ACTPACO&Reviewer& & ! Partnership& ! Partnership!is!governed!by!the!article!1767!of!the!Philippine!Partnership!Law.!The!article!defines!partnership! as!follows,!contract!whereby!two!or!more!persons!bind!themselves!to!contribute!money,!property,!or! industry!to!a!common!fund!with!the!purpose!of!dividing!the!profits!among!themselves.! ! Except!for!a!general!professional!partnership,!all!other!partnerships!are!subject!to!income!tax.! Why?!Because!each!partner!(professionals)!are!required!to!file!income!tax!individually! ! Any!partner!who!has!the!legal!capacity!to!enter!into!a!contract!can!be!a!partner.! ! A!partnership!agreement!may!be!written!or!oral,!since!both!are!valid.!It!is,!however,!advisable!to!have!the! agreement!in!writing!to!avoid!future!disputes.! ! Any!business!run!by!two!or!more!persons!organized!as!a!partnership!(except!cooperatives!and!labor!unions),! whose!capitalization!is!P3,000!or!more,!should!be!registered!with!the!SEC!(Securities!and!Exchange! Commission)! ! When'is'a'partnership'rendered'void?

' Whenever!immovable!properties!are!contributed!and!the!partnership!did!not!submit!to!SEC!a!public! instrument!containing!a!signed!inventory!of!the!said!properties.!This!is!because!of!tax!(e.g.,!Real!Estate!Tax)! and!loan!purposes.! ! What'may'be'contributed'by'a'partner'to'the'partnership?! Money! Tangible!assets!(movable!and!Immovable!properties)! Services/Industry! Existing!business!of!the!partner! ! Articles!of!Partnership!(alternative!name:!Articles!of!Copartnership!!for!nonprofessional!partners)!is!the! written!partnership!contract!which!specifies!all!the!rights,!duties,!and!obligations!of!the!partners!among! themselves!and/or!in!relation!to!the!partnership.! ! Classification&of&Partnership& ! A.!As!to!object!of!partnership! ! ! 1.!Universal!Partnership!of!all!present!properties! !the!whole!property!of!each!partner!contributed!at!the!time!of!the!constitution!of!the! partnership!becomes!the!common!property!of!all!partners,!as!well!as!the!profits!which!they!may! acquire!therewith.! !

! !

2.!Universal!Partnership!of!profits! W!the!partners!contribute!everything!that!they!will!receive!or!acquire!through!their!services! during!the!existence!of!the!partnership.!The!individual!properties!of!the!partner!remain!as!their! personal!properties!and!do!not!become!partnership!properties.! ! 3.!Particular!Partnership! W!one!in!which!the!parties!combine!to!pursue!a!single!individual!transaction!or!enterprise! and!divide!among!themselves!the!benefits!therefrom.!It!may!be!formed!from!an!exercise!of!a! profession!or!vocation.!An!example!is!a!partnership!of!certified!public!accountants.!!

! B.!As!to!nature!of!activity! ! ! 1.!Service!(most!common!and!famous)! ! 2.!Trading/Merchandising! ! 3.!Manufacturing!(most!unusual!because!of!huge!capital!requirement)! ! C.!As!to!liability! ! ! 1.!General!Partnership! !W!where!all!partners!who!are!liable!for!partnership!debts!to!the!extent!of!their!personal! property!after!all!the!partnership!assets!have!been!exhausted.! ! ! 2.!Limited!Partnership!(Special!Partnership)! W!where!at!least!one!of!the!partners!is!a!general!partner!and!the!rest!may!all!be!limited! partners!who!are!liable!only!to!the!extent!of!their!capital!contributions.!The!business!name!or!trade! name!of!a!limited!partnership!always!carries!the!word!Limited!or!Ltd.!or!LLP!(Limited!Liability! Partnership)! ! Characteristics&of&a&Partnership& ! ! 1.!Limited!Life! A!partnership!may!be!dissolved!by!the!death,!incapacity,!withdrawal,!or!bankruptcy!of!any!of! the!partners;!by!mutual!agreement;!admission!of!a!new!partner;!incorporation;!or!court!order.! ! 2.!Mutual!Agency! Each!partner!has!the!authority!to!act!for!the!partnership,!and!to!enter!into!contracts!binding! upon!it,!provided!that!these!are!within!his!express!or!implied!authority.! ! ! 3.!Unlimited!Liability! Each!partner!is!individually!liable!to!creditors!for!debts!incurred!by!the!partnership.!If!a! partnership!becomes!insolvent,!the!creditors!can!demand!payment!from!any!of!the!partners!who! have!resources!or!assets.! ! ! 4.!CoWownership!of!Property! !properties!invested!become!the!common!property!of!all!the!partners.! ! ! 5.!Participation!in!Profits!&!Losses! Net!income!and!net!loss!are!divided!among!the!partners!in!accordance!with!the!partnership! agreement.!In!the!absence!of!an!agreement,!all!partners!share!in!accordance!with!their!original! capital!contribution.!Unless!otherwise!agreed!upon,!the!industrial!partner!shares!in!net!income!only.! ! Kinds&of&Partners& !

A.!According!to!Liability! ! ! 1.!General!Partner! W!one!whose!liability!extends!up!to!his!personal!properties!and!is!answerable!to!the!creditors! in!case!the!partnership!becomes!insolvent.! ! ! 2.!Limited!Partner!(Special!Partner)! W!one!whose!liability!is!only!upto!the!extent!of!his!capital!contribution!in!the!partnership.! ! B.!According!to!Nature!of!Capital!Contribution! ! ! 1.!Capitalist!Partner! W!one!whose!capital!contribution!in!the!partnership!is!in!the!form!of!cash,!property,!or!both.! ! ! 2.!Industrial!Partner! W!one!whose!contribution!into!the!partnership!is!his!services.!He!shares!in!the!net!income!but! not!in!net!loss!unless!stipulated!by!the!partners.!He!is!normally!the!managing!partner.! ! ! 3.!CapitalistWIndustrial!Partner! W!one!who!contributes!money,!property!,!or!both!in!addition!to!his!services.!He!is! automatically!considered!a!general!partner.! ! C.!According!to!Business!Operations! ! ! 1.!Managing!Partner! W!one!who!takes!the!lead!in!steering!the!business!to!profitable!level.!A!managing!partner!is! usually!an!industrial!partner!(in!this!case,!he!is!a!general!partner).! ! ! 2.!Liquidating!Partner! W!one!who!takes!charge!when!the!business!is!being!dissolved!and!liquidated.! ! ! 3.!Secret!Partner! Wone!who!takes!active!part!in!business!operations!but!is!not!known!to!the!public!as!a!partner.! ! ! 4.!Silent!Partner! W!one!who!does!not!take!active!part!in!business!operations!but!may!be!known!to!the!public!as! a!partner.! ! ! 5.!Dormant!Partner! W!one!who!does!not!take!part!in!partnership!operations!and!is!not!known!to!the!public!as!a! partner.!(Can!be!a!Secret!Partner!in!the!long!run)! ! ! 6.!Nominal!Partner! W!one!who!takes!no!active!part!in!partnership!operations,!makes!no!investment,!but!permits! his!name!to!be!used!by!the!partnership.!He!is!a!partner!by!estoppels!and!is!also!liable!to!a!third!party.! ! Note:!the!classification!of!partners!is!not!mutually!exclusive!in!that!a!capitalist!partner!may!either!be!a! general!or!limited!partner.!An!industrial!partner!is!a!general!partner.! ! Partnership&vs.&Sole&Proprietorship& ! Advantages! Greater!source!of!capital!

 Better!management!resulting!from!combined!abilities!of!partners!(great!pool!of!ideas)! ! Disadvantages! Possibility!of!disputes!among!partners! ! Partnership&vs.&Corporation&& ! Advantages! Easier!and!less!expensive!to!organize! Less!governmental!intervention!(because!lesser!tax!and!easier!to!liquidate)! Less!preparation!of!reports! ! Disadvantages! Limited!life!(easily!dissolved)! Unlimited!liability!of!partners!is!seen!as!more!risky!on!the!part!of!third!parties! Less!capacity!to!raise!capital! ! Partnership&Formation& & Case!1:!Partnership!is!formed!by!two!individual!persons! ! 1.!if!the!contribution!is!in!the!form!of!cash,!the!credit!to!the!partners!capital!account!is!equivalent!to! the!amount!of!cash!given.! ! 2.!if!the!contribution!is!in!the!form!of!nonWcash!asset!or!property!(such!as!Merchandise!Inventory!or! Land),!the!credit!to!partners!capital!account!is!equivalent!to!the!fair!or!current!market!value!of!the! property.! ! 3.!if!the!property!contributed!has!an!attached!liability!that!will!be!assumed!by!the!partnership,!the! credit!to!partners!capital!account!will!be!equivalent!to!the!fair!market!value!of!the!property!minus! the!attached!liability.!The!liability!is!recorded!in!the!partnership!books.! ! 4.!if!the!contribution!is!in!the!form!of!services,!a!memorandum!entry!is!recorded!in!the!books!of!the! partnership.! ! Example:!Admitted!Alpha!as!an!industrial!partner,!to!share!15%!of!net!profit.! ! General!Ledger! Alpha!Capital! 7/1/11! Memo!entry:!Admitted! Alpha!as!an!industrial! ! partner!to!share!15%! of!net!profit! 7/1/13! Memo!entry:!Alpha!! Becomes!a!capitalistW! ! Industrial!partner! ! ! ! 500,000! ! General!Journal! ! July!1,!2011!|!Memorandum!entry:!Admitted!Alpha!as!an!industrial!partner!to!share!15%!in!net!! profit.! ! July!1,!2013!|!Cash!! ! ! ! 500,000! ! ! Alpha,!Capital!! ! ! ! 500,000!

! Case!2:!Sole!Proprietorship!and!an!individual!(New!set!of!books!to!be!used!by!partnership)! ! Books!of!the!sole!proprietor! ! 1.!Adjust!the!accounts!affected!by!the!revaluation!as!agreed!upon!by!the!partners.!(credit!the!capital! account)! ! 2.!Close!the!books!of!the!sole!proprietorship!by!debiting!all!accounts!with!credit!balances!and! crediting!all!accounts!with!debit!balances.!(close!permanent!accounts)! Books!of!the!partnership! ! 1.!Make!opening!entries!to!record!the!investment!of!the!owner!of!the!sole!proprietorship.!This!is! done!by!reversing!the!entry!in!the!books!of!the!sole!proprietor.! ! ! 2.!Record!the!initial!investment!of!the!individual!partner.! ! Case!3:!Two!or!more!sole!proprietorship!business! ! 1.!Adjust!the!ledger!accounts!of!the!two!sole!proprietorships!to!conform!to!the!agreed!valuation!of! accounts.! ! 2.!Record!in!the!partnership!books!the!transfer!of!the!sole!proprietorships!assets!and!liabilities.!This! is!their!initial!investment!in!the!partnership.! ! 3.!Close!the!books!of!the!two!sole!proprietorships.! ! Partnership&Operations& & Rules!in!Dividing!Profits! ! ! 1.!According!to!partners!agreement! ! ! 2.!In!the!absence!of!agreement,!according!to!the!ratio!of!their!original!capital!contribution! ! 3.!If!the!agreement!provides!only!for!division!of!profits!but!not!for!losses,!the!division!of!losses!shall! be!deemed!similar!to!that!for!profits! ! Accounts!Maintained!for!Each!Partner! ! 1.!Capital!Account! ! Debited!for! Credited!for! Permanent!withdrawals!by!a!partner!provided! Initial!investment!of!partner!in!the!form! the!other!partners!agree!and!that!the! of!cash,!merchandise,!or!other!assets! withdrawals!will!not!prejudice!the!partnership! Additional!investments!in!the!form!of! creditors! cash,!merchandise,!or!other!assets! Amount!of!interest!sold!with!the!consent!of!the! Payment!of!partnership!debts!by!a! other!partners! partner!from!his!personal!funds! (treating!it!as!his!additional!investment)! Collection!by!the!partnership!of!the! claims!of!a!partner!

In!certain!cases,!the!credit!balance!of!a! partners!drawing!account!

! 2.!Drawing!Account! ! Debited!for! Credited!for! The!voluntary!or!temporary!withdrawal!of!the!partner!in! The!share!of!the!partner!in! cash!or!other!partnership!assets!(in!anticipation!of! partnership!profits! income)! Interest,!salaries!and!bonuses! allowed!to!a!partner! Share!of!the!partner!in!the!losses!from!partnership! operations! 3.!Loan!Account!(Payable!to!Partner)! ! Debited!for! Credited!for! Loan!from!a!partner!is!repaid!by!the! A!loan!is!obtained!by!the!partnership!from!a! partnership! partner! ! 4.!Receivable!from!Partner!Account!(Current!Asset)! ! Debited!for! Credited!for! When!the!partnership!grants!loan!to!a! When!the!partnership!receives!the!loan!payment! partner! of!the!partner! ! Notes!on!Division!of!Profit! ! ! 1.!The!Income!Summary!account!is!used!to!close!the!net!income!or!net!loss!of!the!firm.! ! ! 2.!The!balance!of!the!Income!Summary!account!is!closed!to!the!individual!partners!Drawing!account.! ! 3.!If!the!result!of!operation!is!a!net!income,!the!Income!Summary!is!debited!and!the!partners! Drawing!accounts!are!credited.! ! 4.!If!the!result!of!the!operation!is!net!loss,!the!Income!Summary!is!credited!and!the!partners!Drawing! accounts!are!debited.! ! Note:'Unless!agreed!upon,!the!partners!drawing!account!is!not!closed!to!the!capital!account.! ! Ways!of!Dividing!Profit!(supported!by!partnership!laws)! ! ! 1.!Equally! ! ! ! 2.!Using!arbitrary!ratios! ! ! W!Fraction!!(1/3)!1:2!(2/3)! ! ! W!Percentages!!25%!and!75%! ! ! 3.!In!the!ratio!of!the!partners!capital!balances! ! ! W!original!capital!contribution! ! ! W!capital!at!the!beginning!of!each!fiscal!period! ! ! W!capital!at!the!end!of!each!fiscal!period! ! ! W!average!capital!for!each!period! ! ! ! ! Date! Capital!Balance! Number!of! PesoWmonths! Average!Capital!

! ! ! ! ! !

! !

months! unchanged! ! !

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4.!Allowing!interest,!salaries,!and!bonuses! ! W!Interest!on!Partners!Capital! W!to!give!recognition!to!the!differences!in!partners!capital!contributions.!Interest!on! capital!may!be!based!on!original,!beginning!,!ending!or!average!capital!balances! ! W!Salary!Allowance! W!to!give!recognition!to!the!ability,!experience,!or!time!devoted!by!a!partner!to!the! business.! ! W!Bonus! W!to!give!recognition!to!the!services!of!the!partner!as!manager!of!the!partnership.! Bonus!is!expressed!either!as!a!specified!amount!or!a!certain!percentage!of!net! income.!

Note:'Bonuses!are!only!given!when!there!is!net!profit!and!only!granted!to!the!managing!partner.! Interest!and!Salary!Allowances!are!given!to!the!partners!even!if!there!is!net!loss!or!insufficient!net! income.! ! Partnership&Dissolution& ! Dissolution! - It!ends!the!association!of!individuals!for!their!original!purpose!but!does!not!necessarily!mean!the! termination!of!the!business!or!an!interruption!in!its!operations! - By!dissolution,!only!the!legal!life!of!the!existing!partnership!is!terminated! ! Causes!of!Partnership!Dissolution! - Death,!bankruptcy,!or!incapacity!of!any!member!of!the!partnership! - Admission!of!new!partner(s)! - Withdrawal!or!retirement!of!partners! - Partnership!incorporation! - Court!Order!(because!of!illegal!activities)! ! Admission&of&a&Partner& Wthe!existing!partners!may!invite!a!friend!to!join!the!firm!for!business!expansion;!or!one!or!both!of!them!may! be!in!need!of!cash!or!so!that!they!sell!a!portion!of!their!interest! ! Methods!of!Acquiring!Interest!in!a!Partnership! - Admission!by!Purchase:!By!purchase!of!part!or!all!of!the!interest!of!old!(existing)!partner(s)! ;! personal!transaction!so!regardless!of!the!amount!paid!or!received,!the!partnership!wont!mind!because!it! is!for!the!selling!partners!personal!gain.! - Admission!by!Investment:!By!making!an!investment!in!the!partnership;!the!purchase!of!interest! increases!partnerships!assets!and!total!capitalization.! ! Definition!of!terms:! ! Bonus!

The!amount!of!capital!or!equity!given!by!one!partner!to!another!in!consideration!of!the!good!reputation! or!earning!capacity!of!the!latter.!

! Total!Contributed!Capital!(TCC)! - The!actual!contribution!or!investment!of!all!the!partners,!whether!cash!or!nonWcash!assets.! ! Total!Agreed!Capital!(TAC)! - The!amount!of!capital!credited!to!all!partners!as!agreed!upon.! ! Withdrawal&of&a&Partner& - May!result!to!liquidation! ! Methods!or!Settlement!(Interest!of!the!withdrawing!Partner)! - Purchase!of!the!withdrawing!partners!interest!by!outside!party!or!by!another!partner! o Similar!to!the!admission!of!a!new!partner!by!purchase!of!interest! o There!is!transfer!of!the!withdrawing!partners!capital!to!the!capital!account!of!the!buying! partner! o The!actual!amount!paid!to!the!withdrawing!partner!is!not!recorded!in!the!partnership!books! since!this!is!a!personal!transaction!between!the!selling!partner!and!the!new!partner! ! Purchase!of!the!withdrawing!partners!interest!by!the!partnership! o Results!in!a!reduction!in!the!partnership!assets,!accompanied!by!the!cancellation!of!the! withdrawing!partners!capital! o If!settlement!is!deferred!or!made!after!the!date!of!withdrawal,!the!capital!account!of!the! withdrawing!partner!is!closed!and!a!liability!account!is!credited!for!the!amount!to!be!paid!to!him!

! Note:!When!the!partnership!settles!the!interest!of!the!withdrawing!partner!at!an!amount!equal!to!the!capital! balance!of!the!withdrawing!partner!then!there!is!no!bonus.!However,!when!the!amount!paid!to!the! withdrawing!partner!is!more!(less)!than!the!interest!of!the!partner!in!the!partnership,!then!there!is!bonus!to! the!withdrawing!(remaining)!partners.! ! Partnership&Liquidation& ! 1.!Liquidation! !the!process!of!windingWup!a!business!which!normally!consists!of!the!conversion!of!a!portion!or!all! of!the!assets!into!cash,!settlement!with!creditors,!and!the!distribution!of!remaining!assets!to!the!partners! W!means!the!end!of!both!the!legal!and!economic!life!of!a!business! ! 2.!Realization! ! W!the!conversion!of!assets!into!cash! ! 3.!Gain!on!Realization! ! Wthe!excess!of!the!selling!price!over!the!cost!or!book!value!of!the!nonWcash!assets!sold! ! 4.!Loss!on!Realization! ! W!the!excess!of!the!cost!or!book!value!of!the!nonWcash!assets!sold!over!its!selling!price! ! 5.!Capital!Deficiency! ! W!the!excess!of!a!partners!share!on!losses!over!his!capital;!a!debit!balance!in!the!partners!capital! account! ! 6.!Deficient!Partner!

! W!a!partner!with!a!debit!balance!on!his!capital!account!after!receiving!his!share!on!the!loss!on! realization.!A!deficient!partner!may!be!solvent!or!insolvent.! ! 7.!Solvent!Deficient!Partner! ! W!a!deficient!partner!whose!personal!assets!exceed!his!personal!liabilities;!hence,!he!is!able!to!make! additional!investment!in!the!partnership!to!cover!his!capital!deficiency! ! 8.!Insolvent!(Deficient)!Partner! ! W!a!deficient!partner!whose!personal!liabilities!exceeds!his!personal!assets;!hence,!he!is!unable!to! make!additional!investment!in!the!partnership!to!cover!his!capital!deficiency.!The!other!partners!absorb!his! capital!deficiency.! ! 9.!Right!of!Offset! ! W!the!legal!right!to!apply!part!or!all!of!the!amount!owing!to!a!partner!(loan!balance)!against!a! deficiency!in!his!capital!account!resulting!from!losses!in!the!process!of!liquidation.! ! 10.!Partners!Interest! ! !W!the!sum!of!the!partners!capital,!loan!balance,!and!advances!to!the!partnership!reduced/increased! by!his!actions!(drawing,!investing,!etc.)! ! Methods&of&Liquidation& ! 1.!LumpWsum!Liquidation! ! W!Cash!distribution!to!partners!is!made!only!after!realization!of!ALL!nonWcash!assets!has!been! completed!and!the!full!gain!or!loss!from!realization!is!known,!and!that!all!liabilities!to!outsiders!have!been! settled! ! 2.!Instalment!Liquidation!(Piecemeal!Liquidation)! ! W!NonWcash!assets!are!realized!on!a!piecemeal!basis!and!cash!is!distributed!to!partners!in!a!periodic! basis!as!it!becomes!available!even!before!converting!all!noncash!assets!in!cash! ! Corporation& ! Definition&of&Terms& ! 1.!PreWoperating!Expenses! !!expenses!incurred!before!the!corporation!starts!its!normal!operations.!It!is!debited!for! promotional!expenses,!cost!of!preWincorporation!meetings,!and!legal!fees.!Previously,!this!was!called! Organization!Costs! ! 2.!Authorized!Share!Capital! ! W!the!account!credited!under!the!journal!entry!method!for!the!total!par!value!or!stated!value!of!shares! which!a!corporation!is!authorized!to!issue! ! 3.!Unissued!Share!Capital! ! W!the!account!debited!under!the!journal!entry!method!for!the!total!par!or!stated!value!of!authorized! shares.!It!is!credited!when!share!certificates!are!issued! ! 4.!Subscribed!Share!Capital! ! W!the!account!credited!for!the!total!par!or!stated!value!of!shares!subscribed! ! 5.!Subscriptions!Receivable! ! W!the!account!debited!for!the!total!subscription!price!of!shares!being!subscribed!

! 6.!Share!Capital! ! W!the!account!credited!under!the!Memorandum!Entry!method!when!share!certificates!are!issued! ! W!fully!issued!and!fully!paid!stocks! ! 7.!Share!Premium! ! W!a!general!account!credited!for!anything!that!increases!contributed!capital!other!than!the!share! capital!account!and!its!companion!accounts;!it!is!an!equity!account!not!an!income!account! & ! ! ! Prepared&By:& The&Academics&Committee& Economics&Organization& &