ACC 102 CHAPTER 1

ACCOUNTING FOR PARTNERSHIPS

Basic Considerations and Formation

BRIEF HISTORY
● The idea of partnership is quite ancient. In 2200 B.C., Hammurabi, King of Babylon, provided for the regulation of
partnerships. In ancient Rome, the partnership was called a societa.
● It was during the Middle Ages in Italy that the laws of partnership began to develop. Italian merchants operated as limited
partners. Their approach was introduced throughout Europe. The English setters brought the concept of partnership into the
US. So, the partnership law in the United States evolved from the English law, the Partnership Act of 1890. In the US,
the Uniform Partnership Act was approved in 1914 and the Uniform Limited Partnership Act in 1916.
● In the Philippines, before the effectivity of the new Civil Code on Aug. 30, 1950, there are two types of partnerships:
commercial and civil. Commercial or mercantile partnerships were governed by the Code of Commerce. The old Civil Code
governed the civil or non-commercial partnerships

DEFINITION
● 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. Two or more persons may also form a partnership for the
exercise of a profession (Civil Code of the Philippines, Article 1767).
● An association of two or more persons to carry on, as co-owners, a business for profit (Uniform Partnership Act, Section 6).
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● The partnership has a juridical personality separate and distinct from that of each of the partners (Civil Code of the
Philippines, Article 1768). Thus, for example, where Vincent Fabella and Wilhelmina Neis established a partnership, three
persons are involved, namely: the partnership and the partners, Fabella and Neis.
● Partnerships resemble sole proprietorships, except that there are two or more owners of the business. Each owner is called a
partner. Partnerships are often formed to bring together various talents and knowledge. Partnerships provide a means of
obtaining more equity capital than a single individual can obtain and allow the sharing of risks for rapidly growing businesses.
● A profession is an occupation that involves a higher education or its equivalent, and mental rather than manual labor. Strictly
speaking, the exercise of a profession not a business or an enterprise for profit but the law allows two or more persons to act
as partners in the practice of their profession. Partnerships are generally associated with the practice of law, public
 accounting, medicine and other professions. Partnerships of this nature are called general professional partnerships. On the
other hand, service industries, retail trade, wholesale and manufacturing enterprises may also be organized as partnerships.

CHARACTERISTICS OF A PARTNERSHIP
● The characteristics of partnerships are different from the sole proprietorships already studied in basic accounting. Some of the
more important characteristics are as follows:
Mutual Contribution. There cannot be a partnership without contribution of money, property or industry (ie. work or services which
may either be personal manual efforts or intellectual) to a common fund.
Division of Profits or Losses. The essence of partnership is that each partner must share in the profits or losses of the venture.
Co-Ownership of Contributed Assets. All assets contributed into the partnership are owned by the partnership by virtue of its
separate and distinct juridical personality.one partner contributes an asset to the business, all partners jointly own it in a s
sense.
Mutual Agency. Any partner can bind the other partners to a contract if he is within his express or implied authority. acting
Limited Life. A partnership has a 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.
Unlimited Liability. All partners (except limited partners), including industrial partners, are personally liable for all debts incurred by
the partnership. If the partnership can not settle its obligations, creditors' claims will be satisfied, from the personal assets of the
partners without prejudice to the rights of the separate creditors of the partners. Income Taxes. Partnerships, except general
professional partnerships, are subject to tax at the rate of 30% (per R.A. No. 9337) of taxable income.
Partners' Equity Accounts. Accounting for partnerships are much like accounting for
sole proprietorships. The difference lies in the number of partners' equity accounts. Each partner has a capital account and a
withdrawal account that serves similar functions as the related accounts for sole proprietorships.
ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP
● A partnership offers certain advantages over a sole proprietorship and a corporation. It also has a number of disadvantages.
They are as follows:
Advantages versus Proprietorships
1. Brings greater financial capability to the business.
2. Combines special skills, expertise and experience of the partners.
3. Offers relative freedom and flexibility of action in decision-making.
Advantages versus Corporations
1. Easier and less expensive to organize. 2. More personal and informal.
Disadvantages
1. Easily dissolved and thus unstable compared to a corporation.
2. Mutual agency and unlimited liability may create personal obligations to partners.
3. Less effective than a corporation in raising large amounts of capital.

PARTNERSHIP DISTINGUISHED FROM CORPORATION

Manner of Creation. A partnership is created by mere agreement of the partners while a corporation is created by operation of law.
Number of Persons. Two or more persons may form a partnership; in a corporation, not exceeding fifteen (15). A corporation with a
single stockholder is considered a
One Person Corporation (Sec. 10, Revised Corporation Code of the Philippines; in Chapter 5). 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 certificate of incorporation by the Securities and Exchange Commission.
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.
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.
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.
Terms of Existence. In a partnership, for any period of time stipulated by the partners; in a corporation, shall have perpetual
existence unless its articles of incorporation provide otherwise (Sec. 11, Revised Corporation Code of the Philippines).

CLASSIFICATIONS OF PARTNERSHIPS
1. 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. If
the articles of universal partnership did not specify its nature, it will considered a universal partnership of profits.
C. Particular partnership. The object of the partnership is determined-its use or fruit, specific undertaking, or the exercise of a
profession or vocation.

2. According to liability:
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.

3. 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.

4.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.

5.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.

KINDS OF PARTNERS
1. General partner. One who is liable to the extent of his separate property after all the assets of the partnership are exhausted.
2. Limited partner. One who is liable only to the extent of his capital contribution. He is not allowed to contribute to industry or
services only.
3. Capitalist partner. One who contributes money or property to the common fund of the partnership.
4. Industrial partner. One who contributes his knowledge or personal service to the partnership.
5. Managing partner. One whom the partners has appointed as manager of the partnership.
6. Liquidating partner. One who is designated to wind up or settle the affairs of the partnership after dissolution.
7. Dormant partner. One who does not take active part in the business of the partnership and is not known as a partner.
8. Silent partner. One who does not take active part in the business of the partnership though may be known as a partner.
9. Secret partner. One who takes active part in the business but is not known to be a partner by outside parties
10. Nominal partner or partner by estoppel. One who is actually not a partner but who represents himself as one.

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;
4. The capital contribution of each partner, the procedure for valuing non-cash investments, treatment of excess contribution (as
capital or as 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.

A contract of partnership is void whenever immovable property or real rights are contributed and a signed inventory of the
said property is not made and attached to a public instrument.

SEC REGISTRATION
● When the partnership capital is P3,000 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 P3,000 or more is
still valid and therefore has legal personality.
● The SEC shall not register any corporation organized for the practice of public accountancy (The Philippine Accountancy
Act of 2004, Sec. 28).
● The purpose of the registration is to set "a condition for the issuance of the licenses to engage in business or trade. In this
way, the tax liabilities of big partnerships cannot be evaded, and the public can also determine more accurately their
membership and capital before dealing with them." (Dean Capistrano, IV Civil Code of the Philippines)

To register a partnership with the SEC, here are the basic steps to follow:
 ● Have your proposed business name verified in the verification unit of SEC The partnership name shall bear the word
"Company" or "Co." and if it's a limited partnership, the word "Limited" or "Ltd." A professional partnership may bear the
word "Company," "Associates" or "Partners" or other similar descriptions (SEC Memorandum Circular 5, Series 2008).
Submit the following documents:
● Articles of Partnership
● Verification Slip for the Business Name
● Written undertaking to change business name if required
● Tax Identification number of each partner partnership and/or that of the partnership
● Registration data sheet for partnership duly accomplished in six copies
● Other documents that may be required:
● endorsement from other government agencies if the proposed partnership will engage in an industry regulated by
the government.
● for partnership with foreign partners: SEC Form F-105, bank certificate on the capital contribution of partners, proof
of remittance of contribution of foreign partners;
Pay the registration/filing and miscellaneous fees: filing fee equivalent to 1/5 of 1% of the partnership capital but not less
than P1,000 and legal research fee which is 1% of the filing fee;

A Forward documents to the SEC Commissioner for signature.

ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY

● Certified public accountants (CPAs), firms and partnerships of CPAs, engaged in the practice of public accountancy, including
the partners and staff members thereof, shall register with the Professional Regulation Commission and the Professional
Regulatory Board of Accountancy. The registration shall be renewed every three years (The Philippine Accountancy Act of
2004, Sec. 31). The rules and regulations covering the accreditation for the practice of public accountancy are specified in
Annex B of The Rules and Regulations Implementing Republic Act 9298 otherwise known as the Philippine
Accountancy Act of 2004

ACCOUNTING FOR PARTNERSHIPS

Owners' Equity Accounts

● In Basic Accounting, generally accepted accounting principles were discussed in the context of a sole proprietorship. These
accounting principles also apply to a partnership. Thus, the recording of assets, liabilities, income and expenses is consistent
 for both proprietorships and partnerships. Comparing two businesses of the same nature, one organized as a sole
proprietorship and another as a partnership, there will be no marked difference in their operations.
● However, differences arise between the two forms of business concerning owners' equity. For a proprietorship, there is only a
single owner. Therefore, there is only one capital account and one drawing account. On the other hand, since a partnership
has two or more owners, separate capital and drawing accounts are established for each partner.
● A partner's capital account is credited for his initial and additional net investments (assets contributed less liabilities assumed
by the partnership), and credit balance of the drawing account at the end of the period. It is debited for his permanent
withdrawals and debit balance of the drawing account at the end of the period.
● Typically, partners do not wait until the end of the year to determine how much of the profits they wish to withdraw from the
partnership. To meet personal living expenses, partners customarily withdraw money on a periodic basis throughout the year.
A partner's drawing account is debited to reflect assets temporarily withdrawn by him from the partnership. At the end of each
accounting period, the balances in the drawing accounts are closed to the related capital accounts.

● Permanent withdrawals are made with the intention of permanently decreasing the partner's capital while temporary
withdrawals are regular advances made by the partners in anticipation of their share in profit.
● The use of drawing accounts for temporary withdrawals provides a record of each partner's drawings during an accounting
period. Hence, drawings in excess of the allowed amounts as stated in the partnership agreement may be controlled.
 ● Notice that profit (or loss) is credited (or debited) either to the drawing account or to the capital account. The choice of the
account to credit or debit depends on the intention of the partners. If they wish to maintain their capital accounts for
investments and permanent withdrawals, then profit or loss should be entered in the drawing account.
● On the other hand, if the purpose of the partners is to make profit or loss part of their capital, then the capital account should
be used. In either case, the resulting partners' ending capital balances will be the same.
● On Sept. 6, 2007, the International Accounting Standards Board (IASB) issued a revised International Accounting
Standards (IAS) No. 1, Presentation of Financial Statements. This standard supersedes the 2003 version of IAS 1 as
amended in 2005. It's common to encounter "profit or loss" rather than usual "net income or net loss" as the descriptive
term used in the Statement of Comprehensive Income (the new title of the income statement per revised IAS No. 1). The
balance sheet is called the Statement of Financial Position. The complete set of financial statements will be in Chapter 2.
● Several Asian countries, whose Partnership Law have strong resemblances to the Partnership Act of 1890 of England,
are using two or three accounts in the capital section of the statement of financial position (as capital, drawings and current
accounts). These accounts and interest on drawings will be discussed in Chapter 2.
Loans Receivable from or Payable to Partners
● If a partner withdraws a substantial amount of money with the intention of repaying it, the debit should be to Loans
Receivable-Partner account instead of to Partner's Drawing account. This account should be classified separately from
the other receivables of the partnership.