What is Partnership? .

Accounting For
Partnerships
Lesson 1

Brief History .

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. 2 or more persons may also form a
In 2200 B.C., Hammurabi, King of Babylon,
partnership for the exercise of a profession.
provided for the regulation of partnerships. In
ancient Rome, the partnership was called a
The partnership has a juridical personality
societa.
separate and distinct from that of each of the
partners. Each owner is called a partner.
The partnership law in the United States evolved
Partnerships provide a means of obtaining more
from the English law, the Partnership Act of 1890.
equity capital than a single individual can obtain
In the US, the Uniform Partnership Act was
and allow the sharing of risks for rapidly growing
approved in 1914 and the Uniform Limited
businesses.
Partnership Act in 1916.

Partnerships are generally associated with the

practice of law, public accounting, medicine
and other professions. This nature are called
general professional partnerships.

Characteristics of a Partnership .

In the Philippines, there are 2 types of

partnerships:
➔​ Commercial or Mercantile
Partnerships were governed by the
Code of Commerce.
➔​ The old civil code governed the civil or
non-commercial partnerships. The New
Mutual Contribution: There cannot be a
Civil Code repealed the provisions of the
partnership without contribution of money,
two codes relating to mercantile and
property or industry to a common fund.
civil partnerships. Rules from the two
American Uniform Partnership Acts
Division of Profit or Losses: The essence of
were incorporated into the new Civil
partnership is that each partner must share in
Code.
the profits or losses of the venture.
Co-Ownership of Contributed Assets: All assets Advantages of a Partnership .
contributed are owned by the partnership by
virtue of its separate and distinct juridical
personality. If 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

Advantages versus Proprietorships
partners to a contract if he is acting within his
➔​ Brings greater financial capability to the
express or implied authority. The managing
business.
partner is the one who manages the business
➔​ Combines special skills, expertise, and
and in charge of all decision making. Any
experience of the partners
decisions of the managing partner will be the
➔​ Offers relative freedom and flexibility of
losses or gain of other partners since they
action in decision-making.
entrusted the business to the managing partner.

Advantages versus Corporations

Limited Life: It can be dissolved by the
➔​ Easier and less expensive to organize
admission, death, insolvency, incapacity,
➔​ More personal and informal
withdrawal of a partner or expiration of the
term specified in the agreement.
Disadvantages

Unlimited liability: All partners except from ➔​ Easily dissolved and unstable compared

limited partners are personally liable for all the to a corporation

debts. If it can’t settle its obligations, creditors’ ➔​ Mutual agency and unlimited liability

claims will be satisfied from the personal assets may create personal obligations to

of the partners without prejudice to the rights of partners

the separate creditors of the partners. ➔​ Less effective than a corporation in

raising large amounts of capital.

Ex: Asset is 100K, Liabilities is 120K, OE is

-20K. Since the business has insufficient
Partnership Corporation
funds the partners must pay for it.
Manner of Creation
Income Taxes: Partnerships, except general
It is created by It is created by
professional partnerships, are subject to tax at mere agreement of operation of law
the rate of 30% of taxable income. the partners

Number of Persons
Partners’ Equity Accounts: Accounting for
2 or more persons Not exceeding 15.
partnerships is the same with proprietorship but
However, A
it differs in no. of partners’ equity accounts. Each corporation with
partner has a capital and withdrawal account. single stockholder
is called a One
-​
Person
Corporation

Commencement of Juridical
Personality

It commences It commences
 whatever the partners contributed at the
from the execution from the issuance
of the articles of certificate of time of the contract belongs to the
of partnership incorporation by partnership. If it doesn't specify its
the Securities and nature, it will be considered as
Exchange
Commission universal partnership of profits

Management ●​ Particular Partnership. The object of

the partnership is determinate
Every partner is an Management is
agent of the vested on the
partnership if the Board of Directors. According to liability
partners did not Incorporators are
●​ General. All partners are liable to the
appoint a the ones who
managing partner. assign board of extent of their separate properties
directors.
●​ Limited. Limited Partners are liable only
Extent of Liability
to the extent of their personal

Each of the Stockholders are contribution. The law states that there
partners except a liable only to the shall be at least 1 general partner in the
limited partner is extent of their partnership.
liable to extent of interest or
his personal assets investment in the
corporation According to duration

Right of Succession ●​ Partnership with a fixed term or for

particular undertaking
There is no right of There is a right of
succession succession. A ●​ Partnership at will. One in which no
corporation has the
capacity of term is specified and is not formed for
continued any particular undertaking
existence
regardless of
death, withdrawal, According to purpose
insolvency of its
●​ Commercial or trading partnership.
directors
One formed for the transaction of
Term of Existence business

Any period of time It should have ●​ Professional or non-trading

stipulated by the perpetual
partners existence unless partnership. One formed for the
its articles of exercise of profession
incorporation
provides otherwise
According to legality of existence
●​ De jure partnership. One which has
Classification of Partnerships .
complied with all the legal
According to Object requirements for its establishment.
●​ Universal partnership of all present
property. All contributions become part ●​ De facto partnership. One which has
of the partnership funds. failed to comply with all the legal
requirements for its establishment
●​ Universal partnership of profits. All that
the partners acquire during the
existence of the partnership and use of
 Kinds of Partners . 10.​ Nominal Partner or partner by
estoppel. One who is actually not a
partner but who represents himself
as one.

Articles of Partnerships .

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 its capital contributions. He is
not allowed to contribute industry or
services only This is where the agreements of the partners
are indicated. It can be constituted orally or in
3.​ Capitalist Partner. One who writing. The following essential provisions may
contributes money or property to the be contained in the agreement:
common fund of the partnership 1.​ Partnership name, nature, purpose and
location
4.​ Industrial Partner. One who
contributes his knowledge or 2.​ Names, Citizenship, and residences of
personal service to the partnership the partners

5.​ Managing Partner. One whom the 3.​ Date of formation, and duration of the
partners have appointed as manager of partnership
the partnership.
4.​ Capital contribution of each partner,

6.​ Liquidating Partner. One who is treatment of excess contribution and

designated to wind up or settle the penalties for partner’s failure to invest

affairs of the partnership after

5.​ Rights and duties of partners
dissolution.

6.​ Accounting period to be adopted, nature

7.​ Dormant Partner. One who does not
of accounting records, financial
take active part in the business of the
statements and audits by independent
partnership and not known as a
public accountants
partner.
7.​ Method of sharing profit or loss,
8.​ Silent Partner. One who does not frequency of income measurement and
take active part in the business of the distribution, including any provisions for
partnership though may be known as differences in contributions
a partner.
8.​ Drawings or salaries to be allowed to
9.​ Secret Partner. One who takes active partners
part in the business but is not known
to be a partner by outside parties.
 9.​ Provision for arbitration of disputes, ●​ Proposed business name must be
dissolution, and liquidation. verified in the verification unit of
SEC
A contract of partnership is void whenever
-​ The name should bear the
immovable property or real rights are
word “Company” or “Co.”
contributed and a signed inventory of the said
-​ If it's a limited partnership, the
property is not made and attached to a public
word “Limited” or “Ltd.”
instrument.
-​ A professional partnership may
bear the word “Company”,
SEC Registration . “Associates” or “Partners” or
other similar descriptions

When the partnership capital is ₱3,000 or

more in money or property, the public ●​ Submit the documents:
instrument must be recorded with the -​ Articles of Partnership
Securities and Exchange Commission (SEC).
-​ Verification Slip for Business
Even if it is not registered but has a min. capital of
Name
₱3,000 it is still valid and has legal personality.

-​ Written undertaking to change

The SEC shall not register any corporation
business name if required
organized for the practice of public
accountancy because they has the ability to -​ Tax Identification no. of each
manipulate the financial statements and partner or the partnership
recording of money.
-​ Registration Data Sheet for

The purpose of the registration is to set a Partnership duly accomplished

condition for the issuance of licenses to in 6 copies

engage in business or trade. In this way, tax

-​ Others:
liabilities of big partnerships cannot be evaded
-Endorsement from other
and the public can determine more accurately
government agencies if the
their membership and capital before dealing with
partnership will be regulated
them.
by the government

Steps in registering partnership with -For partnership w/ foreign

partners: SEC Form F-105,
SEC:
Bank Certificate on the capital
contribution of partners, proof
of remittance of contribution of
foreign partners
 Accounting for Partnerships .
OWNER’S EQUITY ACCOUNTS
General Accepted Accounting Principles and
recording of accounting titles are the same as
sole proprietorship. However, differences arise
between 2 forms of business owners’ equity.

Since a partnership has 2 or more owners,

separate capital and drawing accounts are
●​ Pay the registration/filing and
established for each partner.
miscellaneous fee:
-​ Filing Fee equivalent to ⅕ of
A partner’s capital account is credited for his
1% of the partnership initial and additional net investments (assets
capital but not less than contributed less liabilities assumed by the
₱1,000 and legal research partnership), and credit balance of the drawing

fee which is 1% of the filing account at the end of the period.

fee
Partner’s Capital Account
●​ Forward documents to the SEC
Debit Credit
Commissioner for signature
Permanent Original Investment
Withdrawal

Accreditation to Practice Public . Debit Balance of Credit balance of

Drawing account in drawing account at
Accountancy . closing entries closing entries

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
CPAs, firms and partnerships, engaged in personal living expenses, partners customarily

the practice of public accountancy including withdraw money on a periodic basis throughout
the year.
partners and staff members shall register
w/ the Professional Regulation Commission
Partner’s Drawing Account
and Professional Regulatory Board of
Accountancy. It shall be renewed every 3 Debit Credit
years. The rules and regulations covering
Temporary Share in profit (it can
the accreditation for the practice of public Withdrawals be credited directly to
Capital)
accountancy are specified in Annex B of the
Rules and Regulations Implementing Share in Loss (it can
be debited directly to
Republic Act 9298 otherwise known as the Capital)

Philippine Accountancy Act of 2004.

Permanent Withdrawals are made with the
intention of permanently decreasing the
partner’s capital
Temporary withdrawals are regular advances market values at the date of transfer to the
made by the partners in anticipation of their partnership.
share in profit.

Fair Market Value of an asset is the estimated

*If partners wish to maintain their capital amount that a willing seller would receive
accounts for investment and permanent from a financially capable buyer for the sale of
withdrawals, then profit or loss should be asset in a free market.
entered in the drawing account*
Per International Financial Reporting Standards
*If the purpose of the partners is to make profit (IFRS) No. 3, fair value is the price at which an
or loss part of their capital, then the capital asset or liability could be exchanged in a
account should be used.* current transaction between knowledgeable,
unrelated willing parties.
LOANS RECEIVABLE FROM OR PAYABLE
TO PARTNERS
ADJUSTMENT OF ACCOUNTS PRIOR TO
●​ If a partner withdraws money with the
FORMATION
intention of repaying it, the debit
should be Loans Receivable-Partner When a partner has an existing business, their
instead of Partner’s Drawing account. It respective books will have to be adjusted to
is separate from the receivable of the reflect the fair market values of their assets or
partnership. to correct misstatements in the accounts. If
the adjustments will not be made, the initial
●​ A partner may lend money to the capital balances of the partners may be
partnership in excess of his intended inequitable.
permanent investment and this should
be credited to Loans Payable-Partner A printing equipment invested by Milavel
account and not Partner’s Capital Nazario was recorded incorrectly in the
account. Loans Payable must be paid partnership books at ₱730,000—its book value
after the claims of outside creditors have from the proprietorship’s records.
been paid in full. It is important in case
of liquidation If the partnership sold it for its fair market
value of ₱800,000, the resulting ₱70,000 gain
Partnership Formation would increase the capital balance of Milavel
and Virginia.

The printing equipment should have been

recorded at ₱800,000 and Nazario’s capital
credited with ₱800,000.
VALUATION OF INVESTMENTS BY
PARTNERS
Increase in asset values accruing before
Partners may invest cash or non-cash assets in formation should be for the benefit of the
the partnership. When a partner invests non-cash contributing partner.
assets, they are to be recorded at values agreed
upon by the partners. In absence of agreement,
the contributions will be recognized at their fair
 Illustrated Example 3.​ Additional salaries payable in the
amount of ₱10,000 is to be established.
Emerita Geron and Emerita Modesto formed a
Solution:
general professional partnership. Geron will
Salaries Expenses are understated
invest sufficient cash to get an equal interest in
and to correct it the owner’s equity
the partnership while Modesto will transfer the will be decreased.
assets and liabilities of her business. The
account balances of Modesto prior to the Modesto, Capital 10,000
partnership formation is the following: Salaries Payable 10,000

Owner’s Equity Account

Debit Credit

Decrease in Asset Increase in Asset

Increase in Liability Decrease in

Liability
The following adjustments shall be made in the
books of. Emerita Modesto: Increase in Decrease in
1.​ An allowance for uncollectible accounts contra-asset contra-asset

of 5% of accounts receivable is to be
established.
Solution:
Allowance for Uncollectible
Accounts is a contra-asset account.
When it increases, the effect is to
decrease the related asset account.
OE is also decreased since
uncollectible is considered as an
expense in the ordinary course of
business.

Modesto, Capital 15,000

Allowance for 15,000
Uncollectible Accts.

2.​ Prepaid expenses amounting to

₱30,000 were omitted by the
accountant. It has to be recognized.
Solution:
Prepaid Expenses will denote that
the expenses of the business are
overstated. When expenses are
overstated, profit and owner’s
equity is understated.

Prepaid Expenses 30,000

Modesto, Capital 30,000
 Opening Entries of Partnership . SOLE PROPRIETOR AND ANOTHER
Upon Formation . INDIVIDUAL FORM A PARTNERSHIP

Under this type of formation, the assets and

INDIVIDUALS WITH NO EXISTING liabilities of the proprietorship will be transferred
BUSINESS FORM A PARTNERSHIP to the newly formed partnership at values agreed
upon by all partners.

On July 1, 2019, Nilo Burgos and Helenita

Ruiz agreed to form a partnership. Its
agreement specified that Burgos is to invest
cash of ₱700,000 and Ruiz is to contribute
land with a fair market value of ₱1,300,000
with ₱300,000 mortgage to be assumed by
the partnership. The entries are as follows

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

Burgos and Ruiz

Statement of Financial Position
July 1, 2019

ASSETS
Cash ₱700,000 Marissa Dimarucot offered to invest cash to get a
Land _₱1,300.000_ capital credit equal to ½ of Galicano Del Mundo’s
capital after giving effect to the adjustments
Total Assets​ ​ _₱2,000,000_
below and Del Mundo accepted the offer.

Mortgage Payable ₱300,000

1.​ The merchandise is to be valued at
Nilo Burgos, Capital ₱700,000 ₱74,000
Helenita Ruiz, Capital _₱1,000,000_
Total Liabilities and _₱2,000,000_ 2.​ The accounts receivable is estimated to
Owner’s Equity be 95% collectible

3.​ Interest accrued on the notes receivable

Suppose Burgos and Ruiz formed another
will be recognized: ₱10,000, 12% dated
partnership with Nora Maniquiz since they
July 1, 2019 and ₱20,000, 12% dated
considered Maniquiz vast business network in
Aug. 1, 2019
Bicol as an industrial partner. The partnership did
not receive any asset from Maniquiz. In this case,
4.​ Interest on notes payable to be accrued
only a memorandum entry in the general journal
at 14% annually from Apr. 1, 2019
will be made.
5.​ The furniture and fixtures are to be
valued at ₱46,000

6.​ Office supplies on hand that have been

charged to expense in the past
amounted to ₱4,000. These will be used
by the partnership.
STEP 1: Adjust the entries based on the STEP 2: Close the sole proprietorship
agreement book

Del Mundo, Capital 6,000

Merchandise Inventory 6,000

Del Mundo, Capital 2,000

Allowance for 2,000
Uncollectible Accounts

(240,000 x 95% = 225,000)

(225,000 - 240,000 = 12,000)
(12,000 - 10,000 = 2,000)
*In adjusting allowances for uncollectible
accounts, the initial A/R amount must be used
and not with the amount where the
allowances were already deducted. This is
STEP 3: Transfer the amounts to the book
because the allowances are just
of partnership
assumptions.*

Interest Receivable 700

Del Mundo, Capital 700
(10,000 x 12% x 3/12 = 300)
(20,000 x 12% x 2/12 = 400)
(400 + 300 = 700)

Interest Payable 2,800

Del Mundo, Capital 2,800
(40,000 x 14% x 6/12 = 2,800)
STEP 4: Create statement of financial
position for the partnership

Del Mundo, Capital 8,000

Accumulated Depreciation 8,000
(54,000 - 46,000 = 8,000)
*Unlike Allowances for Uncollectible
Accounts, the depreciation net amount will be
used in the computation since depreciation is
a fixed amount.*

Office Supplies 4,000

Del Mundo, Capital 4,000
 TWO OR MORE SOLE PROPRIETORSHIP STEP 1: Adjust the Books of Deogracia
FORM A PARTNERSHIP Corpuz based on the agreement.

On June 30, 2019, Deogracia Corpuz and

Esterlina Gevera, friendly competitors in a
certain line of business, decided to combine
their talents and capital to form a partnership.
Their statements of financial positions are the
following:

The conditions and adjustments agreed upon by

the partners for purposes of determining their
interest in the partnership are:
1.​ Actual count and bank reconciliation on
Corpuz proprietorship’s cash account
revealed cash short and unrecorded
expenses of ₱3,500
2.​ Establishment of 10% allowance for
uncollectible accounts in each book
3.​ Merchandise Inventory of Gevera is to
be increased by ₱10,000
4.​ Furniture and Fixtures of Corpuz are to
be depreciated by ₱6,000
5.​ Delivery Equipment of Gevera is to be
depreciated by 9,000