PARTNERSHIP FORMATION

Partnership
-two or more person bind themselves to contribute money, property or industry to a common
fund with the intention of dividing the profits among themselves.

1. Association of two or more persons

-the person are usually individuals. Any natural persons who possesses the right to enter
into contract can become a partner
2. To carry on as co-owners
-this means that all partners are co-owners of partnership property and are co-owners of the
profits/(losses) of the partnership
3. Business for profit
-partnership must attempt to make a profit

Partner’s ledger accounts

1. Capital accounts
 Increases by:
A. Original investment
B. Additional investment
C. Partner’s share in the profits
 Decreases by:
A. Partner’s share in the lossess

2. Drawing or personal accounts

 Increases by:
A. Withdrawals of asset by the partners

3. Account for loans to or from partners

A partnership may be formed in the following ways:

1. Formation of a partnership for the first time

2. From sole proprietorship to a partnership
i. A sole proprietor allows another individual, who has no business of his own, to join his
business.
ii. Two or more sole proprietors form a partnership
3. Admission of a new partner

VALUATION

 Cash investment -face value

 Noncash investment
1. Use the agreement of the partners
2. In absence of 1, use the Fair Value/ Appraised value at the time of investment
3. In the absence of 1&2, use the Book value

 Liabilities
1. If assumed by the partnership, consider the liability
2. If not assumed by the partnership, IGNORE

 Capital contribution
1. Agreement of the partners
2. In absence of 1, partners will contribute equally (not based on the P/L ratio)
Problem arises, when the contributed net assets is not equal with agreed capital. To solve this
problem, the capital accounts of the partners will be adjusted using two methods-bonus
method and revaluation(goodwill) method.

BONUS METHOD

Partner 1 xx xx(%) xx
Partner 2 xx xx(%) xx
Partner 3 xx xx(%) xx
Total Contributed Total Agreed 0
Capital(TCC) = Capital (TAC)

REVALUATION (GOODWILL) METHOD

*Theoretically, in business combination, goodwill must only be recognized as a result of an

acquisition made by the reporting entity. Accordingly, this asset had a historical cost in the
traditional accounting sense. Partnership goodwill has no such cost: the business recognizes
as asset even though no funds have been spent.

Partner 1 xx xx(%) xx
Partner 2 xx xx(%) xx
Partner 3 xx xx(%) xx
Total Contributed Total Agreed Capital xx :positive revaluation
Capital(TCC) ≠ (TAC) (xx) :negative revaluation

IF SILENT:
BONUS METHOD VS. REVALUATION (GW) METHOD:
BONUS METHOD

If revaluation method is used, POSITIVE VS. NEGATIVE REVALUATION:

POSITIVE REVALUATION