Manufacturing ❖ Upon sale of goods to customers

SYSTEM OF ACCOUNTING FOR INVENTORIES

💡A manufacturing concern is a nature of business operation that converts raw Dr: Cash / Accounts Receivable
Dr: Cash / Accounts Receivable
materials into finished goods as its final products. Cr: Sales
Cr: Sales
Dr: Cost of Goods Sold
❖ Upon acquisition of raw materials Cr: Finished Goods

❖ Upon incurrence of transportation costs (outgoing goods)

Dr: Purchases Dr: Raw Materials

Cr: Cash / Accounts Payable Cr: Cash / Accounts Payable
Dr: Freight Out / Delivery Expense Dr: Freight Out / Delivery Expense
❖ Upon incurrence of transportation costs (incoming goods) Cr: Cash Cr: Cash
❖ Upon collection within or beyond the discount period

Dr: Freight In Dr: Raw Materials

Cr: Cash / Accounts Payable Cr: Cash / Accounts Payable
Dr: Cash Dr: Cash
❖ Upon return of raw materials to supplier Dr: Sales Discount * Dr: Sales Discount *
Cr: Accounts Receivable Cr: Accounts Receivable

Dr: Cash / Accounts Payable Dr: Cash / Accounts Payable

Cr: Purchase Returns Cr: Raw Materials
❖ Requirement for physical count
❖ Upon payment to supplier within or beyond the discount period

Required Not required

Dr: Accounts Payable Dr: Accounts Payable
Cr: Cash Cr: Cash
❖ Volume of inventories
Cr: Purchase Discounts * Cr: Raw Materials *

❖ Upon issuance of raw materials to factory

Large Small
❖ Price of products
Dr: No Entry Dr: Work-in-process
Cr: No Entry Cr: Raw Materials
❖ Upon incurrence of direct labor in the factory
Low High
❖ Inventory turnover

Dr: Direct Labor Dr: Work-in-process

Cr: Cash / Accrued Salaries Cr: Cash / Accrued Salaries
Fast Slow
❖ Upon incurrence of indirect costs in the factory
❖ Use of stock cards

Dr: Factory Overheads Dr: Work-in-process

Cr: Sundry credits Cr: Sundry credits No Yes
❖ Upon completion of the product ❖ Use of moving average

Dr: No Entry Dr: Finished Goods No Yes

Cr: No Entry Cr: Work-in-process
❖ Effectiveness of internal controls FINISHED GOODS

Inferior Superior
Cost of Goods Manufactured
Add: Finished Goods, Beginning
Total Goods Available for Sale
NON-COST SYSTEM OF ACCOUNTING FOR INVENTORIES
💡Flow of Cost – this term refers to the movement of items of cost.

Under the non-cost system, flow of cost is not accounted for in detail. The
periodic inventory method is used so that cost of goods manufactured, and Total Goods Available for Sale
cost of goods sold can only be arrived at after an inventory taking of raw Less: Finished Goods, Ending
materials, work in process and finished goods. Paperwork is minimal since Cost of Goods Sold
perpetual records of the flow of cost are non-existent. Product unit cost is
simply arrived at by dividing cost of goods manufactured by the total number
of units produced.

RAW MATERIALS

Raw Materials, Beginning

Add: Net Purchases*
Total Raw Materials Available for Use

COST OF GOODS SOLD

Total Raw Materials Available for Use

Less: Raw Materials, Ending Raw Materials, Beginning
Total Raw Materials Used in the Production Add: Net Purchases
Less: Raw Materials, Ending
WORK IN PROCESS Total Raw Materials Used in the Production

Direct Materials Direct Materials

Add: Direct Labor Add: Direct Labor
Add: Factory Overheads Add: Factory Overheads
Total Manufacturing Cost Total Manufacturing Cost
Add: Work in Process, Beginning
Less: Work in Process, Ending
Cost of Goods Manufactured
Add: Finished Goods, Beginning
Total Manufacturing Cost Less: Finished Goods, Ending
Add: Work in Process, Beginning Cost of Goods Sold
Total Cost Put into Process
GROSS PROFIT RATE VS MARK UP RATE
💡Mark up – This is the amount a seller puts up over the cost of investment on a
product.

Total Cost Put into Process

Less: Work in Process, Ending simply arrived at by dividing cost of goods manufactured by the total number
Cost of Goods Manufactured of units produced.

💡The prime cost of a product is composed of direct materials and direct labor,
while conversion cost is composed of direct labor and factory overheads. Net Sales
Less: Cost of Goods Sold
Gross Profit
 Manufacturing costs include all costs related to the production process. They are
classified into three categories:
• Direct Materials
Gross Sales
These materials become a physical part of a finished product. Their costs
Less: Sales Returns
can be conveniently and economically traceable to the finished product.
Less: Sales Discounts
Net Sales • Direct Labor
It is the compensation of employees or workers who physically convert
raw materials into finished goods.
• Manufacturing Overhead
This includes all manufacturing costs that cannot be classified as direct
materials or direct labor.
Gross Profit . • Finished Goods Inventory
Cost of Goods Sold It is the cost of completed goods that have remained unsold at the end
of the accounting period. This inventory is what the manufacturers sell
to the merchandisers. This account holds the cost of direct materials on
hand that is intended for use in the manufacturing process
• Work in Process Inventory
This account gives the cost of the goods that are in the manufacturing
Gross Profit . process but are not yet complete at the end of the accounting period.
Net Sales • Factory Supplies Inventory
It is the cost of unused indirect materials at period end.

💡The cost ratio is computed as cost of goods sold divided by sales. The sum of cost ratio
and gross profit rate (based on sales) should always be equal to 100. So, if cost ratio is Two accounting systems may be used in accounting for manufacturing activities -
70%, gross profit rate is 30%. cost and non-cost. The cost system keeps perpetual records of the costs of raw
material, work in process and finished goods inventories. This system provides more
timely information about those inventories and changes in their levels.

The non-cost system produces a manufacturing accounting system based on the

periodic inventory system. The costs of raw materials, work in process and finished
goods inventories are based on physical counts of the quantities on hand at the end
of each period. This information is then used to compute the amounts consumed,
Cost
finished and unsold during the period. This system does not provide for a detailed
Multiply by: Mark Up Rate
flow of costs in the manufacturing process.
Mark Up
The following are the pro- forma journal entries of the more common
transactions for a manufacturing entity.
1. To record purchase of raw materials and indirect materials on account:
Purchases -- Raw Materials xx
Cost Indirect Materials xx
Add: Mark Up Vouchers Payable xx
Selling Price
2. To record cost of defective raw materials returned to vendor:
Vouchers Payable xx
Purchase Returns and Allowances xx

3. To record payment of account within the discount period:

Mark Up ..
Vouchers Payable xx
Cost
Purchase Discounts xx
Cash in Bank xx

4. To record freight and handling of raw materials:

Transportation In xx
Merchandising and manufacturing entities earn revenues by selling goods. A
Vouchers Payable xx
merchandiser normally buys a product that is ready for resale when it is received. A
5. To record payroll for factory employees:
manufacturer buys raw materials and processes them into finished goods that it sells
Direct labor xx
to customers.
Indirect labor xx
SSS Contribution Payable xx
Medicare Contributions Payable xx
Pag-IBIG Contributions Payable xx
• Buy materials Withholding Taxes Payable xx
• Buy products • Use labor and other economic Vouchers Payable xx
• Sell products resources to produce products
• Sell products
6. To record employer's payroll expenses: Manufacturing Summary xx
Employer's Payroll Contributions—Factory xx Raw Materials Inventory, beginning xx
SSS Contributions Payable Medicare Contributions Payable xx Work in Process Inventory, beginning xx
EC Contributions Payable xx Purchases—Raw Materials xx
Pag-IBIG Contributions Payable xx Transportation In xx
Direct Labor xx
7. To record distribution of payroll: Indirect Labor xx
Vouchers Payable xx Indirect Materials xx
Cash in Bank xx Depreciation Expense—Factory Bldg xx
Repairs and Maintenance—Factory Bldg, xx
8. To record accrual of factory payroll: Amortization of Patents xx
Direct Labor xx Real Property Taxes xx
Indirect Labor xx Factory UtilitiesxxTools used xx
Accrued Payroll xx Employer's Payroll Contributions—Factory xx
Factory Supplies Expense xx
9. To record depreciation of factory building: Miscellaneous Factory Expense xx
Depreciation Expense --Factory Bldg. xx Manufacturing Operations xx
Accumulated Depreciation-Factory Bldg. xx
c. To close manufacturing summary and beginning finished goods
10. To record repairs on factory building: inventory to income summary:
Repairs and Maintenance --Factory Building xx Income Summary xx
Vouchers Payable xx Manufacturing Summary xx
Finished Goods Inventory, beginning xx
11. To record amortization of patents:
Amortization of Patents xx d. To establish the ending finished goods inventory:
Patent xx Finished Goods inventory, beginning xx
Income Summary xx
12. To record real property taxes on factory site:
Real Property Taxes xx
Vouchers Payable xx Renante Balocating Manufacturers
Statement of Cost of Goods Manufactured
13. To record factory utilities incurred: For The Year Ended Dec.
Factory Utilities xx
Direct Materials Used:
Vouchers Payable xx
Raw Materials Inventory, beginning P xxx
Add: Net Cost of Purchases:
14. To record cost of tools used:
Purchases - Raw Materials P xx
Tools Used xx
Less: Purchases Returns and Allow. P xx
Tools xx
Purchases Discounts xx xx
Net Purchases P xx
15. To record sales of finished goods:
Add: Transportation In xx xxx
Accounts Receivable xx
Raw Materials Available for Use P xxx
Sales xx
Less:Raw materials Inventory, end xxx
P xxx
16. To record sales returns of customers:
Direct Labor xxx
Sales Returns and Allowances xx
Manufacturing Overhead
Accounts Receivable xx
Indirect Labor xxx
Indirect Materials xxx
17. Closing entries peculiar to manufacturing concerns: Depreciation Expense - Factory Bldg. xxx
In order for a manufacturer to summarize all the transactions that affect Repairs and Maintenance - Factory Bldg. xxx
computation of the cost of goods manufactured, a manufacturing Amortization of Patents xxx
summary is maintained. It is credited for the results of the physical Real Property taxes xxx
count of raw inventory and work in process inventory at the end of the Factory Utilities xxx
accounting period, contra-purchases accounts are also credited to this Tools Used xxx
account. This account is debited for the beginning balances of raw Employer’s Payroll Contributions - Factory xxx
materials and work in process inventory, and the manufacturing accounts Factory Supplies Expense xxx
with debit balances. The balance of the manufacturing summary account Miscellaneous Factory Expense xxx xxx
is then closed to the income summary account, Total Manufacturing Costs P xxx
Add: Work in Process, beginning xxx
a. To close manufacturing accounts with credit balances, and to Total Cost of Goods Placed in Process P xxx
record ending inventory formaterials and work in process: Less: Work in Process, End xxx
Raw Materials Inventory, end xx Cost of Goods Manufactured P xxx
Work in Process Inventory, end xx
Purchases Returns and Allowances xx
Purchases Discounts xx
Manufacturing Summary xx The difference in the income statement of a merchandising and a manufacturing
entity lies in the cost of goods sold section. As illustrated, observe that the
b. To close manufacturing accounts with debit balances: merchandiser used the term merchandise inventory while the manufacturer
used the term finished goods inventory. A merchandiser’s entire inventory is 2.Product cost
finished goods; a merchandiser has no materials inventory and work in process • bago ipasok sa cost of good sold at cost of sale dapt naibenta na ang
inventory. yung natira is what we call inventory
• Also called inventoriable cost because pag hindi naibenta [wede bilangin
A manufacturer produces its own finished goods inventory. Cost of goods at ilalagay sya sa inventory
manufactured is the manufacturer’s counterpart to the merchandiser’s
purchases. Net cost of purchases is the cost of all the goods a merchandiser ❖ Prime Cost
bought for resale during the period. Cost of goods manufactured is the • primarily cost incurred in making the product
manufacturing cost of the goods completed during a production period. • Direct Material - ginagamit sa pagawa ng product
• Direct Labor - wage
Merchandising Entity
❖ Conversion Cost - mga na incurred from raw materials to finished products
Merchandise Inventory, Beg. P xx
• Direct Labor
Add: Net Cost of Purchases xx
Goods Available for Sale P xx • Factory Overhead
Less: Merchandise Inventory, End xx
Cost of Goods Sold P xx 3. Fixed Cost
• Bumababa habang tumataas ang production
Manufacturing Entity • Inversely proportional to the label of the output
Finished Goods Inventory, Beg. P xx
Add: Cost of Goods Manufactured xx 4. Variable Cost
Goods Available for Sale P xx • mga cost na tumataas pag tumaas din ang prduction
Less: Finished Goods Inventory, End xx • Directly proportional to the label of the output

1. Scrap Materials
The worksheet for a manufacturing entity is basically the same as that for a • pwede pa mapakinabangan o maibenta
merchandising entity except that it includes a pair of columns for cost of goods • also known as salvage value in merchandising that you will minus the
manufactured. All the accounts that comprise the statement of cost of goods salvage value to the amount and divide to the life years of the given so
manufactured are extended to these columns. Beginning raw materials inventory it will be equal to the depreciated amount
and work in process are debited in the manufacturing columns while the related
ending inventories are credited. 2. Waste Materials
• hindi magamit or wala na talaga
The other manufacturing accounts are either debited or credited as necessary.
The difference between the total debits and total credits of these two columns is 3. Defective Goods
then extended to the debit column of the income statement. Beginning finished • nasiraan ng onti and irerework para mabenta ulit
goods inventory being a component in the computation of cost of goods sold is
extended to the debit side of the income statement columns while the ending 4. Spoiled Goods
finished goods inventory to the credit column. • rejected sa inspection and hindi na pwede irework

notes 5. Indirect Labor

• mga materials na hindi need sa production

6. Indirect Materials
• mga ginagamit natin sa pag gawa but hindi directly nakikita sa finished
• A type of business in that you have to process the product before
product (for example, sand paper & glue)
offering to your customer/client.
• You have to produce or manufacture the product first. 7. Direct Materials
• mga ginagamit natin sa pag gawa na directly nakikita sa finished product

a. Raw Materials - hindi pa nauumpisahan magamit; for example, leather

b. Work in Process - naumpisahan na magamit per hindi pa tapos; for ex.,
cut leather
c. Finished Goods - madami ng tapos or napack sa warehouse pero hindi
Net Sales
pa naibebenta
Sales P xxx
d. Factory Supplies - mga ginagamit natin sa pag gawa but hindi directly
Less Sales Return and Allowance xxx
nakikita sa finished product (for example, sandpaper & glue)
Sales Discount xxx
Net Sales P xxx
Cost System - (Perpetual - we record every transaction that happens)
Non-Cost System - (Periodic - we record only at the end of the accounting period)
Selling Expenses P xxx
Sales Salaries xxx
Impairment loss xxx
1.Periodic Cost Advertising Expenses xxx
• cost na hindi pwede icharge sa product cost so ipinapasok sya sa period Sales Commission xxx
cost which are the income statement account (for ex. operating expense Delivery expenses xxx
like administrative expenses, to selling or marketing expenses) P xxx
• there’s no inventory
Administrative Expenses
Office Salaries P xxx Partnership
Professional fees xxx
Depreciation furniture & fixtures xxx
Depreciation office equipment xxx PARTNERSHIP OPERATIONS AND FINANCIAL REPORTING
P xxx

❖ The basis on which profits or losses are shared is a matter of agreement

Beg Invtry. RM among the partners and may not necessarily be the same as their capital
Add Purchases xxx contribution ratio.
RM Avail. For use P xxx ❖ The equity of the partner in the net asset of the partnership should be
Less. RM Inventory xxx distinguished from a partner’s share in profits or losses.
RM Used P xxx ❖ Partners may agree on any type of profit and loss ratio regardless of the
Direct Labor xxx amount of their respective capital account balances.
Factory Overhead xxx
Total Factory Costs P xxx
❖ Money, Property, or Industry
Add WIP xxx
- The amount of capital invested by each partner, the amount of time
Total costs placed in process P xxx each partner devotes to the business and other contributions are
Less WIP xxx the factors being considered in the formulation of equitable profit
Costs of goods manufactured P xxx and loss ratio.
Add Factory Goods xxx ❖ Performance Methods
GAFS P xxx - Many partnerships use profit and loss sharing arrangements that
Less Factory Goods xxx give some weight to the specific performance of each partner to
provide incentives to perform well. This allocation of profits to
Cost of goods sold P xxx
partners on the basis of performance is referred to as a bonus.
- Examples of the use of performance criteria:
Sales P xxx Chargeable hours
Less COGS xxx Total billings
Gross Profit P xxx Write-offs
Less Expenses Promotional and civic activities
Sales Expense xxx
Profits in excess of specified levels
Advertising Expense xxx
Amortent and Patent xxx
Uncoll.Accts Expense xxx
Interest Expense xxx Profits
Misc. Expense xxx a. The profits will be divided according to partner’s agreement.
Depreciation Exp. Off. Equip. xxx xxx b. If there is no agreement:
Net Profit P xxx - As to capitalist partners, the profit shall be divided according to
their capital contributions (according to the ratio of original capital
investments or in its absence, the ratio of capital balances at the
beginning of the year.)
RM Beginning P xxx - As to industrial partners (if any), such share may be just and
Add Purchases P xxx equitable under the circumstances, provided, that the industrial
Freight-In xxx partner shall receive such share before the capitalist partners shall
Gross Purchases xxx divide the profits
Less: Purchase return and allow. P xxx
Losses
Purchase Discount xxx xxx xxx
RM Avail for used P xxx a. The losses will be divided according to partner’s agreement.
Less: RM End xxx b. If there is no agreement as to the distribution of losses but there is
RM used P xxx an agreement as to profits, the losses shall be divided according to
the profit sharing ratio.
c. In the absence of any agreement:
Factory Overhead - As to capitalist partners, the losses shall be divided according to their
Indirect Materials P xxx capital contributions (according to the ratio of original capital
Indirect labor xxx investments or in its absence, the ratio of capital balances at the
Heat, light, Power xxx beginning of the year.)
Factory rent xxx - As to purely industrial partners (if any), shall not be liable for any
Factory Insurance xxx losses.
Depreciation- Machinery xxx
Misc.Factory overhead P xxx
❖ Prior Period Errors are omissions from and other misstatements of the
entity’s financial statements for one or more prior periods that are
discovered in the current period.
❖ Errors may occur as a result of mathematical mistakes, mistakes in
applying accounting policies, misinterpretation of facts, fraud or
oversight.
 ❖ Prior period errors should be reported by adjusting the opening balances Assume instead that Medina and Detoya share profits and losses in a ratio of
of partner’s equity and affected assets and liabilities (correcting entry)
and profit was the profit would be divided as follows:
Income Summary
❖ The ratio in which profits or losses from partnership operations are Medina, Drawing
distributed is recognized as the profit and loss ratio. Detoya, Drawing
❖ The partners may agree on any of the following scheme in distributing
profits or losses: To record division of profits.
Equally or in agreed ratio Medina:
Based on the partners’ capital contributions Detoya:
a. Ratio of original capital investments
b. Ratio of capital balances at the beginning of the year
c. Ratio of capital balances at the end of the year
d. Ratio of average capital balances
By allowing interest on partners’ capital and the balance in an agreed Ratio of Original Capital Investments. The original investments of Medina and Detoya
ratio are and respectively. The profit of for is divided
By allowing salaries to partners and the balance in an agreed ratio. as follows:
By allowing bonus to the managing partner based on profit and the Income Summary
balance in an agreed ratio.
Medina, Drawing
By allowing salaries, interest on partners’ capital, bonus to the
managing partner and the balance in an agreed ratio (combination Detoya, Drawing
of To record division of profits.

Medina:
Medina and Detoya Partnership had a profit of for the year ended Dec. Detoya:
the first year of operations. The partnership contract provided the following:
Each partner may withdraw on the last day of each month; both Ratio of Capital Balances at the Beginning of the Year. In this case, the original
partners did so during the year investments are also the capital balances at the beginning of the year since the
The drawings are recorded by debits to the partner’s drawing accounts partnership is only on its first year of operations. The profit of is
and shall not be considered in the division of profit or loss divided as follows:
It is the intention of the partners that each partner’s share in the profit Income Summary
or loss be either credited or debited to the drawing account Medina, Drawing
Detoya, Drawing
Medina invested on Jan and an additional on April Detoya To record division of profits.
invested on Jan and withdrew on July
Medina:
Detoya:

Ratio of Capital Balances at the End of the Year. The ending capital balances before
drawings and the distribution of profit are for Medina and for
Detoya. The profit of for is divided as follows:

Income Summary
Medina, Drawing
Partnership contracts may provide that profit or loss be divided equally. The profit Detoya, Drawing
of for the partnership is transferred by a closing entry on Dec. To record division of profits.
from the income summary ledger account to the partners’ drawing accounts:
Medina:
Income Summary P Detoya:
Medina, Drawing P
Detoya, Drawing
Ratio of Average Capital Balances.
To record division of profits
❖ Preferable since it reflects the capital actually available for use by the
If the partnership had a loss of for the year ended Dec. , the income partnership during the year.
❖ The agreement should state the amount of drawings each partner may
summary account will have a debit balance of This loss would be
make. These drawings are considered temporary and recorded as debits
transferred with the following entry: to the partner’s drawing account.
Medina, Drawing P ❖ Drawings within the allowable amount will not affect the computation of
the average capital balance.
Detoya, Drawing
❖ Drawings in excess of the allowable amount are considered permanent
Income Summary P reductions in capital; hence, the computation of the average capital
To record division of losses balance is affected.
 If the partnership agreement provided for interest on capital accounts, this provision
must be honored regardless of whether operations yielded profits or not.
Medina invested on Jan. and an additional on April Detoya
invested on Jan. and withdrew on July Illustration: Assume that Medina and Detoya Partnership incur a loss of
Interest will be given, and the remainder will be divided equally.

The journal entry to close the income summary ledger account on Dec.
follows:
Medina, Drawing
Income Summary
Detoya, Drawing
To record division of profits.

❖ The partnership agreement should be clear on the treatment of salary

allowances when losses are incurred.
❖ In the absence of an agreement, salary allowances will be provided even
when operations yielded losses.
❖ Salaries to the partners are not deducted as expenses in the income
Ratio of Original Capital Investments. The profit of for is divided as statement
follows:
Income Summary Continuing the illustration, assume that the partnership agreement provided for an
Medina, Drawing annual salary of to Medina and to Detoya, and the balance to be

Detoya, Drawing divided equally. The profit of is divided as follows:

To record division of profits.

Medina:
Detoya:

❖ Interest rate should be specified in the partnership agreement. The journal entry to close the income summary ledger account on Dec.
❖ It should also state whether interest is to be computed on capital follows:
balances on specific dates or on average capital balances during the Income Summary
year.
Medina, Drawing
❖ Interest on partners’ capital are to be considered as mere techniques to
share profits or losses equitably and not as expenses of the partnership. Detoya, Drawing
To record division of profits.
Assume that the partnership agreement allowed % interest on average capital
account balances with the balance to be divided equally. The profit of for
is divided as follows: ❖ Given in order to encourage the partner to maximize the profit potentials
of the partnership.
❖ It is not considered in the computation of profit, rather it is a mere
technique to distribute profit.

Assume that the Medina and Detoya Partnership agreement provided for a bonus of
% of profit before bonus to partner Medina and the balance to be divided equally.
The profit is .

The journal entry to close the income summary ledger account on Dec.
follows:
Income Summary
Medina, Drawing
Detoya, Drawing
To record division of profits.
The journal entry to close the income summary ledger acc. on Dec. follows: Assume instead that the bonus to Medina is % of profit after salaries, interest,
Income Summary and after bonus. The computation of bonus follows:
Medina, Drawing
Detoya, Drawing
To record division of profits.

Assume instead that partnership agreement provided for a bonus of % of profit

after bonus to partner Medina and the balance to be divided equally. The profit is

The journal entry to close the income summary ledger acc. on Dec. follows:
Income Summary
Medina, Drawing BRIEF HISTORY
Detoya, Drawing ❖ In B.C., Hammurabi, King of Babylon, provided for the regulation
To record division of profits. of partnerships.
❖ In ancient Rome, the partnership was called a 'societa'.
❖ In the Philippines, before the effectivity of the new Civil Code on August
there are two types of partnerships:
a. Commercial. Commercial or mercantile partnerships were governed
❖ Note that the provisions for salaries and interest in the partnership by the Code of Commerce.
agreement are called allowances. b. Civil. The old Civil Code governed the civil or non-commercial
❖ These allowances are not reported in the income statement as salaries partnerships.
and interest expense. ❖ The new Civil Code repealed the provisions of the two codes relating to
❖ They are merely means of allocating profit to the partners. mercantile and civil partnerships. Rules from the two American Uniform
Partnership Acts were incorporated into the new Civil Code
Assume that the profit for the year is and the partnership agreement for
the partnership provided for the following: PARTNERSHIP
Bonus to Medina of % of profit after salaries and interest but before bonus; In a contract of partnership, two or more persons bind themselves to contribute
Annual salaries of to Medina and to Detoya; money (cash on hand and in bank), property (land, tangible materials) or industry
(skills, services) to a common fund with the intention of dividing the profits among
Interest on the average capital balances of and to Medina and themselves. Two or more persons also form a partnership for the exercise of a
Detoya, respectively. profession (Civil Code of the Philippines Article
Balance to be divided in a ratio of .
An association of two or more persons to carry on, as co-owners, a business for
profit (Uniform Partnership Act, Section The partnership has juridical personality
separate and distinct from that of each of the partners (Civil Code of the Philippines,
Article
Partnership resembles sole proprietorships, except that there are two or more owners
of the business. Each owner is called partner. Partnerships are often formed to bring
together various talents and knowledge. Partnership provides 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
The journal entry to close the income summary ledger acc. on Dec. follows:
mental rather than manual labor. Strictly speaking, the exercise of a profession is
Income Summary not a business or an enterprise for profit but the law allows two or more persons
Medina, Drawing to act as partners in the practice of their profession. Partnerships are generally
associated with the practice of law, public accounting, medicine and other
Detoya, Drawing
professions. Partnerships of this nature are called general professional partnerships.
To record division of profits On the other hand, service industries, retail trade, wholesale and manufacturing
enterprises may also be organized as partnerships.
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 partnership are owned by the partnership by virtue
of its separate and distinct personality. If one partner contributes an asset to the ACCORDING TO OBJECT:
business, all partners jointly own it in a special sense. a. Universal partnership of all present property
All contributions become part of the partnership fund.
Mutual agency
Any partner can bind the other partners to a contract if he is acting within his b. Universal partnership of profits
express or implied authority. (binding with other partners, can express authority) 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
Limited life institution of the contract belong to the partnership.
A partnership has a limited life. It may be dissolved by the admission, death, c. Particular Partnership
insolvency, incapacity, withdrawal of a partner or expiration of term specified in the The object of the partnership is determinate – its use of fruit, specific undertaking
partnership agreement. or the exercise of profession or vocation.

Unlimited liability ACCORDING TO LIABILITY:

All partners are personally liable for all debts incurred by the partnership. If the a. General
partnership cannot settle its obligations, creditors’ claims will be satisfied from the All partners are liable to the extent of their separate properties.
personal assets of the partners.
b. Limited
Income taxes The limited partners are liable only to the extent of their personal contributions. In
Partnership, except general professional partnerships, are subject to tax at the rate a limited partnership, the law states that there shall be or at least one general
of % (per R.A. – National Internal Revenue Code) of taxable income. partner.

ACCORDING TO PURPOSE:
Partners’ equity accounts
a. Commercial or Trading Partnership
Each partner has a capital account and a withdrawal account that serves similar
One formed for the transaction of business
functions as the related accounts for sole proprietorships
b. Professional or Non-trading Partnership
One formed for the exercise of profession.
Advantages Of Partnership Vs Sole Proprietorship
ACCORDING TO LEGALITY OF EXISTENCE:
. Brings greater financial capability to the business.
a. De jure partnership
. Combines special skills, expertise and experience of the partners. One which has complied with all the legal requirements for its establishment.
. Offers relative freedom and flexibility of action in decision-making b. De facto partnership
One which has failed to comply with all the legal requirements for its establishment.
Advantages Of Partnership Vs Corporation
. Easier and less expensive to organize
. More personal and informal. General partner
One who is liable to the extent of his separate property after all assets of the
Disadvantages Of Partnership Vs Corporation partnership are exhausted.
. Easily dissolved and thus unstable compared to a corporation.
Limited partner
. Mutual agency and unlimited liability may create personal obligations to partners.
One who is liable only to the extent of his capital contribution. He is not allowed to
. Less effective than a corporation in raising large amounts of capital. contribute industry or services only.

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

Industrial partner
One who contributes his knowledge or personal services to the partnership.

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

Liquidating partner
One who is designated to wind up or settle the affairs of the partnership after
dissolution.
Dormant partner ➢ Verification slip for the Business Name
One who does not take active part in the business of the partnership and is not ➢ Written undertaking to change business name, if required
known as a partner. ➢ Tax Identification Number (TIN) of each partner and that of the
partnership
Silent partner
One who does not take active part in the business of the partnership though may Registration data sheet for partnership duly accomplished in six copies
be known as a partner ❖ Other documents that may be required:
Endorsement from other government agencies if the proposed
Secret partner
partnership will engage in an industry required by the government
One who takes active part in the business but is not known to be a partner by
outside parties For partnership with foreign partners, SEC Form F- , bank
certificate on the capital contribution of partners, proof of
Nominal or partner by estoppel remittance of contribution of foreign partners.
One who is actually not a partner but who represents himself as one. ➢ Pay the registration/filing and miscellaneous filing fee
equivalent to of % of the partnership capital but not less
than and legal research fee which is % of the filing fee.
Essential provisions may be contained in the agreement: ➢ Forward documents to the SEC Commissioner for signature.
. The partnership name, nature, purpose and location.
. The names, citizenship and residences of the partners. ACCOUNTING FOR PARTNERSHIP
. The date of formation and the duration of the partnership.
The capital contribution of each partner, the procedure for valuing noncash In Basic accounting, generally accepted accounting principles were discussed in the
context of a sole proprietorship. These accounting principles also apply to a
investments, treatment of excess contribution (as capital or as loan) and the
partnership. Thus, the recording of assets, liabilities, income, and expenses is
penalties for a partner’s failure to invest and maintain the agreed capital.
consistent for both proprietorships and partnerships. comparing to businesses of the
. The rights and duties of each partners. same nature, one organized as a sole proprietorship and another as a partnership,
. The accounting period to be adopted, the nature of accounting records, there will be no marked difference in their operations.
financial statements and audits by independent public accountants. However, differences arise between the two forms of business concerning owner's
(accounting year – fiscal year and equity. For a proprietorship, there is only a single owner. Therefore, there is only
. The method of sharing profit or loss, frequency of income measurement and one capital account and1 drawing account. on the other hand, saints a
distribution, including any provisions for the recognition of differences in partnership has two or more owners, separate capital and drawing accounts are
contributions. established for each partner.
The drawings or salaries to be allowed to partners.
A partner's capital account is credited for his initial and additional net investments
The provision for arbitration of disputes, dissolutions and liquidation. (assets contributed last 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 a debit balance of the drawing account at the end of the period.
When the partnership capital is or more, in money or property, the public
Typically, partners do not wait until the end of the year to determine how much of
instrument must be recorded with the Securities and Exchange Commission (SEC). the profit they wish to withdraw from the partnership. To meet personal living
Even if it is not registered, the partnership having a capital of or more is still expenses, partners customarily withdraw money on a periodic basis throughout the
valid and therefore has legal personality. year. a partner’s drawing account is debited to reflect assets temporarily withdrawn
The SEC shall not register any corporation organized for the practice of public by him from the partnership. at the end of each accounting period, the balances in
the drawing accounts are closed to the related capital accounts
accountancy (The Philippine Accountancy Act , Section
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 partnership
cannot be evaded, and the public also determine more accurately their membership
and capital before dealing with them (Dean Capistrano, IV Civil Code of the
Philippines).
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 “Co.” and if it’s a
limited partnership, the word “Limited” or “Ltd”. A professional partnership
may bear the word “Company”, “Associates” or “Partners” or other similar
descriptions (SEC Memorandum Circular Series Permanent withdrawals are made with the intention of permanently decreasing the
partner’s capital while temporary withdrawals or regular advances made by the
partners in anticipation of their share in profit.
ACCORDING TO DURATION:
a. Partnership with a fixed term The use of a drawing account for temporary withdrawals provides a record of each
partner's drawings during an accounting period. Hence drawings in excess of the
b. Partnership at will
allowed amounts as stated in the partnership agreement may be controlled.
One in which no term is specified and is not formed for any particular undertaking.
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
To register a partnership with the SEC, here are the basic steps to follow: intention of the partners. if they wish to maintain their capital accounts for
❖ Documents to be submitted: investment and permanent withdrawals, then profit or loss should be entered into
➢ Articles of partnership the drawing account.
On the other hand, if the purpose of the partners is to make a profit or loss part of
their capital, then the capital account should be used. In either case, the resulting
partner’s ending capital balances will be the same.

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 PayablePartner account and
not to Partner’s Capital account classified among the liabilities but separate from
liabilities to outsiders. This distinction is important in the 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 partner’s equity

PARTNERSHIP FORMATION

The books of the partnership are opened with entries reflecting the net contribution
of the partners to the firm. Assets 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 contribution will be recognized at
their fair values at the date of transfer to the partnership.
( values – agreed values, fair value)

Fair market value of an asset is the estimated amount that a willing seller would Grace Hila offered to invest cash to get capital credit equal to one-half of Elena
receive from a financially capable buyer for the sale of the asset in a free market. Flores’s capital after giving effect to the adjustments below. Elena Flores accepted
Per International Financial Reporting Standards (IFRS) No. , fair value is the price the offer.
at which an asset or liability could be exchanged in a current transaction between The merchandise is to be valued at
knowledgeable, unrelated willing parties.
The accounts receivable is estimated to be 90% collectible.
The furniture and fixtures are to be valued at .
Individuals with no existing business form a partnership The office supplies on hand that have been charged to expense in the past
Conversion of a sole proprietorship to a partnership amounted to . These will be used by the 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
Two or more partnerships form a partnership

The opening entry to recognize the contributions of each partner into the partnership
is simply to debit the assets contributed, and to credit the liabilities assumed and
the capital account of each other.
What happened between the partners?
They agreed to form a partnership.
When was the agreement of the partners?
May
Who are the partners?
Antonio Beltran and Carlos Domingo The following procedures may be used in recording the formation of the partnership:
What will the partners contribute? Books of Elena Flores:
Beltran to contribute cash while Domingo will contribute land with fair . Adjust the assets and liabilities of Elena Flores in accordance with the agreement.
market value of with mortgage to be assumed by the Adjustments are to be made to her capital accounts.
partnership. Close the books.

Books of Partnership:
. Record the investment of Elena Flores.
Record the investment of Grace Hila.
 Actual count and bank reconciliation on Matalino proprietorship’s cash account
revealed cash shortage and unrecorded expense
. Establishment of % allowance for uncollectible accounts in each book.
The merchandise of Matalino is to be decreased by while merchandise of
White is to be increased by
The furniture and fixture of Matalino are to be depreciated by
The delivery equipment of White is to be depreciated by

The conditions and adjustments agreed upon by the partners for purposes of
determining their interests in the partnership are:
 INTRODUCTION
The dissolution of a partnership is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on as distinguished
from the winding up of the business of the partnership. On dissolution, the
partnership is not terminated, but continues until the winding up of partnership
affairs is completed.
The dissolution of the partnership does not necessarily imply that business
operations will come to an end. Most changes in ownership of a partnership are
accomplished without interruptions of its normal operation. A partnership
dissolution should be distinguished from liquidation. A partnership is said to be
liquidated when the business is terminated; a a partnership may be dissolved
without being terminated but liquidation is always preceded by dissolution.
❖ Winding up is the process of settling the business or partnership affairs
after dissolution.
❖ Termination is the point in time when all partnership affairs are wound
up or completed, and is the end of the partnership life

❖ Admission of a partner
❖ Withdrawal or retirement of a partner
❖ Death of a partner
❖ Incorporation of a partner

ADMISSION OF A PARTNER
❖ A new partner can only be admitted into a partnership with the
consent of all the continuing partners based on the principle of
delectus personae: No one becomes a member of a partnership without
the consent of all the members. This is because a partnership is based
on mutual trust and confidence of the partners.
❖ By admission of a new partner, the old partnership has been dissolved
and it is important that a new agreement be formulated to govern the
continuing business operations.
A person may become a partner in an existing partnership be either of the
following:
Purchase of an interest from one or more of the existing partners.
Investment of assets in the partnership by new partner.
❖ The situations are similar in the sense that the old partnership is legally
dissolved; the capital and profit and loss ratio will be based on new
partnership agreement.
❖ Dissimilar in the sense that the partnership receives no new resources
when a third party purchases an interest directly from existing partners,
but it does receive new resources when third party becomes a partner by
investing in the partnership.

❖ A person admitted as a partner into an existing partnership is liable for all

the obligations of the partnership incurred before his admission as though
he had been a partner when such obligations were incurred. Such liability is
limited to his capital contribution unless otherwise agreed.

❖ With the consent of all continuing partners, a person may be admitted

into an existing partnership by purchasing an interest directly from one
or more of the existing partners. Payment is made personally to the
partner from whom the interest is obtained resulting to mere transfers
among capital accounts.
❖ This type of admission will only result to a debit to the capital account
PARTNERSHIP FORMATION of the selling partner for the interest sold and a credit to the capital
account of the buying partner for the interest purchases.
A sole proprietor may consider forming a partnership with an individual who has a ❖ The amount debited and credited is not affected by the actual price
no existing business. Under this type of formation, the assets and the liabilities of for the equity interest.
the proprietorship will be transferred to the newly formed partnership at values ❖ Total assets, total liabilities and total partner’s equity of the
agreed upon by all the partners or their current fair prices. partnership are not affected upon admission.
 ❖ Purchase may be:
a. Payment to old partners is equal to interest purchased.
b. Payment to old partners is less than the interest purchased.
c. Payment to old partners is more than the interest purchased.
Case . Payment to old partners is equal to interest purchased

❖ A new partner may be admitted into the partnership because of his

vast financial resources, extensive business network, distinctive
Case . Payment to old partners is less than the interest purchased
reputation, unique management and/or technical skills. The old
partners may be willing to give a premium for all of these exceptional
qualifications by allowing a capital credit greater than the prospective
partner’s investment just to ensure his association with the
partnership. This bonus will be treated as a bonus from the equities of
the old partners and credited to the new partner
Case Payment to old partners is more than the interest purchased

❖ A person may be admitted into a partnership by investing cash or

other assets in the business.
❖ The assets are invested into the partnership and not given to the
individual partners.
❖ The investment will increase the total assets and total partner’s equity.

❖ Total contributed capital. It is the sum of the capital balances of the

old partners and the actual investment of the new partner.
❖ Total agreed capital. It is the total capital of the partnership after
considering the capital credits given to each of the partners. Under
bonus method, total agreed capital is equal to the total contributed WITHDRAWAL OR RETIREMENT OF A PARTNER
capital though the capital credit to each other may be equal to, A partner may withdraw or retire from a partnership for various reasons. Disputes
greater than or less than his capital contributions. with other partners, old age, and pursuit for better opportunities among the
❖ Bonus. It is the amount of capital or equity transferred by one partner possible explanations. The withdrawal of a partner dissolves the old partnership.
to another partner. This type of dissolution may be accomplished by either of the following ways:
❖ Capital credit. It is the equity of a partner in the new partnership and a. By selling his equity interest to one or more of the remaining partners
is obtained by multiplying the total agreed capital by the applicable b. By selling his equity interest to an outsider
percentage interest of the partner. c. By selling his equity interest to the partnership

❖ A person may be admitted into a partnership by investing cash or ❖ When a partner’s interest is sold to another partner or an outsider, the
other assets in the business. withdrawing partner is paid from the personal assets of the buyer.
❖ Accounting for this sale is similar to admission by purchase of interest.
The total assets of the partnership are not affected by the
Rebecca Miranda and Stephanie Calamba are partners with capital balances of consideration involved.
and respectively. They share profits in the ratio of . The ❖ The required entry will only be a debit to the seller’s capital account
partners agreed to admit Gualberto Magdaraog Jr., as a member of the firm. The for his capital balance and a credit to the buyer’s capital account for
foregoing information will be the basis of the following cases. the same amount.

❖ When a withdrawing partner sells his interest to the partnership, the

partner is paid from the assets of the partnership. He may receive an
amount equal to, greater than or less than the balance of his capital
account. The effect of withdrawal is to reduce the assets and owner’s
equity of the partnership.
❖ The accounting issues to be encountered here will be similar to
admission by investment of assets but in a reverse manner.
 ❖ Instead of a new partner joining the partnership by investing assets partner shouldbe transferred to a liability account, payable to the
into the partnership, an old partner is now leaving the partnership with estate.
the business distributing assets to the withdrawing partner.
INCORPORATION OF A PARTNER
❖ A partnership may decide to incorporate after evaluating the various
advantages of having a corporate form of business organization.
Suppose that Remedios Palaganas is retiring in midyear from the partnership of
❖ After necessary adjusting and closing entries, the assets and liabilities
Selisana, Dela Cruz and Palaganas because of family relocation. Physical distance
of the partnership are transferred to the corporation in exchange for
will prevent her from coping with the daily rigors of their fashion and beauty
shares of stock.
consulting business. After the books have been adjusted for the semi-annual
❖ The shares received by the partnership are distributed to the partners
profits but before revaluation, their capital balances are as follows:
based on their equity interests.
Jessica Selisana, Capital ❖ In the books of the corporation, the receipt of transferred assets and
Daisy Dela Cruz, Capital liabilities will be recorded along with the issuance of share capital to
Remedios Palaganas, Capital the incorporators, the “former” partners.

An independent appraiser revalued their cosmetics inventory to and their

land to . The profit and loss ratio of the partners is

The entries to record the revaluation of assets follow:

Jessica Selisana, Capital
Daisy Dela Cruz, Capital
Remedios Palaganas, Capital
Cosmetics Inventory

Land
Jessica Selisana, Capital
Daisy Dela Cruz, Capital
Remedios Palaganas, Capital

After revaluation, the capital balances of the partners are shown below:
Jessica Selisana, Capital
Daisy Dela Cruz, Capital
Remedios Palaganas, Capital

Case : Withdrawal at book value

INTRODUCTION
The liquidation of a partnership is the winding up of its business activities
characterized by sale of all non-cash assets, settlement of liabilities and distribution
Case : Withdrawal at more than book value of the remaining cash to the partners. The conversion of non-cash assets into cash
is referred to as realization. This may either result to gain or loss on realization and
shall be divided in the profit or loss ratio of the partners. A substantial loss on
realization may yield for a partner a capital deficiency, which is the excess of a
partner’s share in losses over the partner’s capital credit balance. Partner’s interest
is the sum of his capital and loan accounts in the partnership.
Rules in Settling Accounts After Dissolution
Case : Withdrawal at less than book value
❖ Civil Code of the Philippines, Art.
❖ Assets of the Partnership
The asset of the partnership consist of the following:
. Partnership property
. Additional contributions of the partners needed for the payment of
all liabilities.
DEATH OF A PARTNER
❖ The death of a partner dissolves a partnership. The assets of a general partnership shall be applied in the following order:
❖ When the death of a partner does not result to liquidation, the . First, those owing to outside creditors,
accounting procedures to be followed are similar in the withdrawal of a Second, those owing to inside creditors in the form of loans or advances for
partner.
business expenses by the partners,
❖ The deceased partner may be considered to have retired from the
partnership and his heirs or estate can expect to receive the amount of Third, those owing to the partners with respect to their capital contributions,
his interest from the business. Lastly, those owing to the partners with respect to their share of the profits.
❖ If payment to the estate of the deceased cannot be made
immediately, the balance in the capital account of the deceased
❖ Right of offset- legal right of a partner to apply part or all of his loan Elimination of partner’s capital deficiencies using one of the following
account balance against his capital deficiency resulting from losses in methods, in the order of priority:
the realization of the partnership assets. a. If the deficient partner has a loan balance, then exercise the right of
❖ Insufficient Partnership Assets in cases when the partnership assets are offset
insufficient to settle all outside liabilities, the partners should make b. If the deficient partner is solvent, then he should invest cash to
additional contributions in the partnership. Any partner who contributed eliminate his deficiency
in excess of his share in this liability has a right to collect the supposed c. If the deficient partner is insolvent, then the other partners should
additional contributions from the other partners. absorb his deficiency.
. Payments to partners, in the order of priority:
❖ The creditors of the partnership shall have priority in payments over a. Loan accounts
those of the partner’s separate creditors as regards the partnership b. Capital account
properties. On the other hand, the creditors of the partners are
preferred with respect to the separate or personal properties of
the partners. ❖ Under this method, realization of non-cash assets is accomplished over
an extended period of time. It is a process of selling some assets, paying
the creditors, paying the remaining cash to the partners, realizing
If a partner is insolvent, his personal properties shall be distributed as follows: additional assets and making additional payments to the partners. The
. First, those owing to separate creditors, liquidation will continue until all non-cash assets have been realized and
Second, those owing to partnership creditors all available cash distributed to partnership creditors and partners.
❖ Installment payments to partners are appropriate if necessary,
Lastly, those owing to the partners by way of additional contributions when safeguards are used to ensure that all partnership creditors are paid in
the assets of the partnership were insufficient to settle all obligations. full and that no partner is paid more than the amount to which he would
be entitled after all losses on realization of assets are known.
❖ The procedures below may be followed in installment liquidation:
Lump-sum method. Under this method, all non-cash assets are realized and a. Realization of non-cash assets and distribution of gain or loss on
the related gains or losses distributed and all liabilities are paid before a single realization among the partners based on their profit or loss ratio.
final cash distribution is made to the partners. b. Payment of liquidation expenses and adjustment for unrecorded
. Installment Method. Under this method, the realization of non-cash assets liabilities; both of these items will be distributed among the partners
is accomplished over an extended period of time. When cash is available, in their profit or loss ratio
creditors may be partially or fully paid. Any excess may be distributed to the c. Payment of liabilities to outsiders
partners in accordance with a program of safe payments or a cash priority d. Distribution of available cash based on a schedule of safe payments
program. This process persists until all non-cash assets are sold. which assumes possible losses due to inability of the partnership to
dispose of part or all the remaining non-cash assets and failure of
the partners with capital deficiencies to make additional
contributions. Payments can also be made based on a cash priority
program.

Joel Feliciano, Evelyn Tria and Nick Marasigan are partners in a public relations firm
and share profits and losses in the ratio of respectively. They decided to
liquidate their business on Dec. . the following is the condensed statement
of financial position prepared prior to liquidation:

Case : Loss on Realization fully absorbed by partner’s capital balances

Under this method, all non-cash assets are realized and all liabilities are settled
before a single final cash distribution is made to partners. The procedures
below may be followed in lump-sum liquidation:
Realization of non-cash assets and distribution of gain or loss on realization
among the partners based on their profit or loss ratio.
Payment of liabilities.
Case : Loss on Realization resulting to a capital deficiency with right of offset

Case : Partnership insolvent but partners personally solvent

Case : Loss on Realization resulting to a capital deficiency to a personally solvent

partner

Notes
Case : Loss on Realization resulting to a capital deficiency to a personally insolvent
partner
ACCOUNTING FOR PARTNERS’ CONTRIBUTION

Partners’ contribution shall be recorded in the partnership book

General rule: at Agreed Value
Specific:
Cash contributions: at Face Value
Non-cash contributions: at Fair Market Value on the date of contribution.
 **As for the profits, an industrial partner shall receive such share as may be just
It must be explicitly stated that the partnership is assuming the attached liability and equitable under the circumstances. If besides his services he has contributed
for it to be recorded in the partnership book. capital, he shall also receive a share in the profits in proportion to his capital. As
for the losses, an industrial partner shall not be liable for the losses and therefore
his equity will not be deducted for loss sharing.
❖ Update the books by recognizing unrecorded items
❖ Close nominal accounts to the sole proprietor’s capital account (if the
❖ Equally
books will be used as partnership books)
❖ Unequal ratio
❖ Adjust the assets to their agreed value and take effect those
❖ Capital ratio (Original, Beginning, Ending, Weighted Average)
adjustments to the sole proprietor’s capital account
❖ With provision for salary/ies to partner/s
❖ With provision for interest/s on capital account balance/s
❖ With provision for bonus to a managing partner
Note: Salary of partners, interest on capital, and bonus to managing partner are not
business expenses. These are simply provided to achieve fair distribution of profits
and losses. Salary and interest provisions are allowed whether there is profit or loss,
but bonus is not allowed when there is a loss incurred by the business.

CHANGES IN OWNERSHIP STRUCTURE

❖ Admission of a new partner

❖ Retirement, Withdrawal, or Death of a partner
❖ Incorporation of the partnership
Revaluation of assets, Bonus or goodwill will be considered (as to what the situation
implies), when an incoming partner will contribute an amount that will not be equal
to his agreed capital ratio in proportion to the total invested capital after his
admission (in case of admission of a new partner), or when the departing partner
will be given an amount not equal to his updated equity in the partnership (in case
of retirement, withdrawal, or death of a partner). In cases where revaluation of
assets are indicated, only old partners will benefit or suffer (in case of upward or
downward revaluation, respectively).
Note: Right before the dissolution, update the partnership books to arrive at the
adjusted capital balances.
ADMISSION OF A NEW PARTNER:

❖ A transaction between the selling partner (old) and the buying partner
(new)
❖ No incoming asset from the new partner is recognized in the partnership
books
❖ Journal entry is about transfer of capital only (Debit: Selling partner
account, Credit: Buying partner account)

❖ A transaction between the partnership and the incoming partner

❖ Incoming asset from the new partner is recognized in the partnership
books
❖ Journal entry is about additional investment from the incoming partner
(Debit: Asset invested, Credit: Incoming partner capital account)
OTHER CAUSES OF DISSOLUTION:

❖ Adjust partners’ equity for any overvaluation or undervaluation of

asset/s as of the date of dissolution.
DISTRIBUTION OF PROFITS AND LOSSES ❖ Distribute profits or losses from operations from the last date of
reporting to the date of dissolution
❖ Release the equity of the departing partner (in case of Retirement,
Partnership’s profits and losses shall be distributed to partners Withdrawal, or Death of a Partner) or convert the partners’ equity to
General rule: according to their agreement*. shares in a corporation (in case of Incorporation of the Partnership)
If there’s no agreement**: according to their capital contribution.
*If partners have agreed on sharing the losses only and forgot about profits, it is
assumed that there is no agreement at all, hence any result of operations will be
distributed according to original capital contribution.
 TERMINATION OF PARTNERSHIP BUSINESS

❖ Non-cash assets are disposed of and converted into cash

❖ Liabilities are settled (outside creditors’ claim first)
❖ Remaining assets are distributed to the partners

❖ One-time sale (Lump-sum liquidation)

❖ Periodic sale (Installment liquidation)

Outside creditors (Lenders’ claim)

Inside creditors (Partners’ claim)
Partners’ capital balances

❖ No complex problem
❖ Solvent general partners will provide additional contribution to cover the
deficiency.

❖ The doctrine of marshalling of assets will apply

Claims to be prioritized over the personal assets of a partner
Claims of his personal creditors
Claims of partnership creditors
Other partners’ claim for his additional contribution

❖ All non-cash assets are disposed of taking not much of time

❖ Obligations to partnership creditors are settled
❖ Remaining assets are then distributed to partners

❖ Portion by portion, non-cash assets are disposed of taking considerable

amount of time
❖ Obligations to partnership creditors are settled
❖ Along the process of liquidation, available cash may be distributed to
partners, subject to limitations.
* to see Limitation on available cash for distribution

Schedule of Safe Payment Prepared periodically during the process of liquidation

Compute for the total interest* of each partner
Allocate possible loss** among partners
Any deficiency of a partner will be absorbed*** by other partners’ equity
Distribute available cash to partners according to their remaining equity
*Total interest = Partner’s equity + Payable to partner – Receivable from partner
**Possible loss = Book value of unsold non-cash assets + Cash withheld for expenses
or unrecorded liabilities
***Absorption means being deducted as if there’s an additional loss

Cash Priority Program Programmed at the beginning of the liquidation process

Compute for maximum loss absorption* for each partner
Determine the priority** of cash distribution to partners
Distribute available cash to partners according to the determined
priorities.
*Maximum loss absorption = Total interest ÷ P&L ratio
**Priority of distribution is determined by eliminating any excess of maximum loss
absorption from one partner to another and giving cash priority to the partner with
an amount equivalent to his P&L ratio as a portion of his excess loss potential