I. A.

OWNER’S EQUITY ACCOUNTS

Separate capital and drawing accounts are established for each partner

Partner's Capital Account

Debit
1. Permanent withdrawals
2. Debit balance of the
drawing account at the end of
the period
Credit
1. Original investment
2. Additional investment
3. Credit balance of the
drawing account at the end of
the period

Partner's Drawing Account

Debit Credit
1. Temporary withdrawals 1. Share in profit (this may be
2. Share in loss (this may be credited directly to Capital)
debited directly to Capital)
I. A. OWNER’S EQUITY ACCOUNTS

• Permanent withdrawals are made with the

intention of permanently decreasing the partner’s
capital.
• Temporary withdrawals are regular advances made
by the partners in anticipation of their share in
profit.
• Drawings in excess of the allowed amounts as
stated in the partnership agreement may be
controlled.
I. B. LOAN PAYABLE TO A PARTNER

• For instance, Mayaman, one of the partners, lent the

business P15,000 cash with the condition that it will be
paid back after three months.
Dr Cr
Cash P 15,000
Loan Payable to Mayaman P 15, 000
To record amount borrowed from Mayaman
Loans Payable to Partners must be paid after the claims of
outside creditors have been paid in full. These loans have
priority over partners’ equity.
I. B. LOAN RECEIVABLE FROM A
PARTNER
• For instance, Kinakapos, one of the partners, is in need of
cash. The partnership agreed to lend him cash of
P10, 000 with the condition that it will be paid back after
60 days.
Dr Cr
Loan Receivable from Kinakapos P 10,000
Cash P 10, 000
To record loan extended to Kinakapos
II. PARTNERSHIP FORMATION
A. VALUATION OF INVESTMENT BY PARTNERS

• When a partner invests non-cash assets, 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 to the partnership.

• Fair market value of an asset is the estimated

amount that a willing seller would receive from a
financially capable buyer for the sale of the asset in a
free market.
• Fair value is the price at which an asset or liability
could be exchanged in a current transaction between
knowledgeable, unrelated willing parties.
A. Individuals with No Existing Business Form
a Partnership
A.1 Contribution in the Form of Cash, Property
and Industry

• Araza, Magno and Rotubia formed a partnership

on January 27, 2018. Araza is to invest cash of
P 50,000. Magno is to invest merchandise which
she bought last year for P 5,000 but which has a
market value of P 10,000. Rotubia is to be
admitted as Sales Manager to share 10% in the
profits.
 Dr Cr
2018 January 27 Cash P 50,000
Araza, Capital P 50,000
To record cash investment of Araza

Merchandise Inventory 10,000

Magno, Capital 10,000
To record investment of Magno

Admitted Rotubia as sales manager for a 10% share

in profits of the partnership.
 Araza, Capital
(General Partner)
Jan. 27 50,000

Magno, Capital
(General Partner)
Jan. 27 10,000

Rotubia, Capital
(Industrial Partner)
Admitted as sales manager on Jan. 27, 2018
for a 10% share in the profits.
A. Individuals with No Existing Business Form
a Partnership
A.2 Contribution of Property with Attached
Liability

• Magno decided to invest also her land

which cost her P 100,000 when she bought
this in 2012 but which current appraised
value is P 200,000. However, this land has
a mortgage balance of P 50,000.
a) The partners agreed that the mortgage be
assumed by the partnership.

Dr Cr
Land P 200,000
Mortgage Payable P 50,000
Magno, Capital 150,000
To record the land invested by Magno
with mortgage balance.
b) The mortgage balance will not be
assumed by the partnership.

Dr Cr
Land P 200,000
Magno, Capital P 200,000
To record land investment.
Another illustration, On August 1, 2018, Araza and
Rotubia agreed to form a partnership. The partnership
agreement specified that Araza is to invest cash of
P 700,000 and Rotubia is to contribute land with fair
market value of P 1,300,000 with P 300,000 mortgage to
be assumed by the partnership. The entries are as follows:
Dr Cr
Cash 700,000
Land 1,300,000
Mortgage Payable 300,000
Araza, Capital 700,000
Rotubia, Capital 1,000,000
To record the initial investments of Araza
and Rotubia
B. A Sole Proprietor and another Individual
Form a Partnership
Adjustment of Accounts Prior to Formation
• Illustration:
Percy Jackson has a bookstore and it has
been operating for 3 years. Annabeth Chase
invited him to put up a partnership. Percy agreed
to close his business and invest his net assets in
the partnership. Annabeth agreed to put up cash
equal to the contribution of Percy. The following
are the assets and liabilities of the bookstore:
 Debit Credit
Cash ₱ 15,000
Accounts Receivable 5,000
Merchandise Inventory 25,000
Furnitures and Fixtures 10,000
Accumulated Depreciation 2,000
Accounts Payable 7,000
Jackson, Capital 46,000
55,000.00 55,000.00
It is agreed that for purposes of establishing
Annabeth’s contribution, the following adjustments
shall be made in the books of Percy:

1. An allowance for uncollectible accounts of 15%

of the accounts receivable is to be established.
2. The furniture and fixtures should be
depreciated by 25%
3. Obsolete merchandise amounting to P 3,000
should be written off.
4. Both partners will act as managing partner and
share profits and losses equally.
Entries and Explanations
• 1. An allowance of 15% of P 5,000 needs to be established.
( 5,000 x 15% = 750)

Dr Cr
Jackson, Capital P 750
Allowance for Uncollectible Accounts P 750
To adjust the allowance to 15% of the accounts
receivable.
Entries and Explanations
• 2. Required accumulated depreciation is 25% of P 10,000 or P
2,500.

Required Accum. Dep 2,500

Per books 2,000
Increase accumulated by 500

Dr Cr
Jackson, Capital P 500
Accumulated Depreciation P 500
To adjust accumulated depreciation to 25% of cost.
Entries and Explanations
• 3. Write off obsolete merchandise.
Merchandise per books 25,000
Should be 22,000
Write off 3000

Dr Cr
Jackson, Capital P 3,000
Merchandise Inventory P 3,000
To write off obsolete merchandise.
Entries and Explanations
• Close the assets, liabilities and capital at the adjusted
amounts.

Dr Cr
Accounts Payable ₱ 7,000
Allowance for Uncollectible Accounts 750
Accumulated Depreciation 2,500
Jackson, Capital 41,750
Cash ₱ 15,000
Accounts Receivable 5,000
Merchandise Inventory 22,000
Furniture & Fixture 10,000
To close the net asset of the business.
Entries in the Partnership
Book:
Dr Cr
Cash ₱ 15,000
Accounts Receivable 5,000
Merchandise Inventory 22,000
Furnitures and Fixtures 7,500
Allowance for Uncollectible Accounts ₱ 750
Accounts Payable 7,000
Jackson, Capital 41,750
To record investment of Percy Jackson
Dr Cr
Cash ₱ 41,750
Annabeth Chase, Capital ₱ 41,750
To record cash investment of Chase
Cultivate contentment because life
is too short to be chasing after the
non-essentials. - M. Salumbides