CHAPTER 2
PARTNERSHIP: BASIC CONCEPTS AND
FORMATION
A partnership requires a combination of
1. Capital resources or assets
2. Managerial skills and expertise
A partnership is a legal entity guided by the rules and regulations put up by
each country or state. In the Philippines, partnerships as well as corporations
are governed by the new Civil Code of the Philippines, Article 1767 to1867.
PARTNERSHIP AS DEFINED IN THE CIVIL CODE OF THE PHILIPPINES
Partnership is a business organization owned by two or more persons who
agree on a specific division of responsibilities and profits.
A partnership is an organization where two or more persons bind themselves
to contribute money, property, or industry( refers to an expertise of a person)
into a common fund with the intention of dividing the profits among
themselves. (New Civil Code, Article 1767)
The Uniform Partnership Act defines a Partnership as an association of
two or more persons to carry on co-owners of business for profit.
From the definition above:
1. Two or more persons are needed to form a partnership
2. Money is not the only resource that a person can contribute.
Property that assets owned by a person can also be a form of
contribution.
Industry refers to the skills or expertise of a person.
3. A partnership must be established for the purpose of obtaining thee
profit. If tan organization is created for purposes other than the
generation of profit (e.g. charitable institutions, public hospitals) it
cannot take the form of partnership.
4. Partnership are the common form of business organization used by
companies who generate profits by the practice of their profession
(e.g. law firms, auditing firms)
CHARACTERISTICS OF A PARTNERSHIP
1. Voluntary Association- Individuals, by their own free will, agree to join
together and form a partnership.
2. Separate Legal Personality- A partnership can also be defined as an
artificial being created by the operation of law. This results in partnerships
having a juridical personalities separate and distinct from their owners (called
partners). (Articles 1768) It can acquire, sell or dispose properties, incur
obligations and transact business in its name.
Being an artificial person, a partnership can perform the acts that the partners
can do except those acts that are purely personal in nature. Partnership can
enter in to contracts under its own name. a partnership can also acquire
property under its own name. property acquired by the partnership belongs to
the partnership not to the individual partners. However, even if a partnership
has a separate legal existence. Its income is not taxed as a separate entity.
After the income has been distributed to the partners, it will be included in their
respective tax returns and it will be taxed accordingly.
3. Co-ownership of Property- Partnership assets are jointly owned by the
partners. Once assets are invested and or acquired by the partnership, these
cease to become personal properties and instead become joint property of all
partners. Partners have a claim on all partnership assets based on their capital
accounts and share in partnership earnings.
4. Taxable Entity- The income of an ordinary partnership is taxable like a
corporation at a rate of 30%. Exempted from tax is a general professional
partnership. A general professional partnership is one which is formed for the
sole purpose of exercising their common profession, such as accounting, tax,
law, medicine, and engineering. (National Internal Revenue Code, Sections 20
and 24).
5. Mutual Agency- Each partner is a fully authorized agent of the partnership.
Acts of the partners within the scope of the partnership are binding when
transacting partnership business. The partnership can be sued, together with
the partners, by third parties when a partner commits a wrongful act or a
breach of trust. (Article 1818). “the act of one is the act of all” it means even
without asking permission of the partner or even though a partner has no
authority to do so as long as the act concerns the normal business operations.
6. 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. (Articles 1830-1831).
Partnership Dissolution- occurs when there is a change in the relationship
among the partners. Dissolution does not necessarily mean that the
partnership will cease to exist. Withdrawal and Admission of partners are
normal occurrences in a partnership, and they only lead to the formation of a
new partnership.
Partnership Liquidation- an event that ends both the legal and economic life
of a partnership. Where all assets are sold, liabilities are paid, and the
remaining assets are distributed to all the partners.
7. Unlimited Liability- Even though it has separate legal personality, each
partner is personally and individually liable for all partnership liabilities. In the
event that cash flow problems occur and partnership assets are not sufficient
to liquidate partnership liabilities, the personal assets of the partners should be
used to help settle the company's obligations. (Articles 1791 and 1835).
In layman’s term, if the assets of the partnership are not enough to satisfy their
claims. Creditors can claim the deficiency from any of the partners.
8. Mutual Contribution- partners should have both or either of the personal or
expertise contribution in the partnership.
9. Division of Profits- each person is entitled to receive a share in the profits
realized by the business. The profit or loss is divided among partners in
accordance with their agreement or the profit-sharing scheme agreed upon the
formation of the partnership. In the absence of stipulation or If there is no
profit-sharing scheme, profits or losses will be shared or distributed by the
partners in the ratio of their actual contributions or the original capital
contributions in the business. Industrial partners, however, does not share in
the losses.
10. Partnership Agreement- partnership is a contract. Contracts are
perfected through oral or written agreement. Partnership can be formed orally
or in written form. However, to protect the interests of all partners, it is ideal to
form a partnership in a written contract. The written contract is called the
Articles of partnership.
ELEMENTS OF A PARTNERSHIP
1. There must be a valid contract, whether oral or written.
2. A partnership must be put up by persons having legal capacity to contract.
3. Their contributions must be in the form of money, property or service.
4. The purpose of the business is to divide the profit among them.
With regards a written or oral contract, the law does not provide a mandatory
requirement for this, not unless the investment of the partner is in the form of
immovable property, in which case a public instrument is necessary.
(Article1667).
Additionally, Article 1772 provides: Every contract of partnership having a
capital of three thousand pesos (P3,000) or more, in money or property, shall
appear in a public instrument, which must be recorded in the office of the
Securities & Exchange Commission.
ROLE OF PARTNERS
1. The partners are co-owners of the partnership property. It means
that when a partner invests his land or building, this ceases to be his
personal property. Instead, this becomes joint property of all the
partners.
2. The partners have unlimited liability. The partners become
individually liable for all partnership debts in the event that the
partnership assets are not sufficient to cover up its liabilities. (Article
1791) This means that in the event partnership assets are
inadequate to settle the claims of the partnership creditors, these
creditors can seize the personal properties of anyone of the
partners.
3. The partnership is bound by the acts of any of the partners since
they are considered agents of the partnership for the purpose of
carrying its activities
ADVANTAGES OF A PARTNERSHIP
1. It is easy and inexpensive to organize than a corporation, as it is
formed by a simple contract between two or more persons.
2. The unlimited lability of the partners makes it reliable from the point
of view of creditors
3. The Capital of the partnership is bigger in amount since there are at
least two persons forming it. The combined personal credit of the
partners offers better opportunity for obtaining additional capital than
does a sole proprietorship.
4. The participation in the business by more than one person makes it
possible for a closer supervision of all the partnership activities.
There is a better management because all partners are considered
as the agents of the firm in matters within the scope of its business.
5. The direct gain to the partners is an incentive to give close attention
to the business.
6. The personal element in the characters of the partners is retained.
7. It does not have to comply with as many legal requirements of the
government nor its heavy burden of taxation. A partnership can be
organized for the practice of a profession such as partnerships of
CPA’s, Doctors, Lawyers, Engineers, Architects.
DISADVANTAGES OF A PARTNERSHIP
1. The personal liability of a partner for firm debts deters many from
investing capital in a partnership.
2. A partner may be subject to personal liability for the wrongful acts or
omissions of his/her associates.
3. It is less stable because it can easily be dissolved.
4. There is divided authority among the partners
5. There is constant likelihood of dissension and disagreement when
each of the partners has the same authority in the management of
the firm.
6. Disputes and misunderstandings may arise due to some acts of one
partner which binds the partnership.
7. Unlimited liability of the partners. General partners are liable for the
debts of the firm beyond their capital contributions made.
8. The life of the business is limited. The death, incapacity or
withdrawal of a partner will dissolve the partnership unlike a
corporation whose maximum life is 50 years.
9. Any transfer of partners interests would necessitate the consent of
all the partners.
10. A partnership has a smaller amount of capital as compared to a
corporation.
KINDS OF PARTNERSHIPS
1. As to activity
Trading partnership- one whose main activity is the manufacture or the
purchase and sale of merchandise.
Non-trading partnership- one which is organized for the purpose of
rendering services it is mostly for the exercise of profession.
2. As to object or property
Universal Partnership
 Universal partnership of all present property- one in which the
partners contribute at the time of the constitution of the
partnership, all the properties which actually belong to each of
them into a common fund with the intention of dividing the same
among themselves as well as the profits which they may acquire
therewith.
All assets contributed to the partnership and subsequent
acquisitions become common partnership assets.
A Universal Partnership of Property is one where all the partners
contribute all their properties into a common fund (Article 1778 of
the New Civil Code)
 Universal partnership of all profit- one which comprises all that
the partners may acquire by their industry or work during the
existence of the partnership and the usufruct of movable or
immovable property which each of the partners may possess at
the time of the institution of the Contract.
Partnership assets consist of assets acquired during the life of the
partnership and only the usufruct or use of assets contributed at
the time of partnership formation. The original movable or
immovable property contributed do not become common
partnership assets.
A Universal Partnership of Profits is one where the partners contribute
all what they will receive as a result of their work or service rendered
during the lifetime of the partnership. The partners retain ownership over
their present or future property
Particular partnership- one which has for its object determinate things,
their use or fruits, or a specific undertaking or the exercise of the profession
or vocation.
3. As to liability of partners
General Co-partnership- one consisting of general partners who are liable
prorata and sometimes solidarily with their separate property for
partnership liabilities.
A General Partnership is one where all partners are general partners
with unlimited liability and are therefore liable to partnership creditors
even up to the extent of their personal properties especially when
partnership becomes insolvent.
Limited partnership- one formed by two or more persons having as
members one or more general partners and one or more limited
partners, who as such are not bound by the obligations of the
partnership. The word LIMITED or LTD added to the name of the
partnership to inform the public that it is a limited partnership.
 A Limited Partnership is composed of at least one general partner with
the others as limited partners who are liable to partnership creditors only
to the extent of their investment in the partnership. This type of
partnership has two classes of partners general and limited (Articles
1816, 1843)
4. As to duration
Partnership at will- one for which no term is specified and is not formed for
a particular undertaking o venture and which may be terminated any
time by mutual agreement of the partners or the will of one partner alone
Partnership with a fixed term- one in which the term or period for which
the partnership is to exist is agreed upon. It may also refer to a
partnership formed for a particular undertaking and upon the expiration
of that term or completion of the particular undertaking the partnership is
dissolved unless continued by the partners
5. As to representation to others
Ordinary partnership- one which actually exists among the partners and
also as to third persons
Partnership by estoppel- one which in reality is not a partnership but is
considered as one only in relation to those who, by their conduct or
omission are precluded to deny or disprove the partnership’s existence.
6. As to legality of existence
De jure partnership- one which has complied with all the requirements for
its establishment
De facto partnership- one which failed to comply with one or more of the
legal requirements for its establishment
7. As to publicity
Secret partnership- one wherein the existence of certain persons as
partners is not made known to the public by any of the partners
Open partnership- one wherein the existence of certain persons as
partners is made known to the public by the members of the firm
CLASSES OF PARTNERS
1. As to contribution
Capitalist partner- one who contributes capital in cash (money) or property
into the partnership fund.
Industrial partner - one who contributes industry, labor, skill, talent or
service.
Take note that an industrial partner is also a general partner, with
unlimited liability and is not allowed to engage in any other kind of
business unless expressly authorized by the other partners. (Article
1789)
Capitalist-industrial partner- one who contributes cash, property, and
industry.
2. As to liability
General partner - one whose liability to third persons extends to his
separate (private) property. A partner whose liability for the debts of the
partnership is unlimited and therefore may extend to his personal assets.
One who manages the partnership, contributes property or service and
has unlimited liability assuming risk or the loss of personal property in
the event partnership becomes insolvent.
Limited partner- one whose liability to third persons is limited only to the
extent of his capital contribution to the partnership.
One who invests cash or property, has no unlimited liability and has no
active role in the management of the partnership.
A partner whose liability for the debts of the partnership is limited to his
capital contributions only.
3. As to management
Managing partner - one who manages actively the business of the
partnership.
Silent Partner- one who is known publicly as a partner but does not
participate in the management of the partnership affairs
4. As to publicity
Ostensible partners- One who takes active part in the management of the
firm and is known to the public as a partner in the business.
Real/Ordinary partners- one which actually exists among the partners
and also the third persons known that he is a partner.
Nominal partners - one who is not really a partner, not being a party to
the partnership agreement, but is made liable as a partner for the
protection of innocent third persons. Partner in name only. A partner
has no contributions at all but permits his name to be used by the
firm.
Secret partners- one who takes active part in the management of the
business but whose connection with the partnership is concealed or
unknown to the public.
Dormant partners- one who does not take active part in the management of
the business and is not known to the public as a partner, he is both a
silent and a secret partner. A partner that does not participate in running
business affairs.
5. As to property or object
Universal partner- is one whose participation extends to the entire business.
Particular partner- is one whose participation is limited to a unit or part of a
business.
6. Other classifications
Liquidating partner - one who takes charge of the winding up of partnership
affairs upon dissolution.
Continuing Partners- these are partners that still remain after the dissolution
of the previous partnership that they want to continue to operate. It is
sometimes called Surviving Partners
PARTNERSHIP CONTRACT A corporation has an indefinite life as compared to a partnership. The
corporate shareholders or investors are free from liability except for what they
An agreement concerning formation, operation, dissolution, and liquidation of invested.
the partnership is embodied in a contract called Articles of Co-Partnership.
Although a verbal agreement is valid, it is advisable that it be in writing as Management in a corporation is vested in a few shareholder’s whereas
conflicts and disagreements may easily arise because of the number of partners in general may actively manage the business. Unlike a shareholder, a
persons involved. The contract will act as a form of governance of partnership further can commit or bind the partnership to any contract entered in the name
activities and will clearly reflect the relationships of the partners among each of the partnership.
other and with third parties.
Advantages of a partnership over a corporation
Article 1772 of the New Civil Code requires that contributions of partners in
cash or properties should be in a public instrument duly registered with the Ease in forming, lesser legal requirements, access to records, and active
Securities and Exchange Commission if it amounts to three thousand pesos or management
more.
Disadvantages of a partnership over a corporation:
The Securities and Exchange Commission (SEC) is a government agency
which supervises partnership and corporate forms of businesses. Registration Difficult to transfer and or increase ownership as it requires unanimous
with the SEC is necessary as a condition for the issuance of a license to consent of all partners whereas shareholders may transfer easily their shares
engage in business or trade. In this way, tax liabilities of partnerships as well Limited life as it is easy to dissolve a partnership with the death, incapacity or
as corporate businesses cannot be evaded. The public can also determine insolvency of anyone partner. Unlimited liability which makes the partners
more accurately the financial status of these businesses before dealing with personally liable to partnership creditors.
them as these businesses are required periodic financial statements.
ORGANIZING A PARTNERSHIP
The following information are contained in the articles of co-partnership
Before a partnership can operate legally, it has to comply first with certain
1. Name of the partnership registration requirements which are summarized below:
2. Principal place of business PLACE OF REQUIREMENTS OF CERTIFICATES
3. Date of effectiveness and life of the partnership REGISTRATION REGISTRATION ISSUED
4. Purpose of the partnership Articles of Co-partnership
5. Names, addresses and contributions of the individual partners, their SEC SEC Certificate
filled SEC registration form
description on what classes of partners and agreed values Certificate of registration
6. Manner of management of the partnership Articles of Co-partnership of Business Name
7. Manner of dividing the profits or loss among the partners, including DTI
SEC Certificate (renewable every five
salary, allowance and interest on capital years)
8. Periodic withdrawals allowed for a partner. This are the conditions Mayor’s Permit and
under which the partners may withdraw money or other assets for City or Municipal Certificate of registration of
License to Operate
personal use Mayor’s Office Business Name
(renewable annually)
9. Manner of liquidating the partnership with the rights and duties of the
BIR registration no.
partners
Partnership Tax
10. The provision for Arbitration in settling disputes
Identification Number
SEC Registration Articles of
BIR (TIN)
Co-Partnership
Registration of books,
COMPARISON OF BUSINESS ORGANIZATIONS invoices, and official
receipts.
1. Similarities between a partnership and a sole proprietorship: SSS Certificate of
Filled SSS Application form Membership
SSS
Sole proprietors and partners have unlimited liability and an active role in List of employees SSS Employer ID
managing the business. Both businesses have limited life because its Number
continuity depends upon the decision of the proprietor or the partners. PHILHEALTH Employer
Likewise, death or incapacity of proprietor or anyone of the partners may Number (PEN) and the
cause its termination. SEC registration Certificate of registration
PHILHEALTH
Employer data record or PHILHEATH
Insurance
Differences between a partnership and sole proprietorship ERI form Identification Number
Corporation
Business Permit or License (PIN) and Member Data
A partnership is a taxable entity It is also a juridical or legal entity, and has a Record (MDR) for
combination of capital resources and skills. concerned employees
HMDF Certificate of
Home Mutual
SEC Registration Membership
Advantages of a partnership against a sole proprietorship: Development Fund
Articles of Co-Partnership HMDF Employer ID
(PAG-IBIG Fund)
Number
Partnership has a greater amount of capital because of the number of persons
involved. There is therefore a greater opportunity to expand the business.
Better management will result because of the shared managerial skills, efforts RIGHTS OF A PARTNER
and experiences of the partners.
1. A partner has a right over specific partnership property
Disadvantages of a partnership over a sole proprietorship:
2. A partner has a right to share in the profits resulting from business
The number of persons involved may delay matters involving prompt and operation.
immediate attention. Conflicts and disagreements may easily arise which may
adversely affect the operation of the business and may cause its downfall or, 3. A partner has a right to share in the remaining assets upon partnership
at worse, its termination. liquidation after the partnership creditors have been paid.

2. Similarities between a partnership and a corporation: 4. A partner has a right to co-manage the partnership

Both are taxable entities and legal entities. 5. A partner has a right to ask that the books be kept in the principal place of
business subject to inspection at a reasonable time.
Differences between a partnership and a corporation.
 2. Permanent Withdrawal - withdrawal of capital are debited to each
BUSINESS ENTITY CONCEPT partner's capital account to decrease the partner's equity.

The entity concept emphasizes the view that a business unit such as a To illustrate, assume that Abad and Basa opened Sun Internet Cafe on
partnership, sole proprietorship or a corporation should be treated as distinct January 1, 2012. The following transactions took place:
and separate from the owner, partners or shareholders. As such, only
transactions of the business are recorded in its books. January 1 Initial cash investments of P300,000 from each partner

A partnership acquires, holds, disposes properties in its own name, it enters March 1 Abad made another cash investment of P150,000
into contracts with others through the partners who are merely acting as its
agents. The partnership cannot be held liable when a partner enters into a June 1 Basa made a permanent cash withdrawal of P25,000.
contract with a third party on activities not within

the bounds of the partnership as provided in its articles of co partnership. Care Entries in the partnership books will be as follows:
therefore should be taken in recording its assets, liabilities, revenues and
expenses and that what is personal to the partners or not within the bounds of January 1 Cash 600,000
the activities of the partnership should be excluded from the partnership
Abad, Capital 300,000
books.
Basa, Capital 300,000
Initial cash investments
In contrast, the proprietary theory emphasizes the view of the individual
of Abad and Basa
partners as owners of the net assets of the business specially when salaries
are given to them, or when obligation to partnership creditors extend to their
personal properties, or when the original partnership is dissolved and the
consent of the partners are required in admitting a new partner. March 1 Cash 150,000
Abad, Capital 150,000
ACCOUNTING FOR A PARTNERSHIP Additional investment of
Abad
The accountant must have sufficient knowledge of the legal provisions
regarding a partnership as these would affect certain aspects of partnership
accounting such as investments of the partners, dissolution of the partnership, June 1 Basa, Capital 25,000
distribution of profit or loss to the partners and liquidation of the partnership. Cash 25,000
Permanent cash
In addition, the accountant uses the Articles of Co-Partnership as a guide in withdrawal of Basa
recording transactions regarding the partners' capital contributions, distribution
of profit or loss, dissolution and liquidation. At the end of the year, the capital accounts will appear in the general ledger as
follows:
The main difference lies in accounting for equity which in a partnership is
called partners equity means plurality of Capital and Drawing accounts Abad, Capital No. 301
(one capital and one drawing account is maintained in each partner). The Jan 1 300,000
accounting equation is expressed thus Assets = Liabilities + Partners' Mar 1 150,000
Equity.
Basa, Capital No. 302
PARTNERS' EQUITY
Jan 1 25,000 Jan 1 300,000
The right of a partner over the net assets of the business is called Partners'
Equity and is represented by two accounts Partner's Capital and Partner's
Drawing. This is the same rule that one applies in a sole proprietorship except The balances of the capital accounts will be shown in the statement of
that there are more accounts in a partnership since there are two or more financial position or balance sheet after the assets and liabilities as follows:
partners involved.
Partners' Equity:
PARTNERS CAPITAL ACCOUNT Abad, Capital 450,000
1. Permanent Withdrawal 1. Original investment by a partner Basa, Capital 275,000
(decrease) of capital Total 725,000

2. Share of partnership loss from 2. Additional investment by a partner These balances should also be reflected in the Articles of Co Partnership as
operation their permanent interest. Partners usually make investments only once or
twice over the lifetime of the partnership. If additional investment is made
3. Debit balance of drawing account 3. Share in partnership profits from which will affect the other provisions of the partnership contract, such as the
closed to capital operations to be added to capital agreement on profit distribution, there should have been a provision to this
effect otherwise there will be a need to revise the Articles of Co Partnership
PARTNERS DRAWING ACCOUNT
1. Personal withdrawal by a partner 1. Share in partnership profits from PARTNER'S DRAWING ACCOUNT
operations (this may be credited
directly to the partners’ capital This is the account title used to reflect temporary interest of a partner
account) Ordinarily, there are also two transactions affecting this account:
2. Share in partnership loss from
operation (this may be debited 1. Share in the net profit (the agreement as to the manner of distribution is
directly to the partners’ capital provided in the Articles of Co-Partnership) is credited to the drawing account to
account) increase the partner's equity and become a source of regular drawings by the
partner, or share in net loss is debited to the drawing account to decrease
PARTNER'S CAPITAL ACCOUNT the partner's equity and his source of regular drawings.

The capital account represents original investment which becomes its
permanent or fixed interest. This could change only if additional investments
are made or when non-current assets are revalued. The following transactions
affect this account:
1. Investment- contribution made are credited to each partner's capital
account to increase the partner's equity and
2. Personal drawings may be formal as provided in the Articles of Co-
Partnership. These are oftentimes called salaries but are in fact withdrawals of
profit and are debited to the drawing account to decrease the partner's equity
Informal or irregular withdrawals may also be made by the partners when the
need arises (made with the consent of all partners) and are also debited to the
drawing account and viewed as decreases in the overall equity or interest of
the partner.
Balance of the drawing account is closed to the capital account. If the share of PARTNERSHIP FORMATION:
the partner in the profit (credited to his drawing account) is greater than the BOOKS OF PROPRIETOR
actual withdrawals made by him (debited to his drawing account), the credit 1. Adjust assets and liabilities in accordance with the agreement.
balance of the drawing account is added to the capital account to arrive at the 2. Close the books
total partner's equity. BOOKS OF PARTNERSHIP
1. Open the books of the partnership
The partnership started operation on October 1 and at the end of each month
Abad withdrew P10,000 cash while Basa withdrew P10,000 cash but only
GAINS, LOSSES, INCOME AND EXPENSES ADJUSTMENTS WILL BE
before the end of the year. A net profit of P150,000 was reported at the end of
REFLECTED DIRECTLY TO CAPITAL ACCOUNT
the year which was divided equally between them. Additional entries in the
partnership books of Abad and Basa:

Oct. 31 Abad, Drawing 10,000

Cash 10,000
Personal drawing of Abad

Nov. 30 Abad, Drawing 10,000

Cash 10,000
Personal drawing of Abad

Dec. 30 Abad, Drawing 10,000

Basa, Drawing 10,000
Cash 20,000
Personal drawing of Abad and
Basa

Income and Expense summary 150,000

Abad, Drawing 75,000
Basa, Drawing 75,000
Profit share of the partners.

At the end of the year, the drawing accounts of the partners will appear in the
general ledger as follows:

Abad, Capital No. 301-A

Oct 31 10,000 Dec 31 75,000
Nov 31 10,000
Dec 31 10,000

Basa, Capital No. 302-A

Dec 31 10,000 Dec 31 75,000

From the above entries and T accounts, on this page and in the preceding
page, the partners' equity will appear thus:
Abad, Capital 450,000
Abad, Drawing 45,000 495,000

Basa, Capital 275,000

Basa, Drawing 65,000 340,000

The balances in the drawing accounts represent net profit shares which are
withdrawable depending on the partnership agreement These balances could
be left open and brought forward next accounting period especially if partners
intend to withdraw them as per agreement. Or these balances could be closed
to the capital accounts and made part of their permanent investments.

WAYS OF FORMING A PARTNERSHIP

1. Two or more persons may form a partnership for the first time.
In this type of formation, the partners may contribute cash, property
or services.
2. Two or more persons may form a partnership where one of
them is already engaged in the business
a. New set of books may be opened for the partnerships
b. One of the old books to be continued as the partnership books
3. Admission of a new partner in an existing partnership
a. By purchase of a certain fraction of interest of one of the partners or
both
b. By investment or by contributing cash or other tangible assets to the
firm.