Chapter 11: Partnership Formation (FAR by:

Millan)
 Chapter 11
Partnership Formation
Learning Objectives
1. Differentiate between the accounting for
partnerships, sole proprietorships, and
corporations.
2. State the valuation of contributions of partners.
3. Account for the initial investments of the
partners to the partnership.
4. State the peculiar accounts used in a partnership
and identify the transactions that affect these
accounts.

Chapter 11: Partnership Formation (FAR by:

Millan)
 Partnership
• A partnership is an unincorporated association of two or more
individuals to carry on, as co-owners, a business, with the
intention of dividing the profits among themselves.

Chapter 11: Partnership Formation (FAR by:

Millan)
 Characteristics of a partnership
1. Ease of formation
2. Separate legal personality
3. Mutual agency
4. Co-ownership of property
5. Co-ownership of profits
6. Limited life
7. Transfer of ownership
8. Unlimited liability (this is applicable to a general partnership)

Chapter 11: Partnership Formation (FAR by:

Millan)
 Accounting for partnerships
• The following are the major considerations in the accounting
for the equity of a partnership:
1. Formation – accounting for initial investments to the
partnership
2. Operation – division of profits or losses
3. Dissolution – admission of a new partner and withdrawal,
retirement or death of a partner
4. Liquidation – winding-up of affairs

Chapter 11: Partnership Formation (FAR by:

Millan)
Valuation of contributions of partners

• All assets contributed to (and related liabilities

assumed by) the partnership shall be measured at
fair value.

Chapter 11: Partnership Formation (FAR by:

Millan)
 Partners’ ledger accounts

1. Capital accounts
2. Drawing accounts
3. Receivable from/ Payable to a partner

Chapter 11: Partnership Formation (FAR by:

Millan)
 Bonus on initial investments

• A bonus exists when the capital account of a partner is

credited for an amount greater than or less than the fair value
of his contributions.
• The bonus is treated as adjustment to the capital accounts of
the other partners.

Chapter 11: Partnership Formation (FAR by:

Millan)
 QUESTIONS????
 REACTIONS!!!!!

Chapter 11: Partnership Formation (FAR by:

Millan)
END

Chapter 11: Partnership Formation (FAR by:

Millan)