Module 1

 Basic Consideration and

Formation for Partnership

CCACC0
2
Essentials
of
Accounti
ng
to your 1st Module
Modulmodule!

This module is a
combination of
synchronous &
asynchronous
learning
and will last for 2
week
Pretest will be given
via
Google Form in
asynchronous test
Overview

Yves A. Mortillero
[email protected]
Course Coach

No part of this module may be reproduced

in any form without prior permission in
writing from the Instructor.

August 26, 2021

Date Initiated
September 10, 2021
Date of Completion
 Basic Consideration and Formation for Partnership
TABLE OF CONTENT

MODULE OUTLINE
Module Duration...........................................................................................................................................................................................
Learning Objectives.....................................................................................................................................................................................
Input Information..........................................................................................................................................................................................
Learning Activities........................................................................................................................................................................................
Assessment/Evaluation................................................................................................................................................................................
Assignment..................................................................................................................................................................................................
Learning Resources.....................................................................................................................................................................................

MODULE PROPER
Definition of Partnership...............................................................................................................................................................................
Characteristics of Partnership......................................................................................................................................................................
Advantages and Disadvantages of a Partnership.................................................................................................................................
Distinguish between Partnership and Corporation 8
Classification of Partners 8
Contents of Articles of Partnership 10
Accounting Difference between a sole proprietorship and partnership 12
Distinguish between partner's capital and drawing account 12
Fair Value Concept 13
Entries for Partnership formation 16
Limited Liability Company 25

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 Basic Consideration and Formation- Partnership

MODULE 1 OUTLINE

MODULE DURATION

I. August 26 to September 10, 2021 Synchronous Meeting and Asynchronous Learning For asynchronous learning inquiries,
you may reach me through the messenger group or may send an email to [email protected] every
Monday and Wednesday
II. For asynchronous learning inquiries, you may reach me through email ([email protected]) every Monday
and Wednesday

LEARNING OBJECTIVES

After completing this module, you are expected to:

I. understand the what is a partnership, characteristics and comparison from other forms of business organization
II. describe the different methods of partnership formation

INPUT INFORMATION

Module 1

LEARNING ACTIVITIES

1. Group discussion during a synchronous meeting

2. Asynchronous Learning

Individual activity:

Collaborative activity:

OL & NOL Students:

ASSESSMENT/EVALUATION
I. Synchronous Test with a time limit.

II. Asynchronous Learning

Deadline:

ASSIGNMENT

Using the google classroom, please answer the assignment.

Progressive Requirement:

Deadline :

LEARNING RESOURCES

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 Partnership and Corporation Accounting, 2019 Issue- 21st Edition by Win Ballada, CPA, CBE, MBA and Susan
Ballada, CPA

Disclaimer. DISCLOSURE STATEMENT

The contents of this module was taken from the book, Partnership and Corporation Accounting, 21st Edition 2019
Issue by Win Ballada CPA,CBE,MBA and Susan Ballada,CPA , with an intention of putting more emphasis, guidance
to accounting students. It is not the intention of the coach to take credit to any of his wonderful and informative
writings

Online resources:

Disclaimer. DISCLOSURE STATEMENT

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College of Business and Accountancy Prepared by Yves A. Mortillero

The contents of this module was taken from the book, Partnership and Corporation Accounting, 21st Edition 2019 Issue
by Win Ballada CPA,CBE,MBA and Susan Ballada,CPA , with an intention of putting more emphasis, guidance to
accounting students. It is not the intention of the coach to take credit to any of his wonderful and informative writings

Learning Objectives:

After studying this chapter, you should be able to:

1.Define partnership.
2. Identify the characteristics of a partnership.
3. Explain the advantages and disadvantages of a partnership.
4. Distinguish between partnership and corporation.
5. Identify and describe the different classifications of partnerships and the different kinds of
partners.
6.Outline the essential contents of the articles of partnership.
7.Summarize how a partnership is registered with SEC.
8.Explain the accounting differences between a sole proprietorship and a partnership.
9. Distinguish between partner's capital and drawing accounts.
10.Discuss the fair value concept.
11. Prepare and explain the entries for partnership formation.
12. Describe a limited liability company.

"In this new wave of technology, you can't do it all yourself, you have to form alliances." - Carlos
Slim Helu, 73, with $73 billion net worth, world's richest (The World's Billionaires, Forbes, March
2013).

Telecommunications billionaire Carlos Slim Helu learned early in his career that money partnering
is critical to helping ensure success. While Helu made his money creating Mexico's first privately
owned telecommunications company, Telmex, he had to partner with French and American
telecom companies in order to take his native Mexico's phone service away from the government.

Both only 40 years old, Larry Page with $23 billion net worth and Sergey Brin with $22.8 billion,
ranked 20th and 21st, respectively (The World's Billionaires, Forbes, March 2013). They are the
funders of Google.

Brin met co-founder in a computer science Ph.D. program at Stanford to Google from a friend's
garage. The Larry and Sergey, now called the Google Guys , founded Google in Sept. 7, 1998.
These creative guys solved the of by developing an algorithm to determine web site importance.

Google rocketed from being unknown to having the status of Apple or Microsoft in a few years.
And, in the October 2013 Forbes Richest Americans, Page and Brin are ranked 13th and 14th,
respectively. Google is into satellite mapping, online payment news, YouTube and smartphones
powered by Android. Brin heads Google X division which is dedicated to breakthrough ideas like
driverless cars and wearable computers: such as the Glass. Glass is an augmented-reality
spectacles which will allow a everything from chat on video to view Google Maps while walking.

At the outset of their endeavor, the partnership form of business may have provided: Brin and
Page the necessary advantages to start-up their software venture. How should they contribute to
the business considering its business potential? In what will the investment be? How should the
partners divide profits and losses? If ever, should a partner who leaves the entity compensated for
his share of the business?

BRIEF HISTORY

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The idea of partnership is quite ancient. In 2200 B.C., Hammurabi, King of Babylon, provided for
the regulation of partnerships. In ancient Rome, the partnership was called a societa.

It Was during the Middle Ages in Italy that the laws of partnership began to develop. Italian
merchants operated as limited partners. Their approach was introduced throughout Europe. The
English setters brought the concept of partnership into the So, the partnership law in the United
States evolved from the English law, thi Partnership Act of 1890. In the US, the Uniform
Partnership Act was approved in 1914 and the Uniform Limited Partnership Act in 1916.

In the Philippines, before the effectivity of the new Civil Code on Aug. 30, 1950, are two types of
partnerships: commercial and Civil Commercial or mercantile partnerships were governed by the
Code of Commerce. The old Civil Code governed civil or non-commercial partnerships.

DEFINITION

In a contract of partnership, two or more persons bind themselves to contribute money, property,
or industry to a common fund, with-the intention of dividing the profit among themselves. Two or
more persons may also form a partnership for the exercise of a profession
(Civil Code of the Philippines, Article 1767).

An association of two or more persons to carry on, as co-owners, a business for profit.
(Uniform Partnership Act, Section 6).

The partnership has a juridical personality separate and distinct from that of each of the partners
(Civil Code of the Philippines, Article 1768). Thus, for example, where Vincent Fabella and
Wilhelmina Neis established a partnership, three persons are involved, namely: the partnership
and the partners, Fabella and Neis.

Partnerships resemble sole proprietorships, except that there are two or more owners of the
business.
Each owner is called a partner. Partnerships are often formed to bring together various talents and
knowledge. Partnerships provide a means of obtaining more equity capital than a single individual
can obtain and allow the sharing of risks for rapidly growing businesses.

A profession is an occupation that involves a higher education or its equivalent, and mental rather
than manual labor. Strictly speaking, the exercise of a profession is not a business or an
enterprise
for profit but the law allows two or more persons to act as partners in the practice of their
profession.
Partnerships are generally associated with the practice of law, public accounting, medicine and
other
professions. Partnerships of this nature are called general professional partnerships. On the other
hand, service industries, retail trade, wholesale and manufacturing enterprises may also be
organized as partnerships.

CHARACTERISTICS OF A PARTNERSHIP

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The characteristics of partnerships are different from the sole proprietorships already studied in
basic accounting. Some of the more important characteristics are as follows:

Mutual Contribution. There cannot be a partnership without contribution of money, Property or

industry (i.e. work or services which may either be personal manual efforts or intellectual) to a
common fund.

Division of Profits or Losses. The essence of partnership is that each partner must share in the
profits or losses of the venture.

Co-Ownership of Contributed Assets. All assets contributed into the pa owned by the
partnership by virtue of its separate and distinct juridical one partner contributes an asset to the
business, all partners jointly own it in a special sense.

Mutual Agency – Any partner can bind the other partners to a contract if he is acting within his
express or implied authority.

Limited Life A partnership has a limited life. It may be dissolved by the death. incapacity,
withdrawal of a partner or expiration of the term in the partnership agreement.

Unlimited Liability. All partners (except limited partners), including industrial arc personally liable
for all debts incurred by the partnership. If the Partnership cannot settle its obligations, creditors'
claims will be satisfied from the personal assets, partners without prejudice to the rights of the
separate creditors of the partners.

Income Taxes. Partnerships, except general professional partnerships, are at the rate of 30%
(per R.A. No. 9337) of taxable income.

Partners' Equity Accounts. Accounting for partnerships are much like sole proprietorships. The
difference lies in the number of partners' equity accounting; Each partner has a capital account
and a withdrawal account that serves account functions as the related accounts for sole
proprietorships.

ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP

A partnership offers certain advantages over a sole proprietorship and a corporation,

also has a number of disadvantages. They are as follows:

Advantages versus Proprietorships

1. Brings greater financial capability to the business.
2. Combines special skills, expertise and experience of the partners.
3.Offers relative freedom and flexibility of action in decision-making.

Advantages versus Corporations

I. Easier and less expensive to organize.
2. More personal and informal.

Disadvantages
l. Easily dissolved and thus unstable compared to a corporation.
2. Mutual agency and unlimited liability may create personal obligations to partners
3. Less effective than a corporation in raising large amounts of capital.

PARTNERSHIP DISTINGUISHED FROM CORPORATION

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Manner of Creation. A partnership is created by mere agreement of the partners while a
corporation is created by operation of law.

Number of Persons. Two or more persons may form a partnership; in a corporation,

at least five (5) persons, not exceeding fifteen (15).

Commencement of Juridical Personality. In a partnership, juridical personality commences

from the execution of the articles of partnership; in a corporation, from the issuance of certificate
of incorporation by the Securities and Exchange Commission.

Management. In a partnership, every partner is an agent of the partnership if the partners did
not appoint a managing partner; in a corporation, management is vested on the Board of
Directors.

Extent of Liability. In a partnership, each of the partners except a limited partner is liable to
the extent of his personal assets; in a corporation, stockholders are liable only to the extent of
their interest or investment in the corporation.

Right of Succession. In a partnership, there is no right of succession; in a corporation, there is

right of succession. A corporation has the capacity of continued existence regardless of the death,
withdrawal, insolvency or incapacity of its directors or stockholders.

Terms of Existence. In a partnership, for any period of time stipulated by the partners;
in a corporation, not to exceed fifty (50) years but subject to extension.

CLASSIFICATIONS OF PARTNERSHIPS

According to object:

a. Universal partnership of all present property. All contributions become part of the
partnership fund.

b. Universal partnership of profits. All that the partners may acquire by their industry or work
during the existence of the partnership and the use of whatever the partners contributed at the
time of the institution of the contract belong to the partnership. If the articles of universal
partnership did not specify its nature, it will be considered a universal partnership of profits.

c. Particular partnership. The object of the partnership is determinate—its use or fruit, specific
undertaking, or the exercise of a profession or vocation.

According to liability:
a. General. All partners are liable to the extent of their separate properties.
b. Limited. The limited partners are •liable only to the extent of their personal contributions.
In a limited partnership, the law states that there shall be at least one general partner.

According to duration:

a. Partnership with a fixed term or for a particular undertaking.

b. Partnership at will. One in which no term is specified and is not formed for any particular
undertaking.

According to purpose:

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a Commercial or trading partnership. Business. One formed for transaction of business

b. Professional or non-trading partnership. One formed for the exercise of a profession.

According to legality of existence:

a. De jure partnership. One which has complied with all the legal requirements for its
establishment.

b. De facto partnership. One which has failed to comply with all the legal requirements for its
establishment.

KINDS OF PARTNERS

1.General partner. One who is liable to the extent of his separate property after all the assets of
the partnership are exhausted.

2.Limited partner. One who is liable only to the extent of his capital contribution. He is not
allowed to contribute industry or services only.

3.Capitalist partner. One who contributes money or property to the of the partnership.

4.Industrial partner. One who contributes his knowledge or personal service partnership.

5. Managing partner. One whom the partners has appointed as manager of the partnership.

6. Liquidating partner. One who is designated to wind up or settle the affairs of the partnership
after dissolution.

7. Dormant partner. One who does not take active part in the busines$ partnership and is not
known as a partner.

8.Silent partner. One who does not take active part in the business partnership though
may be known as a partner.

9. Secret partner. One who takes active part in the business but is not known to be a partner
by outside parties.

10. Nominal partner or partner by estoppel. One who is actually not a partner but who
represents himself as one

ARTICLES OF PARTNERSHIP

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A partnership may be constituted orally or in writing. In the latter case, partnership agreements are
embodied in the Articles of Partnership. The following essential provisions may be contained in
the agreement:

1. The partnership name, nature, purpose and location;

2. The names, citizenship and residences of the partners;

3. The date of formation and the duration of the partnership;

4. The capital contribution of each partner, the procedure for valuing non-cash
investments, treatment of excess contribution (as capital or as loan) and the
penalties for a partner’s failure to invest and maintain the agreed capital;

5. The rights and duties of each partner;

6. The accounting period to be adopted, the nature of accounting records, financial

Statements and audits by independent public accountants;

7. The method of sharing profit or loss, frequency of income measurement and

distribution, including any provisions for the recognition of differences in
contributions;

8. The drawings or salaries to be allowed to partners;

9. The provision for arbitration of disputes, dissolution, and liquidation.

10. A contract of partnership is void whenever immovable property or real rights are
contributed and a signed inventory of the said property is not made and attached to
a public instrument.

SEC REGISTRATION

When the partnership capital is P3,000 or more, in money or property, the public •instrument must
be recorded with the Securities and Exchange Commission (SEC). Even if it not registered, the
partnership having a capital of P3,000 or more is still valid and therefore has legal personality.

The SEC shall not register any corporation organized for the practice of public accountancy (The
Philippine Accountancy Act of 2004, Sec. 28).

The purpose of the registration is to set "a condition for the issuance of the licenses to engage in
business or trade. In this way, the tax liabilities of big partnerships cannot be evaded, and the
public can also determine more accurately their membership and capital before dealing with
them." (Dean Capistrano, IV Civil Code of the Philippines)

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To register a partnership with the SEC, here are the basic steps to follow.

 Have your proposed business name verified in the verification unit of SEC.
The partnership name shall bear the word "Company" or „and limited partnership, the word
"Limited" or "Ltd." A professional partnership may bear the word "Company," "Associates"
or "Partners" or other descriptions (SEC Memorandum Circular 5, Series 2008)

 Submit the following documents:

1. Articles of Partnership
2. Verification Slip for the Business name
3. Written undertaking to change business name if required
4. Tax Identification number of each partner and/or that of the partnership
5. Registration data sheet for partnership duly accomplished in six copies
6. Other documents that may be required:
a. Endorsement from other government agencies if the proposed partnership will
engage in an industry regulated by the government.
b. For partnership with foreign partners: SEC Form F-105, bank certificate on the
capital contribution of partners, proof of remittance of contribution of foreign
partners.

 Pay the registration/filing and miscellaneous fees: filing fee equivalent. at 1/5 of. 1% of the
partnership capital but not less than P 1,000 and research fee which is 1% of the filing fee;

 Forward documents to the SEC Commissioner for signature.

ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY

Certified public accountants (CPAs), firms and partnerships of CPAs, engaged it practice of public
accountancy, including the partners and staff members thereof; shall register with the Professional
Regulation Commission and the Professional Regular Board of Accountancy. The registration
shall be renewed every three years (The Philippine Accountancy Act of 2004, Sec. 31). The rules
and regulations covering: the accreditation for the practice of public accountancy are specified in
Annex B of the Rules and Regulations Implementing Republic Act 9298 otherwise known as the
Philippine Accountancy act of 2004.

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

1 For example, for air transport, the endorsement will come from the Civil Aeronautics Board, pawnshops or other financial
intermediaries, from the Bangko Sentral ng Pilipinas. For institutions and social welfare organizations, from the Dept. of Social
Welfare and Deve10Pmert professional organizations, from the Professional Regulations Commission. For educational basic
education from the Dept. of Education, college from the Commission on Higher technical-vocational from the Technical Education
Skills and Development Authority. For hospitals' medical clinics and health maintenance organizations, from the Dept. Of Health.
For insurance benefit associations, from the Insurance Commission. In the case of recruitment for overseas from the Philippine
Overseas Employment Administration.

ACCOUNTING FOR PARTNERSHIPS

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Owners' Equity Accounts

In Basic Accounting, generally accepted accounting principles were discussed in the context of a
sole proprietorship. These accounting principles also apply to a partnership. Thus, the recording of
assets, liabilities, income and expenses is consistent for both proprietorships and partnerships.
Comparing two businesses of the same nature, one organized as a sole proprietorship and
another as a partnership, there will be no marked difference in their operations.
However, differences arise between the two forms of business concerning owners' equity. For a
proprietorship, there is only a single owner. Therefore, there is only one capital account and one
drawing account. On the other hand, since a partnership has two or more owners, separate
capital and drawing accounts are established for each partner.

A partner's capital account is credited for his initial and additional net investments (assets
contributed less liabilities assumed by the partnership), and credit balance of the drawing
account at the end of the period. It is debited for his permanent withdrawals and debit balance of
the drawing account at the end of the period.

Typically, partners do not wait until the end of the year to determine how much of the profits
they wish to withdraw from the partnership. To meet personal living expenses, partners
customarily withdraw money on a periodic basis throughout the year. A partner's drawing
account is debited to reflect assets temporarily withdrawn by him m the partnership. At the end
of each accounting period, the balances in the drawing accounts are closed to the related
capital accounts.

Partner's Capital Account

Credit
Debit
1. Permanent withdrawals. 1 Original investment.
2. Debit balance of the drawing. account . Additional investment.
at the end of the period 2. Credit balance of the drawing account at
3. the end of the period.

Partner's Drawing Account

Debit Credit
Temporary withdrawals. 1. Share in profit (this may be credited
1. Share in loss (this may be debited directly directly to Capital).
2. to Capital).

Permanent withdrawals are made with the intention of permanently decreasing the partner's
capital while temporary withdrawals are regular advances made by the partners in anticipation of
their share in profit.
The use of drawing accounts for temporary withdrawals provides a record of each partner's
drawings during an accounting period. Hence, drawings in excess of the, allowed amounts as
stated in the partnership agreement may be controlled.
Notice that profit (or loss) is credited (or debited) either to the drawing account or to the capital
account. The choice of the account to credit or debit depends on the intention of the partners. If

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they wish to maintain their capital accounts for investments and permanent withdrawals, then
profit or loss should be entered in the drawing account.
On the other hand, if the purpose of the partners is to make profit or loss part of their capital, then
the capital account should be used. In either case, the resulting partners' ending capital balances
will be the same.
On Sept. 6, 2007, the International Accounting Standards Board (IASB) issued a revised
International Accounting Standards (IAS) No. 1, Presentation of Financial Statements. This
standard supersedes the 2003 version of IAS 1 as amended in 2005. It's common to encounter
"profit or loss" rather than usual "net income or net loss" as the descriptive term used in the
Statement of Comprehensive Income (the new title of the income statement per revised IAS No.
1). The balance sheet is called the Statement of Financial Position. The complete set of financial
statements will be in Chapter 2.
Several Asian countries, whose Partnership Law have strong resemblances to the Partnership Act
of 1890 of England, are using two or three accounts in the capital section of the statement of
financial position (as capital, drawings and current accounts). These accounts and interest on
drawings will be discussed in Chapter 2.
Loans Receivable from or Payable to Partners
If a partner withdraws a substantial amount of money with the intention of repaying it the debit
should be to Loans Receivable-Partner account instead of to Partner's Drawing account. This
account should be classified separately from the other receivables of the partnership.
A partner may lend amounts to the partnership in excess of his intended permanent investment.
These advances should be credited to Loans Payable-Partner Account and not to Partners Capital
account classified among the liabilities but separate from liabilities to outsiders. This distinction is
important in case of liquidation. Loans payable to partners must be paid after the claims of outside
creditors have been paid in full. These loans have priority over partners’ equity.

PARTNERSHIP FORMATION

Valuation of Investments by Partners

The books of the partnership are opened with entries reflecting the net contributions of the
partners to the firm. Asset accounts are debited for assets contributed to the partnership, liability
accounts are credited for any liabilities assumed by the partnership and separate capital accounts
are credited for the amount of each partner's net investment (assets less liabilities).

Partners may invest cash or non-cash assets in the partnership. When a partner invests non-
cash assets, they are to be recorded at values agreed upon by the partners. In the absence of
any agreement, the contributions will be recognized at their fair market values at the date
of transfer to the partnership.

The fair market value of an asset is the estimated amount that a willing seller would receive from a
financially capable buyer for the sale of the asset in a free market. Per International Financial
Reporting Standards (IFRS) No. 3, fair value is the price at which an asset or liability could be
exchanged in a current transaction between-knowledgeable, unrelated willing parties.

Adjustment of Accounts Prior to Formation

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In cases when the prospective partners have existing businesses, their respective books
will have to be adjusted to reflect the fair market values of their assets or to correct
misstatements in the accounts. If the adjustments will not be made, the initial capital
balances of the partners may be inequitable.

Illustration.

A reconditioned printing equipment invested by Agapito Rubio was recorded incorrectly in the
partnership books at P 730,000—its book value from the proprietorship's records. If the
partnership immediately sold the printing equipment for its fair market value of P800,000, the
resulting P 70,000 gain would increase the capital balances of both Partners Agapito Rubio and
Nora Bisana. The printing equipment should have been recorded at P800,000 and Rubio 's capital
credited with P800,000. Simply stated, increases in asset values accruing before formation should
be for the benefit of the contributing partner.

The adjustments of the assets and liabilities prior to formation will be similar to the adjustments
that we are already familiar with. However, when the adjustment involves a debit or credit to a
nominal account, the Capital account would instead be debited or credited. This is so because the
business has ceased to be a going concern. A business is not viewed as a going concern if
liquidation appears imminent. For example, proprietorships will cease operations because of their
agreement to enter into partnership. Both proprietorships have ceased to be going concerns.
Illustration. Emerita Geron and Emerita Modesto formed a general professional partnership.
Emerita Geron will invest sufficient cash to get an equal interest in the partnership while Emerita
Modesto will transfer the assets and liabilities of her business The account balances on the books
of Modesto prior to partnership formation follows.
Debit Credit
Cash 180,000
Accounts Receivable 300,000
Office Equipment 1,500,000
Accumulated Depreciation 600,000
Accounts Payable 155,000
Salaries Payable 25,000
Emerita Modesto, Capital 1,200,000

It is agreed that for purposes of establishing Emerita Geron's interest, the following adjustments
shall be made in the books of Emerita Modesto:
1. An allowance for uncollectible accounts of 5% of accounts receivable is to be established.
2. Prepaid expenses amounting to P30,000 were omitted by the accountant. This is to be
recognized.
3. Additional salaries payable in the amount of PI0,000 is to be established.

The accounting equation states that assets must always equal liabilities and owner's equity. The
basic accounting model is:
Assets = Liabilities + Owner's Equity

Note that the assets are on the left side of the equation opposite the liabilities and owner's equity.
This explains why increases and decreases in assets are recorded in the opposite manner as
liabilities and owner's equity are recorded. The equation also explains why liabilities and capital

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follow the same rules of debit and credit. The logic of debiting and crediting is related to the
accounting equation,

Accounting is based on a double-entry system which means that the dual effects of a business
transaction are recorded. A debit side entry must have a corresponding credit side entry. For
every transaction, there must be one or more accounts debited and one or more accounts
credited. Each transaction affects at least two accounts• The total debits for a transaction must
always equal the total credits.

The account type determines how increases and decreases in it are recorded. Increases in
assets are recorded as debits (left side of the account) while decreases in assets are recorded
as credits (on the right side), Conversely, increases in liabilities and owner's equity are
recorded by credits; decreases in liabilities and owner's equity are recorded by debits.

The rules of debit and credit for income and expense accounts are based on the relationship of
these accounts to owner's equity. Income increases owner's equity and expense decreases
owner's equity. Hence, increases in income are recorded as credits and decreases as debits.
Increases in expenses are recorded as debits and decreases as credits. These are the rules of
debit and credit.

U The account type determines how increases and decreases in it are recorded. Increases in
assets are recorded as debits (left side of the account) while decreases in assets are recorded as
credits (on the right side), Conversely, increases in liabilities and owner's equity are recorded by
credits; decreases in liabilities and owner's equity are recorded by debits.

The rules of debit and credit for income and expense accounts are based on the relationship of
these accounts to owner's equity. Income increases owner's equity and expense decreases
owner's equity. Hence, increases in income are recorded as credits and decreases as debits.
Increases in expenses are recorded as debits and decreases as credits. These are the rules of
debit and credit.

Using the accounting equation approach of analysis, the adjustments are as follows:
Assets = Liabilities + Owners’ Equity
1. (15,000) = + (15,000)
2. 30,000 = + 30,000
3. = 10,000 + (10,000)
15,000 = 10,000 + 5,000
15,000 = 15,000

Entries and Explanations:

1. An allowance of 5% of P300,000 or P15,000 needs to be established. The account Allowance

for Uncollectible Accounts is a contra-asset account. When this account is increased, the effect is
to decrease the related asset account. The owner's equity is also decreased since this provision
for uncollectible is considered as an expense in the ordinary course of business.

Emerita Modesto, Capital 15,000

Allowance for Uncollectible Accts. 15,000

2. An omission to record the asset—prepaid expenses will denote that the expenses of the
business are overstated. When the expenses are overstated, profit and correspondingly the

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owner's equity is understated. To recognize the prepaid expense, the entry will be:

Prepaid Expenses 30,000

Emerita Modesto, Capital 30,000

3. The establishment of additional salaries payable will increase liabilities. It can be deduced that
the salaries expenses are understated and to correct the misstatement the owner's equity will be
decreased.

Emerita Modesto, Capital 10,000

Salaries Payable 10,000

The adjustments prior to formation will entail debits or credits to asset or liability accounts. To
maintain the double entry system of accounting, a corresponding debit or credit to owner's equity
account will be made. The following T-account will serve to summarize the necessary adjustments
to the capital account:

Owner's Equity Account

Debit Credit

1. Decrease in asset. 1. Increase in asset.

2. Increase in liability. 2. Decrease in Liability

3. Increase in contra-asset 3. Decrease in Contra-Asset.

Opening Entries of a Partnership Upon Formation

A partnership may be formed in any of the following ways:

 Individuals with no existing business form a partnership.

 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.
 Admission or retirement of a partner (to be covered in Chapter 3).

Individuals with No Existing Business Form a Partnership

The opening entry to recognize the contributions of each partner into the partnership; simply to
debit the assets contributed, and to credit the liabilities assumed capital account of each partner.

Illustration. On July 1, 2018, Nilo Burgos and Helenita Ruiz agreed to form partnership. The
partnership agreement specified that Burgos is to invest cash P700,000 and Ruiz is to contribute
land with a fair market value of P 1,300,000 P300,000 mortgage to be assumed by the
partnership.

The entries are as follows:

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College of Business and Accountancy Prepared by Yves A. Mortillero

Cash 700,000
Land 1,300,000
Mortgage Payable 300,000
Nilo Burgos, Capital 700,000
Helenita Ruiz, Capital 1,000.000
To record the initial investments of Burgos and Ruiz.

After the formation, the statement of financial position of the partnership

Burgos and Ruiz

Statement of Financial Position
July 1, 2018

Assets

Cash P 700,000
Land 1,300,000

Total Assets P 2,000,000

Liabilities and Partners Equity

Mortgage Payable P 300,000

Nilo Capital 700,000
Helenita Ruiz, Capital 1,000,000

Total liabilities, and Owners' Equity 2,000,000

Illustration. Suppose that Burgos and Ruiz formed another partnership with Nora Elizabeth
Maniquez. Burgos and Ruiz considered Maniquez who has a vast business network in Bicol as an
industrial partner. The partnership did not receive any asset from Maniquez. In this case, only a
memorandum entry in the general journal will be made.

A Sole Proprietor and Another Individual Form a Partnership

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College of Business and Accountancy Prepared by Yves A. Mortillero

A sole proprietor may consider forming a partnership with an individual who has no existing
business. 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 prices.

Illustration. The statement of financial position of Galicano Del Mundo on Oct. 1, 2018, before
accepting Christine Resultay as partner is shown as follows:

Galicano Del Mundo

Statement of Financial Position
Oct. 1, 2018

Assets

Cash P 60,000
Notes Receivable 30,000
Accounts Receivable P 240,000
Less: Allowance for Uncollectible Accts. 10,000 230,000
Merchandise Inventory 80,000
Furniture and Fixtures P 60,000
Less: Accumulated Depreciation 6,000 54,000
Total Assets P 454,000

Liabilities and Owner's Equity

Notes Payable P 40,000

Accounts Payable 100,000
Galicano Del Mundo, Capital 314,000
Total Liabilities and Owner's Equity P454,000

Christine Resultay offered to invest cash to get a capital credit equal to one-half of Galicano Del
Mundo's capital after giving effect to the adjustments below. Del Mundo accepted the offer.

1. The merchandise is to be valued at P 74,0000.

2. The accounts receivable is estimated to be 95% collectible.
3. Interest accrued on the notes receivable will be recognized: 10,000, 12% dated July 1,
2018 and P20,000, 12% dated August 1, 2018.
4. Interest on notes payable to be accrued at 14% annually from April 1, 2018.
5. The furniture and fixtures are to be valued at P 46,000.
6. Office supplies on hand that have been charged to expense in the amounted to P4,000.
These will be used by the partnership.

New books for the Partnership (required per National Internal Revenue Code)

The following procedures may be used in recording the formation partnership:

Books of Galicano Del Mundo:

1. Adjust the assets and liabilities of Galicano Del Mundo in accordance the agreement.
Adjustments are to be made to his capital account.
2. Close the books.
Books of the Partnership:

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College of Business and Accountancy Prepared by Yves A. Mortillero

1.Record the investment of Galicano Del Mundo.
2. Record the investment of Christine Resultay.

Following the procedures, the entries are:

Books of Galicano Del Mundo

(1)

Galicano Del Mundo, Capita ** 14,100

Office Supplies 4, 000
Interest Receivable 700
Merchandise Inventory 6,000
Allowance for Uncollectible Accounts 2,000
Interest Payable 2,800
Accumulated Depreciation 8,000
To record adjustments to restate Del Mundo's capital.

(2)

Notes Payable 40,000

Accounts Payable 100,000
Interest Payable 2,800
Allowance for Uncollectible Accts. 12,000
Accumulated Depreciation 14,000
Galicano Del Mundo, Capital 299,900
Cash 60,000
Notes Receivable 30,000
Accounts Receivable 240,000
Interest Receivable 700
Merchandise Inventory 74,000
Office Supplies 4,000
Furniture and Fixtures 60,000
To close the books of Del Mundo.

Books of the Partnership

(1)

Cash 60,000
Notes Receivable 30,000
Accounts Receivable 240,000
Interest Receivable 700
Merchandise Inventory 74,000
Office Supplies 4,000
Furniture and Fixtures 46,000
Notes Payable 40,000
Accounts Payable 100,000
Interest Payable 2,800
Allowance for Uncollectible Accounts 12,000
Galicano Del Mundo, Capital 299,900
To record the investment of Del Mundo.

(2)

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College of Business and Accountancy Prepared by Yves A. Mortillero

 Cash 149,950
Christine Resultay, Capital 149,950
To record the investment of Resultay.

Computations:

1. Merchandise Inventory, per ledger P80,000

Merchandise Inventory, as agreed 74 000
Decrease in Merchandise Inventory P 6 000

2. Accounts Receivable, net per ledger P230,000

Accounts Receivable, net as agreed
(P240,000 x 95%) 228 000
Increase in Allowance P 2,000

3. Interest accrued on Notes Receivable: Interest = Principal x Rate x Time

On P 10,000 P 10,000 x12% x 3/12 P 300

On P 20,000 20,000 x 12% x 2/12 400
700
4. Interest accrued on Notes Payable:

On P40,000: P40,000 x 14% x 6/12 P 2,800

5. Furniture and Fixtures net per Ledger P 54,000

Furniture and Fixtures, net as agreed 46,000
Decrease in the Value of Furniture against depreciation 8,000

6. Net Effect of adjustment on capital :

Decrease in Merchandise Inventory P (6,000)

Increase in Allowance for uncollectible accounts (2,000)
Increase in Interest Receivable 700
Increase in Interest Payable (2,800)
Increase in Accumulated Depreciation (8,000)
Increase in Office Supplies 4,000
Net Effect Decrease in Capital P(14,100)

7. Furniture and Fixtures, Cost per books P 60,000

Furnitures and Fixtures, as agreed 46,000
Write down of furnitures and fixtures 14,000

8. Galicano Del Mundo, Capital before adjustments P 314,000

Net Adjustment to Capital ( 14,100)
Galicano Del Mundo adjusted Capital 299,900
Agreed Capital Credit for Christine Resultay 50%
Cash investment of Christine Resultay P 149,950

After the formation, the Statement of financial position of the newly

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College of Business and Accountancy Prepared by Yves A. Mortillero

 Del Mundo and Resultay
Statement of Financial Position
Oct. 1, 2018

Assets

Cash P 209,950
Notes Receivable 30,000
Accounts Receivable P 240,000
Less: Allowance for Uncollectible Accts. 12,000 228,000
Interest Receivable 700
Merchandise Inventory 74,000
Office Supplies 4,000
Furniture and Fixtures 46,000
Total Assets P 592,650

Liabilities and Owners' Equity

Notes Payable P 40,000

Accounts Payable 100,000
Interest Payable 2,800
Galicano Del Mundo, Capital 299,900
Christine Resultay, Capital 149,950
Total Liabilities and Owners' Equity P 592,650

Note that furniture and fixtures are now recorded in the partnership books at the agreed amount
of P 46,000 which represented the cost of the asset to the partnerships On the other hand, the
accounts receivable is, still recorded at gross amount of with a related allowance for uncollectible
accounts of P 12,000. The P 12,000 is only a provision for possible uncollectible".

Two or More Sole Proprietors Form a Partnership

Illustration. On June 30, 2018, Deogracia Corpuz and Esterlina Gevera, friendly competitors in a
certain tine of business, decided to combine their talents and capital to form a partnership. Their
statements of financial position are as follows:

Deogracia Corpuz
Statement of Financial Position
June 30, 2018
Assets

Cash P 50,000
Accounts Receivable 100,000
Merchandise Inventory 80,000
Furniture and Fixtures 60,000
Total Assets P290,000

Liabilities and Owner's Equity

Accounts Payable P 30,000

Deogracia Corpuz, Capital 260,000
Total Liabilities and Owner's Equity P 290,000

Esterlina Gevera

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College of Business and Accountancy Prepared by Yves A. Mortillero

 Statement of Financial Position
June 30, 2018

Assets

Cash P 40,000
Accounts Receivable 80,000
Merchandise Inventory 100,000
Delivery Equipment 90,000
Total Assets P 310,000

Liabilities and Owner's Equity

Accounts Payable P 60,000

Esterlina Gevera , Capital 250,000
Total Liabilities and Owner’s Equity P 310,000

The conditions and adjustments agreed upon by the partners for Purpose% determining their
interests in the partnership are:

1. Actual count and bank reconciliation on Corpuz proprietorship’s account revealed cash
short and unrecorded expenses of P 3,500.

2. Establishment of a 10% allowance for uncollectible accounts in each book

3. The merchandise inventory of Gevera is to be increased by P 10,000

4. The furniture and fixtures of Corpuz are to be depreciated by P 6,000

5. The delivery equipment of Gevera is to be depreciated by P9,000.

New books for the Partnership (required per National Internal Revenue Code)

The following procedures may be used in recording the formation of the partnership:

Books of Deogracia Corpuz and Esterlina Gevera:

1. Adjust the accounts of both parties in accordance with the agreement.

Adjustments are to be made to their respective capital accounts.
2. Close the books.

Books of the Partnership:

1. Record the investment of Deogracia Corpuz.

2. Record the investment of Esterlina Gevera.

Following the procedures, the entries are:

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College of Business and Accountancy Prepared by Yves A. Mortillero

Books of Deogracia Corpuz

(1)

Deogracia Corpuz, Capital 19,500

Cash 3,500
Allowance for Uncollectible Accounts 10,000
Accumulated Depreciation 6,000
To record adjustments to restate Corpuz's capital.

(2)

Accounts Payable 30,000

Allowance for Uncollectible Accts . 10,000
Accumulated Depreciation 6,000
Deogracia Corpuz, Capital 240,500
Cash 46,500
Accounts Receivable 100,000
Merchandise Inventory 80,000
Furniture and Fixtures 60,000
To close the books of Corpuz.

Books of Esterlina Gevera

(1)

Merchandise Inventory 10,000

Esterlina Gevera, Capital 7,000
Allowance for Uncollectible Accounts 8,000
Accumulated Depreciation 9,000
To record adjustments to restate Gevera's capital.

(2)

Accounts Payable 60,000

Allowance for Uncollectible Accts. 8,000
Accumulated Depreciation 9,000
Esterlina Gevera, Capital 243,000
Cash 40,000
Accounts Receivable 80,000
Merchandise Inventory 110,000
Delivery Equipment 90,000
To close the books of Gevera.

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College of Business and Accountancy Prepared by Yves A. Mortillero

Books of the Partnership

(1)

Cash 46,500
Accounts Receivable 100,000
Merchandise Inventory 80,000
Furniture and Fixture 54,000
Accounts Payable 30,000
Allowance for uncollectible Accounts 10,000
Deogracia Corpuz Capital 240,500
To record the investment of Corpuz

(2)

Cash 40,000
Accounts Receivable 80,000
Merchandise Inventory 110,000
Delivery Equipment 81,000
Accounts Payable 60,000
Allowance for Uncollectible Accts. 8,000
Esterlina Gevera, Capital 243,000
To record the investment of Gevera.

After the formation, the statement of financial position of the newly formed partnership is:

CORPUZ AND GEVERA

Statement of Financial Position
June 30, 2018

ASSETS
Cash P 86,500
Accounts Receivable P 180,000
Less: Allowance for Uncollectible Accounts 18,000 162,000
Merchandise Inventory 190,000
Furniture and Fixture 54,000
Delivery Equipment 81,000
Total Assets P 573,500

LIABILITIES AND OWNERS EQUITY

Accounts Payable P 90,000

Deogracia Corpuz, Capital 240,500
Esterlina Geveral, Capital 243,000
Total Liabilities and Owners’ Equity P 573,500

LIMITED LIABILITY COMPANY

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College of Business and Accountancy Prepared by Yves A. Mortillero

A limited liability company (LLC) is a hybrid form of business for it combines the best features of a
partnership and a corporation. LLC is a form of legal entity that limited liability to its owners. In
1988, the Internal Revenue Service (IRS) of the Units. States of America ruled that LLC may be
treated as a partnership for tax purposes to conditions. As a result of this ruling, all 50 U.S. states
allow LLCs.

The owners of an LLC are called members. These owners may be individuals, partnerships,
corporations or other entities. Many states even allow one-person LLC’s. The members have
limited liability even if they are active in the company.

This type of entity is attractive for professional service firms because the owners have personal
liability for the other owners' malpractice.

A limited liability partnership (LLP) is very similar to an LLC except that investment in LLP is
restricted to professionals. The four major international accounting firms KPMG, Ernest & Young,
PricewaterhouseCoopers and Deloitte Touche started as partnerships. As it grew and the risk
increased, these firms were allowed to change, by operation of law: LLPs. The LLP concept is
different from that of a limited partnership.

The accounting for LLCs is the similar to partnerships. The terms "member "member's equity' are
used instead of "partner" and "partner's equity.”

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College of Business and Accountancy Prepared by Yves A. Mortillero