Unit I and 2 Nature and Formation of a Partnership

A partnership is a contract whereby two or more persons bind themselves to contribute money, property or industry into a common fund with the intention of dividing the profit among themselves (Article 1767 of the Civil Code of the Philippines) !his "oint effort may be supported by a partnership agreement #nown as the Articles of Co-Partnership, which is an agreement in writing among the partners governing the nature and terms of the partnership contract A written agreement is re$uired when partnership capital is P %,&&& or more in money or in property !he Article of Co'partnership helps in avoid misunderstanding among the partners !he written agreement among the partners governs the formation, operation and dissolution of the partnership and is re$uired to be registered with ()C !he Article of Co'partnership contains the following information* 1 , !he name of the partnership+ !he names, addresses of the partners, classes of partners stating whether the partner is a general or a limited partner+ % !he effective date of the contract+ - !he purpose and principal place of business of the business+ . !he capital of the partnership stating the contributions of each of the partners+ 6 !he rights and duties of each of the partners+ 7 !he manner of dividing profit or loss among the partners+ / !he conditions under which the partners may withdraw money or other assets+ 0 !he manner of #eeping the boo#s of accounts+ 1& !he causes for dissolution and the provision for arbitration in settling disputes

Characteristics of a Partnership
1 , % . 6 1ased on contract 2 partnership is formed through the mutual agreement of all the partners !he contract may be written or oral 3oluntary association 2 no one should be forced or coerced in "oining a partnership 4utual agency 2 any partner may act as an agent of the partnership in conducting its affairs 5imited life 2 a partnership may be dissolved at any time by action of the partners or by operation of law !he withdrawal, death, retirement, ban#ruptcy, incapacity of a partner and the admission of a new partner dissolves the partnership 6nlimited liability 2 the personal assets of a general partner may be used to satisfy the claims of the creditors of the partnership if the partnership assets are not enough to settle the liabilities to outsiders upon li$uidation Co'ownership of property 2 properties contributed to the partnership are owned by the partnership Properties invested by a partner cease to be his own personal property

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Co'ownership of profit 2 a partner has the right to share in partnership profits !he partners are entitled to share in the firm8s profits as a return on their investment 5egal entity 2 a partnership has a legal personality separate and distinct from that of each of the partners 9ncome ta: 2 partnerships are sub"ect to income ta: rate of %&; beginning the fiscal year ,&1& with the e:ception of general professional partnerships (i e , those partnerships organi7ed for the e:ercise of professions, e g , CPAs, doctors, lawyers, etc )

Advantages of a Partnership
1 9t is easy and ine:pensive to form and to dissolve 9t may be created orally e:cept when partnership capital is P%,&&& or more A partnership is ended whenever there are changes in the ownership structure such as withdrawal of a partner or admission of a new partner <reater amount of capital may be raised compared to a sole proprietorship !he combined capital of , or more partners offers a greater source of capital !here is relative freedom and fle:ibility in decision'ma#ing compared to a corporation =ecisions are effected simply by agreement among the partners without the formalities necessary under a corporation 9t is better managed because more than one person supervises business affairs 1etter management results from the combined e:perience and ability of several individuals !he unlimited liability of general partners ma#es it reliable from the point of view of creditors

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Disadvantages of a Partnership
1 , % . 6 !here is lac# of business continuity because it can be easily dissolved 5imited amount of capital may be raised compared to a corporation !he unlimited liability of a partnership deters many from "oining in a partnership form of business A general partner may be sub"ected to a personal liability for erroneous management decisions made by his associates !here is li#elihood of dissension and disagreement when each of the partners has the same authority in the management of the firm !here is difficulty in transferring ownership interest because ownership interest in the partnership cannot be transferred without the consent of all the partners

Kinds of Partnerships
1 According to activities a (ervice 2 main activity is the rendering of services b 4erchandising or !rading 2 main activity is the purchase or sale of goods c 4anufacturing 2 main activity is the production of goods

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According to liability a <eneral 2 one wherein all the partners are general partners who are liable for the partnership debts to the e:tent of their personal property after all the partnership assets have been e:hausted b 5imited 2 one consisting of one or more general partners and one or more limited partners According to ob"ect a 6niversal partnership of all present property 2 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 ac$uire therewith All assets contributed to the partnership and subse$uent ac$uisitions become common partnership assets b 6niversal partnership of profits 2 one which comprises all that the partners may ac$uire by their industry or wor# during the e:istence 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 !he original movable or immovable property contributed do not become common partnership assets c Particular partnership 2 one which has for its ob"ect determinate things, their use or fruits or a specific underta#ing or the e:ercise of a profession of vocation According to duration of partnership e:istence a Partnership at will 2 one for which no term is specified and is not formed for a particular underta#ing or venture and which may be terminated any time by mutual agreement of the partners or the will of one alone b Partnership with a >i:ed !erm 2 one in which the term or period for which the partnership is to e:ist is agreed upon (1aysa and 5upisan, ,&&&)

Kinds of Partners
1 According to contribution a Capitalist 2 one who contributes capital in money or property b 9ndustrial 2 one who contributes industry, labor, s#ill or service c Capitalist'9ndustrial 2 one who contributes money, property and industry According to 5iability a <eneral 2 one whose liability to third persons e:tends to his private property b 5imited 2 one whose liability to third persons is limited only to the e:tent of his capital contribution to the partnership According to management

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a b ?thers a b c

4anaging Partner 2 one who manages actively the business of the partnership (ilent 2 one who does not participate in the management of partnership affairs @ominal' a partner in name only (ecret 2 one who ta#es active part in the business but whose connection with the partnership is concealed on un#nown to the public =ormant partner 2 one who does not ta#e active part in the business and is not #nown to the public as a partner

Basic Features of Partnership Accounting

1 , % . 6 4ore than one capital and drawing accounts 2 there will be as many capital accounts and as many drawing accounts as there are partners Partner8s loans 2 partners may advance money to the partnership in the form of loans when the business is in need of additional funds !he account title to be credited is Loans Payable to Partner or Partner, Loan Partner8s borrowings 2 the partnership may advance money to partners other than withdrawals in the form of loans !he account title to be debited is Receivable from Partner. Partner8s salaries 2 partners are paid salaries for services rendered in the conduct of partnership business 9nterest on investment 2 interest is allowed to earn on the asset investment of the partners =ivision of profit and losses 2 net profit or net loss is to be divided among the partners based on their agreement

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PARTNERS !P F"R#AT!"N
T$o Kinds of Partnership For%ation
1. business for the first time.
DATE P A R T I C U L A R S Cash investment July 1 Cash Rose, Ca ital To !e"o!# initial investment$ Investment in the %o!m o% non&"ash assets July 1 'on&"ah assets Rose, Ca ital To !e"o!# initial investment$ Note: Fair market value of the non-cash asset is used in recording the investment. Investment in the %o!m o% non&"ash assets (ith assum tion o% lia)ility July 1 'on&"ah assets Lia)ility Rose, Ca ital To !e"o!# initial investment$ Note: Fair market value of the non-cash asset is used in recording the investment; credit the applicable liabilily account using the loan balanceto be assumed by the partnebrship; and credit the capital account of the partner using the net amount (I.e., non cash assets - liability . Investment in the %o!m o% se!vi"e o! in#ust!y *emo!an#um ent!y+ ,ua#a is a#mitte# as an in#ust!ial a!tne! (ith ---- sha!e in !o%its$ P/R D E B I T X X X X X X X X X X C R E D I T

Two or more individuals form a

X X X X X X X X X X

X X X X X X X X X X X X X X X

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2. An individual forms a business with a sole proprietor or a sole proprietorship(s) onverted into a partnership !he following are the accounting procedures in converting a sole proprietorship form of business into partnership a& Ad'ust the e(isting )oo*s of the sole proprietorship+s,&
Date P AR TIC ULAR S P/R In"!ease in the asset value (ith no "ont!a&asset a""ount Asset Rose, Ca ital De"!ease in the asset value (ith no "ont!a&asset a""ount Rose, Ca ital Asset In"!ease in the asset value (ith "ont!a&asset a""ount Cont!a&asset Rose, Ca ital De"!ease in the asset value (ith "ont!a&asset a""ount Rose, Ca ital Cont!a&asset DEBIT X X X X X X X X CREDIT

X X X X X X X X

X X X X X X X X

X X X X X X X X

'ote+ These a#.ustin/ ent!ies a!e simila! to yea!&en# a#.ustments$ The only #i%%e!en"e is that the Ca ital a""ount !e la"es all the nominal a""ounts $

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Date

Close the e(isting )oo*s of the sole proprietorship+s,&

P AR T IC UL AR S All "ont!a asset a""ounts All lia)ility a""ounts Rose, Ca ital All asset a""ounts P/R DEBIT X X X X X X X X X X X X CREDIT

X X X X X

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Record the invest%ent of all the partners in the ne$ set of partnership )oo*s&
DEBIT X X X X X X X X X X X X X X X X X CREDIT

Date P AR T IC UL AR S P/R To !e"o!# the investment o% the sole !o !ieto! All assets %!om the o!i/inal )usiness Allo(an"e %o! #ou)t%ul a""ounts All lia)ilty a""ounts Rose, Ca ital

'ote 1+ I% the sole !o !ieto! assets in"lu#es A""ounts Re"eiva)le, the sai# a""ount must )e !e"o!#e# at /!oss amount an# the allo(an"e %o! #ou)t%ul a""ounts is "a!!ie# ove! in the ne( set o% a!tne!shi )oo0s$ 'ote 1+ De !e"ia)le assets a!e !e"o!#e# in the ne( set o% a!tne!shi )oo0s at thei! net "va!!yin/ value, i$e$, the a""umulate# #e !e"iation a""ount is not !e"o!#e# in the a!tne!shi )oo0s $

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