Partnership

 A contract whereby two or more persons bind

themselves to contribute money, property or
industry into a common fund with the
intention of dividing the profits among
themselves.
Characteristics of a Partnership

1. Voluntary association
2. Mutual agency
3. Unlimited liability
4. Limited life
5. Mutual participation in profits
6. Legal entity
7. Co-ownership of contributed assets
8. Taxable entity
Kinds of Partnership
A. As to activity

1 Trading - Gen. Co-Partnership

2 Nontrading - Gen. Professional Partnership

B. As to object

1 Universal Partnership

a. Universal Partnership of all present property

b. Universal Partnership of all profits

2 Particular Partnership
Elements of a Partnership

1. There must be a valid contract, whether oral

or written
2. A partnership must be put up by persons
having legal capacity to contract
3. Their contributions must be in the form of
money, property or service.
4. The purpose of the business is to divide the
profit among them.
Kinds of Partnership
As to liability of Partners
1. general co-partnership
2. limited partnership
As to property
1. universal partnership of property
2. universal partnership of profits
As to representation to others
1. Ordinary partnership – one which exists among the
partners and also as to third persons.
2. Partnership by estoppel – one which is not really a
partnership but is considered as one only in relation to those
who, by their conduct or omission are precluded to deny or
disprove the partnership’s existence.
Kinds of Partnership
As to duration
1. Partnership at will
2. Partnership with a fixed term
As to legality of existence
1. De jure – one which has complied with all the
requirements of its establishment.
2. De facto – one which has failed to comply with one or
more of the legal requirements for its establishment.
As to publicity
1. Secret partnership – one wherein the existence of
certain persons as partners is not made known to the public
by any of the partners.
2. Open partnership – one wherein the existence of
certain persons as partners is made known to the public by
the members of the firm.
Classes of Partners
1. As to contribution
a. Capitalist partner
b. Industrial partner
c. Capitalist industrial partner
2. As to liability
a. General partner
b. Limited partner
3. As to management
a. Managing partner
b. Silent partner – does not participate in the
management of the partnership affairs.
Classes of Partners
4. Other classification
a. Liquidating partner – one who is in charge of the winding up
of a partnership upon dissolution.
b. Nominal partner –one who is not really a partner, not being a
party to the partnership agreement, but is made liable as a
partner for the protection of innocent third persons.
c. Ostensible partner – one who takes active part in the
management of the firm and is known to the public as a partner
in the business.
d. Secret partner – one who takes active part in the
management of the business but whose connection with the
partnership is concealed or unknown to the public.
e. Dormant partner – does not take active part in the
management of the business and is not known to the public as a
partner, he is both a silent and a secret partner.
 Registration Requirements
Place of Registration Certificates Issued
Registration Requirements

SEC Article of Co-Partnership SEC Certificate

Filled SEC registration form

DTI SEC Certificate Certificate of

Article of Co-Partnership Registration of
Business Name
Mayor’s Office Certificate of Registration of Mayor’s permit &
Business Name license to operate
BIR SEC Certificate BIR Registration No.
Article of Co-Partnership Partnership TIN
Reg of books, invoices,
and OR
SSS Filled SSS Application Form SSS Cert. of membership
List of employees SSS Employer ID No.
Advantages of Partnership
1. Greater amount of capital can be
accumulated compared to a sole
proprietorship.
2. Better management due to shared skills,
efforts, and experiences of partners
3. Ease in formation and lesser legal
requirements compared to a corporation.
4. It is difficult to transfer and/or increase
ownership.
Accounting for Partnerships

 There should be as many capital accounts

and as many drawing accounts as there are
partners.
 Partners may advance money to the
partnership, aside from the contributions, in
the form of loans when the business is in
need of additional funds.
 Partnership may advance money to the
partners, other than withdrawals in the form
of loans.
Accounting for Partnerships
Capital Account
permanent withdrawals
Debit balance of the
drawing account at
the end of the period Orig. investment
Additional investment
Credit balance of the
drawing account at the
end of the period

Note: permanent withdrawal is debited to the capital

account
 Partner's Drawing Account

Temporary withdrawals Share in Profit (this

Share in Net Loss may be directly

(this may be debited directly credited to Capital)

to Capital)

At the end of each accounting period, the balances in the drawing

accounts are closed to the related capital accounts.
Note:

 Profit or loss is credited or debited either to

the drawing account or to the capital account.
 If the intention of the partners is to maintain
their capital accounts for investments and
permanent withdrawals, then P/L should be
entered in the drawing account.
 If the partners purpose is to make P/L part of
their capital, then capital should be used.
 Either case, Capital balance WILL BE SAME.
Illustration:

Assume Kit and Kat opened a coffee shop on

January 1, 2016 and the following
transactions took place:
Jan. 1 Initial cash investments of P750,000
from each partner.
Mar. 1 Kit invested equipment amounting to
P180,000
June 1 Kat made a permanent withdrawal of
P50,000.
Partners’ Equity

Kit, Capital 930,000

Kat, Capital 700,000
Total 1,630,000

These represent the partners permanent

interest
Partner’s Drawing Account

 Used to reflect temporary interest of a

partner.
 2 transactions affect this account:
1. Share in net profit
2. personal drawings
OPENING ENTRIES
Asset contributed is:
♦ Cash - recorded at face value
♦ Property (noncash asset) – recorded at agreed
value or in the absence of agreement, fair market
value
♦ Industry – only memorandum entry is required
Con’t. of Illustration:

The partnership started operation in July 1 and

Kit withdrew P20,000 at the end of each
month until year end while Kat only withdrew
in Sept. amounting to 50,000. At the end of
the year their partnership reported a net
income of P180,000 which will be divided in
the ratio of 60%, 40%, respectively.
Rules in Making the Adjusting Entries
(Partnership will use the books of the SP)

 Debit assets and credit capital for increases

in asset values.
 Debit capital and credit assets for decreases
in asset values.
 Debit liabilities and credit capital for
decreases in liability balances.
 Debit capital and credit liabilities for increases
in liability balances.
Illustrative Problem:
 James and Nadine formed a partnership with James
investing sufficient cash to get an equal interest in the
partnership while Nadine transfers the net assets of her
business.
 The account balances in the books of Nadine prior to
partnership formation follows:
Debit Credit
Cash 360,000
Accounts Receivable 600,000
Office Equipment 3,000,000
Accum. Dep’n. 1,200,000
Accounts Payable 310,000
Salaries Payable 50,000
Nadine, Capital 2,400,000
It is agreed that for purposes of establishing James’
interest, the following adjustments shall be made in the
books of Nadine:
1. An allowance for doubtful accounts of 8% of accounts
receivable is to be established.
2. Prepaid expenses amounting to P56,000 is to be
recognized.
3. Additional salaries payable amounting to P20,000 shall
likewise be recognized.

Required:
1. Prepare the necessary entries to adjust the books of
Nadine.
2. Prepare the entry to record the investments of James
and Nadine.
Contribution of Property with an
Attached Liability
On June 16 Kat decided to invest her land which
she bought 5 years ago at a cost of P250,000.
Today, the land has a fair market value of
P400,000. There exist a mortgage balance on
the land amounting to P50,000 which the
partnership will assume.
Entry:
Land 400,000
Mortgage Payable 50,000
Kat, Capital 350,000
Note: If the mortgage will not be assumed by the partnership, record the investment at its
FMV
Formation of Partnership

A partnership may be formed by:

1. Individuals with no existing business form a
partnership.
2. Conversion of a sole proprietorship to a
partnership
a. A sole proprietor and an individual without
an existing business form a partnership.
b. Two or more sole proprietors form a
partnership.
Illustrative Problem

 On Jan. 4, 2016, A and B agreed to form a

partnership with A contributing cash of
P500,000 and B equipment with a fair market
value of P375,000.
Individuals with No Existing Business
Form a Partnership
 Opening entry:
Simply debit the assets contributed and credit
the liabilities assumed and the capital
account of each partner.
A Sole Proprietor and Another
Individual Form a Partnership
 Under this type of formation, the assets and
the liabilities of the proprietorship will be
transferred to the newly formed partnership at
VALUES AGREED upon by all the partners
or at THEIR CURRENT FAIR PRICE.
Investment of An Already Existing
Business
Accounting procedures;
1. Review the assets and liabilities of the SP business
to the would-be partner for adjustment or
revaluation.
2. In the books of the SP:
a. Update the assets and liabilities as agreed upon.
Nominal accounts ARE NOT to be used. Instead,
use the CAPITAL account of the SP.
b. Close the books at the adjusted amounts.
3. Record the contributions into the partnership of the
SP and the partner.
 Accounting for partnership formation