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According to liability
◦ General – one wherein all the partners are general partners who are liable for
the partnership debts to the extent of their personal property after all the
partnership assets have been exhausted.
◦ Limited – one consisting of one or more general partners and one or more
limited partners.
Kinds of Partnerships
According to object
◦ Universal partnership of all present property – one in which the partners contribute all the
property which actually belong to each of them, at the time of the constitution of the
partnership, to a common fund with the intention of dividing the same among them as well
as the profits which they may acquire therewith. All assets contributed to the partnership
and subsequent acquisitions become common partnership assets.
◦ Universal partnership of profits – 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. The original movable or immovable property contributed do not become
common partnership assets.
◦ Particular partnership – one which has for its object determinate things, their use or fruits or
a specific undertaking or the exercise of a profession of vocation.
Kinds of Partnership
According to duration of partnership existence
◦ Partnership at will – one for which no term is specified and is not formed for a
particular undertaking or venture and which may be terminated any time by
mutual agreement of the partners or the will of one alone.
◦ Partnership with a Fixed Term – one in which the term or period for which the
partnership is to exist is agreed upon (Baysa and Lupisan, 2000).
Kinds of Partners
According to contribution
a. Capitalist – one who contributes capital in money or property.
b. Industrial – one who contributes industry, labor, skill or service
c. Capitalist-Industrial – one who contributes money, property and industry
According to Liability
a. General – one whose liability to third persons extends to his private property
b. Limited – one whose liability to third persons is limited only to the extent of his
capital contribution to the partnership.
Kinds of Partners
According to management
a. Managing Partner – one who manages actively the business of the partnership
b. Silent – one who does not participate in the management of partnership affairs.
Others
a. Nominal- a partner in name only.
b. Secret – one who takes active part in the business but whose connection with the partnership is
concealed or unknown to the public.
c. Dormant partner – one who does not take active part in the business and is not known to the
public as a partner.
Partnership
Formation
Ways of Partnership Formation
1. formation of a partnership for the first time.
2. conversion of a sole proprietorship to a partnership.
◦ a sole proprietor allows another person, who has no business of his own to join his business.
◦ two or more sole proprietors form a partnership.
Illustrative Problem 1 (first time)
ABS, GMA and TV5 decided to form the partnership firm. They contributed as follows:
ABS – computers $500,000 and cash $300,000
GMA – cash 700,000 and stock 100,000
TV5 – plant 280,000 and cash $520,000
Requirement:
1. Calculate the initial capital of each partner.
2. Prepare journal entries for the above transaction in the books of partnership firm.
3. Prepare the statement of financial position/ balance sheet on the formation of the partnership.
Illustrative Problem 2
Kapamilya and Kapuso were the main competitors in the shoe industry. Due to unhealthy competition
between them, On May 15, 2018, they decided to form a new partnership entity with the name of Family &
Love by merging out their businesses. On 15th May, 2018, their accounts balances are as follows:
Kapamilya Kapuso
Cash 16,000 24,000
Accounts Receivable 80,000 96,000
Inventory 64,000 40,000
Machinery – Cost 120,000 96,000
Factory Equipment – Cost 56,000 64,000
Accumulated Depreciation – Machinery 64,000 32,000
Accumulated Depreciation – Factory 24,000 40,000
Equipment
Allowance for Doubtful Accounts 5,600 3,200
Accounts Payable 64,000 76,000
Illustrative Problem 2
continuation…
In order to complete the formation of a new partnership, the following valuations were agreed
upon between Kapamilya and Kapuso as follows:
Kapamilya:
Accounts receivable, net: $ 51,000, inventory at: $ 56,000 & machinery at: 30,000.
Kapuso:
Accounts receivable, net: $16,000, factory equipment: $10,000
Required:
1. Record the journal entries to form the new partnership.
2. Make initial balance sheet of the newly established firm.
Partnership
Operations
Division of Profit and Loss
The Partnership Law provides that if the profit allocation has been agreed upon, the share of
each partner in the losses shall be in the same proportion with the net income allocation. It also
provides that on the absence of agreement, the share of each partner in the profits and losses
shall be in proportion to what they have contributed (based on capital contributions), but the
industrial partner shall receive such share as may be just and equitable under the circumstances.
Methods of profit and loss
allocation
1) Equally
2) Arbitrary ratio
3) In the ratio of partner’s capital account balances and dividing the balance on agreed ratio:
◦ a) Original capital – the initial investment/capital at the time of formation
◦ b) Beginning capital of the period
◦ c) Ending capital of the period
◦ d) Average capital
◦ d1) Simple average
◦ d2) Weighted average
4) Interest on partners’ capital accounts and dividing the balance on agreed ratio
5) Salaries to partners and dividing the balance on agreed ratio
6) Bonus to partners and dividing the balance on agreed ratio
7) Interest on capital account balance, salaries and bonus to partners and dividing the balance on agreed
ratio.
Illustrative Problem 3
Assume that a net income of P288,000 is determined for X and Y Partnership at the end of 2018.
Regular withdrawals by partners in anticipation of net income have been summarized in the
drawing accounts; permanent capital changes have been summarized in the capital accounts.
Drawing and capital accounts at the end of 2018 appear as follows:
X, capital Y, capital
X, drawing Y, drawing
X, drawing Y, drawing
1/1-12/31 P43,200 1/1–12/31 P136,800
12/31/2018 P43,200 12/31/2018 P136,800
Required:
Prepare journal entries to allocate net income based on:
a) Beginning capital
b) Ending capital
c) 6 percent interest on excess average capital balance and the balance allocated in the ratio of
1:2.