De La Salle University

ACTBFAR – Basic Financial Accounting and Reporting

Accounting for Partnership

Teaser Questions:
1. What are ways for forming a partnership?
2. How do we record the investments in the partnership?
3. How should we account partners’ investments?

PARTNERSHIP FORMATION

Formation – accounting for initial investments to the partnership.

Partnerships are required to be registered with the Securities and Exchange Commission
(SEC). Registration is done by filing the Articles of Partnership with the SEC.

The Articles of Partnership define the obligations, responsibilities and roles of each partner and
how the profits and losses will be shared and states who the general and limited partners are. It sets
forth all the terms and conditions mutually agreed by the partners thereto.

Though legally a partnership may be formed orally, it is always advisable that a written contract or
agreement is entered into by the partners so that misunderstandings between and among them as
to the nature and terms of the contract may be reduced to a minimum.

DOCUMENTARY REQUIREMENTS for PARTNERSHIP

Basic Requirements

1. Name Verification Slip

2. Articles of Partnership (AP); and
3. Joint affidavit of two partners to change partnership name. (not required if already stated in
AP)

Additional requirements
1. Endorsement/clearance from other government agencies, if applicable
2. For partnership with foreign national as partner
Note: For limited partnership, the word “Limited” or “Ltd” should form part of the partnership
name.
Accounting for Partnership Formation

What changes the capital or equity of a sole Proprietorship?

• Increase by investments (original and additional) and profit; and
• Decrease by withdrawals (either through capital or drawing account) and loss.

Espiritu Trading Co.

Statement of Changes in Equity
For the year ended December 31,2020

Espiritu, Capital 1/1/2020 3,256,000

Additional Investments -
Profit for the year 3,634,500
Drawings (50,000)
Espiritu, Capital 12/31/2020 6,840,500

What about for Partnership? What are the movements in equity accounts?
Here in partnership accounting, on a per partner basis, movements in the equity accounts are
almost similar except those profits and losses are distributed and shared among and with the
partners in adherence to the partnership agreement.

ABC Trading Co.

Statement of Changes in Partner’s Equity
For the year ended December 31,2020

A B C Total
Beginning Capital 1/1/2020 325,000 250,000 300,000 875,000
Additional Investments - 10,000 20,000 30,000
Profit for the year 47,600 19,200 33,200 100,000
Drawings (50,000) (50,000) (50,000) (150,000)
Ending Capital 12/31/2020 322,600 229,200 303,200 855,000
There are two ways on how to form a partnership:

1. Starting a new business (two or more partners form a partnership for the first time)
2. Sole proprietorship business converted into partnership:
a. An existing sole proprietorship business and a person without existing business
b. Two or more existing sole proprietorship businesses combine their resources

How do we record partner’s investment?

• Investment may be cash or non-cash assets.

• In case of non-cash asset, the valuation should be the agreed value or in the absence of
agreed Value , the fair market value at the date of transfer to the partnership should be
used.

Contribution/Investments Recorded in the partnership books at

Cash Face value
Non-cash or property Agreed value (AV); In the absence of AV, fair market value (FMV)
Liability Net present value
Industry Memorandum entry

CASE #1. Starting a new business (two or more partners form a partnership for the first time)

Example 1: Cash Investment

On December 1, of the current year, Lodi and Idol formed a partnership with cash contributions of
P300,000 and P100,000 respectively. Prepare journal entries.

Account DR CR
Cash 400,000
Lodi, Capital 300,000
Idol, Capital 100,000
To record the cash investment of the partners.

Example 2: Cash and Non-Cash Investment

On December 1, of the current year, Lodi and Idol formed a partnership with cash contributions of
P300,000 and P100,000 respectively. In addition to Lodi’s cash contribution, he also contributed an
office equipment costing P20,000, but with an agreed valuation of P17,500. Idol contributed a piece
of land costing P200,000, but with an agreed valuation of P250,000. Prepare journal entries.
Account DR CR
Cash 400,000
Office Equipment 17,500
Land 250,000
Lodi, Capital 317,500
Idol, Capital 350,000
To record the investments of the partners.
Noncash assets are recorded at agreed value. Again in the absence of agree value, fair value is
used.
 Lodi Idol
Cash 300,000 100,000
Office Equipment @ agreed value 17,500
Land @ agreed value 250,000
Capital Contribution 317,500 350,000

Example 3: Cash and Non-Cash Investment with liabilities

On December 1, of the current year, Lodi and Idol formed a partnership with cash contributions of
P300,000 and P100,000 respectively. In addition to Lodi’s cash contribution, he also contributed an
office equipment costing P20,000, but with an agreed valuation of P17,500. Lorie contributed a
piece of land costing P200,000, but with an agreed valuation of P250,000. The land was mortgaged
in a bank for P 40,000, and it was agreed that the partnership will absorb the mortgage liability in
the bank. Prepare journal entries.

Account DR CR
Cash 400,000
Office Equipment 17,500
Land 250,000
Lodi, Capital 317,500
Idol, Capital 310,000
Mortgage Payable 40,000
To record the investments of the partners.

Noncash assets are recorded at agreed value and liabilities should be assumed by the partnership.
It means that the partnership will pay for the remaining balance in the bank. If the mortgage
liability will not be absorbed by the partnership, then this will be paid personally by the investing
partner.

Lodi Idol
Cash 300,000 100,000
Office Equipment @ agreed value 17,500
Land @ agreed value 250,000
Mortgage Payable (40,000)
Capital Contribution 317,500 310,000
Accounting Equation: Assets minus Liabilities equals Equity

Example 4: Cash and Non-Cash Investment and industry contributions.

On December 1, of the current year, Lodi and Idol formed a partnership with cash contributions of
P300,000 and P100,000 respectively. In addition to Lodi’s cash contribution, he also contributed an
office equipment costing P20,000, but with an agreed valuation of P17,500. Lorie contributed a
piece of land costing P200,000, but with an agreed valuation of P250,000. The land was mortgaged
in a bank for P 40,000, and it was agreed that the partnership will absorb the mortgage liability in
the bank. Igop, an industrial partner, was to contribute his skill in cooking. Profit or loss is to be
shared equally among the partners. Prepare journal entries
 Account DR CR
Cash 400,000
Office Equipment 17,500
Land 250,000
Lodi, Capital 317,500
Idol, Capital 310,000
Mortgage Payable 40,000
To record the investments of the partners.

The memorandum entry to record the contribution of Igop as an industrial partner would be as
follows: Igop was admitted into the partnership as an industrial partner with a one-third share in the
profits.

Example 5: What if there’s an agreed capital share?

On December 1, of the current year, Lodi and Idol formed a partnership with cash contributions of
P300,000 and P100,000 respectively. They agreed to have equal capital in the partnership. Prepare
journal entries.

Account DR CR
Cash 400,000
Lodi, Capital 200,000
Idol, Capital 200,000
To record the investments of the partners.

Since the partners agreed to have equal capital, this is a BONUS APPROACH wherein the
difference in capital contribution and capital share is treated as bonus from one partner to another
partner. In this case, bonus is given by Lodi to Idol for the intangible advantage that Idol would
bring into the partnership.
How to Answer questions in exam for Partnership Formation?

Comprehensive Problem (Starting a new business (two or more partners form a

partnership for the first time): Keating and Bonnie enter into a partnership agreement in which
Keating is 35% in the profits and losses, while Clyde will have 65% in the profits and losses.

Keating contributed the following:

Cost Fair value
Building 235,000 255,000
Equipment 168,000 156,000
Land 500,000 525,000
The building and the equipment has a mortgage of 50,000 and 35,000 respectively.

Bonnie is to contribute 150,000 cash and equipment with a fair value of 350,000. The partners
agreed that only the building mortgage will be assumed by the partnership.

Required:
1. How much is the total capital balance of Keating after the formation?
2. How much is the total assets of the partnership?
3. How much is the total equity of the partnership?
4. Assuming that partners agreed to have 60% interest for Keating and 40%interest for
Bonnie in the total capital. What is the impact of the bonus? Who received the bonus?

Answers:
Keating Bonnie PARTNERSHIP
Cash 150,000 150,000
Building 255,000 255,000
Equipment 156,000 350,000 506,000
Land 525,000 525,000
Mortgage payable - building (50,000) (50,000)
Capital contributions 886,000 500,000 1,386,000

Notes:
• Keating: Only Mortgage on building is being assumed by the partnership. The mortgage
on equipment will be paid personally by Keating.
• The profit or loss agreement is ignored as this will be considered if the partnership has
operated.
1. How much is the total capital balance of Keating after the formation? Answer: P886,000

2. How much is the total assets?

Assets = Liabilities + Equity (P1,436,000 = 50,000 + 1,386,000)

PARTNERSHIP
Cash 150,000
Building 255,000
Equipment 506,000
Land 525,000
Total Assets 1,436,000
 3. How much is the total equity of the partnership? Total Equity is equal to the total capital
contributions of partners. Answer: P1,386,000

4. Assuming that partners agreed to have 60% interest for Keating and 40%interest for
Bonnie in the total capital. What is the impact of the bonus? Who received the bonus?
Keating Bonnie
Total Equity 1,386,000 1,386,000
Agreed Capital rate 60% 40%
Agreed Capital 831,600 554,400

Bonnie will receive additional capital of P54,400 from Keating’s share.

CASE #2: Sole proprietorship business converted into partnership:

a. An existing sole proprietorship business and a person without existing business
b. Two or more existing sole proprietorship businesses combine their resources

The following procedures to adjust the book of the partnership:

1. Adjust the individual or sole proprietorship book to its agreed value (Revalue assets)
2. Close the book of existing Sole Proprietorship (if agreed to open new set of books)
3. Record the investment of all partners

The partnership may either (1) use the books of the sole proprietor or (2) open new set of books.
However, it is a common practice that new set of books are opened for any new business
undertaking.

Example 6: An existing sole proprietorship business and a person without existing

business

On January 1, 2020, Malana, Espiritu, and Reyes decided to form a partnership. Reyes is a sole
proprietor with the following Statement of Financial Position elements.
Cash P 395,000
Accounts Receivable 100,000
Office Supplies 5,000
Building (net) 500,000
Furniture 45,000
Accounts Payable 25,000
Notes Payable 120,000
Utilities Payable 30,000

Additional information on Reyes’ Statement of Financial Position :

• It was seen that the building is under depreciated by P10,000 and Allowance for Doubtful
Accounts must be set up at P3,500.
• Unused office supplies amounted to 4,000 only.
• Accrued salaries of 4,000 should be recognized in books.
• Prepaid Rent should also be recognized amounting to P10,000 in the books.

Malana will contribute cash of P450,000 and Espiritu will contribute equipment that will help the
business in their operations, with a fair market value of P295,000 and an agreed value of P360,000.
They agreed to open new set of books.
Step 1: Adjust the individual or sole proprietorship book to its agreed value (Revalue assets)

Reyes’ Sole Proprietorship book:

Account DR CR
Reyes, Capital 10,000
Accumulated Depreciation - Building 10,000
To record the under-depreciation of building.

Reyes, Capital 3,500

Allowance for Doubtful Accounts 3,500
To set-up allowance for doubtful accounts.

Reyes, Capital 1,000

Office Supplies 1,000
To record the adjustment in office supplies account.

Reyes, Capital 4,000

Accrued Salaries 4,000
To record the recognition of accrued salaries

Prepaid Rent 10,000

Reyes, Capital 10,000
To record the recognition of prepaid rent.

Rule on revaluation of Account Receivable.

The adjustments should always be made using the account “Allowance for Doubtful Account" or
“Allowance for Bad debts” and the corresponding capital account. Normal balance for “Allowance
for Doubtful Account" is credit so if the statement is to set up Allowance for Doubtful accounts that
means the account should appear in the partnership books.

Rule on revaluation of depreciable Properties and Equipment.

"Accumulated depreciation “– the contra asset account title for Any adjustment to any
depreciable properties and equipment or fixed assets. Normal balance for “"Accumulated
Depreciation“ is credit so
• If it is an over-depreciated, the Accumulated Depreciation is debited, and the
corresponding capital account credited.
• If it is an under-depreciated, Accumulated Depreciation is credited, and the
corresponding capital account debited.

Step 2: Close the book of existing Sole Proprietorship (if agreed to open new set of books)

In this case, sole proprietorship should not exist anymore since partnership is now being formed.
The books in the SP should be closed if agreed to open new set of books. Note that adjusted value
should be used in closing the SP books.
Reyes’ Sole Proprietorship book:

Accounts DR CR
Allowance for doubtful accounts 3,500
Accumulated depreciation - Building 10,000
Accounts Payable 25,000
Notes Payable 120,000
Utilities Payable 30,000
Accrued Salaries 4,000
Reyes, Capital 861,500
Cash 395,000
Accounts Receivable 100,000
Office Supplies 4,000
Building 500,000
Furniture 45,000
Prepaid Rent 10,000
To close the books of Reyes in Sole proprietorship

Step 3: Record the investments to the partnership.

Partnership Books:
Accounts DR CR
Cash 395,000
Accounts Receivable 100,000
Office Supplies 4,000
Building* 490,000
Furniture 45,000
Prepaid Rent 10,000
Allowance for Doubtful Accounts* 3,500
Accounts Payable 25,000
Notes Payable 120,000
Utilities Payable 30,000
Accrued Salaries 4,000
Reyes, Capital 861,500
To record the investment of Reyes in the partnership
Recording in the new books of the partnership from the book of the sole proprietorship
a. For Account Receivable – record account receivable at total amount and record the
allowance for doubtful account
b. For Depreciable assets such as building, office equipment, furniture and fixtures, delivery
equipment and others – record the fair value received by partnership.

Account DR CR
Cash 450,000
Malana, Capital 450,000
To record the investment in Malana.

Account DR CR
Equipment 360,000
Espiritu, Capital 360,000
To record the investment in Espiritu.

Statement of Financial Position After Formation:

 Example 7: Two or more existing sole proprietorship businesses combine their resources
On July 1, 2020, Keating and Bonnie decided to form a partnership. The firm is to take over the
business assets and assume liabilities, and the capitals are to be based on net assets transferred after
the ff. adjustments:
• Keating and Bonnie’s inventory is to be valued at 31,000 and 22,000 respectively.
• Accounts receivable of 2,000 in Keating’s book and 1,000 in Bonnie’s books are
uncollectible.
• Accrued salaries of 4,000 for Keating and 5,000 for Bonnie are still to be recognized in the
books.
• Unused office supplies of Keating and Bonnie amounted to 5,000 and 1,500.
• Prepaid rent of 7,000 and 4,500 are to be recognized in the Keating and Bonnie,
respectively.
• Keating is to invest cash necessary to have a 60% interest in the firm.

Statement of Financial Position for Keating and Bonnie before adjustments

Keating Bonnie
Cash ₱ 31,000 ₱ 50,000
Accounts receivable 26,000 20,000
Inventory 32,000 24,000
Office supplies 5,000
Equipment 20,000 24,000
Accumulated Depreciation- Equipment (9,000) (3,000)
Total Assets ₱ 100,000 120,000

Accounts Payable ₱ 28,000 20,000

Capitals 72,000 100,000
Total Liabilities and Capital ₱ 100,000 ₱ 120,000

Required:
1. How much is the capital balances of each partner?
2. How much cash should Keating invest in the partnership to arrive at 60% interest?
3. Record the investment of the partners in the partnership books.
Solutions:
Accounts Keating Bonnie
Assets Book Value Agreed Value Book Value Agreed Value
Cash 31,000 ? 50,000 50,000
Accounts receivable 26,000 26,000 20,000 20,000
Inventory 32,000 31,000 24,000 22,000
Office supplies 5,000 5,000 1,500
Equipment 20,000 11,000 24,000 21,000
Accumulated Depreciation- Equipment (9,000) (3,000)
Allowance for doubtful accounts (2,000) (1,000)
Prepaid Rent 7,000 4,500

Liabilities
Accounts Payable 28,000 28,000 20,000 20,000
Accrued Salaries 4,000 5,000

Capital Balances 139,500 93,000

1. How much is the capital balances of each partner?

To get the capital balance of Keating, note that Bonnie should have 40% interest in the
firm. If the capital balance of Bonnie is 93,000 which is 40% of the total capital of the
partnership, then total partnership capital is P232,500 (93,000/.40). Keating should have
capital of P232,500 X 60% = P139,500.

Answer: P93,000 for Bonnie; P139,500 for Keating

2. How much cash should Keating invest in the partnership to arrive at 60% interest?

Accounts Keating
Assets Book Value Agreed Value
Cash 31,000 ?
Accounts receivable 26,000 26,000
Inventory 32,000 31,000
Office supplies 5,000
Equipment 20,000 11,000
Accumulated Depreciation- Equipment (9,000)
Allowance for doubtful accounts (2,000)
Prepaid Rent 7,000

Liabilities
Accounts Payable 28,000 28,000
Accrued Salaries 4,000

Capital Balances 139,500

Basic accounting Equation is total Assets equals to total Liabilities and Equity

Total Equity of Keating is P139,500 plus Total liabilities of P32,000 (28,000 + 4,000) = Total
Assets is P171,500

Total assets are composed of Non-cash assets and Cash. If the total non-cash assets is
78,000 then Cash to be invested by Keating is P93,500.
 3. Record the investment of the partners in the partnership books.

In Recording the investment, note that the agreed value must be entered into the partnership
books. Note that the partnership should account “Allowance for Doubtful Accounts” since these
accounts can still be collected by the current business while Accumulated Depreciation are not
assumed by the partnership because the depreciation pertains to the asset's value that has been
used up by previous business. The partnership establishes and records the equipment at its
current fair market value and then begins depreciating the equipment over its useful life to the
partnership.

Accounts DR CR
Cash 93,500
Accounts receivable 26,000
Inventory 31,000
Office supplies 5,000
Equipment 11,000
Prepaid Rent 7,000
Allowance for Doubtful Accounts 2,000
Accounts Payable 28,000
Accrued Salaries 4,000
Keating, Capital 139,500
To record Keating's investment

Accounts DR CR
Cash 50,000
Accounts receivable 20,000
Inventory 22,000
Office supplies 1,500
Equipment 21,000
Prepaid Rent 4,500
Allowance for Doubtful Accounts 1,000
Accounts Payable 20,000
Accrued Salaries 5,000
Bonnie, Capital 93,000
To record Bonnie's investment

____MJ ESPIRITU____