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P01 Introduction to Partnership 1

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John Michael Guevarra Pasamonte
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8 views

P01 Introduction to Partnership 1

Uploaded by

John Michael Guevarra Pasamonte
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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INTRODUCTION

TO PARTNERSHIP
8/2/2024
AGENDA

1 Learning Objectives

2 Definition of Partnership

3 Partnership Formation

4 Other Concepts related to Partnership Formation


OBJECTIVES

• To define partnership and differentiate the accounting for


different entities (i.e., sole proprietorship, corporation, and joint
venture
• To discuss valuation of contribution of partners
• To discuss accounting for initial investments of the partners in
the partnership
• To discuss peculiar accounts used in the partnership and
identify the transactions that affect the account

D R A F T: F O R I N T E R N A L U S E O N LY
What is a
Partnership?
Partnership - Definition

• Article 1767 of the Partnership Law – by 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 profits among themselves

• unincorporated association of two or more individuals to carry on,


as co-owners, a business, with the intention of dividing the profits
among themselves
Partnership vs. Other types of Entities
The following distinguish a partnership from other types of entities:
a. A partnership is owned by two or more individuals while a sole
proprietorship is owned by only one individual.
b. A partnership is created by agreement between the partners while a
corporation is created by the operation of law.
c. A partnership is formed for a business undertaking that is normally
of continuing nature while a joint venture may or may not be formed
for a continuing nature.
Characteristics of Partnership
• Separate Legal Personality
• Ease of Formation
• Co-ownership of Partnership Property and Profits
• Limited Life
• Mutual Agency
• Unlimited Liability
Major Considerations of Partnership Accounting
• Partnership Formation
• Partnership Operations
• Partnership Dissolution
• Partnership Liquidation
Partners’ Ledger Accounts – Capital Account
• The capital account is credited for:
• Original Investment
• Additional Investment
• Partners’ share in the profits

• The capital account is debited for:


• Permanent withdrawal of capital
• Debit balance of the drawing account at the end of the period
• Partners’ share in the losses
Partners’ Ledger Accounts – Drawing Account
• The drawing account is credited for:
• Recurring reimbursable cost paid by the partner

• The capital account is debited for:


• Temporary withdrawals during the period
Partners’ Ledger Accounts – Loans
• A withdrawal of partner with the assumption of repayment to the firm
may be debited to Receivable from Partners

• An advance to the partnership by a partner with the assumption of


repayment by the partnership is viewed as a loan rather than as an
increase in the capital account. This type of transaction is credited to
Loans Payable to Partners
Accounting for Initial Investment
Valuation of Initial Investments
• based on agreement of the partners
• in absence of any agreement, fair value of the asset contributed
• liabilities assumed by the partnership should be deducted on the
value of the initial investment of a partner based on its present
value
Accounting for Initial Investment
Example 1:

Cash Investment – Partner A and B each invest P100,000 cash in a new


partnership. The entry to record the investment would be:

Cash P200,000
A, capital P100,000
B, capital P100,000
Accounting for Initial Investment
Example 2:

Non Cash Investment – Partner A and B form a partnership for the first
time. Their investment are as follows:
Partner A (Fair Partner B (Fair
Value) Value)
Cash P70,000
Inventory P20,000
Computer 30,000
Equipment (Cost,
Cash
P50,000) P70,000
Inventory 20,000
Computer Equipment 30,000
A, Capital P70,000
B, Capital 50,000
Bonus Method
• an accounting problem exist when a partners’ capital account is
credited for an amount greater than the fair value of his
contributions.
• for example, a partnership agreement may allow a certain
partner who is bringing in expertise or special skill to the
partnership to have a capital credit greater than the fair value of
his contributions.
• in such case, an additional credit to the partners’ capital (i.e.,
the bonus) is accounted for as deduction from the capital of the
other partner.
• although the credit to the partners’ capital may vary due to a
bonus, the corresponding debit to the asset account must still be
equal to the fair value of the contribution. The difference
between the amounts credited and debited is treated as
Bonus Method
Example 1: Partner A and B contributed P40,000 cash while B
contributed equipment with fair value of P100,000. However, due to
expertise that A will be bringing to the partnership, the partners agreed
that they could initially have an equal interest in the partnership
capital.

Cash P40,000
Equipment 100,000
A, Capital (40,000 + 30,000) P70,000
B, Capital (100,000 – 30,000) 70,000

(P100,000 + P40,000) = P140,000 / 2 = P70,000


Goodwill Method
• the goodwill method is based on the assumption that an implied
value can be estimated mathematically and recorded for any
intangible contribution made by a partner.

• Example: Partner A and B has capital balance of P70,000 and


P50,000 respectively. To equalize capital balances using the goodwill
method, the entry should be:
Goodwill P20,000
B, Capital P20,000

*Please note that a decision to use one method over the other will
depend on the partner’s agreement. In the absence of any
agreement, the bonus method is preferable over the goodwill
method.
Q&A

PRIVATE and CONFIDENTIAL


Thank you.

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