PARTNERSHIP FORMATION  A partnership in which all partners

are individually liable is called

A PARTNERSHIP is an unincorporated association general partnership.
of two or more individuals to carry on, as co-owners,  A partnership in which at least one
a business, with the intention of dividing the profits partner is personally liable is called
among themselves. a limited partnership.
CHARACTERISTICS OF A PARTNERSHIP ADVANTAGES AND DISADVANTAGES OF A
a. EASE OF FORMATION- formation of a PARTNERSHIP
partnership requires less formality. ADVANTAGES
b. SEPARATE LEGAY PERSONALITY-
partnership has a judicial personality  Ease of formation
separate and distinct from the partners. The  Shared responsibility of running the business
partnership can transact and acquire  Flexibility in decision making
properties in its name.  Greater capital compared to sole
c. MUTAL AGENCY- the partners are agents proprietorship
of the partnership for the purpose of its  Relative lack of regulation by the
business. government as compared to corporations
d. CO-OWNERSHIP OF PROPERTY- each
partner is a co-owner of the properties DISADVANTAGES
invested in the partnership and each has an
equal right with his partners to possess  Easily dissolved/limited life
specific partnership property for partnership  Unlimited liability
purposes. However, a partner has no right to  Conflict among partners
possess a partnership property for any other  Lesser capital compared to corporation
purpose without the consent of his partners.  A partnership (other than a general
e. CO-OWNERSHIP OF PROFITS- each professional partnership) is taxed like a
partner is entitled to his share in the corporation.
partnership profit.
ACCOUNTING FOR PARTNERSHIP
f. LIMITED LIFE- the creation of partnership
is basically consensual. As such, a The accounting for assets and liabilities remains the
partnership may be dissolved. same regardless of the form of a business
I. By the express will of any partner; organization. What changes is the accounting for
II. By the termination of a definite equity.
term stipulated in the contract;
III. When a specific thing which a MAJOR CONSIDERATIONS IN ACCOUNTING
partner had promised to contribute FOR THE EQUITY OF PARTNERSHIP:
to the partnership perishes before
a. FORMATION- accounting for initial
the delivery; or
investments to the partnership
IV. Expulsion, death, insolvency or
b. OPERATIONS- division of profits or losses
civil interdiction of a partner.
c. DISSOLUTION- admission of a new partner
g. TRANSFER OF OWNERSHIP- in case of
and withdrawal, retirement or death of a
dissolution, the transfer of ownership,
partner
whether to a new or existing partner,
d. LIQUIDATION- winding-up of affairs
requires the approval of the remaining
partners. FORMATION
h. UNLIMITED LIABILITY- each partner,
including industrial ones, may be held  Contract of partnership is consensual.
personally liable for partnership debt after  May be constituted in any form, such as oral
all partnership assets have been exhausted. or written.
  Partnership’s legal existence begins from the  These accounts are equity accounts and are
moment the contract is executed, unless used to record the ff transactions:
otherwise stipulated.
Juan Dela Cruz,
VALUATION OF CONTRIBUTIONS OF capital
PARTNERS dr cr
 initial
 Contributions of partners to the partnership   xx investment
are initially measured at fair value.  additional
 Fair value is “the price that would   xx investment
 permanent
be received to sell an asset or paid withdrawals of xx
to transfer a liability in an orderly
capital  
transaction between market  share in  share in
participants at the measurement losses xx xx profits
date”. debit balance of
drawing account xx
 When measuring the contributions of
partners, the following additional guidelines
from the PFRSs shall be observed:  The partner’s capital accounts is a real
account and has a normal credit balance.
TYPES OF MEASUREMENT
 Each partner’s capital account is credited for CONTRIBUTIONJuan Bayan,
Drawings
the fair value of his net contribution Cash and cash equivalent Face amount (PAS 7)
dr cr
 recurring
 Inventory Lower ofreimbersabl
cost and net
 No contribution shall be valued at an amount temporary
withdrawals xx xxrealizable value
e
greater than its fair value.
during the period   (net realizable
costs paid byvalue
the NRV
 temporary is estimated costs of
 A partner’s subsequent share in profits funds held xx completion
partner and costs to
(losses) shall also be credited (debit) to his to be remitted to sell)
capital account. the  
partnershi
p  
 Permanent withdrawals of capital are
debited to the partner’s capital account.
 The drawing account is a nominal account
 Temporary withdrawals may be debited to that is closed to the related capital account at
partners’ drawings account. the end of the period. This account is a
contra equity account and has a normal debit
 The sum of the balances in the partners’ balance.
individual capital accounts represents the
RECEIVABLE FROM/ PAYABLE TO A
total equity of the partnership.
PARTNER
PARTNERS’ LEDGER ACOUNTS
 A loan extended by the partnership to a
The partners’ ledger accounts are: partner is recorded as a receivable from the
partner.
a. Capital accounts  A loan obtained by the partnership from a
b. Drawings accounts partner is recorded as a payable to the
c. Receivable from/ Payable to a partner partner.
CAPITAL AND DRAWINGS ACCOUNTS ILLUSTRATION 1: VALUATION OF
 Each partner has his/her own capital CONTRIBUTION
drawings account. A and B formed a partnership. A contributed
 “Juan dela Cruz, Capital” cash of 500,000, while B contributed land with
 carrying amount of 400,000 and fair value of
800,000. The land has an unpaid mortgage of
200,000 which is assumed by the partnership.

Requirements:

a. Determine the correct valuations of the

partners’ contributions in the partnership
books of accounts.
b. Provide the journal entry.

Solutions:

Requirement A:
    A B PARTNERSHIP
cash 500,000 500,000
land (fair value)     800,000 800,000
total assets 500,000 800,000 1,300,000

less: liabilities
mortgage payable -200,000 200,000
adjusted capital
balances   500,000 600,000 1,300,000

Requirement B:
DATE CASH 500,000
LAND 800,000
MORTGAGE
PAYABLE 200,000
A, CAPITAL 500,000
B, CAPITAL 600,000