INTRODUCTION TO PARTNERSHIP ACCOUNTING

Partnership a contract whereby two or more persons bind themselves to contribute money,
property, or industry a common fund with the intention of dividing the profit among themselves
(article 1767 of the Civil Code of the Philippines).
Characteristics of a Partnership
1. Mutual agency any partner may act as an agent of the partnership in conducting its affairs.
Each partner has an equal right to act for the partnership and to enter into contracts binding upon
it, as long as he acts within the normal scope of business operations.
2. Limited life a partnership may be dissolved at any time by action of the partners or by
operation of law. The withdrawal, death, retirement, bankruptcy, incapacity of a partner and the
admission of a new partner dissolves the partnership.
3. Unlimited liability the personal assets of a general partnership 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 liquidation.
4. Co-ownership of property properties contributed to the partnership are owned by the partnership.
Properties invested by a partner cease to be his own personal property.
5.Co-ownership of profit a partner has the right to share in partnership profits. The partners are entitled to
share in the firms profits as a return on their investment.
6. Legal entity a partnership has a legal personality separate and distinct from that of each of the partners. A
partnership may, therefore, acquire property in its own name and may enter into contracts.
Advantages of a Partnership
1. It is easy to form and to dissolve. A partnership is ended whenever there are changes in the
ownership structure such as withdrawal of a partner or admission of a new partner.
2. Greater amount of capital may be raised compared to a sole proprietorship. The source of capital
investment comes from 2 or more persons.
3.There is relative freedom and flexibility in decision-making compared to a corporation. Decisions
are effected simply by agreement among the partners without the formalities necessary under a corporation.
4. It is better managed because business affairs are supervised by more than one person. Better
management results from the combined experience and ability of several individuals.
5. The unlimited liability of a general partner makes it reliable from the point of view of creditors.
Disadvantages of a Partnership
1.The unlimited liability of a partnership deters many from investing in a partnership.
2.There is lack of business continuity because it can be easily dissolved.
3. There is difficulty in transferring ownership interest because ownership interest in the partnership
cannot be transferred without the consent of all the partners.
4. Limited amount of capital may be raised compared to a corporation.
5. There is likelihood of dissension and disagreement when each of the partners has the same
authority in the management of the firm
Kinds of Partnership
1. According to activity
a. SERVICE main activity is rendering of services
b. MERCHANDISING or TRADING main activity is purchase or sale of goods
c. MANUFACTURING main activity is production of goods
2. According to liability
a. GENERAL - one consisting of general partners who are liable prorate and sometimes
solidarily with their separate property for partnership liabilities
b. LIMITED one consisting of one or more general partners and one or more limited
partners. LTD is added to the name of the partnership.
3. According to object
a. 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.
b. 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.
c. 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 Partners
a. According to activity
1. CAPITALIST one who contributes capital in money or property.
2. INDUSTRIAL one who contributes industry, labor, skill, or service
3. CAPITALIST-INDUSTRAIL one who contributes money, property and industry
b. According to Liability
1. GENERAL one whose liability to third persons extends to his private property
2. LIMITED one whose liability to third persons is limited only to the extent of his capital
contribution to the partnership
c. According to Participation
1. NOMINAL a partner in name only
2. SECRET one who takes active part in the business but whose connection with the
partnership is concealed or unknown to the public
3. SILENT one who does not participate actively in the management of partnership affairs
4. MANAGING PARTNER one who manages actively the business of a partnership
Articles of Co-Partnership agreement in writing among the partners governing the nature
and terms of the partnership contract. This agreement is the framework within which the partners
are to operate or conduct partnership business from formation to operations then
to the eventual dissolution and liquidation of the partnership. Observations of these details will
help minimize, if not eliminate, the confusion and disputes that may arise between or among the
partners.
The written agreement among the partners governs the formation, operation and dissolution of the
partnership and is required to be registered with SEC. It contains the following information:
1. The name of the partnership
2. The names, addresses of the partners, classes of partners stating whether the partner is
a general or a limited partner
3. The effective date of the contract
4. The purpose and principal place of business of the business
5. The capital of the partnership stating the contributions of each of the partners
6. The rights and duties of each of the partners
7. The manner of diving profit or loss among the partners
8. The conditions under which the partners may withdraw money or other assets
9. The manner of keeping the books of accounts
10. The causes for dissolution and the provision for arbitration in setting disputes
Features of Partnership Accounting
1. PLURALITY OF CAPITAL AND DRAWING ACCOUNTS there will be as many capital accounts and
as many drawing accounts as there are partners
2. PARTNERS LOANS partners may advance money to the partnership in the form of loans when
the business is in need of additional funds
3. PARTNERS BORROWINGS the partnership may advance money to partners other than
withdrawals in the form of loans.
4. PARTNERS SALARIES partners are paid salaries for services rendered in the conduct of
partnership business.
5. INTEREST ON INVESTMENT interest is allowed to earn on the asset investment of the partners.

6. DIVISION OF PROFIT AND LOSSES net profit or net loss is to be divided among the partners
based on their agreement

PARTNERSHIP FORMATION
Accounting entries to record the formation of a partnership will depend upon how the partnership
is formed. A partnership may be formed in the following ways, namely:
1. Formation of a partnership for the first time by individuals
2. Conversion of a sole proprietorship to a partnership
a. A Sole proprietor allows another individual who has no business of his own to join
the business
b. Two or more sole proprietors form a partnership
General Guidelines
1. Cash investments are recorded using their face values.
2. Non-cash asset investment is recorded at the current fair value of the property at the time of investment.
Independent professional appraisals should be made to determine the fair value. Fair value is the amount to
be obtained when the asset is sold at the present time in its present condition.
3. Accounts receivable are recorded in the books of the partnership at gross amount. Allowance for
bad debts is carried forward to the partnership.
4. Depreciable property assets are recorded in the books of the partnership at carrying
value. Accumulated depreciation is not carried forward to the partnership.
5.When a sole proprietorship is converted into a partnership, the following books may be used:
a. Books of the sole proprietorship may be used as books of the partnership.
b. Books of the sole proprietorship will be closed and a new set of books willbe used for the
partnership

Two Kinds of Partnership Formation

1. Formed by Individuals
Cash investment
Cash
X, Capital
Non-cash assest
investment

Asset

Non-cash asset
investment with
assumption of
liability

Asset

Service or
industry

XXX
XXX
XXX

X, Capital
Note: Use the fair market value of
the asset

XXX

XXX

Liability
XXX
X, Capital
XXX
Note: Debit the asset account using its fair market value;
credit the liability account using the loan balance to be
assumed by the partnership; and credit the capital account of
the partner using the net amount.
Memo entry
Mr. X is admitted as an industrial
partner with a ____ share in
profits.

2. Sole proprietorship(s) converted into a partnership accounting procedures are as

follows:
a. Adjust the books of the sole proprietorship(s)
Increase in value Asse
XXX

of
an asset without
a
contra-asset
account
Decrease in
value of
an asset without
a
contra-asset
account
Increase in value
of
an asset with a
contra-asset
account
Decrease in
value of
an asset with a
contra-asset
account
Increase in value
of a liability
Decrease in
value
of a liability

t
X, Capital

XXX

X, Capital
Asset

Contra-asset

XXX

X, Capital

X, Capital

XXX

XXX

Contra-asset

XXX

X, Capital
Liability

XXX

Liability

XXX

XXX

X, Capital

XXX

Note: These adjustments are similar to the year-end adjusting entries. Only,
replace the nominal accounts with the Owner, Capital account.
b. Close the books of the sole proprietorship(s)
Contra-asset
Closing entry
Liabilities
X, Capital
Assets

XXX
XXX
XXX
XXX

c. Record the investment of the partners in the books of the partnership assume new set of
books.
Assets
XXX
Opening entry
Allowance for Bad Debts
XXX
Liabilities
XXX
X, Capital
XXX
Notes:
1. Accounts receivable is taken at gross amount; allowance for bad debts
is carried over in the books of the partnership.
2. Depreciable property assets are recorded at carrying value;
accumulated depreciation is not carried over in the books of the

partnership.
PARTNERSHIP OPERATIONS
Accounting Cycle of a Partnership same as in sole proprietorship
1. Prepare journal entries
2. Post to ledgers
3. Prepare a trial balance
4. Prepare adjusting entries
5. Prepare financial statements
6. Prepare closing entries
7. Prepare a post-closing trial balance
8. Prepare reversing entries
Special Concerns
I. Journal entries same as in sole proprietorship except for the following transactions which are peculiar to a
partnership:
a. Partners loans partner lends money to partnership
Cash
XXX
Accounts/Loans/Notes
XXX
Payable
or Due to Partner or Loan
from Partner
b. Partners borrowings from partnership partnership lends money to partners
Accounts/Loans/Notes Payable
XXX

or Due to Partner or
Loan from Partner
Cash

XXX

II. Financial Statements the same as in sole proprietorship except:

a. Balance Sheet or Statement of Financial Position the owners equity section is labeled
Partners Equity
b. Income Statement an additional section called Division of Profit and Loss is included. This profit
distribution provides a full analysis of the distribution of earnings which is presented at the bottom of the
partnership income statement.
c. Statement of Changes in Partners Equity a statement that reports the changes that have taken
place in partners equity during the period. Each partner is provided a column heading which explains
details of the changes in their equity account.
III. Closing Entries drawing accounts are not automatically closed to the capital accounts;
drawing accounts are closed to the capital accounts only if agreed upon in the articles of copartnership.

Rules for Dividing Profit and Loss

1. As to Capitalist Partner
a. Division of Profit
1. In accordance with agreement
2. In the absence of an agreement, division of profits is in accordance with capital
contributions
b. Division of Loss

1. In accordance with agreement

2. If only the division of profits is agreed upon, then the division of losses will be the
same as the agreement on division of profits
3. In the absence of an agreement, division of losses is in accordance with capital
contribution
2. As to Industrial Partner
a. Division of Profit
1. In accordance with agreement
2. In the absence of an agreement, the industrial partner shall receive a just and
equitable share of the profits
b. Division of Loss
1. In accordance with agreement
2. In the absence of an agreement, the industrial partner shall have no share in the
losses
Net income is viewed as return for
1. services rendered (salaries)
2. capital investment (interest)
3. entrepreneurial ability or managerial skills (bonus)
Methods of Dividing Net Income
1. Equally
2. Arbitrary Ratio
a. Fractions
b. Percentages
c. Ratio and Proportion
3. Capital Ratio
a. Original/Initial Investment
b. Beginning capital balance
c. Ending capital balance
d. Average capital most equitable method
4. Allowing Salaries, Interest and Bonus considered as part of the distribution of net
income
a. Salaries to give recognition to the ability, experience or time devoted by a
partner to the business
b. Interest to give recognition to differences in the capital contribution given in
proportion to the period such capital was actually used
c. Bonus incentive/special compensation given to a partner for superior income
realized. It is usually based on net income

General Guidelines
1. Partner salary allowances, interest allowances on capital account balances and bonus are not
expenses in the determination of partnership net income.
2. The provision on salaries and interest must be enforces regardless of whether operating results
is a profit or loss.
3. The provision on bonus is enforced only when operating results is a profit.
4. If the partnership agreement specifies that income is to be divided based on partners capital
balances but fails to specify how capital balances are to be computed, the average capital
balances should be used if it can be computed. If not, the original capital balances should be used
Capital Account of a Partner
Partner, Capital

Debit
Permanent Withdrawals

Credit
Initial Investment
Additional Investments

Pro-forma Entries

To distribute
net income

Income Summary

XXX

To distribute
net loss

A, Drawing

XXX

B, Drawing
Income Summary

XXX

A, Drawing
B, Drawing

XXX
XXX

XXX

PARTNERSHIP DISSOLUTION WITHOUT LIQUIDATION

Dissolution
1. The change in the relation of the partners caused by any partner ceasing to be associated
in the carrying out of the business
2. The termination of the life of an existing partnership
Dissolution of an old partnership may be followed by:
1. The formation of a new partnership new partnership continues the business activities of
the dissolved partnership without interruption
2. Liquidation termination of business activities and winding up of a partnership affairs
preparatory to going out of business
Conditions resulting to partnership dissolution
1. Admission of a new partner
2. Withdrawal of a partner due to retirement, death, incapacity bankruptcy or voluntary
withdrawal
3. Incorporation of a partnership
ADMISSION OF A NEW PARTNER
1. The consent of all the partners is necessary
2. Upon the admission of a new partner, a new agreement covering partners interests, profit and
loss sharing and other considerations should be drawn because the dissolution of the original
partnership cancels the old agreement
3. There is a need to update the capital balances of the partners by:
a.