Introduction to Partnership

Partnership definition

is a contract, ✓ enforceable agreement

whereby two or between two or more
more persons bind persons
themselves to ✓ either oral or written
contribute money, Except when,
property, or industry 1. Capital exceeds ₱3,000
to a common fund 2. Investment of real
with the intention properties by a
of dividing profit partner
among themselves. ✓ “Articles of Co-Partnership”
Partnership definition

is a contract,
whereby two or ✓ Natural person
more persons bind - created by God
themselves to
contribute money, ✓ Artificial person
property, or industry
to a common fund - created by operations of
law
with the intention - “juridical entity”
of dividing profit
among themselves.
Partnership definition Natural person

is a contract, Illustration:
whereby two or Maria and Ernesto came
more persons bind into an agreement to
themselves to form a partnership to be
contribute money, name Erma Partnership.
property, or industry
to a common fund Who are the persons
with the intention involved in the
of dividing profit illustration?
among themselves.
Juridical person
Partnership definition

is a contract, Question:
whereby two or Who are the “person/s”
more persons bind allowed to form a
themselves to partnership?

✓
contribute money,
property, or industry
to a common fund Natural person
with the intention +
of dividing profit
among themselves. Natural person
Partnership definition

is a contract, Question:
whereby two or Who are the “person/s”
more persons bind allowed to form a
themselves to partnership?
contribute money,
property, or industry Only NATURAL ENTITY
to a common fund could enter into
with the intention
of dividing profit partnership agreement
among themselves.
Partnership definition

is a contract, Forms of investment

whereby two or 1. Money
more persons bind - legal tender in circulation
themselves to - face value
contribute money, 2. Property
property, or industry - non-cash assets
- Agreed / fair market value
to a common fund
with the intention 3. Industry
- expertise of a partner
of dividing profit - no valuation
among themselves.
Partnership definition

is a contract, Forms of investment

whereby two or 1. Money
more persons bind - Capitalist partner
themselves to - general or limited partner
contribute money, 2. Property
property, or industry - Capitalist partner
- general or limited partner
to a common fund
with the intention 3. Industry
- Industrial partner
of dividing profit - General partner only
among themselves.
 Partner is Liability
Investment Valuation
called
General Limited
Money Face Value Capitalist ✓ ✓
Property AV / FMV Capitalist ✓ ✓
Industry - Industrial ✓ 
Partnership definition

is a contract,
whereby two or ✓ once an asset is invested
more persons bind to the partnership, it is
themselves to now property of the
contribute money, partnership
property, or industry ✓ Partners become co-owners
to a common fund
with the intention
of dividing profit
among themselves.
Partnership definition

is a contract, ✓ provision indicating a

whereby two or partner cannot share in the
more persons bind profit is void
themselves to ✓ Profit must be periodically
contribute money, divided among partner
property, or industry
to a common fund
with the intention
of dividing profit
among themselves.
Features of a Partnership

1. Mutual Agency
2. Mutual contribution
3. Co-ownership of contributed property
4. Participation of profits
5. Limited life
6. Unlimited liability
7. Subject to corporate income tax
Features of a Partnership
All partners may act as
1. Mutual Agency AGENT of a partnership
2. Mutual contribution
3. Co-ownership of contributed property
4. Participation of profits
5. Limited life
6. Unlimited liability
7. Subject to corporate income tax
Features of a Partnership

1. Mutual Agency
2. Mutual contribution xxxxx

3. Co-ownership of contributed property

4. Participation of profits
5. Limited life
6. Unlimited liability
7. Subject to corporate income tax
Features of a Partnership

1. Mutual Agency
2. Mutual contribution All partners
owned the assets
3. Co-ownership of contributed property invested to the
partnership by
4. Participation of profits the partners.
5. Limited life
6. Unlimited liability
7. Subject to corporate income tax
Features of a Partnership

1. Mutual Agency
2. Mutual contribution
3. Co-ownership of contributed property All partners should
share in the profit by
4. Participation of profits the virtue of their
5. Limited life agreement.

6. Unlimited liability
7. Subject to corporate income tax
Features of a Partnership
1. Admission of new partner
1. Mutual
2. Agency
Withdrawal of a partner
2. 3. contribution
Mutual Death of a partner
4. Insolvency of a partner or partnership
3. Co-ownership of contributed property
5. Expiration of partnership’s life
4. Participation of profits Partnership’s life is
5. Limited life easily dissolve through
partners’ action
6. Unlimited liability
7. Subject to corporate income tax
Features of a Partnership

1. Mutual Agency
2. Mutual contribution
3. Co-ownership of contributed property
4. Participation of profits
5. Limited life Liability of the partnership
6. Unlimited liability extends to the personal
property of the partners.
7. Subject to corporate income tax
Features of a Partnership

1. Mutual Agency
2. Mutual contribution
3. Co-ownership of contributed property
4. Participation of profits
5. Limited life
6. Unlimited liability
7. Subject to corporate income tax
→ 30% tax rate
→ effective January 1, 2009
→ except General Professional Partnership (GPP)
 Classification of Partners

1. As to liability
a. General Partner
b. Limited Partner
2. As to contribution
a. Capitalist Partner
b. Industrial Partner
c. Capitalist-industrial Partner
3. As to management
a. Managing Partnership
b. Silent Partner
 Classification of Partners (cont’d)

4. Other classifications
a. Liquidating Partner
b. Nominal Partner
c. Ostensible Partner
d. Secret Partner
e. Dormant Partner
 Classification of Partnership

1. As toliability of partners
a. General Co-partnership
b. Limited Partnership
2. As tolegality of existence
a. De facto Partnership
b. De jure Partnership
3. As toobject
a. Universal Partnership
→ of all present property
→ of profits
b. Particular Partnership
 Classification of Partnership (cont’d)

4. As to duration
a. Partnership at will
b. Partnership with a fixed term
5. As to activity
a. Trading Partnership
b. Non-trading Partnership
6. As to presentation to others
a. Ordinary Partnership
b. Partnership by Estoppel
7. General Professional Partnership
Capital Accounts and Drawing Accounts
(Sole proprietorship VS Partnership)

▪Sole proprietorship
– one ownership account (capital and
drawing
▪Partnership
– depends on the number of partners
– “plurality of accounts”
– there are as many capital and drawing
accounts are there are partners
 Partner's Capital Account
DEBIT CREDIT
Permanent withdrawal Initial investment
Closing of drawing account Additional investment
Share in the net loss Share in the net income
Permanent

Partner's Drawing Account

DEBIT CREDIT
Temporary
Temporary withdrawal Closing of drawing account
 12:38

Question 1

True or False
 12:38

True or False

A partnership
requires only an
agreement
between two or
more persons to
organize.
 12:38

Question 2

True or False
 12:38

True or False
When a partner
invests noncash
assets in a
partnership, the
assets are
recorded at the
partner's book
value.
 12:38

Question 3

True or False
 12:38

True or False

If a partner in the
partnership
contributes his
service to the
business, his
investment will be
recorded by debiting
the account.
“industry”.
 12:38

Question 4

True or False
 12:38

True or False

All
partnership is
subject to
income tax.
 12:38

Question 5

True or False
 12:38

True or False

All
partnership
must have at
least on
general
partner.
 12:38

Question 6

True or False
 12:38

True or False
In general,
observing the
concept of mutual
agency, each
partner may enter
into contracts
which are binding
upon the
partnership.
 12:38

Question 7

True or False
 12:38

True or False

A property
invested by the
partner in the
partnership will
the property of
the partnership.
 12:38

Question 8

True or False
 12:38

True or False

Each partner
has a separate
capital and
withdrawal
account.
 12:38

Question 9

True or False
 12:38

True or False
The chart of
accounts for a
partnership, with
the exception of
drawing and capital
accounts, does not
differ from the
chart of accounts
for a sole
proprietorship.
 12:38

Question 10

True or False
 12:38

True or False

In the
partnership’s
accounting book,
there are as may
capital and
liability account
as there are
partners.
 Illustration on Partnership Formation

FORMATION 1:
Two or more persons form a partnership for the
first time, all partners are new in the
partnership.
FORMATION 2:
A sole proprietorship and an individual form a
partnership.
FORMATION 3:
Two or more sole proprietorships form a
partnership.
FORMATION 1: Two or more persons form a
partnership for the first time

A. Abad and Alba agreed to form a partnership by

contributing ₱600,000 cash each.
FORMATION 1: Two or more persons form a
partnership for the first time

B. Abdon and Anton made the following contributions in

the partnership:
Abdon Anton
Cash ₱600,000 ₱200,000
inventories 300,000 -
Equipment 500,000
FORMATION 1: Two or more persons form a
partnership for the first time

C. Alma, Anna, and Adela formed a partnership. Alma

contributed ₱600,000 cash, Anna contributed ₱300,000
cash and an equipment valued at ₱450,000; Adela is an
industrial partner to contribute her special skills and
talents to the partnership. Profit or loss is to be
shared equally among partners.
FORMATION 1: Two or more persons form a
partnership for the first time

C. Alma, Anna, and Adela formed a partnership. Alma

contributed ₱600,000 cash, Anna contributed ₱300,000
cash and an equipment valued at ₱450,000; Adela is an
industrial partner to contribute her special skills and
talents to the partnership. Profit or loss is to be
shared equally among partners.

? How do we record the investment of Adela, the

industrial partner?
“memorandum entry”
 Basic parts of a memo entry:

1. Name of the partner

2. Kind of partner
3. Share in the partnership’s profit

Alma, Anna, and Adela formed a partnership. Alma contributed

₱600,000 cash, Anna contributed ₱300,000 cash and an equipment
valued at ₱450,000; Adela is an industrial partner to contribute her
special skills and talents to the partnership. Profit or loss is to be
shared equally among partners.
 Basic parts of a memo entry:

1. Name of the partner

2. Kind of partner
3. Share in the partnership’s profit

Alma, Anna, and Adela formed a partnership. Alma contributed

1
₱600,000 cash, Anna contributed 2 cash and an equipment
₱300,000
valued at ₱450,000; Adela is an industrial partner to contribute her
special skills and talents to the partnership. Profit or loss is to be
shared equally among partners.
3
Alma, Anna, and Adela formed a partnership. Alma contributed
1
₱600,000 cash, Anna contributed 2 cash and an equipment
₱300,000
valued at ₱450,000; Adela is an industrial partner to contribute her
special skills and talents to the partnership. Profit or loss is to be
shared equally among partners.
3
ILLUSTRATION 1: Aguilar and Angeles formed a partnership wherein Aguilar is
to contribute cash while Angeles is to transfer the assets and liabilities (net
assets) of his business. Account balances on the books of Angeles are as
follows: DEBIT CREDIT
Cash ₱300,000
Accounts Receivable 450,000
Inventories 240,000
Accounts payable ₱90,000
Angeles, Capital 900,000

The partners agreed on the following conditions:

1. An allowance for uncollectible accounts of ₱22,000 is to be established.
2. The inventories are to be valued at their current replacement cost of ₱270.000.
3. Prepaid expenses of ₱12,000 and accrued expenses of ₱5,000 are to be
recognized.
4. Angeles is to be credited for an amount equal to the net assets transferred.
5. Aguilar is to contribute sufficient cash to have an equal investment in the
partnership.
 The partnership may:
1. use the books of the sole proprietorship
2. open a new set of books

Sole proprietorship books New set of books

1. Adjust the book of 1. Adjust the book of
the sole proprietorship the sole proprietorship
2. Record the investment 2. Close the book of the
of the other partner old sole proprietor
3. Record the investment
of the other partner
FORMATION 3: Two or more sole proprietorships
form a partnership

Antonio, owner of Antonio Variety Store, and Albano,

owner of Albano Trading decided to combine their
businesses on July 1, 2018. Each is to transfer business
assets and liabilities (net assets) at agreed values.
Statements of financial position for the two proprietors
are presented on the next slides.
Antonio Variety Store
Statement of Financial Position
July 1, 2018

Albano Trading
Statement of Financial Position
July 1, 2018
 The partnership may:
1. use either of the proprietors’ books
2. open new set of books

Either of the sole

New set of books
proprietorship books
1. Adjust the respective 1. Adjust the respective
books of the sole books of the sole
proprietorship proprietorship
2. Close the book of the
2. Record the investment sole proprietors
of the other partner 3. Record the investment of
the partners