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Partnership Accounting Notes

1) The document discusses accounting for partnerships, including partnership formation, operations, and dissolution. It covers topics like valuing partner contributions, maintaining partner capital accounts, and dividing partnership profits and losses. 2) Partnership formation requires accounting for initial investments and valuing contributed assets. Operations involve dividing profits/losses according to agreement or formulas. 3) Dissolution events like admitting, withdrawing, or retiring a partner may require purchasing their interest or settling with the partnership. Adjusting partner capital accounts is also required.

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Hayes Hare
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195 views

Partnership Accounting Notes

1) The document discusses accounting for partnerships, including partnership formation, operations, and dissolution. It covers topics like valuing partner contributions, maintaining partner capital accounts, and dividing partnership profits and losses. 2) Partnership formation requires accounting for initial investments and valuing contributed assets. Operations involve dividing profits/losses according to agreement or formulas. 3) Dissolution events like admitting, withdrawing, or retiring a partner may require purchasing their interest or settling with the partnership. Adjusting partner capital accounts is also required.

Uploaded by

Hayes Hare
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Accounting Notes - AFAR

Partnership Accounting
Reference Materials:
Accounting for Special Transactions by Zeus Millan
Advanced Accounting 1 by Pedro Guerrero & Jose Peralta
TITLE IX Partnership. Civil Code

Partnership
- two or more persons bind themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves

Accounting for Partnerships


- CFAS, PRFS, and relevant provisions of the Civil Code
a. Formation - accounting for initial investments to the partnership
b. Operations - division of profits or losses
c. Dissolution - admission of a new partner and withdrawal, retirement or death of a partner
d. Liquidation - winding-up of affairs

Partnership Formation
Valuation of contributions of partners
a. Cash and cash equivalents - Face Amount (PAS 7)
b. Non-cash assets & liabilities - Agreed Values, otherwise Fair Value (Art. 1787, PFRS 2); not given, Book
Value
i. Inventory - Lower of Cost and Net Realizable Value (PAS 2)
Special Notes:
➔ Receivable - accounted for at gross amount; ADA is established separately
➔ PPE - accounted for at net of Accumulated Depreciation; Accumulated Depreciation is not
carried forward
c. Service or industry - memo entry

Note:
No contribution shall be valued at an amount that exceeds the contribution’s recoverable amount (higher
between asset’s FV - cost to sell and value in use)

Partner’s Capital account - real account and has a normal credit balance.
Debit: (a) Permanent withdrawals of capital
(b) Share in losses
(c) Debit balance of drawings account

Credit: (a) Initial investment


(b) Additional investments
(c) Share in profits
Partner’s Drawings Account - nominal account and has a normal debit balance; closed to the related capital
account at the end of the period (contra equity account)

pg. 1
Debit: (a) Temporary withdrawals during the period
(b) Temporary funds held to be remitted to the partnership
Credit: (a) Recurring reimbursable costs paid by the partner

Bonus on Initial Investments - capital account is credited for an amount greater than the fair value of his
contributions

Bonus Method - the additional credit to the partner’s capital “bonus” is accounted for as deduction from the
capital of the other partners.

Formation of Partnership
1. Formation of a partnership for the first time
2. Conversion of a sole proprietorship to a partnership
a. A sole proprietor allows another individual, who has no business of his own to join his business
b. Two or more sole proprietors form a partnership
3. Admission of a new partner

❖ PARTNERSHIP FORMATION FOR THE FIRST TIME - Initial Investment


- normal entries for initial investments except that capital accounts for each partner are
maintained

❖ SOLE PROPRIETOR AND ANOTHER INDIVIDUAL FORM A PARTNERSHIP


Journal entries will depend on whether:
1. The books (old books) of the sole proprietorship are to be used for the newly formed
partnership or
2. New books are to be opened.

Case 1. Sole Proprietorship's Books are Retained for the Partnership.


1. Adjust the assets of the sole proprietor in accordance with the agreement. Adjustments are to
be made to his capital account.
2. Record the investment of the other partner.

Case 2. New Books are Opened for the Partnership.


Books of the Sole Proprietor:
1. Adjust the assets of the sole proprietor according to the agreement. Adjustments are to be
made to his capital account.
2. Close the books.
Books of the Partnership:
1. Record the investment of the sole proprietor (i.e., his assets and liabilities).
2. Record the investment of the other partner.

❖ TWO PROPRIETORS FORM A PARTNERSHIP


- accounting procedures described in the preceding section are also applicable
- books of one of the sole proprietorship may be used or a new set of books may be opened

!!! Reminders !!!


● “AGREEMENT over GENERAL RULE”
● Adjustments in valuation accounts not in the balance sheet account
● Capital Agreed Contribution is different from Profit or Loss Sharing Agreement
○ Investment > Agreed Capital ⇒ Bonus to existing partners
○ Investment < Agreed Capital ⇒ Bonus to new partner

pg. 2
Partnership Operations
Division of profits and losses
Art. 1797 of the Philippine Civil Code:
Rules in profit sharing:
1. Profit sharing agreement
2. If there is no agreement:
a. All capitalist partners → in proportion to their capital contributions;
b. There are capitalist as well as industrial partners:
i. industrial partner → just and equitable share
ii. capitalist partners → remainder: in proportion to their capital contributions;
c. Capitalist-industrial partner → just and equitable share plus share in proportion to his capital
contribution
Rules in loss sharing:
1. Loss sharing agreement
2. If there is no such agreement, but there is profit sharing ratio, use profit sharing ratio
3. In the absence of loss sharing and profit sharing agreement,
a. Capitalist partner - in proportion to their capital contributions;
b. Purely industrial partner - exempted; not liable for any loss

In addition to profit or loss sharing, the partnership may also stipulate:


a. Salaries - normally, an industrial partner receives
b. Bonuses - the managing partner may be entitled to a bonus but, only if the partnership earns profit
c. Interest on capital contributions - may stipulate the capitalist partners are entitled to
– Provided first, and any remaining amount is shared among the partners based on P/L ratio

Division of Profit and Loss in the Ratio of Partners’ Capital Account Balance
Ratio based on:
● Original capital contributions
● Beginning capital balances
● Ending capital balances
● Average capital balances

Ratio of Average Capital Contributions


– should also state the amount of drawings each partner may make without affecting capital account
(temporary withdrawals)
Temporary withdrawals: ⇒ withdrawals equivalent to salaries
⇒ made by the partner in anticipation of profit
⇒ other increases/decreases of relatively minor amounts
– only permanent withdrawals are considered in the computation of the average capital ratio

Simple Average Method


→ Adding up the beginning balance and the ending balance and dividing the sum by 2

Weighted Average Method (Peso-Month/Peso-Day Method)


→ balances × (months outstanding ÷ total months in a year) = weighted average capital

pg. 3
Partnership Dissolution
Dissolution - change in the relation of the partners; does not necessarily terminate the business
If the business is continued after dissolution, new articles of incorporation should be drawn up.

Major Contributions
a. Admission of a partner
b. Withdrawal, retirement or death of a partner
c. Incorporation of a partnership

❖ ADMISSION OF A NEW PARTNER


Revaluation of Assets
– Assets and liabilities should be restated to fair values
– Adjustments are allocated first to the existing partners before recording the admission of the new
partner
➢ Purchase of Interest in the Partnership
■ personal transaction; any consideration paid or received by a partner is not recorded in
the partnership’s books
■ only entry to be made is a transfer within equity
■ establish new capital account and decrease selling partner’s capital account
■ NO gain or loss is recognized in the partnership’s book
➢ Investment in the Partnership
■ investing directly into the partnership; the consideration paid by the incoming partner is
recorded in the partnership’s books
■ equity transaction with an owner, no gain or loss is recognized
1. Investment is equal to his/her capital credit (incoming partner’s interest × partnership’s
net assets)
2. Investment is greater than his/her capital credit
excess — bonus to old partners
Increase in old partners’ capital
3. Investment is less than his/her capital credit
deficiency — bonus to new partner
Increase in new partner’s capital

❖ WITHDRAWAL, RETIREMENT OR DEATH OF A PARTNER


Interest of the withdrawing, retiring, or deceased partner may be
(a) purchased by one or all of the remaining partners
(b) settled by the partnership

Purchase by remaining partners Settlement by partnership

● Payment to outgoing is not ● Payment to outgoing is recorded


recorded in the books in the books

● Partnership capital remains ● Partnership capital is decreased


the same before and after by the payment

● No gain or loss is recognized ● No gain or loss is recognized in


in the partnership’s books the partnership’s books

Interest of the withdrawing, retiring, or deceased partner is adjusted for:


pg. 4
a. his share of any profit or loss during the period up to date of his withdrawal, retirement, or
death
b. his share of any revaluation gains or losses as at the date of his withdrawal, retirement, or
death

❖ INCORPORATION OF A PARTNERSHIP
The accounting procedures will depend on whether the original books of the partnership will be
continued by the corporation or new books will be opened.

Partnership Books Retained


1. Revalue the assets and recognize goodwill, if any.
2. Close the partners’ capital accounts to the corporate capital accounts.

New Books are Opened for the Corporation


Books of the Partnership:
1. Revalue the assets (and any items agreed on) in accordance with the agreed transfer values.
2. Record the transfer of assets and liabilities to the corporation and the receipt of capital
stocks by the partnership.
3. Record the distribution of stocks to the partners in settlement of the balances of their capital
accounts.
Books of the Corporation:
1. Record the acquisition of assets and liabilities from the partnership at their adjusted values

pg. 5

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