PARTNERSHIP

DEFINITION

A CONTRACT WHEREBY TWO OR MORE PERSONS CONTRIBUTE MONEY OR

INDUSTRY TO A COMMON FUND WITH THE INTENTION OF DIVIDING THE PROFITS
AMONG THEMSELVES. (Art. 1767 Civil Code of the Philippines)

-AN ASSOCIATION OF TWO OR MORE PERSONS WHO CO-OWN A BUSINESS FOR A PROFIT.

CHARACTERISTICS
1. Separate legal personality
2. Mutual agency
3. Limited life
4. Unlimited liability
5. Co-ownership of property
6. Co-ownership of profits

ADVANTAGES DISADVANTAGES
ease of formation and dissolution easily dissolved/limited life
unlimited liability unlimited liability
better management difficulty in transferring ownership
flexibility in decision making conflict among partners
greater capital compared to sole lesser capital compared to corporation
proprietorship

ARTICLES OF CO-PARTNERSHIP
-this agreement is a framework which governs the formation, operations, dissolution
and liquidation of the partnership.

CONTENTS:
1. Name and nature of the partnership.
2. Date on which the partnership contract takes effect and duration of such
contract.
3. Names of partners, and partners’ investments.
4. Authority, rights and duties of each partner.
5. Accounting period to be applied, and accounting and auditing of partnership
books.
6. Method of sharing profits and losses.
7. Provision of the arbitration of disputes and liquidation of the partnership.
 KINDS OF PARTNERSHIP
Non-Trading Partnership
Trading Partnership
General Partnership
Limited Partnership
Universal Partnership of All Present Property
Universal Partnership of All Profits
Particular Partnership

KINDS OF PARTNERS
Capitalist Partner
Industrial Partner (shares in the profits only)
Capitalist- Industrial Partner
General Partner
Limited Partner
Nominal Partner
Secret Partner
Silent Partner

PARTNER’S CAPITAL, DRAWING & LOAN ACCOUNTS

PARTNER’S CAPITAL
Decrease Increase

Permanent withdrawal Initial investment

Sale of equity Additional Investment

Payment of partnership liability from personal funds

PARTNER’S DRAWING
Increase Decrease

Temporary withdrawal Share in Net Income

Share in Net Loss

LOANS TO AND FROM PARTNERS

Loan Receivable from Partner Loans Payable to Partner
Withdrawal of substantial amount with the Money advanced to the partnership by a partner with the
assumption of repayment assumption of its ultimate repayment
PARTNERSHIP FORMATION
1. formation of a partnership for the first time.
2. conversion of a sole proprietorship to a partnership.
a. a sole proprietor allows another person, who has no business of his own to join
his business.
b. two or more sole proprietors form a partnership.

A. FORMATION FOR THE FIRST TIME

Journal Entries

Debit Credit
Cash 200,000
Matthew, Capital 200,000
To record Matthew’s investment

Debit Credit
Cash 200,000
Merchandise Inventory 70,000
Mark, Capital 270,000
To record Mark’s investment

Debit Credit
Cash 200,000
Merchandise Inventory 70,000
Land 100,000
Building 500,000
Furniture & Equipment 30,000
Luke, Capital 900,000
To record Luke’s investment

Industrial Partner
Memo Entry: John is admitted into the partnership as an industrial partner to share
10% in the partnership profit.

B. CONVERSION OF SOLE PROPRIETORSHIP TO PARTNERSHIP

Books of Sole Proprietorship

1. Adjust or revalue the assets of the sole proprietorship according to the agreement.
Adjustments are made to the Proprietor’s Capital account.
• For every increase in asset value, there is corresponding increase in the
proprietor’s capital account.
• For every decrease in asset value, there is corresponding decrease in the
proprietor’s capital account.
• For every increase in liability, there is corresponding decrease in the
proprietor’s capital account.
2. Close the proprietor’s books (at adjusted amounts)

Books of the Partnership

1. Record the investments of the Sole Proprietor.( at adjusted amounts)
• Non-current assets are recorded at their carrying/fair values
2. Record the investments of other partners.
EXAMPLES OF ADJUSTMENT/REVALUATION OF ASSETS
1. Adjustment of all assets without contra account are debited/credited directly to such
asset account with corresponding debit/credit to proprietor’s account.

Example
a. Equipment per ledger P 100,000
Agreed Valuation 120,000

Adjustment
Equipment 20,000
Proprietor Capital 20,000
To revalue the equipment.

b. Equipment per ledger P100,000

Agreed Valuation 80,000

Adjustment
Proprietor Capital 20,000
Equipment 20,000
To revalue the equipment.

2. Adjustment of all assets without contra account are debited/credited to the related
contra account with corresponding debit/credit to proprietor’s account.

Example
a. Equipment per ledger P 140,000
Accumulated Depreciation per ledger 10,000
Agreed Valuation 120,000

Adjustment
Proprietor capital 10,000
Accumulated Depreciation-Equipment 10,000
To revalue the equipment.

b. Equipment per ledger P 140,000

Accumulated Depreciation per ledger 30,000
Agreed Valuation 120,000

Adjustment
Accumulated Depreciation-Equipment 10,000
Proprietor capital 10,000
To revalue the equipment.
 3. Adjustment of Accounts Receivable with/without contra account are debited/credited
to the related contra account with corresponding debit/credit to proprietor’s account.

Example
a. Accounts Receivable per ledger P 140,000
Agreed Valuation 120,000

Adjustment
Proprietor capital 20,000
Allowance for Doubtful Account 20,000
To decrease the realizable value of accounts receivable

b. Accounts Receivable per ledger P 140,000

Allowance for Doubtful Accounts 30,000
Agreed Valuation 120,000

Adjustment
Allowance for Doubtful Account 10,000
Proprietor capital 10,000
To increase the realizable value of accounts receivable

SAMPLE PROBLEM:
Nadine, a sole proprietor invited Mark and Lark to form a trading partnership. Nadine will
invest her existing business while Mark and Lark will both invest cash and non-cash assets.
The Statement of Financial Position of Nadine Trading on September 15, 2010 showed
the following:
Cash 50,000
Accounts Receivable 220,000
Allowance for Bad Debts 15,000
Merchandise Inventory 575,000
Office Equipment 150,000
Accumulated Depreciation-Office Equipment 50,000
Furniture and Fixture 100,000
Accounts Payable 60,000
Notes Payable 270,000
Nadine, Capital 700,000
The partners agreed that the following adjustments be made in the books of Nadine:
• Merchandise Inventory is to be recorded at its fair value of P550,000.
• 10% of the Accounts Receivable is estimated to be uncollectible.
• The office equipment was estimated to have remaining value of P110,000
• The market value of the furniture amount to P120,000.
• Accrued interest on notes of P13,500 should be set up.
Required:
1. Adjust and close the books of Nadine
2. Open the books of the partnership
3. Prepare a statement of financial position
1. Adjustments/Revaluation of Assets:

a. Adjustment:
Merchandise Inventory is to be recorded at its fair value of P550,000.
Adjusting Entry:
Nadine, Capital 25,000
Merchandise Inventory 25,000
To revalue the merchandise inventory.

b. Adjustment:
10% of the Accounts Receivable is estimated to be uncollectible.
Adjusting Entry:
Nadine, Capital 7,000
Allowance for Bad Debts 7,000
To adjust bad debts allowance

c. Adjustment:
The office equipment was estimated to have remaining value of P110,000
Adjusting Entry:
Accumulated Depreciation 10,000
Nadine, Capital 10,000
To revalue the office equipment

d. Adjustment:
The market value of the furniture amount to P120,000.
Adjusting Entry:
Furniture and Fixtures 20,000
Nadine Capital 20,000
To revalue the furniture

e. Adjustment:
Accrued interest on notes of P13,500 should be set up.
Adjusting Entry:
Nadine, Capital 13,500
Interest Payable 13,500
To record accrued interest.

2. CLOSING THE BOOKS OF NADINE

Debit Credit
Allowance for Bad Debts 22,000
Accumulated Depreciation-Office Equipment 40,000
Accounts Payable 60,000
Notes Payable 270,000
Interest Payable 13,500
Nadine, Capital 684,500
Cash 50,000
Accounts Receivable 220,000
Merchandise Inventory 550,000
Office Equipment 150,000
Furniture and Fixtures 120,000
To close Nadine’s books

3. OPEN A NEW SET OF BOOKS FOR THE PARTNERSHIP

A. RECORD THE INVESTMENT OF THE SOLE PROPRIETOR

 Debit Credit
Cash 50,000
Accounts Receivable 220,000
Merchandise Inventory 550,000
Office Equipment 110,000
Furniture and Fixtures 120,000
Allowance for Bad Debts 22,000
Accounts Payable 60,000
Notes Payable 270,000
Interest Payable 13,500
Nadine, Capital 684,500
To record Nadine’s investment.

B. RECORD THE INVESTMENTS OF OTHER PARTNERS

Debit Credit
Cash 100,000
Merchandise Inventory 100,000
Mark, Capital 200,000
To record Marie’s investment

Debit Credit
Cash 100,000
Land 100,000
Building 700,000
Lark, Capital 900,000
To record Lark’s investment

LMN Partnership
Statement of Financial Position
September 15,2010

Assets
Note
Current Assets
Cash P250,000
Trade and Other Receivables 1 198,000
Merchandise Inventory 650,000
P1,098,000

Non-Current Assets
Property, Plant and Equipment 2
1,030,000

Total Assets P2,128,000

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Liabilities and Partners’ Equity

Current Liabilities
Trade and Other Payables 3 P 343,500

Partners’ Equity
Lark, Capital P 900,000
Mark, Capital 200,000
 Nadine Capital 684,500
1,784,500
Total Liabilities and Partners’ Equity P
2,128,000
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=

Notes to Financial Statements

Note 1 Trade and other Receivables

Accounts Receivable P 220,000
Less: Allowance for Bad Debts 22,000
Net Realizable Value P 198,000
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Note 2 Property, Plant and Equipment
Land P 100,000
Building 700,000
Office Equipment 110,000
Furniture and Fixtures 120,000
Total P1,030,000
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Note 3 Trade and other Payables
Accounts Payable P 60,000
Notes Payable 270,000
Interest Payable 13,500
Total P 343,500
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