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Finance and Accounting Department

John Gokongwei School of Management
Ateneo de Manila University

2nd Semester, AY 2012-2013 Mr. Carlsberg S. Andres, CPA
An organization where two or more persons bind themselves to contribute money, property or
industry into a common fund with the intention of dividing the profits among themselves.

1. Mutual agency each partner is an agent for the partnership when transacting partnership
business. Each partners act binds the other partners and the partnership
2. Limited life Legally, a partnership can operate for an indefinite period of time. However, in
practice, it can easily be dissolved or terminated with the mere withdrawal, incapacity or
death of a partner
3. Co-ownership of partnership property partnership property belongs jointly to all the
4. Participation in profits or losses from the definition of partnership, profits must be divided
among partners according to agreement, in case there is no stipulation as to division of
profits or losses, the partners shall divide the profits or losses in proportion to their capital
5. Based upon a contract a partnership is formed by a contract (either orally, written,
expresses or implied)
6. Unlimited Liability each partner is personally and individually liable for all partnership
liabilities. In the event that the partnership assets are not sufficient to liquidate partnership
liabilities, the personal assets of the partners should be used to settle the obligations
7. Voluntary association individuals by their own free agree to join together to form a
partnership (delectus personae)

Business entity concept

A business unit is treated as distinct and separate from the investors or partners, so that only
transactions of the business are recorded in its books, and the balance sheet presents only the
assets and liabilities of that particular business. A partnership acquires, holds, disposes properties
in its own name; it enters into contracts with others through the partners who are merely acting as
its agents.


Partners equity
The accounting process for partnership assets and liabilities are the same as in the accounting for
sole proprietorship. It is only in accounting for transactions affecting the equity section that
partnership accounting differs from a single proprietorship. The right of a partner over the net
assets of the business is represented by two account titles : Partners capital and partners drawing
(withdrawal). The accountant should account for each partners interest over the partnership by
setting up as many capital and drawing accounts as there are partners.

The first entries in the partnership books pertain to the contributions made by the partners.
Contributions may be in the form of cash, property, services or an already existing business

Proforma entry

Assets xx
Liabilities (assumed by the partnership only) xx
Partners, Capital xx

If the contribution is in the form of services, a memorandum entry should be prepared. If the
contribution is in the form of property, it should be recorded as of investment date, at its fair market
Case 1: Contribution is in the form of cash, property and services

Santos, Ambros, Carlos formed a partnership on August 1, 2000. Santos is to invest cash of
P50,000. Ambros is to invest merchandise which she bought last year for P50,000 but which has a
current market value of P40,000. Carlos is to be admitted as Sales Manager for a 10% share in
profits. Prepare the necessary journal entries

Case 2 : Contribution of property with an attached liability

Ambros decided to invest also her land, which cost her P100,000 when she bought this in 2000 but
which current appraised value is P500,000. However this land has a mortgage balance of P50,000.
The partners agreed that the mortgage be assumed by the partnership. Prepare journal entries

Investment of an already existing business

In this formation, two books will be affected the books of the sole proprietorship business and the
new books of the partnership. The following are the accounting procedures

1. Present the assets and liabilities of the sole proprietorship business for review by the other
2. Adjust the sole proprietorship book for any revaluation agreed upon. Since the business is
not normally operating anymore, no adjustment is made for revenue and expense account.
The assets and liabilities to be invested represent the partners capital contribution. Hence,
adjustments are made through the capital account. The close the books at the adjusted
3. Record the net assets or partners contribution in the new books of partnership at the
adjusted amounts
*the focus of the chapter is using new sets of books rather than using one of the partners old

Case 3 : Investment of an already existing business with old books being closed and new
partnership books being used.

Peter has a bookstore along Taft Avenue called Peter Pans bookstore, which has been operating for
five years. On March 1, 2000, Pilar Garcia invited him to put up a partnership along CM Recto
Avenue. Peter agreed to close his business along Taft Avenue and invest his business in the
partnership. Pilar agreed to put up cash equal to the contribution f Peter. The following are the
assets and liabilities of the bookstore on March 1, 2000:

Debit Credit
Cash P12,000
Accounts Receivable 5,000
Allowance for bad debts 500
Merchandise Inventory 25,000
Furnitures and Fixtures 10,000
Accumulated Depreciation 2,000
Accounts payable 7,000
Pan, Capital ______ 42,500
Total P52,000 P52,000

The articles of co-partnership was drawn subject to the following conditions:

1. The allowance for bad debts should be adjusted to 15% of the accounts receivable
2. The furnitures and fixture should be 25% depreciated
3. Obsolete merchandise amounting to P3,000 be written off
4. Both partners will act as managing partners and share profits and losses equally
Prepare the necessary journal entries.

Computation of net income for sole proprietorship is the same for partnership. However, because
partnership has more than one owner, there should be a method of distributing profit or losses.

Partnership law enumerates the following rules in dividing profit or loss.

1. Profit or Loss are distributed based on partnership agreement (articles)
2. If the agreement is only on how to distribute profit but result of operation is a net loss then
the same agreement is applicable
3. In the absence of an agreement on how to distribute the net profit or loss, then the
distribution should be based on what the partners contributed with the industrial partner
receiving what may be just and equitable
4. An industrial partner does not share in the losses incurred by the firm. He has a priority in
distribution of profit

Methods of dividing profit or loss

1. Arbitrary ratio (any agreed ratio)
2. Capital ratio based on any of the following:
a. Initial or original capital
b. Beginning yearly capital
c. Ending yearly capital
d. Average capital
3. Interest on investments, balance in an agreed ratio (must be given always despite of losses)
4. Salaries to partners, balance in an agreed ratio (must be given always despite of losses)
5. Interest on investments, salaries to partners, balance in an agreed ratio
6. Interest on investments, salaries to partners, bonus to managing partner, balance in an
agreed ratio.

Division of profit or loss in some arbitrary ratio

A,B and C established a law office with capital contributions of P300,000, P200,000 and P100,000
respectively. They agreed to distribute profit and loss equally. At the end of the year, the business
earned a net income of P90,000. Prepare journal entries.

Division of profit or loss based on capital ratio

Assume that ABBA realtor earned net income after tax at the end of the year amounting to
P300,000. The articles provided for a division of profit or loss based on capital ratio. Ledger
balances showed the following:

Bello, Capital
1/1 P200,000
4/1 50,000

Prepare journal entries for each situation:

1. Profit or loss is divided based on the beginning capital ratio
2. Based on ending capital ratio

Interest on investments, balance in an agreed ratio

Assume that X and Y are doctors who put up a medical clinic with capital balances of P350,000 and
P250,000 respectively. They agreed to divide the profit and loss as follows: 12% interest on capital,
balance to be divided equally.

Prepare journal entries assuming:

1. The business earned net income of P300,000
2. The business resulted to a net profit of P60,000
3. Assume that the result of operation was a net loss of P28,000

Salaries to partners, balance in an agreed ratio

Assume that the partners A,B and C invested in a restaurant assets amounting to P200,000,
P300,000 and P100,000 respectively. A, as managing partner, is to receive an annual salary of
P120,000 and the remaining profit if any is to be distributed to all the partners based on the capital

Prepare journal entries assuming:

1. Net profit is P180,000
2. Net profit is P90,000
3. Net loss is P30,000

Combination of interest and salaries, balance in an agreed raito

Assume that partners A and B with capital balances of P500,000 and P300,000 respectively have
the following agreement on the division of profit and loss:
12% interest on capital balances
Salary of P15,000 per month to B
Balance, if any, to be divided equally

Prepare journal entries assuming

1. A net income of P376,000
2. A net income of P200,000
3. A net loss of P24,000

Bonus to managing partner

A and B have capital balances of P30,000 and P50,000 respectively. The articles provided for the
following: 25% bonus to A as managing partner with the remainder divided according to their
capital balances. The business earned a net income of P300,000 at the end of the year. Prepare the
journal entries assuming.
1. Bonus is based on the net income before bonus
2. Bonus is based on the net income after bonus

Dissolution is the change in the ownership structure of the partnership. The old partnership is
dissolve and a new partnership is created.

Accounting procedures just before dissolution

1. Update the capital accounts of the partners as of dissolution date by revaluing partnership
assets, determining the profit share of the partners from the last balance sheet date to
dissolution date, and closing their drawing accounts
2. Record the change in the partners equity

Updating partners equity before dissolution

Update their capital accounts for revaluation of assets, if any, share in the undistributed profit or
loss and closing their drawing accounts.

Assume that the AA partnership of Alex and Amado decided to dissolve their partnership and admit
Albert as a new partner on March 31, 2008. They agreed to revalue the land by P150,000 and
distribute the profit reported by the accountant for the first quarter amounting to P300,000.
Prepare journal entries.

Changes in ownership may result from

1. Admission of a new partner by purchase of interest
2. Admission of a new partner by investment
3. Withdrawal or retirement of a partner
4. Death of a partner

Admission of a new partner by purchase of interest

A new partner cannot be admitted without the unanimous consent of all the partners
1. The new partner buys interest from the old partner or partners, hence the transaction is
PERSONAL between them
2. Generally the assets of the partnership are not affected, since the payment of the buying
partner will go to the selling partner
3. The accountant records only a transfer of interest from the selling partner to the buying
Selling partner, Capital xx
Buying partner, Capital xx
4. Remember: total partners equity will therefore remain the same before and after the

Assume that Ana and Zena have capital balances of P40,00 each and share profit and loss equally.
Pura was admitted by Ana and Zena based on the following: (Prepare journal entries)
1. Transfer of interest is equal to the amount paid to the selling partner
Pura buys 1/4 share from Ana and pays P10,000 cash.
2. Transfer of interest is less than the amount paid to the selling partner
Pura buys 1/5 interest from Ana by giving P15,000 cash
3. Transfer of interest is greater than the amount paid to the selling partners
Pura buys 1/2 interest from the partners by paying cash of P30,000

Admission of a new partner by investment

1. The new partner is contributing to the partnership, hence the transaction is between the new
partner and the partnership
2. This time the partnership asset will increase with a corresponding increase in equity.

Assume that Fred and Susie are partners with capital balances of P50,000 each, sharing profits
and losses equally
1. New partners investment is also his capital credit
Bob is admitted to a 1/3 interest for a cash investment of P50,000 in an agreed capitalization of
2. New partners investment is equal to his capital credit. Assets of the partnership is also revalued
Bob is admitted to a 1/3 interest for a cash investment of P80,000. Fred and Susie agreed to
revalue the land from P90,000 to P150,000
3. Capital credit for the new partner is lesser than his investment with the difference given as
bonus to the original partners
Bob is admitted to a 1/3 interest for a cash investment of P40,000 and is to be credited for
P60,00. The difference will be recognized as bonus to Fred and Susie.

Withdrawal of a partner
The following rules must be observed
1. The capital balance of the withdrawing partner must be determined as a basis for settlement.
Capital balances must be updated
2. The updated capital of the withdrawing partner may be recovered by him through any of the
following alternatives:
a. Sell his share to an outside party. (same in admission by purchase)
b. Sell his share to any or all of the remaining partners. (same in admission by purchase)
c. His share is to be liquidated by the partnership. asset of the partnership will decrease
with the corresponding decrease in equity.
Assume that C with an updated capital balance of P31,200 received cash settlement from the
1. For P31,200
2. For P36,200
3. For P30,000
Prepare journal entries.

Accounting procedures
1. Books should be adjusted and the nominal accounts closed
2. Assets are sold and converted into cash resulting gain(loss) added (deducted) to the partners
capital accounts
3. If there is a deficient capital, eliminate it by:
a. Recording additional investment of deficient but solvent partner
b. Transferring deficiency as a loss to the other partners if deficient partner is personally
4. Payment of liabilities or claims owing to outside creditors
5. Payment of partners interest for
a. Loan balance
b. Capital balance

Assume that partners A,B and C decided to liquidate their partnership. A balance sheet was
prepared on this date as follows:
ABC Partnership
Balance Sheet
As of March 1, 2000
Assets Liabilities and Equity
Cash P20,000 Accounts payable P25,000
Other assets 180,000 Loans payable, B 5,000
A, Capital 50,000
B, Capital 45,000
______ C, Capital 75,000
Total P200,000 Total P200,000

Assume that the other assets were sold for

1. P210,000
2. P84,000
3. P72,000 and that deficient partners are solvent
4. P68,000 and that B is an insolvent partner

Partnership is insolvent but partners are solvent

Assume that X,Y and c decided to liquidate their business on March 1, 2000. They share profit and
loss in the ratio of 2:1:1 respectively. The balance sheet at this date showed:

ABC Partnership
Balance Sheet
As of March 1, 2000
Assets Liabilities and Equity
Cash P16,000 Accounts payable
Other assets 84,000 X, Capital
Y, Capital 10,000
______ Z, Capital 12,000
Total P100,000 Total

Partners personal records show

Assets Liabilities
X P10,000 P5,000
Y 20,000 18,000
Z 15,000 10,000

Other assets were sold for P40,000