore 1,080,000.

With the total capital and the profit/loss sharing ratio

agreed as basis of the capital contribution , we can
now compute the capital of each partner:
Raju (1/6 x 1,080,000). 180,000
Sanjay (2/6 x 1,080,000). 360,000
Tendulkar (3/6 x 1,080000) 540,000
 RAJU, SANJAY & TENDULKAR PARTNERSHIP
SOLUTION
STEP 2: Cash 60,000
Prepare the journal entries as Machine 120,000
required Raju’s capital 180,000

To record Raju’s capital

Cash 260,000
Furniture 100,000
Sanjay, Capital 360,000

To record Sanjay;s capital

Cash 540,000
Tendulkar, Capital 540,000
 EXAMPLE 5: AIMAN AND FAZILA
SAVERS PARTNERSHIP
PROBLEM:

Aiman and Fazila formed a retail outlet for grocery named “Savers” with a capital investment of
1,000,000. Aiman has 40% share while Fazila has 60%.

Aiman contributed furniture which costs 400,000 at an agreed value of 325,000.

On the other hand, Fazila contributed equipment costing 350,000 at an agreed value of 450,000.
Apart from this, each partner invested necessary cash to meet the capital requirement.

REQUIRED:
1. Prepare jounal entries to record the capital investment of Aiman and Fazila.
2. Prepare the balance sheet of the newly-formed partnership.
 EXAMPLE 5: AIMAN AND FAZILA
SAVERS PARTNERSHIP
SOLUTION
STEP 1: Determine capital of each partner Aiman Fazila
keeping in mind that Aiman contributed 40% and Total capital 400,000 600,000
Fazila, 60% of the total capital of P1,000. Less: Furn (agreed 325,000 450,000
value) 75,000 150,000
Cash contributed
STEP 2: Prepare journal entries Cash 75,000
Furniture 325,000
Aiman, Capital 400,000
To record Aiman, capital
Cash 150,000
Furniture 450,000
Fazila, Capital 600,000
To record Fazila capital.
 EXAMPLE 5: AIMAN AND FAZILA
SAVERS PARTNERSHIP
SOLUTION
SAVERS PARTNERSHIP
BALANCE SHEET
AS OF ________

ASSETS EQUITIES

Cash 225,000 Aiman, Capital

400,000

Furnitures 325,000 Fazila, Capital

600,000

Equipment 450,000

TOTAL ASSETS 1,000,000 TOTAL EQUITIES

1,000,000
========
========
KEEP PRACTICING!
To present next meeting:
Group 1: Example 1
Group 2: Example 2
Group 3: Example 3
Group 6: Example 6