01 - Module 1 PDF

Republic of the Philippines
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
Tel. No. (047) 224-2089 loc. 314
DETAILED LEARNING MODULE
Title: BASIC CONSIDERATIONS AND PARTNERSHIP FORMATION

Module No. 1
I. Introduction
Partnerships are a popular form of business because they are easy to form and they allow
several individuals to combine their talents and skills in a particular business venture. In
addition, partnerships provide a means of obtaining more capital than a single individual
can obtain and allow the sharing of risks for rapidly growing businesses.
II. Learning Objectives

After studying this module, you should be able to:
1. Understand the definition of Partnership.
2. Enumerate and discuss the characteristics of Partnership.
3. Distinguish the advantages and disadvantages of Partnership from Sole Proprietorship
and Corporation.
4. Enumerate and discuss the classifications of Partnership, and kinds of Partners.
5. Understand the Articles of Partnership, the rule on SEC Registration and Accounting
for Partnerships.
6. Application of Partnership Formation.
III. Topics and Key Concepts

A. DEFINITION
ART. 1767 of the Civil Code of the Philippines. In a 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 profit among themselves.
B. CHARACTERISTICS OF PARTNERSHIP
i. Mutual contribution. There can be no partnership without contribution of
money, property or industry to a common fund.
ii. Divisions of profits or losses. The essence of partnership is that each
partner must share in the profits or losses of the venture.
iii. Co-Ownership of Contributed Assets. All assets contributed in the
partnership are owned by the partnership by the virtue of its separate and
distinct juridical personality.
iv. Mutual Agency. Any partner can bind the other partner to a contract if he
is acting within his express or implied authority.
v. Limited life. It may be dissolved by the admission, death, insolvency,
incapacity, withdrawal of a partner or expiration of the term specified in
the partnership agreement.
vi. Unlimited liability. All partners are personally liable for all the debts
incurred by the partnership.
vii. Income Taxes. Partnerships are subject to tax.
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
viii. Partner's Equity Accounts. Each partner has a capital account and
withdrawal account.
C. ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP

i. Advantages versus Proprietorships
a. Brings greater financial capability to the business.
b. Combines special skills, expertise and experience of the partners.
c. Offers relative freedom and flexibility of action in decision-making.
ii. Advantages versus Corporations
a. Easier and less expensive to organize.
b. More personal and informal
iii. Disadvantages
a. Easily dissolved and thus unstable compared to a corporation.
b. Mutual agency and unlimited liability may create personal obligations to
partners.
c. Less effective than a corporation in raising large amounts of capital.
D. PARTNERSHIP DISTINGUISHED FROM A CORPORATION
i. Manner of creation. A partnership is created by mere agreement of the partners while
a corporation is created by operation of law.
ii. Number of persons. Two or more persons may form a partnership, in a corporation,
at least 5 persons not exceeding 15.
iii. Commencement of juridical personality. In a partnership, juridical personality
commences from the execution of the articles of partnership, in a corporation from the
issuance of the certificate of incorporation by the Securities and Exchange
Commission.
iv. Management. In a partnership, every partner is an agent of the partnership if the
partners did not appoint a managing partner, in a corporation, management is vested
on the Board of Directors.
v. Extent of liability. In a partnership, each of the partners except a limited partner is
liable to the extent of his personal assets; in a corporation, stockholders are liable only
to the extent of their interest or investment in the corporation.
vi. Right of Succession. In a partnership, there is no right of succession; in a corporation,
there is a right of succession. A corporation has the capacity of continued existence
regardless of the death, withdrawal, insolvency or incapacity of its directors or
stockholders.
vii. Terms of existence. In a partnership, for any period of time stipulated by the partners;
in a corporation, not to exceed 50 years but subject to extension.
E. CLASSIFICATION OF PARTNERSHIP
i. According to object.
a. Universal partnership of all present property. All contributions become
part of the partnership fund.
b. Universal partnership of profits. All that the partners may acquire by their
industry or work during the existence of the partnership and the use of
whatever the partners contributed at the time of the institution of the contract
belong to the partnership.
c. Particular partnership. The object of the partnership is determinate- its use
or fruit, specific undertaking, or the exercise of a profession or vocation.
ii. According to liability.
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
a. General. All partners are liable to the extent of their separate properties.
b. Limited. The limited partners are liable only to the extent of their personal
contributions. In a limited partnership, the law states that there shall be at least
one general partner.
iii. According to duration.

a. Partnership with a fixed term or for a particular undertaking.
b. Partnership at will. One in which no term is specified and is not formed for
any particular undertaking.
iv. According to purpose.
a. Commercial or trading partnership. One formed for the transaction of
business.
b. Professional or non-trading partnership. One formed for the exercise of
profession.
v. According to legality of existence.
a. De jure partnership. One which has complied with all the legal requirements
for its establishment.
b. De facto partnership. One which has failed to comply with all the legal
requirements for its establishment.
F. KINDS OF PARTNERS
i. General partner. One who is liable to the extent of his separate property after all the
assets of the partnership are exhausted.
ii. Limited partner. One who is liable only to the extent of his capital contribution. He
is not allowed to contribute industry or services only.
iii. Capitalist partner. One who contributed money or property to the common fund of
the partnership.
iv. Industrial partner. One who contributes his knowledge or personal service to the
partnership.
v. Managing partner. One whom the partners has appointed as a manager of the
partnership.
vi. Liquidating partner. One who is designated to wind up or settle the affairs of the
partnership after dissolution.
vii. Dormant partner. one who does not take active part in the business of the partnership
and is not known as partner.
viii. Silent partner. One who does not take active part in the business of the partnership
though may be known as a partner.
ix. Secret partner. One who takes active part in the business but is not known to be a
partner by outside parties.
x. Nominal partner or partner by estoppel. One who is actually not a partner but who
represents himself as one.
G. ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in writing. In the latter case,
partnership agreements are embodied in the Articles of Partnership. The following essential
provisions may be contained in the agreement.
1. The partnership name, nature, purpose and location;

2. The names, citizenship and residences of the partners;
3. The date of formation and the duration of the partnership;
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
4. The capital contribution of each partner, the procedure for valuing non-cash
investments, treatment of excess contribution (as capital or as a loan) and the penalties
for a partner’s failure to invest and maintain the agreed capital;
5. The rights and duties of each partner;
6. The accounting period to be adopted, the nature of accounting records, financial
statements and audits by independent public accountants;
7. The method of sharing profit or loss, frequency of income measurement and
distribution, including any provisions for the recognition of differences in
contributions;
8. The drawings or salaries to be allowed to partners;
9. The provision for arbitration of disputes, dissolution and liquidation.
H. SEC REGISTRATION
When the partnership capital is 3,000 or more, in money or property, the
public instrument must be recorded with the Securities and Exchange Commission (SEC). Even
if it not registered, the partnership having a capital of 3,000 or more is still valid and therefore
has legal personality.
I. ACCOUNTING FOR PARTNERSHIP
PARTNER’S CAPITAL ACCOUNT

DEBIT CREDIT
1. Permanent withdrawals 1. Original investments
2. Debit balance of the drawing account at 2. Additional investments
the end of the period.
3. Credit balance of the drawing account at
the end of the period.
PARTNER’S DRAWING ACCOUNT

DEBIT CREDIT
1. Temporary withdrawals 1. Share in profit (this may be credited
directly to Capital).
2. Share in loss (this may be debited directly
to Capital).
J. PARTNERSHIP FORMATION
Valuation of Investments by Partners
Asset accounts are debited for assets contributed to the partnership, liability
accounts are credited for any liability assumed by the partnership and separate capital accounts
are credited for the amount of each partner’s net investment (assets less liabilities).
Partners may invest cash or non-cash in the partnership. When a partner
invests non-cash assets, they are to be recorded at values agreed upon by the partners. In the
absence of any agreement, the contribution will be recognized at their fair market values at the
date of transfer to the partnership.
Fair Market Value of an asset is the estimated amount that a willing seller
would receive from a financially capable buyer for the sale of the asset in a free market.
Adjustment of Accounts Prior to Formation

In cases when the prospective partners have existing businesses, their respective books will
have to be adjusted to reflect the fair market values of their assets or to correct misstatements in
the accounts.
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
A. Illustration. A reconditioned printing equipment invested by Agapito Rubio was recorded

incorrectly in the partnership books at P 730,000- its book value from the proprietorship’s
records. If the partnership immediately sold the printing equipment for its fair market value of
P 800,000, the resulting gain of P 70,000 would increase the capital of both partners Agapito
Rubio and Nora Bisana. The printing equipment should have been recorded at P 800,000 and
Rubio’s capital credited with P 800,000. Simply stated, increases in asset values accruing before
formation should be for the benefit of the contributing partner.
The adjustments of the assets and liabilities prior to the formation will be similar to the
adjustments that we are already familiar with. However, when the adjustment involves a debit
or credit to a nominal account, the Capital account would instead be debited or credited.
B. Illustration. Emerita Geron and Emerita Modesto formed a general professional partnership.
Emerita Geron will invest sufficient cash to get an equal interest in the partnership while Emerita
Modesto will transfer the assets and liabilities of her business. The account balances on the
books of Modesto prior to the partnership formation follows:
DEBIT CREDIT
CASH 180,000
ACCOUNTS RECEIVABLE 300,000
OFFICE EQUIPMENT 1,500,000
ACCUMULATED DEPRECIATION 600,000
ACCOUNTS PAYABLE 155,000
SALARIES PAYABLE 25,000
EMERITA MODESTO, CAPITAL 1,200,000
It is agreed that for purposes of establishing Emerita Geron’s interest, the following adjustments
shall be made in the books of Emerita Modesto:
1. An allowance for uncollectible accounts of 5% of accounts receivable is to
be established.
2. Prepaid expenses amounting to P 30,000 were omitted by the accountant.
This is to be recognized.
3. Additional salaries payable in the amount of P 10,000 is to be established.
Using the accounting equation approach of analysis, the adjustments are as follows:
ASSETS = LIABILITIES + OWNER’S EQUITY

1. (P 15,000) (P 15,000)
2. P 30,000 P 30,000
3. P 10,000 (P 10,000)
P 15,000 P 10,000 P 5,000
P 15,000 P 15,000
Entries:
1. Emerita Modesto, Capital 15,000
Allowance for Uncollectible Accounts 15,000
2. Prepaid Expenses 30,000

Emerita Modesto, Capital 30,000
3. Emerita Modesto, Capital 10,000

Salaries payable 10,000
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
The following T- Account will serve to summarize the necessary adjustments to the capital account:
Opening entries of a Partnership Upon Formation

A partnership may be formed in any of the following ways:
i. Individuals with no existing business form a partnership.
ii. Conversion of a sole proprietorship to a partnership.
a. A sole proprietor and an individual without an existing business form a
partnership.
b. Two or more sole proprietorships form a partnership.
iii. Admission or retirement of a partner.
Individuals with no Existing Business form a Partnership

The opening entry to recognize the contributions of each partner into the partnership is simply to debit the assets
contributed and to credit the liabilities assumed and the capital account of each partner.
Illustration. On July 1, 2020 Nilo Burgos and Helenita Ruiz agreed to form a partnership. The partnership
agreement specified that Burgos is to invest cash of P 700,000 and Ruiz is to contribute land with a fair value of
P 1,300,000 with P 300,000 mortgage to be assumed by the partnership. The entries are as follows:
Cash 700,000
Land 1,300,000
Mortgage Payable 300,000
Nilo Burgos, Capital 700,000
Helenita Ruiz, Capital 1,000,000
After the formation, the statement of financial position of the partnership is:
Burgos and Ruiz
Statement of Financial Position
July 1,2020
ASSETS
Cash P 700,000
Land 1,300,000
Total Assets P 2,000,000
LIABILITIES AND OWNER’S EQUITY

Mortgage Payable P 300,000
Nilo Burgos, Capital 700,000
Helenita Ruiz, Capital 1,000,000
Total Liabilities and Owner’s Equity P 2,000,000
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
A Sole Proprietorship and Another Individual Form a Partnership.

A Sole Proprietor may consider forming a partnership with an individual who has no existing business. Under this
type of formation, the assets and the liabilities of the proprietorship will be transferred to the newly formed
partnership at values agreed upon by all the partners or at their current fair prices.
Illustration. The statement of financial position of Galicano Del Mundo on October 1, 2020 before accepting
Christine Resultay as partner is shown as follows:
Galicano Del Mundo

October 1, 2020
ASSETS
Cash P 60,000
Notes Receivable 30,000
Accounts Receivable P 240,000
Less: Allowance for Uncollectible Accounts 10,000 230,000
Merchandise inventory 80,000
Furniture and Fixtures P 60,000
Less: Accumulated Depreciation 6,000 54,000
Total Assets P 454,000

Notes Payable P 40,000
Accounts Payable 100,000
Galicano, Del Mundo Capital 314,000
Total Liablitites and Owner’s Equity P 454,000
Christine Resultay offered to invest cash t get a capital credit equal to one-half of Galicano Del Mundo’s capital
after giving effect to the adjustments below. Del Mundo accepted the offer.
i. The merchandise is to be valued at P 74,000

ii. The accounts receivable is estimated to be 95% collectible.
iii. Interest accrued on the notes receivable will be recognized: P 10,000, 12% dated July 1, 2020 and P
20,000, 12% dated August 1, 2020.
iv. Interest on notes payable to be accrued at 14% annually from April 1, 2020.
v. The furniture and fixtures are to be valued at P 46,000.
vi. Office supplies on hand that have been charged to expense in the past amounted to P 4,000. These will
be used by the partnership.
The following procedures may be used in recording the formation of the partnership:
Books of Galicano Del Mundo
i. Adjust the assets and liabilities of Galicano Del Mundo in accordance with the agreement. Adjustments
are to be made to his capital account.
ii. Close the books.
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
Books of the Partnership

i. Record the investment of Galicano Del Mundo.
ii. Record the investment of Christine Resultay.
Following the procedures, the entries are:

Books of Galicano Del Mundo
(1)
Galicano Del Mundo, Capital6 14,100
Office Supplies 4,000
Interest Receivable3 700
Merchandise Inventory1 6,000
Allowance for Uncollectible Accounts2 2,000
Interest Payable4 2,800
Accumulated Depreciation5 8,000
(2)
Notes payable 40,000
Interest Payable 2,800
Allowance for Uncollectible Accounts 12,000
Accumulated Depreciation 14,000
Galicano, Del Mundo Capital 299,900
Cash 60,000
Accounts Receivable 240,000
Interest Receivable 700
Merchandise Inventory 74,000
Furniture and Fixtures 60,000

(1)
Cash 60,000
Furniture and Fixtures7 46,000
Notes payable 40,000
Accounts payable 100,000
Interest payable 2,800
Allowance for Uncollectible accounts 12,000
Galicano Del Mundo, Capital 299,900
(2)
Cash8 149,950
Christine Resultay, Capital 149,950
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
Computations:
1. Merchandise inventory, per ledger P 80,000
Merchandise inventory, as agreed 74,000
Decrease in Merchandise inventory 6,000
2. Accounts Receivable, net per ledger 230,000

Accounts Receivable, net as agreed
(240,000 x 95%) 228,000
Increase in allowance 2,000
3. Interest accrued on Notes Receivable: Interest = Principal x Rate x Time

On P 10,000 P 10,000 x 12% x 3/ 12 = P 300
On P 20,000 P 20,000 x 12% x 2/ 12 = P 400
P 700
4. Interest accrued on Notes Payable:

On P 40,000 P 40,000 x 14% x6/ 12 = P 2,800
5. Furniture and Fixtures, net per ledger P 54,000

Furniture and Fixtures, net as agreed 46,000
Increase in Accumulated Depreciation P 8,000
6. Net effect of adjustments on Capital:

Decrease in Merchandise inventory P (6,000)
Increase in allowance for Uncollectibles (2,000)
Increase in Interest receivable 700
Increase in Interest payable (2,800)
Increase in Accumulated depreciation (8,000)
Increase in Office supplies 4,000
Decrease in Capital P (14,100)
7. Furniture and Fixtures, cost per books P 60,000

Furniture and Fixtures, cost as agreed 46,000
Writedown of Furniture and Fixtures P 14,000
8. Galicano Del Mundo, Capital before adjustment P 314,000

Net adjustments to Capital (14,100)
Galicano Del Mundo, Capital after adjustment P 299,900
Agreed Capital credit for Christine Resultay 50%
Cash Investment of Christine Resultay P 149,950
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
After the formation, the statement of financial position of the newly formed partnership is:
Del Mundo and Resultay

October 1, 2020
ASSETS
Cash P 209,950
Notes receivable 30,000
Accounts receivable 240,000
Less: Allowance for Uncollectible Accts. 12,000 228,000

Notes payable P 40,000
Interest payable 2,800
Galicano Del Mundo, Capital 299,900
Christine Resultay, Capital 149,950
Total Liabilities and Owner’s Equity P 592,650
Two or More Sole Proprietorship Form a Partnership

Illustration. On June 30, 2020, Deogracia Corpuz and Esterlina Gevera, friendly competitors in a certain line of
business, decided to combine their talents and capital to form a partnership. The statements of financial position
are as follows:
Deogracia Corpuz
June 30, 2020
ASSETS
Cash P 50,000
Furnitures and Fixtures 60,000

Accounts Payable P 30,000
Deogracia Corpuz, Capital 260,000
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
Esterlina Guevara
June 30, 2020
ASSETS
Cash P 40,000
Delivery Equipment 90,000
TOTAL LIABILITIES AND OWNER’S EQUITY

Esterlina Gevera, Capital 250,000
The conditions and adjustments agreed upon by the partners for purposes of determining their interests in the
partnership are:
i. Actual count and bank reconciliation on Corpuz proprietorship’s cash account revealed cash short and
unrecorded expenses of P 3,500.
ii. Establishment of a 10% allowance for uncollectible accounts in each book.
iii. The merchandise inventory of Gevera is to be increased by P 10,000.
iv. The Furniture and Fixtures of Corpuz are to be depreciated by P 6,000.
v. The delivery equipment by Gevera is to be depreciated by P 9,000
The following procedures maybe used in recording the formation of the partnership:
Books of Deogracia Corpuz and Esterlina Gevera:

1) Adjust the accounts of both parties in accordance with the agreement. Adjustments are to be made to
their respective capital accounts.
2) Close the books.
Books of the Partnership:

1) Record the investment of Deogracia Corpuz.
2) Record the investment of Esterlina Gevera.
Following the procedures, the entries are:
Books of Deogracia Corpuz

(1)
Cash 3,500
Allowance for uncollectible accounts 10,000
Accumulated depreciation 6,000
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
(2)
Cash 46,500
Books of Esterlina Gevera

(1)
Accumulated Depreciation 9,000
(2)

Cash 40,000

(1)
Cash 46,500
Furnitures and fixtures 54,000
(2)
Cash 40,000
Delivery equipment 81,000
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
After the formation, the statement of financial position of the newly formed partnership is:
Corpuz and Gevera
June 30, 2020
ASSETS
Cash P 86,500
Less: Allowance for Uncollectible Accts 18,000 162,000
LIABILITIES AND EQUITY

Total Liabilities and Equity P 573,500

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Republic of the Philippines

DETAILED LEARNING MODULE

Title: BASIC CONSIDERATIONS AND PARTNERSHIP FORMATION

II. Learning Objectives

III. Topics and Key Concepts

C. ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP

iii. According to duration.

1. The partnership name, nature, purpose and location;

PARTNER’S CAPITAL ACCOUNT

PARTNER’S DRAWING ACCOUNT

Adjustment of Accounts Prior to Formation

A. Illustration. A reconditioned printing equipment invested by Agapito Rubio was recorded

ASSETS = LIABILITIES + OWNER’S EQUITY

2. Prepaid Expenses 30,000

3. Emerita Modesto, Capital 10,000

Opening entries of a Partnership Upon Formation

Individuals with no Existing Business form a Partnership

LIABILITIES AND OWNER’S EQUITY

A Sole Proprietorship and Another Individual Form a Partnership.

Galicano Del Mundo

LIABILITIES AND OWNER’S EQUITY

i. The merchandise is to be valued at P 74,000

Books of the Partnership

Following the procedures, the entries are:

Books of the Partnership

2. Accounts Receivable, net per ledger 230,000

3. Interest accrued on Notes Receivable: Interest = Principal x Rate x Time

4. Interest accrued on Notes Payable:

5. Furniture and Fixtures, net per ledger P 54,000

6. Net effect of adjustments on Capital:

7. Furniture and Fixtures, cost per books P 60,000

8. Galicano Del Mundo, Capital before adjustment P 314,000

Del Mundo and Resultay

LIABILITIES AND OWNER’S EQUITY

Two or More Sole Proprietorship Form a Partnership

LIABILITIES AND OWNER’S EQUITY

TOTAL LIABILITIES AND OWNER’S EQUITY

Books of Deogracia Corpuz and Esterlina Gevera:

Books of the Partnership:

Following the procedures, the entries are:

Books of Deogracia Corpuz

Books of Esterlina Gevera

Accounts payable 60,000

Books of the Partnership

LIABILITIES AND EQUITY

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