ACCOUNTING FOR
PARTNERSHIPS
Dax Aaron L. Ucat, CPA
Instructor
Learning Objectives
After studying this chapter, you should be able to :
1. Define partnership
2. Identify characteristics of a partnership
3. Explain the advantages and disadvantages of a
partnership
4. Distinguish partnership and corporation
5. Identify and describe the different classifications
of partnerships and the different kinds of partners
6. Outline the essential contents of the
Articles of partnership
7. Summarize how a partnership is registered
with SEC
8. Explain the accounting differences
between a sole proprietorship and a
partnership
9. Distinguish between partner’s capital and
drawing accounts
10. Discuss the fair value concept
11. Prepare and explain the entries for
partnership formation
12. Describe a limited liability company
DEFINITION
Civil Code of the Philippines, Article 1767,
states that a partnership is a contract between
two or more persons who 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.
CHARACTERISTICS OF A PARTNERSHIP
1. Mutual Contribution – There cannot be a partnership
without contribution of money, property or industry to a
common fund
2. Division of Profits or Losses – The essence of
partnership is that each partner must share in the profits or
losses of the venture
3. Co-ownership of Contributed assets
4. Mutual agency – Any partner can bind the other
partners to a contract if he is acting within his express or
CHARACTERISTICS OF A PARTNERSHIP
5. Limited life – a partnership has a limited life. It may be
dissolved by the admission, death, insolvency, incapacity,
withdrawal of a partner or expiration of the term specified
in the partnership agreement
6. Unlimited liability – all partners (except limited
partners), including industrial partners are personally liable
for all debts incurred by the partnership.
7. Income taxes – Partnerships, except General
professional partnerships, are subject to tax at the rate of
25% of taxable income (per RA No. 11534, CREATE Act)
CHARACTERISTICS OF A PARTNERSHIP
8. Partner’s Equity accounts – each partner has a
capital account and a withdrawal account that serve similar
functions as the related accounts for sole proprietorships
Owner’s Equity Accounts
PARTNER’S CAPITAL ACCOUNT
Debit Credit
1. Permanent 1. Original investment
withdrawals
2. Debit balance of the 2. Additional
drawing account at the investment
end of the period
3. Credit balance of the
drawing account at the
end of the period
Owner’s Equity Accounts
PARTNER’S DRAWING ACCOUNT
Debit Credit
1. Temporary 1. Share in profit (this
withdrawals may be credited
directly to Capital)
2. Share in loss (this
may be debited directly
to Capital)
ADVANTAGES OF A PARTNERSHIP
Advantages versus Proprietorships
1. Brings greater financial capability to the business
2. Combines special skills, expertise and experience of
the partners
3. Flexibility of action in decision making
Advantages versus Corporations
1. Easier and less expensive to organize
2. More personal and informal
DISADVANTAGES OF A PARTNERSHIP
1. Easily dissolved and thus unstable compared to a
corporation
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
1. Manner of Creation
2. Number of persons
3. Commencement of Juridical personality
4. Management
5. Extent of Liability
6. Right of Succession
7. Terms of existence
CLASSIFICATION OF PARTNERSHIPS
1. According to object
a. Universal partnership of All present property.
b. Universal partnership of profits.
c. Particular partnership
General rule: Depending on the partner’s agreement
Exception: If the articles of universal partnership is silent,
it will be considered as Universal partnership of profits
2. According to liability
a. General
b. Limited
3. According to duration
a. Fixed term/for a particular undertaking
b. Partnership at will
4. According to purpose
a. Commercial or trading partnership
b. Professional or nontrading partnership
5. According to legality of existence
a. De jure partnership
b. De facto partnership
KINDS OF PARTNERS
1. General partner – liable to the extent of his separate
property after all the assets of the partnership are
exhausted
2. Limited partner – liable only to the extent of his
capital contribution. He is not allowed to contribute
industry or services only
3. Capitalist partner – one who contributed money or
property to a common fund
4. Industrial partner – contributes his knowledge or
personal service to the partnership
5. Managing partner – appointed as manager of the
partnership
6. Liquidating partner – designated to wind up or settle
the affairs of the partnership after dissolution
7. Dormant partner – one who does not take active part
in the business and is not known as a partner
8. Silent partner – does not take active part in the
business though may be known as a partner
9. Secret partner – one who takes active participation in
business but is not known to be a partner by outside
parties
10. Nominal partner/partner by estoppel – who is not
a partner but who represents himself as one
ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in
writing. In the latter case, partnership
agreement are embodied in the Articles of
Partnership. The following essential provisions
may be contained in the agreement
The partnership name, nature, purpose and location
The names, citizenship and residences of the partners
The date of formation and the duration of the
partnership
The capital contribution of each partner
Rights and duties of each partner
The accounting period to be adopted, the nature of
accounting records, financial statements and audits by
independent public accountants
The method of sharing profit or loss, frequency of
income measurement and distribution, including any
provisions for the differences in contributions
The drawings or salaries to be allowed to partners
The provision for arbitration of disputes, dissolution, and
liquidation
ACCOUNTING FOR PARTNERSHIP
a.FORMATION
b.OPERATION
c. DISSOLUTION
d.LIQUIDATION
PARTNERSHIP FORMATION
- accounting for investment/contribution
- A contract of partnership is consensual. It is
created by mere agreement of the partners
which may be constituted in any form, such as
oral or written
- However, Articles 1771 and 1772 of the
Philippine Civil Code requires that a
partnership agreement be made in public
instrument and recorded in the office if the
Securities & Exchange Commission (SEC)
a. Immovable property or real rights are
contributed to the partnership; or
b. The partnership has a capital of at least
three thousand pesos (3,000) or more
Article 1773 of the Civil Code further
requires that an inventory of any immovable
property contributed to the partnership should
be signed by the parties, and attached to the
public instrument, otherwise the partnership
VALUATION OF CONTRIBUTIONS
Article 1787 of the Civil Code states that
“when a capital or part of thereof which a
partner is bound to contribute consists of
goods, their appraisal must be made in the
manner prescribed in the contract of
partnership, and in the absence of stipulation,
it shall be made by experts chosen by the
partners, and according to current prices, the
subsequent changes thereof being for the
account of the partnership.”
VALUATION OF CONTRIBUTIONS
(Summary)
1. Cash = Face value
2. Noncash-assets:
a. Agreed value
b. Fair value
c. Book value / Carrying value
COMPUTATION OF CAPITAL
1. Equal to Contribution (TCC = ACC)
2. Specified Ratio (TCC is not equal to ACC)
a. Bonus/Transfer of capital method
b. Invest/Withdraw of capital method
OPENING ENTRIES OF PARTNERSHIP
UPON FORMATION
A partnership may be formed in any of the
following ways:
1. Individual with no existing business form
a partnership
2. Conversion of a sole proprietorship to a
partnership
i. A sole proprietor and an individual
without an existing business
ii. Two or more sole proprietors
OPENING ENTRIES OF PARTNERSHIP
UPON FORMATION
A partnership may be formed in any of the
following ways:
3. Admission or retirement of a partner
Illustration: Individuals with no Existing
Business form a Partnership
On July 1, 2023, Nilo Burgos and Helenita
Ruiz agreed to form a partnership. The
partnership agreement specified that Burgos is
to invest cash of P700,000 and Ruiz is to
contribute land with a fair market value of
P1,300,000 with P300,000 mortgage to be
assumed by the partnership
Requirement: Provide the necessary journal
Illustration: A Sole proprietor and another Individual
Albert Incognito was already in trading business a year
ago. He offered Julius Rocabo to join with him in the
business. The general ledger balances of Incognito prior to
formation follows:
Cash P375,000
A/R 90,000
Est. uncollectible accounts (1,000)
Merchandise 420,000
Equipment 250,000
Acc. Dep’n. (50,000)
Accounts payable 75,000
Incognito, Capital ?
Rocabo will contribute cash equal to one-half of
Incognito’s capital balance after the following
adjustments:
a. Accounts receivable should have an estimated
realizable value of P85,000
b. Merchandise inventory should have a net
realizable value of P390,000 after considering
obsolescence
c. Equipment should have a carrying value or net
book value of P180,000
d. The omitted accrued utilities of P1,500 should
be considered in the adjustment
Requirements:
1. Compute the capital balance of Incognito
prior to partnership formation.
2. Adjusting entry necessary to correct the
book of Incognito
3. Compute the adjusted capital account of
Incognito
4. Closing entry in the sole proprietorship book
of Incognito
5. Opening entry in the partnership book.
6. Statement of Financial Position after the
formation of partnership.
Thank you
Dax Aaron L. Ucat, CPA
+639859580982
[email protected]
