ACCOUNTING FOR

PARTNERSHIP

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 Identify the basic
concepts and
characteristics of a
LEARNING
Partnership
OBJECTIVES
Account for the
start-up of a
Partnership

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 LO #1:
IDENTIFY THE BASIC CONCEPTS AND
CHARACTERISTICS OF A PARTNERSHIP

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 PARTNERSHIP
Is an organization where two
As defined
in the Civil
or more persons bind
Code of themselves to contribute
the money, property, or industry
Philippines into a common fund with the
(Ar t. 1767) intention of dividing the
profits among themselves

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A partnership is a business with
two or more owners that is not
organized as a corporation.

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 Valid contract

Oral or written; investment in the form of

immovable property requires public
instrument

Legal capacity

Partners must have a legal capacity – of legal

ELEM EN TS O F age, physically and mentally capable of
A entering into contract
PART N ERSHIP
Contributions

In the form of money, property or service

Purpose

To share in the profits earned by the firm

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 DISTINCTIVE FEATURES OF
A PARTNERSHIP

• Voluntary association
• Legal entity, evidenced by a written agreement
• Co-ownership of property
• Mutual agency
• Limited life
• Unlimited liability
• Taxability
• Partners’ capital accounts

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 VOLUNTARY
ASSOCIATION

Individuals, by
their own free will,
agree to join
together and form
a partnership.

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 LEGAL ENTITY

– Partnership has a juridical personality separate and

distinct from the partners
– It can acquire, sell or dispose properties on its own
– It can incur obligations and transact business in its name

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 A partnership agreement
– Is a contract between partners,
also called the Articles of
Partnership
W R I TT E N – Is governed by contract law
AGREEMENT
– Outlines the rules of the
partnership

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 The Articles of Partnership specifies:
• Name, location, and nature of the business
• Name, capital contribution, and duties of
each partner
• Procedures for admitting a new partner
• Method of sharing profits and losses among
the partners
• Procedure for withdrawal of assets by the
partners
• Procedures for withdrawal of a partner from
the partnership
• Procedures for liquidating the partnership

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 CO-OWNERSHIP OF
PROPERTY

Any asset contributed by a partner

becomes property of the partnership.

The partner who contributed the

property is no longer the sole owner of
the property.

Any new assets purchased by the

partnership are owned by the partners.

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 Mutual agency means
that every partner is a
mutual agent of the firm.

Any partner can bind MUTUAL

the business to a
contract. AGENCY

Partners cannot bind

the business to
contracts associated
with personal matters.

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© bcn2021

LIMITED LIFE

A partnership A dissolution is Examples of

has a limited the ending of a dissolutions
life. partnership. include:
Changes in the existing
partners
The withdrawal of a
partner
The death of a partner
Adding a new partner
(Note: This dissolves
the old partnership but
creates a new one.)

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 UNLIMITED LIABILITY

Each partner has unlimited personal Partners must pay the debts of the
liability for the debts of the business. business with personal assets when the
partnership cannot pay its debts.
This is known as unlimited liability.

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Taxable like a
corporation
PA RT N E R S H I P
I N C O M E TA X
(ORDINARY
PA RT N E R S H I P )
Tax on income =
30% rate

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 The partnership
entity does not pay
business income tax.

NO PARTNERSHIP The net income (or

I N C O M E TA X net loss) flows
(GENERAL
PROFESSIONAL through to the
PARTNERSHIP) individual partners.

Partners pay personal

income tax on their
share of partnership
income.

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 PARTNERS’ CAPITAL
ACCOUNTS

Accounting for a partnership Each partner needs a Each partner has a

is much like accounting for a separate capital account. withdrawal account.
sole proprietorship.

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 SIMILARITIES & DIFFERENCES
AMONG FORMS OF ORGANIZATION

PARTNERSHIP SIMILARITIES DIFFERENCES

vs Sole Proprietorship • Unlimited liability • Juridical or legal entity
• Can take an active role in • Taxable entity
managing the business
• Limited life
vs Corporation • Taxable entities (except for • Pp has limited life; corporation has
GPP) perpetual existence
• Juridical entities • Partners have unlimited liability;
shareholders’ liability is limited to
investment
• Partners can co-manage the
business; management in a
corporation is vested among few,
major shareholders

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ADVANTAGES & DISADVANTAGES
OF A PARTNERSHIP

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 KINDS OF PARTNERSHIP

• As to liability
• General vs Limited Partnership
• As to property
• Universal Partnership of Property vs
Universal Partnership of Profits

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In a general partnership
each partner is a co-owner
of the business, with all the
privileges and risks of
ownership.
G EN ERAL
PART N ERSHIP
The profits and losses of the
partnership pass through to
the partners, who then pay
personal income tax on
their share of the income.

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 A limited partnership (LP) has
LIMITED at least two classes of partners:
PARTNERSHIP • at least one general partner; and
• the limited partner(s)

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 LIMITED PARTNERSHIP

The general partner(s): Limited partners:

Takes primary responsibility and usually Do not participate in the day-to-day
manages the business operations of the business
Has unlimited personal liability Have no personal liability for the debts
Is usually the last to receive a share of of the partnership beyond their
profits and losses contribution in the business
Often gets all the excess profit after the Usually have first claim to profits and
limited partners get their share of the losses but only up to a certain limit
income Have limited potential for profits
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 KINDS OF PARTNERS

General vs Limited partner

Capitalist vs Industrial partner
Real vs Nominal partner
Ostensible vs Secret partner
Universal vs Particular partner

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 General Partner

• One who manages the partnership

• Contributes property or service
• Has unlimited liability
• Assumes the risk of loss of personal
GENERAL VS property in the event partnership
becomes insolvent
LIMITED
PARTNER Limited Partner

• One who invests cash or property

• Liability to third party is limited only
to his investment
• No active role in the management
of the partnership

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 • Capitalist Partner
• One who contributes money or
property into the partnership fund
C APITALIST VS
INDUSTRIAL • Industrial Partner
PARTNER • One who contributes industry or
service only
• Usually designated as a managing
partner

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 Real vs Nominal partner

• Real Partner is an actual partner

• Nominal Partner is a partner in name only

Ostensible vs Secret partner

• Ostensible Partner is known to the public

KINDS OF that he is a partner
• Secret Partner is not known as such to the
PARTNERS public

Universal vs Particular partner

• Universal Partner is one who’s participation

extends to the entire business
• Particular Partner is one whose
participation is limited to a unit or part of a
business

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 LO #2:
ACCOUNT FOR THE
START-UP OF A PARTNERSHIP

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 HOW ARE PARTNERSHIPS
ORGANIZED?

It is easy to form a partnership.

No permissions are required from the government.

It is wise to enlist the assistance of an attorney.

The partners agree to contribute assets and abilities/skills to the

partnership.

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Register Register the Business Name at the Securities and Exchange Commission (SEC)

Obtain Obtain a Barangay Clearance

Register Register with the Social Security System (SSS)

Obtain Obtain Permit from the Mayor’s Office

Register Register the Business with the Bureau of Internal Revenue (BIR)

HOW TO RE GIS T E R A PA RTN E RS HIP

COM PA NY IN THE P HILIP P INE S ?

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 D O C U M E N T S R E Q U I R E D TO S E T U P A
PA RT N E R S H I P I N T H E P H I L I P P I N E S

Joint Affidavit of two

Articles of Partnership partners to change Registration of data-
Name Verification Slip. partnership name (not
(AP) required if already sheet.
stated in AP)

Certificate of Bank Name of the

Principal office address.
Deposit. partnership.

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 WHO C AN FORM A
PARTNERSHIP

• Two or more individuals with no existing

businesses
• An individual with no existing business and
another with an already existing business
• Two or more individuals with existing
businesses

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 Cash
• To be recorded at its face value

Other form of assets or properties

• To be recorded at its current fair market value or appraised value

Assets or properties with attached liabilities agreed

W H AT C A N T H E to be assumed by the Partnership
PA RT N E R S
• Asset to be recorded at its current FMV; liability to be recorded at
C O N T R I B U T E I N TO its face value; capital to be recorded net of the liability
THE BUSINESS?
Service
• In which case, only a memorandum entry shall be recorded

An already existing business

• Where assets to be transferred and liabilities to be assumed by the
partnership shall be recorded in its revalued or adjusted amounts

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Read through the next pages of your
module, to learn more about
transactions affecting Partners’ Equity
accounts.

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