Partnership

Formation
Nhelmore D. Marcelino
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ARTICLE 1767. By the contract of partnership two
or more persons bind themselves to contribute
money, property, or industry to a common fund,
with the intention of dividing the profits among
themselves.
Two or more persons may also form a partnership
for the exercise of a profession. (1665a)

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Characteristics of a Partnership
￮ Mutual Contribution $
￮ Division of Profit and Losses
￮ Co-ownership of Contributed Asset
￮ Mutual Agency
￮ Limited Life
￮ Unlimited Liability
￮ Income Taxes
￮ Partnership Equity Account

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Classification of Partnership
￮ Universal Partnership of all present property
￮ Universal Partnership of all profits
￮ Limited Partnership
￮ General Partnership
￮ Partnership at will

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Classification of Partnership
￮ Partnership with a fixed term
￮ Partnership for a particular undertaking
￮ Partnership by Estoppel
￮ De Jure Partnership
￮ De Facto Partnership

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Kinds of Partners
￮ Capitalist Partner ￮ Silent Partner
￮ Industrial Partner ￮ Secret Partner
￮ Capitalist-industrial ￮ Dormant Partner
Partner ￮ Liquidating Partner
￮ General Partner ￮ Partner by
￮ Limited Partner Estoppel
￮ Managing Partner

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 Fair Value
Concept
This pertains to the value agreed upon by the partnership
with regards to their investment and the liability assumed by
the partnership

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Order of Priority in
Recording Investment:
1.Agreement of Partners
2.Fair Value
3.Book Value

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An asset may be invested:
1. Without liability; or
2. With liability
a. Liability is assumed – the
asset and liability is recorded
separately;
b. Liability is not assumed - the
asses is recorded net of the
liability.
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 Two Individuals Form a
Partnership
Journal Entry:
Asset xx
Liability xx
Capital xx

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Illustration
Mr. Alan, Mr. Bond and Mr. Charlie created a
partnership business. The following are the
investments of each partners:
￮ Mr. Alan: Cash 30,000; office equipment worth
500,000
￮ Mr. Bond: Merchandise Inventory worth 350,000
￮ Mr. Charlie: machinery worth 560,000
￮ The partners will share profit and loss equally.

Prepare Journal Entries to record the partner’s investments.

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An Individual and a Sole
Proprietor Form a Partnership
Book of Proprietor Book of Proprietor Books of
Partnership
Adjusting Entries Closing Entry
Asset(increase) xx Liability xx Asset xx

Liability(decrease) xx Capital xx Liability xx

Capital(decrease) xx Asset xx Capital xx

Asset(decrease) xx
Liability(increase) xx .

Capital(increase) xx

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Illustration
Start, Baratheon, and Targaryen decided to form a partnership. Stark is
currently a sole proprietor who will invest cash amounting to 50,000,
Inventories with fair value of 60,000 and agreed value of 55,000, and
equipment with book value of 80,000 but the partners agreed to value it
at 60,000. A mortgage amounting to 20,000 is attached to the equipment
which will not be assumed by the partnership. Baratheon will invest his
Building having a fair value of 130,000. Targaryen wll invest cash
enough to align her capital with her profit and loss share. The partners
agreed to share profit and loss in the ratio of 20%,30%, and 50%
respectively.
Prepare Journal Entries to record the partner’s investments.

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Two or More Sole Proprietor
Form a Partnership
Book of Proprietor Book of Proprietor Books of
Partnership
Adjusting Entries Closing Entry
Asset(increase) xx Liability xx Asset xx

Liability(decrease) xx Capital xx Liability xx

Capital(decrease) xx Asset xx Capital xx

Asset(decrease) xx
Liability(increase) xx .

Capital(increase) xx

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 Illustration
Ryan and Smith were the main competitors in the In order to complete the formation of a new
shoe industry. Due to unhealthy competition between partnership, the following valuations were agreed
them, they decided to form a new partnership. On upon between Ryan and Smith as follows:
December 15, their account balances are as follows:
Mr. Ryan Mr. Smith Ryan: Accounts Receivable 51,000
Cash 16,000 24,000 Inventory 56,000
Accounts Receivable 80,000 96,000 Machine 30,000
Inventory 64,000 40,000 Smith: Accounts Receivable 16,000
Machine -Cost 120,000 96,000 Factory Equipment 10,000
Factory Equipment - 56,000 64,000
cost
Accumulated 64,000 32,000 Prepare Journal Entries to record the partner’s
Depreciation - investments.
Machine
Accumulated 24,000 40,000
Depreciation - Factory
Equipment
Allowance for 5,600 3,200
uncollectible accounts
Accounts Payable 64,000 76,000 15
Bonus Method
Occurs when the actual capital contributed
by the partners are not equal to their agreed
capital contribution.

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Illustration
Partner X contributed Land with an agreed value of
100,000. Partner Y, on the other hand, contributed cash
of 50,000. The partners agreed to share profits equally.
Assuming that the partners capital will be realigned
based on their profit distribution, how much is the new
capital of both partners.

Total Capital 150,000

x 50%
New capital of 75,000
both partners

Journal Entry:
X, Capital 25,000
Y, Capital 25,000

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Let’s review some
concepts
Characteristics of Classification of Kinds of Partners
Partnership Partnership

Fair Value Concept Order of Priority in Bonus Method

Recording
Investment

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Thanks!
Any questions?

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