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PARTNERSHIP
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2nd Semester, AY 2012-2013 Mr. Carlsberg S. Andres, CPA
Definition
An organization where two or more persons bind themselves to contribute money, property or
industry into a common fund with the intention of dividing the profits among themselves.
Features/Characteristics
1. Mutual agency each partner is an agent for the partnership when transacting partnership
business. Each partners act binds the other partners and the partnership
2. Limited life Legally, a partnership can operate for an indefinite period of time. However, in
practice, it can easily be dissolved or terminated with the mere withdrawal, incapacity or
death of a partner
3. Co-ownership of partnership property partnership property belongs jointly to all the
partners
4. Participation in profits or losses from the definition of partnership, profits must be divided
among partners according to agreement, in case there is no stipulation as to division of
profits or losses, the partners shall divide the profits or losses in proportion to their capital
contribution
5. Based upon a contract a partnership is formed by a contract (either orally, written,
expresses or implied)
6. Unlimited Liability each partner is personally and individually liable for all partnership
liabilities. In the event that the partnership assets are not sufficient to liquidate partnership
liabilities, the personal assets of the partners should be used to settle the obligations
7. Voluntary association individuals by their own free agree to join together to form a
partnership (delectus personae)
Partners equity
The accounting process for partnership assets and liabilities are the same as in the accounting for
sole proprietorship. It is only in accounting for transactions affecting the equity section that
partnership accounting differs from a single proprietorship. The right of a partner over the net
assets of the business is represented by two account titles : Partners capital and partners drawing
(withdrawal). The accountant should account for each partners interest over the partnership by
setting up as many capital and drawing accounts as there are partners.
PARTNERSHIP FORMATION
The first entries in the partnership books pertain to the contributions made by the partners.
Contributions may be in the form of cash, property, services or an already existing business
Proforma entry
Assets xx
Liabilities (assumed by the partnership only) xx
Partners, Capital xx
If the contribution is in the form of services, a memorandum entry should be prepared. If the
contribution is in the form of property, it should be recorded as of investment date, at its fair market
value.
Case 1: Contribution is in the form of cash, property and services
Santos, Ambros, Carlos formed a partnership on August 1, 2000. Santos is to invest cash of
P50,000. Ambros is to invest merchandise which she bought last year for P50,000 but which has a
current market value of P40,000. Carlos is to be admitted as Sales Manager for a 10% share in
profits. Prepare the necessary journal entries
Ambros decided to invest also her land, which cost her P100,000 when she bought this in 2000 but
which current appraised value is P500,000. However this land has a mortgage balance of P50,000.
The partners agreed that the mortgage be assumed by the partnership. Prepare journal entries
1. Present the assets and liabilities of the sole proprietorship business for review by the other
partners
2. Adjust the sole proprietorship book for any revaluation agreed upon. Since the business is
not normally operating anymore, no adjustment is made for revenue and expense account.
The assets and liabilities to be invested represent the partners capital contribution. Hence,
adjustments are made through the capital account. The close the books at the adjusted
amounts
3. Record the net assets or partners contribution in the new books of partnership at the
adjusted amounts
*the focus of the chapter is using new sets of books rather than using one of the partners old
books
Case 3 : Investment of an already existing business with old books being closed and new
partnership books being used.
Peter has a bookstore along Taft Avenue called Peter Pans bookstore, which has been operating for
five years. On March 1, 2000, Pilar Garcia invited him to put up a partnership along CM Recto
Avenue. Peter agreed to close his business along Taft Avenue and invest his business in the
partnership. Pilar agreed to put up cash equal to the contribution f Peter. The following are the
assets and liabilities of the bookstore on March 1, 2000:
Debit Credit
Cash P12,000
Accounts Receivable 5,000
Allowance for bad debts 500
Merchandise Inventory 25,000
Furnitures and Fixtures 10,000
Accumulated Depreciation 2,000
Accounts payable 7,000
Pan, Capital ______ 42,500
Total P52,000 P52,000
PARTNERSHIP OPERATIONS
Computation of net income for sole proprietorship is the same for partnership. However, because
partnership has more than one owner, there should be a method of distributing profit or losses.
Bello, Capital
1/1 P200,000
4/1 50,000
PARTNERSHIP DISSOLUTION
Dissolution is the change in the ownership structure of the partnership. The old partnership is
dissolve and a new partnership is created.
Assume that the AA partnership of Alex and Amado decided to dissolve their partnership and admit
Albert as a new partner on March 31, 2008. They agreed to revalue the land by P150,000 and
distribute the profit reported by the accountant for the first quarter amounting to P300,000.
Prepare journal entries.
Assume that Ana and Zena have capital balances of P40,00 each and share profit and loss equally.
Pura was admitted by Ana and Zena based on the following: (Prepare journal entries)
1. Transfer of interest is equal to the amount paid to the selling partner
Pura buys 1/4 share from Ana and pays P10,000 cash.
2. Transfer of interest is less than the amount paid to the selling partner
Pura buys 1/5 interest from Ana by giving P15,000 cash
3. Transfer of interest is greater than the amount paid to the selling partners
Pura buys 1/2 interest from the partners by paying cash of P30,000
Assume that Fred and Susie are partners with capital balances of P50,000 each, sharing profits
and losses equally
1. New partners investment is also his capital credit
Bob is admitted to a 1/3 interest for a cash investment of P50,000 in an agreed capitalization of
P150,000
2. New partners investment is equal to his capital credit. Assets of the partnership is also revalued
Bob is admitted to a 1/3 interest for a cash investment of P80,000. Fred and Susie agreed to
revalue the land from P90,000 to P150,000
3. Capital credit for the new partner is lesser than his investment with the difference given as
bonus to the original partners
Bob is admitted to a 1/3 interest for a cash investment of P40,000 and is to be credited for
P60,00. The difference will be recognized as bonus to Fred and Susie.
Withdrawal of a partner
The following rules must be observed
1. The capital balance of the withdrawing partner must be determined as a basis for settlement.
Capital balances must be updated
2. The updated capital of the withdrawing partner may be recovered by him through any of the
following alternatives:
a. Sell his share to an outside party. (same in admission by purchase)
b. Sell his share to any or all of the remaining partners. (same in admission by purchase)
c. His share is to be liquidated by the partnership. asset of the partnership will decrease
with the corresponding decrease in equity.
Assume that C with an updated capital balance of P31,200 received cash settlement from the
partnership.
1. For P31,200
2. For P36,200
3. For P30,000
Prepare journal entries.
PARTNERSHIP LIQUIDATION
Accounting procedures
1. Books should be adjusted and the nominal accounts closed
2. Assets are sold and converted into cash resulting gain(loss) added (deducted) to the partners
capital accounts
3. If there is a deficient capital, eliminate it by:
a. Recording additional investment of deficient but solvent partner
b. Transferring deficiency as a loss to the other partners if deficient partner is personally
insolvent
4. Payment of liabilities or claims owing to outside creditors
5. Payment of partners interest for
a. Loan balance
b. Capital balance
Assume that partners A,B and C decided to liquidate their partnership. A balance sheet was
prepared on this date as follows:
ABC Partnership
Balance Sheet
As of March 1, 2000
Assets Liabilities and Equity
Cash P20,000 Accounts payable P25,000
Other assets 180,000 Loans payable, B 5,000
A, Capital 50,000
B, Capital 45,000
______ C, Capital 75,000
Total P200,000 Total P200,000
ABC Partnership
Balance Sheet
As of March 1, 2000
Assets Liabilities and Equity
Cash P16,000 Accounts payable
P60,000
Other assets 84,000 X, Capital
18,000
Y, Capital 10,000
______ Z, Capital 12,000
Total P100,000 Total
P100,000