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PARTNERSHIP AND CORPORATION PRELIMS REVIEWER | Holy Angel University

ACCOUNTING FOR PARTNERSHIPS: Basic Considerations and Formation
Hammurabi - in 2200 B.C., the King of Babylon provided for the regulation of partnerships
Societa - in ancient Rome, partnership was called ___
- during the Middle Ages in Italy, laws of partnership began to develop and Italian merchants operated
Limited Partners
as ____.
- after the Italians introduced the concept to Europe, the English settles brought it to the US where their
Partnership Act of 1890
partnership laws evolved from the English law: ___.
1. Uniform Partnership Act of 1914
2. Uniform Limited Partnership Act of - two American uniform partnership acts incorporated into the new civil code of the Philippines
1916
 Commercial - in the Philippines, before the effectivity of the new Civil Code on Aug 30, 1950, there are two types
 Civil of partnerships:
Commercial or Mercantile Partnerships - governed by the Code of Commerce
Civil or Non-Commercial Partnerships - old civil code governs this
- 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)
- and association of two or more persons to carry on, as co-owners, a business for profit (Uniform
Partnership Act, Section 6)
Partnership
- has a juridical personality separate and distinct from that of each of the partners (Civil Code of the
Philippines, Article 1768)
- resemble sole proprietorship, except that there are two or more owners of the business
- are often formed to bring together various talents and knowledge
- provide a means of obtaining more equity capital than a single individual can obtain and allow the
sharing of risks for rapidly growing businesses
Partner - each owner in a partnership it's called a ___.
- is an occupation that involves a higher education or its equivalent, and mental rather than manual
labor
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
General Professional Partnerships - are generally associated with the practice of law, public accounting, medicine and other professions.
Characteristics of a Partnership
- there cannot be a partnership without contribution of money, property, or industry (i.e. work or
Mutual Contribution
services which may either be personal manual efforts or intellectual) to a common fund
Division of Profits or Losses - each partner must share in the profits or losses of the venture
- all assets contributed into the partnership are owned by the partnership by virtue of its separate and
Co-Ownership of Contributed Assets distinct juridical personality
- if one partner contributes an asset to the business, all partners jointly own it in a special sense
- any partner can bind the other partners to contract if he is acting within his express or implied
Mutual Agency
authority
- it may be dissolved by the admission, death, insolvency, incapacity, withdrawal of a partner or
Limited Life
expiration of the term specified in the partnership agreement
- all partners (except limited partners), including industrial partners, are personally liable for all debts
incurred by the partnership
Unlimited Liability
- if the partnership cannot settle its obligations, creditor’s claims will be satisfied from the personal
assets of the partners without prejudice to the rights of the separate creditors of the partners
- partnerships, except general professional partnerships, are subject to tax at the rate of 30% (per R.A.
Income Taxes
No. 9337) of taxable income
- the difference between accounting for partnerships lies in the number of partners’ equity accounts
Partner’s Equity Accounts - each partner has a capital account and a withdrawal account that serves similar functions as the
related accounts for sole proprietorships
Advantages and Disadvantages of a Partnership

Advantages
Versus Proprietorships Versus Corporations
1. Brings greater financial capability to the business 1. Easier and less expensive to organize
2. Combines special skills, expertise, and experience of the 2. More personal and informal
partners
3. Offers relative freedom and the flexibility of action in
decision-making
Disadvantages
1. Easily dissolved and thus unstable compared to a corporation
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PARTNERSHIP AND CORPORATION PRELIMS REVIEWER | Holy Angel University
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

Partnership Corporation
Manner of Creation
- created by mere agreement of the partners - is created by operation of law
- not exceeding fifteen (15)
- One Person Corporation - a corporation with a
Number of Persons - two or more persons
single stockholder (Sec. 10, Revised Corporation
Code of the Philippines)
- from the issuance of certificate of incorporation
- commences from the execution of the articles of
Commencement of Juridical Personality by the Securities and Exchange Commission
partnership
(SEC)
- every partner is an agent of partnership if the - and each man is vested on the Board of
Management
partners did not appoint a managing partner Directors
- each of the partners except a limited partner is - stockholders are liable only to the extent of their
Extent of Liability
liable to the extent of his personal assets interest or investment in the corporation
- has the capacity of continued existence
Right of Succession - there is no right of succession regardless of the death, withdrawal, insolvency or
incapacity of its directors or stockholders
- he'll have perpetual existence unless its articles
Terms of Existence - for any period of time stipulated by the partners of incorporation provides otherwise (Sec. 11.
Revised Corporation Code of the Philippines)
Classifications of Partnerships
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
According to object
institution of the contract belong to the partnership. if the articles of universal partnership did not
specify its nature, it will 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
A. General. All partners are liable to the extent of their separate properties
According to liability B. Limited. 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.
A. Partnership with a fixed term or for particular undertaking.
According to duration B. Partnership at will. One in which no term is specified and is not formed for any particular
undertaking.
A. Commercial or trading partnership. One formed for the transaction of business
According to purpose
B. Professional or non-trading partnership. One formed for the exercise of profession.
A. De jure partnership. One which has complied with all the legal requirements for its establishment
According to legality of existence B. De facto partnership. One which has failed to apply with all the legal requirements for its
establishment.
Kinds of Partners
- one who is liable to the extent of his separate property after all the assets of the partnership are
General Partner
exhausted
- one who is liable only to the extent of his capital contribution.
Limited Partner
- is not allowed to contribute industry or services only
Capitalist Partner - one who contributes money or property to the common fund of the partnership
Industrial Partner - one who contributes his knowledge or personal service to the partnership
Managing Partner - one whom the partners has appointed as manager of the partnership
Liquidating Partner - one who is designated to wind or settle the affairs of the partnership after dissolution
Dormant Partner - one who does not take active part in the business of the partnership and is not known as a partner
- one who does not take active part in the business of the partnership though may be known as a
Silent Partner
partner
Secret Partner - one who takes active part in the business but is not known to be a partner by outside parties
Nominal Partner or partner by estoppel - one who is actually not a partner but who represents himself as one
Articles of Partnership
 Orally
- a partnership may be constituted __ or ___.
 In Writing
Articles of Partnership - in the case of partnership made in writing, agreements are embodied in the ___.
The following essential provisions may be contained in the agreement:
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PARTNERSHIP AND CORPORATION PRELIMS REVIEWER | Holy Angel University
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 noncash 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 are salaries to be allowed to partners;
9. The provision for arbitration of disputes, dissolution, and liquidation
- the contract of partnership is void whenever ____ our contributed and assigned inventory of the said
Immovable property or real rights
property is not made and attached to a public document
SEC Registration
- when the partnership capital ___ or more, in money or property, the public instrument must be
recorded with the Securities and Exchange Commission (SEC)
P3,000≤ Partnership Capital
- even if it is not registered, the partnership having a capital of ___ or more is still valid and therefore
has legal personality
- the SEC shall not register any corporation organized for the practice of ___. (The Philippine
Public Accountancy
Accountancy Act of 2004)
- is to set “condition for the issuance of the licenses to engage in business or trade. in this way, the tax
Purpose of Registration liabilities of big partnerships cannot be evaded, and the public can also determine more accurately their
membership and capital before dealing with them.“ (Dean Capistro, IV Civil Code of the Philippines)
1. Have your proposed business name verified in the verification unit of SEC
 Company “Co.” – name partnership shall bear
 Limited “Ltd.” – if it is a limited partnership
 A professional partnership may bear the word “Company”, “Associates”, or “Partners” or
other similar descriptions (SEC Memorandum Circular 5, Series 2008)
2. Submit the following requirements:
 Articles of Partnership
 Verification Slip for the business name
 Written undertaking to change business name if required
Steps in SEC Registration  Tax identification number of each partner and/or that of the partnership
 Registration data sheet for partnership duly accomplished in six copies
 Other documents that may be required:
 Endorsement from other government agencies if the proposed partnership will
engage in an industry regulated by the government
 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;
3. Pay the registration or filing and miscellaneous fees: filing fees equivalent to 1/5 of 1% of the
partnership capital but not less than P1,000 and research fee which is 1% of the filing fee
4. Forward documents to the SEC Commissioner for signiture
- CPAs, firms and partnerships of CPAs, engaged in the practice of public accountancy, including the
partners and staff members thereof, shall register with the Professional Regulation Commission and the
Professional Regulatory Board of Accountancy.
Accreditation to Practice Public - the registration shall be renewed every three years (The Philippine Accountancy Act of 2004, Sec.
Accountancy 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 also known as
the Philippine Accountancy Act of 2004
Accounting for Partnerships
- credited for his initial and additional net investments (assets contributed less liabilities assumed by
the partnership), and credit balance to 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
Partner’s Capital Account
Partners’ Capital Account
Debit Credit
1. Permanent Withdrawals 1. Original Investment
2. Debit balance of the drawing 2. Additional Investment
account at the end of the period 3. Credit balance of the drawing
account at the end of the period
Partners’ Drawing Account - partners customarily withdraw money on a periodic basis throughout the year
- is debited to reflect assets temporarily withdrawn by him from your partnership
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PARTNERSHIP AND CORPORATION PRELIMS REVIEWER | Holy Angel University
- provides a record of each partners’ drawings during an accounting period. Hence, drawings and
excess of the allowed amounts are stated in the partnership agreement may be controlled
- at the end of the accounting period, the balances in the drawing accounts are closed to the related
capital accounts

Partner’s Drawing Account

Debit Credit
1. Temporary Withdrawals 1. Share in profit (this may be
2. Share in loss (this may be credited directly to the capital)
debited directly to the capital)
- the choice of the account to credit or debit depends on the intention of the partners
a. If they wish to maintain their capital accounts for investments and permanent withdrawals,
Profit or Loss then profit or loss should be entered in the drawing account
Credited or Debited b. If their purpose is to make profit or loss part of their capital, then the capital account should be
used
c. In either case, the resulting partners’ ending capital balances will be the same
Permanent Withdrawals - are made with the intention of permanently decreasing the partner's’ capital
Temporary Withdrawals - are regular advances made by the partners in anticipation of their share in profit
- if a partner withdraws a substantial amount of money with the intention of repaying it, this account
Loans Receivable-Partner should be debited
- this account should be classified separately from the other receivables of the partnership
- a partner may lend amount to the partnership in excess of his intended permanent investment
- these advances should be credited to this account
Loans Payable-Partner
- 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.
Claims of Outside Creditors - these loans have priority over partners’ equity
Partnership Formation
Net Contributions - books of the partnership are opened with entries reflecting the ___ of the partners
- when partner invests ___, they are to be recorded at values agreed upon by the partners
Non-cash Investment - in absence of an agreement, they are to be recognized at their fair marker values at the date of transfer
to the partnership
- estimated amount that a willing seller would receive from a financially capable buyer for the sale of
Fair Market Value
the asset in a free market
- per International Financial Reporting Standards (IFRS) No. 3, ___ is the price at which an asset or
Fair Value liability could be exchanged in a current transaction between knowledgeable, and related willing
parties
Adjustments of Accounts Prior to Formation
- when adjustment involves a debit or credit to a nominal account (revenues, expenses, profit, losses),
Capital Account this account would be debited/credited instead because the business has ceased to be a going concern
(liquidation appears imminent).
Opening Entries of a Partnership Upon Formation
1. Individuals with no existing business
form a partnership
2. Conversion of a sole proprietorship
to a partnership
a. A sole proprietor and an
(3) Ways partnerships are formed
individual without an existing
business form a partnership
b. Two or more sole proprietors
form a partnership
3. Admission or retirement of a partner
- when a partner is a industrial partner and partnership did not receive any asset, only this entry will
Memorandum Entry
be made in the general journal
- required per National Internal Revenue Code
- STEPS:
A. Books of Partner A
1. Adjust assets and liabilities of Partner A in accordance with the agreement. Adjustments
New Books for the Partnership for a
are made to his capital account
Sole Proprietor and Another Individual
2. Close the books.
B. Books of the Partnership
1. Record the investment of Partner A
2. Record the investment of Partner B
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PARTNERSHIP AND CORPORATION PRELIMS REVIEWER | Holy Angel University
- required per National Internal Revenue Code
- STEPS:
C. Books of Partners
1. Adjust the accounts of both parties in accordance with the agreement. Adjustments are to
New Books for the Partnership for Two be made to their respective capital accounts.
or More Sole Proprietors 2. Close the books.
D. Books of the Partnership
1. Record the investment of Partner A
2. Record the investment of Partner B
Limited Liability Company
- hybrid form of business for it combines the best features of a partnership and corporation
- form of legal entity that provides limited liability to its owners
Limited Liability Company (LLC)
- attractive for professional service firms because owners will not have personal liability for the other
owners’ malpractice
- owners of an LLC are called ___
Members - may be individuals, partnerships, corporations, or other entities
- they have limited liabilities eve if they are active in the company
Limited Liability Partnership (LLP) - very similar to an LLC except that investments in LLP is restricted to professionals
Member
- terms __ and __ are used instead of “partner” and “partner’s equity”
Member’s Equity
BONUS Approach - transfer of capital from one partner to another
PRACTICE PROBLEMS

C’s
A’s Contributions B’s Contributions
Partnership of Partner A, B, & C Contribution
Book Val FM Val Book Val FM Val
Cash 25,000 50,000
Car 550,000 400,000 Service,
Balance-Bank 100,000 Industry
Furniture 70,000 34,000
Equipment 120,000 95,000

Journalizing Partnership Contributions

A’s Contributions DR CR
Cash 25,000
Car 400,000
Mortgage Payable 100,000
A, Capital 325,000

B’s Contributions DR CR
Cash 50,000
Furniture 34,000
Equipment 95,000
B, Capital 179,000
B’s Capital C’s Capital
A’s Capital 179,000 Partner C is
325,000 admitted to the
partnership…1/3 in
the partnership
profit

Jan 1 Memorandum Entry

Partner C is admitted into the partnership as an industrial partner to share 1/3 in the partnership profit

If Partner C is a capitalist partner, then the ledger would be

Partner C is …
C’s Capital profit
10,000
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PARTNERSHIP AND CORPORATION PRELIMS REVIEWER | Holy Angel University
Compound Entry
DR CR
Cash 50,000
Car 400,000
Furniture 34,000
Equipment 95,000
Mortgage Payable 100,000
A, Capital 325,000
B, Capital 179,000
A & B Contributed 50,000 each. It was agreed that Partner A will be getting 40% of the partnership interest. *BONUS APPROACH
Cash 100,000
A, Capital 40,000
B, Capital 60,000

COST FMV
Land 2,000,000 2,500,000
Balance - Bank 500,000

DR CR
Land 2,500,000
Loan Payable 500,000
X, Capital 2,000,000
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PARTNERSHIP AND CORPORATION PRELIMS REVIEWER | Holy Angel University

Recording Accumulated Depreciation

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PARTNERSHIP AND CORPORATION PRELIMS REVIEWER | Holy Angel University

Proprietor-Proprietor Partnership
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PARTNERSHIP AND CORPORATION PRELIMS REVIEWER | Holy Angel University
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PARTNERSHIP AND CORPORATION PRELIMS REVIEWER | Holy Angel University
Pepe and Pillar have decided to form a partnership. Pepe was a sole proprietor.
Book Value Agreed Valuation
Cash Assets = 450k + (180k – 15k) + 300k + (180k – 30k) =
450,000
1,065,000
Accounts Receivable 180,000
Allowance for Bad Debts 15,000 10,000 Liabilities = 105k + 90k = 195,000
Merchandise Inventory 300,000 270,000
Equipment 180,000 125,000 OE = 1,065,000 – 195,000 = 870,000
Accumulated Depreciation 30,000 1,025,000
Accounts Payable – 205,000
105,000
= 820,000
Notes Payable 90,000
Pepe, Capital 870,000
The partnership will use the books of Pepe

To adjust books of Pepe: DR CR

Allowance for Bad Debts 5,000
Pepe, Capital 5,000

Pepe, Capital 30,000

Merchandise Inventory 30,000

Accumulated Depreciation 30,000

Pepe, Capital 25,000
Equipment 55,000
Pepe,
Pilar will invest sufficient cash to get 1/3 interest in the partnership Capital
Pepe, Capital 870,000 30,000 870,000
25,000 5,000
Allowance for Bad Debts 5,000
55,000 875,000
Merchandise Inventory (30,000)
Bal. 820,000
Equipment (25,000)
820,000

Pilar 1/3 410,000

Pepe 2/3 820,000
Total Interest 3/3 1,230,000
*if partnership of pilar and pepe will use new books
DR CR
Cash 450,000
Accounts Receivable 180,000
Merchandise Inventory 270,000
Equipment 125,000
Accounts Payable 105,000
Notes Payable 90,000
Allowance for Bad Debts 10,000
Pepe, Capital 820,000

Cash 410,000
Pilar, Capital 410,000