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CHAPTER 1
Partnership Formation and
Operations
 *

Definition
of Partnership
 The Partnership Law is the
general authority for partnerships.

Article 1767 by the contract of

partnership, two or more persons
bind themselves to contribute
money, property or industry to
common fund with the intention of
dividing profits among
themselves.
Characteristics
of a Partnership
Co-ownership of contributed assets.
Assets contributed to the partnership
become assets of the partnership by virtue
of its separate legal personality.
Income Tax. Partnerships, except general
professional partnerships (organized for
the exercise of professions) are subject to
income tax at the rate of 30% of profit.
Limited life. A partnership may be dissolved
at any time by action of the partners or by
operations of law.
Legal entity. A partnership has a legal
personality separate and distinct from that
of each of the partners.
Mutual Agency. Any partner may act as an
agent of the partnership in conducting its
affairs.
Mutual participation in profits. A partner
has the right to share in partnership
profits.
Unlimited liability. The personal assets of
any partners may be used to satisfy the
creditors equity.
Advantages of a
Partnership
1. It is easy and inexpensive to organize
compared with a corporation.
2.The unlimited liability of the partners
makes it reliable from the point of
view of the creditors.
3.The combined personal liability of the
partners offers better opportunity for
obtaining additional capital than does
a sole proprietorship.
4. The participation in the business by
more than one person makes
possible for a closer supervision of
all its activities.
5. The direct gain to the partners is an
incentive to give close attention to
the business.
6. The personal element in the
character of the partners is
retained.
Disadvantages
of a Partnership
1.The personal liability of a partner for
partnership debts deters many from
investing capital in a partnership.
2.A partner may be subject to a
personal liability for the wrongful
acts or omissions of his associates.
3. It is less stable because it can be
easily dissolved.
4.There is dividend authority among
the partners.
5.There is a constant likelihood of
dissension and disagreement when
each of the partners has the same
authority in the management of the
partnership.
6.There is difficulty in disposing of
interest since no formal established
marketplace exists for the sale of
partnership interest.
 Kinds of
Advantages of a Partnership
Partnerships
1. As to Activity
a. Trading partnership- one whose main activity
is the manufacture or the purchase and sale of
goods.
b. Nontrading partnership- organized for the
purpose of rendering services.
2. As to Object
a. Universal Partnership
*Universal partnership of all present
*Universal partnership of all profit
b. Particular Partnership- one which has for its
object determinate things, their use of fruit, or a
specific undertaking or the exercise of a profession
or vocation.
3. As to Liability of Partners
a. General co-partnership- consisting of
general partners who are liable prorata and
sometimes solidarily with their separate property
for partnership debts.
b. Limited partnership- formed by two or
more persons having as members, one or more
general partners and one or more limited partners,
who are not bound by the obligations of the
partnership.
LIMITED or LTD is added to the name of the
partnership to inform the public that it is a limited
partnership.
4. As to Duration
a. Partnership at will- no time 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
by the will of one alone.
b. Partnership with a fixed term- the term
or period for which the partnership exist is
agreed upon or one formed for a particular
undertaking and upon expiration of that term
or completion of the particular undertaking,
the partnership id dissolved unless continued
by the partners.
5. As to Representation to Others
a. Ordinary partnership- it exists among the
partners and also as to third persons.
b. Partnership by estoppel- it is not a
partnership but is considered only in relation to those
who by their conduct or omission are precluded to
deny or disprove the partnerships existence.
6. As to Legality of Existence
a De jure partnership- has complied with all the
requirements for its establishment
b. De facto partnership- has failed to comply
with one or more of the legal requirements for its
establishment.
7. As to Publicity
a. Secret partnership- the existence of
certain persons as partners is not made known
to the public by any of the partners.
b. Open partnership- one wherein the
existence of certain persons as partners is
made known to the public by the members of
the firm.
 Classes
of Partners
1. As to Contribution
a. Capitalist partner- contributes capital in
the form of money/property
b. Industrial partner- contributes industry,
labor, talent, skills or service
c. Capitalist industrial partner- contributes
money, property and industry
2. As to Liability
a. General partner- one whose liability to
third person extends to his separate (private)
property.
b. Limited partner- one whose liability to
third person is limited only to the extent of his
capital contribution in the partnership.
3. As to Management
a. Managing partner- one who manage
actively the business of the partnership.
b. Silent partner- one who does not
participate in the management of the partnership
affairs.
4. Other Classifications
a. Liquidating partner one who takes
charge of the winding up partnership affairs upon
dissolution.
b. Nominal partner- one who is not really a
partner, not being a party to the partnership
agreement, but is made liable as a partner for the
protection of innocent third persons
 c. Ostensible partner- one who takes active
part in the management of the firm and is known to
the public as a partner inn business.
d. Secret partner- one who takes active part
in the management of the business but whose
connection with the partnership is concealed or
unknown to the public.
e. Dormant Partner- one who does not take
active part in the management of the management
and is not known to the public as a partner; he is
both a silent and secret partner.
 Articles of
Co-Partnership
 A partnership is created by an oral or
written agreement.
* partnerships are required to be
registered with the Office of the Securities and
Exchange Commissions.
The written agreement between/among
the partners which governs the
formation, operation and dissolution of
the partnership is referred to as the
Articles of Co-Partnership.
The articles of Co-Partnership contains the ff.
information:
1.The name of the partnership.
2.The names, addresses of the partners,
classes of partners stating whether the
partner is general or limited partner.
3.The effective date of the contact.
4.The purpose/s and principal office of the
business
5.The capital of the partnership, stating
the contribution of individual partners,
their description and agreed values.
6.The rights and duties of each partner.
7.The manner of dividing profit or loss
among the partners, including salary
allowance and interest on capital.
8.The conditions under which the
partners may withdraw money or other
assets for personal use.
9.The manner of keeping the books of
accounts
10.The causes for dissolution.
11.The provision for arbitration in settling
disputes.
Accounting for
Partnerships
 Capital Account
1. Permanent 1. Original investment
withdrawal by a partner
(decrease) of capital 2. Share in partnership
2. Share in partnership profits from
loss from operations operations
3. debit balance of 3. additional
drawing account investment by a
closed to capital partner
 Drawing Account
1. Personal withdrawal 1.Share in partnership
by a partner in profits from
anticipation of operations (this may
profits (temporary be credited directly
withdrawal of to capital)
capital)
2. Share in partnership
loss from operations
(this may be debited
directly to capital)
Partnership
Formation
 Asset Contributions (cash, property
or industry) are debited to the appropriate
asset accounts and credited to the capital
accounts of the partners.
If the asset contributed is:
*CASH- it is recorded in the partnership
books at FACE VALUE.
*NON-CASH ASSETS- it is recorded at
AGREED VALUES or, in the absence of an
agreement, at their FAIR MARKET VAUE.
*SERVICES- a MEMORANDUM ENTRY is
prepared.
ILLUSTRATIVE PROBLEM A:
Acosta and Beltran agreed to form a
partnership to be known as AB
ENTERPRISES. The entries to record the
formation of the partnership under three
independent assumptionns are as follows.
Assumption 1- Cash Contributions
Each partner invested cash of P250,000 for
an equal interest in the partnership.

Cash 500,000
Acosta, Capital 250,000
Beltran, Capital 250,000
Assumption 2- Cash and Non-cash
Contributions
Acosta contributed cash of P160,000 and
inventories costing P130,000 and with agreed
value of P140,000. Beltran contributed
equipment, costing P170,000 with accumulated
depreciation of P25,000 and agreed value of
P150,000, for a one-third interest.
Cash 160,000
Inventories 140,000
Equipment 150,000
Acosta, Capital 300,000
Beltran, Capital 150,000
Assumption 3- Cash, Non-cash Assets and
Industry
Acosta contributed cash of P100,000; Accounts
Receivable of P150,000 with Allowance for
Uncollectible Accounts of P50,000; and Equipment
valued at P400,000. Beltran is an industrial
partner to contribute his special skills and talents
to the partnership for a one-third interest.

Cash 100,000
A/R 150,000
Equipment 400,000
Allow. for Uncollectible Accounts 50,000
Acosta, Capital 600,000
ILLUSTRATIVE PROBLEM B:
Acosta and Beltran, both sole proprietors,
agreed to form a partnership. Account
balances per ledger and the respective
agreed values upon formation are shown
below.
 ACOSTA BELTRAN
PER BOOKS AS AGREED PER BOOKS AS AGREED

CASH P150,000 P150,000 P140,000 P140,000

A/R 140,000 140,000 135,000 135,000

Allow. For (50,000) (40,000) (30,000) (40,000)

Uncollectible Accts
Inventories 135,000 137,000 128,000 130,000

Equipment, Cost 300,000 150,000 200,000 175,000

Accumulated Dep. (60,000) (20,000)

A/P 100,000 100,000 150,000 150,000

Assumption 1- New set of books will be
opened for the partnership.
The entries to record the contributions of the
partners are as follows;

(a) To record the contribution of Acosta

Cash 150,000
A/R 140,000
Inventories 137,000
Equipment 150,000
Allow. for Uncollectible Accounts 40,000
A/P 100,000
Acosta, Capital 437,000
 (b) To record the contribution of Beltran
Cash 140,000
A/R 135,000
Inventories 130,000
Equipment 175,000
Allow. for Uncollectible Accounts 40,000
A/P 150,000
Beltran, Capital 390,000
 Assumption 2- The books of Acosta will be used
by the new partnership
The journal entries to record the required
adjustments and to record the investment of
Beltran are as follows:
(a) To record the adjustments on the books of
Acosta in order to bring the ledger balances to
agreed values
Allow. for Uncollectible Accounts 10,000
Inventories 2,000
Accumulated Depreciation 60,000
Acosta, Capital 78,000
Equipment 150,000
(b) To record the investment of Beltran

Cash 140,000
A/R 135,000
Inventories 130,000
Equipment 175,000
Allow. for Uncollectible Accounts 40,000
A/P 150,000
Beltran, Capital 390,000
 CAPITAL SHARE
DIFFERENT FROM
CAPITAL CONTRIBUTION
*The CAPITAL SHARE of each partner is the
percentage of equity that each of them will
have in the net assets of the newly formed
partnership.
*Generally, the capital share of a partner is
proportionate to his/her CAPITAL
CONTRIBUTION.
*In recognition of intangible factors, partners
may agree to a division of capital that is not
proportionate to their capital contributions.
This will give rise to allowing BONUS on initial
investment.
 ILLUSTRATIVE PROBLEM C:
Acosta and Beltran agreed to divide initial
partnership capital equally even though
Acosta contributed P400,000 cash into the
partnership.

1.Full investment Approach

Cash 900,000
Acosta, Capital 500,000
Beltran, Capital 400,000
 2. Bonus Approach

Cash 900,000
Acosta, Capital 450,000
Beltran, Capital 450,000
 LOAN
RECEIVABLE
AND LOAN
PAYABLE
 Any loan between partners and partnership
is always accompanied by a proper loan
documentation such as PROMISSORY NOTE.
A loan from a partner is shown as LOAN
PAYABLE
Unless all partners agreed otherwise, the
partnership is obligated to pay to the
individual partner interest on the loan, such
interest is reported in the INCOME
STATEMENT of the partnership is an
EXPENSE.
 If the partnership lend money to a
partner, the partnership records a LOAN
RECEIVABLE from the partner.
Unless all the partners agreed, the loan
bears INTEREST and such interest is
reported in the INCOME STATEMENT of
the partnership as an INCOME