Partnershi

 In a contract of partnership, two or

more persons 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.
Each owner is called a partner.

Characteristics of a
Partnership
Mutual Contribution
Division of Profits or Losses
Co-ownership of Contributed Assets
Mutual Agency
Limited Life
Unlimited Liability
Income Taxes
Partners' Equity Accounts

Partnership Distinguished from

Corporation
Manner of Creation
Number of Persons
Commencement of Juridical
Personality
Management
Extent of Liability
Right of Succession
Terms of Existence

Advantages of a Partnership
Better management can be attained
considering the combined expertise of
the partners.
A bigger amount of capital can be raised
as compared to a sole proprietorship.
There is a great advantage of forming a
partnership for the exercise of profession
because such partnership is exempted
from payment of income tax.
The interest of one partner cannot be
transferred to a new partner without the
consent of other partners.

Disadvantages of a Partnership
A partner's personal assets can be
ran after by the partnership creditor
in case the partnership could not
pay all its obligations.
Misunderstanding and disputes may
arise among partners.
Limited
source
of
capital
as
compared to a corporation
Limited life of existence

Kinds of Partnership
According to its activities:
Trading Partnership- its main activity is to
manufacture or purchase and sale of goods.
Non-trading Partnership- its main activity is
to engage in service activities, professional
or non-professional activities.

According to the liability of the partners:

General Partnership
Limited Partnership

Classification of Partners
1. As to contribution

Capitalist Partner
Industrial Partner
Capitalist-industrial partner

2. As to liability

General Partner
Limited Partner

3. Other classification
Nominal Partner
Secret Partner
Silent Partner
Dormant Partner

Partnership Contract
Partnership is based on contract. It
should be in writing and appear in the
public instrument to be recorded in the
Office of the Securities and Exchange
Commission when:
The capital of the partnership is P 3,000
or more in money or property and
Immovable property or real rights are
contributed into the partnership

Articles of Co-Partnership
A written contract by the partners which
requires registration with the Securities
and Exchange Commission.
Must contain the ff.:

Name of partnership, nature and place of

business
Names of partners(general or limited), their
address and contribution
Effectively date and duration of the partnership
Accounting period to be adopted, nature of
accounting records, financial statements and
audits by independent public accountants
Profit and loss sharing
Rights, powers and duties of the partners.

Articles of Co-Partnership
the drawings or salaries to be allowed
to partners
the provision for arbitration of
disputes, dissolution, and liquidation.
A contract of partnership is VOID
whenever immovable property or real
rights are contributed and a signed
inventory of the said property is not
made and attached to a public
instrument.

Partner's Capital Account

Debit
Permanent withdrawals
Debit balance of the drawing account at
the end of the period.

Credit
Original investment
Additional investment
Credit balance of the drawing account at
the end of the period.

Partner's Drawing Account

Debit
Temporary withdrawals
Share in loss (this may be debited
directly to Capital)

Credit
Share in profit ( this may be credited
directly to Capital)

 Permanent withdrawals are made

with the intention of permanently
decreasing the partner's capital while
temporary withdrawals are regular
advances made by the partners in
anticipation of their share in profit.
The use of drawing accounts for
temporary withdrawals provides a
record of each partner's drawings
during an accounting period. Hence,
drawing in excess of the allowed
amounts as stated in the partnership
agreement may be controlled.

Loans Receivable from or Payable to

Partners

If a partner withdraws a substantial

amount of money with the
intention of repaying it, the debit
should be to Loans ReceivablePartner account instead of to
Partner's Drawing account. This
account
should
be
classified
separately
from
the
other
receivables of the partnership.

Loans Receivable from or Payable to

Partners
A partner may lend amounts to the
partnership in excess of his intended
permanent investment. These advances
should be credited to Loans PayablePartner account and not to Partner's Capital
account classified among the liabilities but
separate from liabilities to outsiders. This
distinction
is
important
in
case
of
liquidation. Loans payable to partners must
be paid after the claims of outside creditors
have been paid in full.These loans have
priority over partner's equity.

 Partnership Formation
1. Valuation of Investment by Partners
Partners may invest cash or non-cash assets in
the partnership. When partners invests NCA, they
are to be recorded at values agreed upon by the
partners. In the absence of any agreement, the
contributions will be recognized at their fair
market values at the date of transfer.

2. Adjustment of accounts prior to formation

In cases when the prospective partners have
existing businesses, their respective books will
have to be adjusted to reflect the fair market
values of their assets to correct misstatements in
the accounts. If the adjustments will not be made
, the initial capital balances of the partners may
be inequitable.

Formation and Opening of Partnership Books

Problem 1:
Ms. AJ and BJ formed a partnership. BJ
will invest sufficient cash to give her an
equal interest in the partnership while
AJ will transfer the assets and liabilities
of his business.
The following adjustments shall be made in
the books of AJ:
An allowance for uncollectible accounts of 5% of
Accounts Receivable is to be established.
Prepaid expenses amounting P3,000 were omitted
by the accountant. This is to be recognized.
Additional salaries payable in the amount of P
1,000 is to be established.

 The account balances on the books of

AJ prior to partnership formation
follows:
Cash
Accounts Receivable
Office Equipment
Accu. Depn.
Accounts Payable
Salaries Payable
AJ Capital

Debit
Credit
18,000
30,000
150,000
60,000
15,500
2,500
120,000

Formation and Opening of Partnership Books

Problem 2:
On January 2 20A, Ann, Beth and Cathy
formed a partnership business with the
following contributions:
Ann (general partner) contributed cash of
P100,000 and shares profit of 45%.
Beth(limited partner) contributed a brand
new motorcycle costing P120,000 in which
his liability of P15,000 from Cebu Motorama
will be assumed by the partnership and
shares profit of 45%.
Cathy's(industrial partner) contribution will
be her personal services and shares 10% in
profit.

PARTNERSHIP OPERATIONS
Rules For The Distribution Of Profits or Losses
The profits or losses shall be distributed in
conformity with the agreement. If only the share
of each partner in the profits has been agreed upon,
the share of each in the losses shall be in the same
proportion(accdg. to the profit sharing ratio)
In the absence of stipulation, the share of each
partner in the profits or losses shall be in proportion
to what he may have contributed( accdg. to the ratio
of original capital investments or the ratio of capital
balances at the beginning of the year), but the
industrial partner may not be liable for the losses.
A stipulation which excludes one or more partners
from any share in the profits or losses is VOID.

 As for the profits, the industrial partner shall

receive such share as may be just and
equitable under the circumstances. If aside
from his services he has contributed capital,
he shall also receive a share in the profits in
proportion to his capital.

DISTRIBUTION OF PROFITS OR LOSSES

BASED ON PARTNERS' AGREEMENT
The ratio in which profits or losses from
partnership operations are distributed is
recognized as the profit & loss ratio.
1. EQUALLY OR IN OTHER AGREED RATIO
2. BASED ON PARTNERS' CAPITAL
CONTRIBUTIONS
a. ratio of original capital investments
b. ratio of capital balances at the beginning of
the year
c. ratio of capital balances at the end of the year
d. ratio of average capital balances

 3. BY ALLOWING INTEREST ON PARTNERS'

CAPITAL AND THE BALANCE IN AN AGREED
RATIO
4. BY ALLOWING SALARIES TO PARTNERS
AND THE BALANCE IN AN AGREED RATIO
5. BY ALLOWING BONUS TO MANAGING
PARTNER BASED ON PROFIT AND THE
BALANCE IN AN AGREED RATIO
6. BY ALLOWING SALARIES, INTEREST ON
PARTNERS' CAPITAL, BONUS TO THE
MANAGING PARTNER AND THE BALANCE IN
AN AGREED RATIO ( COMBINATION OF THE
ABOVE CASES # 3-5)