PARTNERSHIP

FORMATION

By: Ma. Rosalina A. Besario

Learning Objectives

At the end of the chapter, the students should be able to:

Differentiate between the accounting for partnerships, sole

proprietorships, and corporations.
State the valuation of contributions of partners.
Account for the initial investments of the partners to the partnership.
State the peculiar accounts used in a partnership and identify the
transactions that affect these accounts.
What is Partnership
Two or more persons bind themselves to contribute money, property,
Civil Code of the or industry to a common fund with the intention of dividing profit
Philippines among themselves.
Art. 1767 Two or more persons may form a partnership for the exercise of a
profession.

Uniform An association of two or more persons to carry on, as co-owners, a

Partnership Act, business for profit.
Sect. 6

Civil Code of the

A juridical personality separate and distinct from that of each of the
Philippines
partners.
Art. 1768
What are the Characteristics of Partnership

Each partner has the authority to act for the partnership and to enter
Mutual Agency- into contracts binding upon it. The partners are agents of the
Each partnership for the purpose of each business.

Each partner including the industrial ones, may be held liable for
partnership debt after all partnership assets have been exhausted. If
Unlimited a partners is personally insolvent, his share in the partnership debt
Liability shall be assumed by the other solvent partner.

A partnership is created as a business, as such each partners is

Co-ownership of
entitled to his share in the partnership profit. Any stipulation which
Profits
excludes any partner/s from any share in the profits or losses is void.
What are the Characteristics of Partnership

The partnership has a juridical personality separate and distinct from

Separate Legal the owners. A partnership can acquire assets or incur liabilities or
Personality enter into a contract with third parties in its own name.

Since a partnership is based on a contract between individuals, its

life is limited to the duration of that contract. Any change among
the relationship among partners, terminates the contract and
Limited Life therefore dissolves the partnership. It may dissolve by:
a. the express will of any partner,
b. termination of a definite term stipulated in the
contract,
c. any event that make it unlawful to carryout the
partnership,
d. specific things which a partner had promised to
contribute perishes before the delivery, and
e. expulsion, death, insolvency or civil interdiction of a
partner.
What are the Characteristics of Partnership

A partnership may be created by an oral or written contract between

Ease of two or more persons. As compared to corporations, the formation of
Formation a partnership requires less formality.

Property or Assets invested in a partnership are no longer separately

owned but now belong to the partnership and has equal rights to
Co-ownership of posses partnership property for partnership purpose. However, a
Property partner has no right to posses a partnership property for any other
purpose without the consent of his partners.

Transfer of Is case of dissolution, the transfer of ownership, whether to a new or

Partnership existing partner, requires the approval of the remaining partners.
Advantages and Disadvantages of a Partnership

Advantages Disadvantages

Ease of formation Easily dissolved/limited life

Shared responsibility of running Unlimited liability

the business
Conflict among partners

Flexibility in decision making Lesser capital compared to a

corporation
Greater capital compared to a
sole proprietorship A partnership (other than a
general professional partnership is
Relative lack of regulation by taxed like a corporation.
the government as compared
Difficulties in transferring
to corporation
ownership interest
Kinds of Partnership

According to Activities or Purpose

Commercial Professional
Partnership Partnership

A partnership whose main activity A partnership organized for the

is the manufacture or the purpose of rendering professional
purchase and sale of goods and services such as the professional
services. firm of accountants, lawyers,
engineers, doctors and others
Kinds of Partnership

According to the Liability of the

Partners

General Limited
Partnership Partnership

A partnership wherein all partners A partnership wherein one or more,

may publicly act on behalf of the but not all the partners have a limited
firm and each partner can be held liability. The law provides that at least
one partner of the limited partnership
individually liable for the
shall be a general partner, a limited
obligations of the firm to the
partner is answerable for partnership
extent of their personal property. debts only to the extent of his
contribution.
Kinds of Partnership

According to Legality of Existence

De Jure De Facto
Partnership Partnership

A partnership that has

A partnership that has not complied with some
complied with all the or all the legal
legal requirements to its requirements for its
existence formation.
Kinds of Partnership

According to the Manner of Creation

Orally Agreed Written in a

Upon Public
Instrument

The partnership agreement

was incorporated in a article
The partnership agreement of co-partnership and
was formed by means of approved by SEC, it is said to
articulation or the be written in a public
agreement is orally made.. instrument.
Difference between a General and
Limited Partnership
As to Composition

General Limited

The partnership is
The partnership is composed of at least one
composed of two or more general partner and at least
general partners including one limited partner.
industrial partner, no limited
partner.
Difference between a General and
Limited Partnership
As to Contribution

General Limited

Contribution may be money, Can only contribute money

property or industry and property but not
industry
Difference between a General and
Limited Partnership
As to Contract

General Limited

The contract is called The contract is called

“Articles of Partnership” “Certificate of partnership”
Difference between a General and
Limited Partnership
As to Management

General Limited

The general partners Only the general partner

manage the partnership by manages the business,
themselves as mutual limited partners cannot
agents or by a managing participate in the
partner. management of the
business.
Difference between a General and
Limited Partnership
As to Name of the Partnership

General Limited

The name of one or more The name of the firm should

partners can be used as the include the word “Limited”
partnership’s name. and the names of the
limited partners can not be
used in the firm’s name.
Difference between a General and
Limited Partnership
As to Liability to a Third Party

General Limited

General partners, including Limited partners are liable

industrial partners, are liable only up to their
to the extent of their contributions, only the
personal assets for net general partners are liable to
liabilities of the partnership the extent of their personal
assets to liabilities of the
partnership
Difference between a General and
Limited Partnership
As to Return of Contribution

General Limited

General partners get the Limited partners get the

return of their contribution return of contribution as per
only during dissolution and stipulation in the certificate
liquidation
Kinds of Partners – According to the Nature
of Contribution

Capitalist one who contributes cash or non cash

Partner properties

Industrial one who contributes only his labor,

Partner knowledge and skill

Industrial- one who contributes not only his labor,

Capitalist knowledge and skill but also cash or non
Partner cash properties
Kinds of Partners – According to Liability

one who is liable to pay personally the

General obligations or debts of the business in case
Partner its assets are not sufficient to cover the
claims of its creditors

Limited one whose liability extend only to his

Partner contributed capital which normally is the
amount actually invested
Kinds of Partners – According to the Knowledge
by the Public and Management of the Partnership
a partner who is not known to the public as
Secrete a partner but participates actively in the
Partner management of partnership affairs

a partner who is known as a partner but

Silent does not take an active part in the
Partner management of partnership affairs

partner who is not known to be a partner

Dormant
and does not take an active part in the
Partner
management of the partnership
Kinds of Partners – According to the Nature of
Management Work
one who is chosen by the partners to
Managing manage the operation of the partnership for
Partner the partners

one who is designated to win up the affairs

Liquidating of the partnership
Partner

partner who is not known to be a partner

Nominal
and does not take an active part in the
Partner
management of the partnership
Kinds of Partners – Pseudo Partners

one who is not a partner but represents himself or

consents to another representing him to a third
Partner by person as a partner in an existing partnership. The
law considers him partner as far as the third person
Estoppel
in concerned.

one who is not a partner but allows the use of is

Nominal name either for accommodation or for
consideration. He does not participate in the
Partner
partnerships management and has no financial
investment in the business
Steps in the Formation of a Partnership

Step 1 - Business Name

The partnership must have a business name. An application for a
business name must be filed with the SEC. The business name will be
reserved until the Article of Co-Partnership is approved.
Steps in the Formation of a Partnership

Step 2 - Securities and Exchange Commission

An article of co-partnership, the partnership contract should be filed
with the SEC for approval. Within one month from the date of filing, the
partnership contract shall be approved or disapproved by the said
commission.
Steps in the Formation of a Partnership

Step 3 - SSS, Philhealth and Pag-ibig

The partnership must register with the SSS, Philhealth and Pag-ibig to
secure the certificate of membership and employer ID no.
Steps in the Formation of a Partnership

Step 4 - Business Permit

Before starting operations, a business permit should be secured from
the city or municipality where the business is located.
Steps in the Formation of a Partnership

Step 4 – Bureau of Internal Revenue

The partnership must register with the BIR to secure a tax identification
no. (TIN) and be classified as VAT or non VAT taxpayer. The partnership
must also acquire approval from the BIR for its books of accounts and
business forms, such as the sales invoices and official receipts
THE ARTICLES OF PARTNERSHIP
THE ARTICLES OF PARTNERSHIP

THE ARTICLES OF
PARTNERSHIP
THE ARTICLES OF PARTNERSHIP
THE ARTICLES OF PARTNERSHIP
THE ARTICLES OF PARTNERSHIP
How to register with SEC
How to register with SEC
Valuations of Contributing Partners
Valuations of Contributing Partners
Valuations of Contributing Partners
ACCOUNTING FOR PARTNERSHIP FORMATION
ACCOUNTING FOR PARTNERSHIP FORMATION
ACCOUNTING FOR PARTNERSHIP FORMATION

Partner’s Ledger Accounts

Capital accounts
Drawing accounts
Receivable from
Payable to partner
ACCOUNTING FOR PARTNERSHIP FORMATION

Capital and Drawing Accounts

Besario, Capital Besario, Drawing

DR CR DR CR
Permanent
withdrawals of Temporary Recurring
Initial investments
capital withdrawals during
reimbursable cost
the period
paid by the partner

Shares in losses Additional Temporary funds held

Investments to be remitted to the
partnership

Debit balances of
drawing accounts Share in profits
ACCOUNTING FOR PARTNERSHIP FORMATION
Illustration # 1

A and B formed a partnership. A contributed cash of

P 1,000,000 while B contributed land with a carrying value of
P 800,000 and fair value of P1,600,000. The land has an
unpaid mortgage of P 400,000 which is assumed by the
partnership.

Required:
1. Determine the correct valuation of the partner’s
contribution in the partnership books of accounts.
2. Provide the journal entry.
ACCOUNTING FOR PARTNERSHIP FORMATION
Solution:
Requirement (A) A B Partnership
Cash 1,000,000 - 1,000,000
Land (fair value) - 1,600,000 1,600,000
Total 1,000,000 1,600,000 2,600,000

Mortgage Payable - 400,000 400,000

A, Capital 1,000,000 1,000,000
B, Capital 1,200,000 1,200,000
Total 1,000,000 1,600,000 2,600,000

Requirement (B)
Cash 1,000,000
Land 1,600,000
Mortgage Payable 400,000
A, Capital 1,000,000
B, Capital 1,200,000
ACCOUNTING FOR PARTNERSHIP FORMATION
Illustration # 2

A and B formed a partnership. The following are the contributions:

A B
Cash 1,000,000
Accounts Receivable 200,000
Building 1,400,000

Additional Information:
1. The accounts receivable include P40,000 that is deemed
uncollectible.
2. The building is under-depreciated by P100,000.
3. The building has an unpaid mortgage of P200,000, but is not assumed by the partnership. Partner B
promised to pay for the mortgaged himself.

Requirements:

1. Determine the correct valuations of the partner’s contributions in the partnership books of accounts.
2. Prepare the journal entry.
ACCOUNTING FOR PARTNERSHIP FORMATION
Solution:
Requirement (A) A B Partnership
Cash 1,000,000 - 1,000,000
Accounts Receivable 160,000 - 160,000
Building 1,300,000 1,300,000
Total 1,160,000 1,300,000 2,460,000

A, Capital 1,160,000 1,160,000

B, Capital 1,300,000 1,300,000
Total 1,160,000 1,300,000 2,460,000

Requirement (B)
Cash 1,000,000
Accounts Receivable 160,000
Building 1,300,000
A, Capital 1,160,000
B, Capital 1,300,000
ACCOUNTING FOR PARTNERSHIP FORMATION
Bonus on Initial Investments
ACCOUNTING FOR PARTNERSHIP FORMATION
Bonus on Initial Investments
ACCOUNTING FOR PARTNERSHIP FORMATION
Bonus on Initial Investments
ACCOUNTING FOR PARTNERSHIP FORMATION
Bonus on Initial Investments

10,000

90,000
ACCOUNTING FOR PARTNERSHIP FORMATION
Bonus on Initial Investments

Solution:
ACCOUNTING FOR PARTNERSHIP FORMATION
Bonus on Initial Investments
ACCOUNTING FOR PARTNERSHIP FORMATION
Bonus on Initial Investments
ACCOUNTING FOR PARTNERSHIP FORMATION
ACCOUNTING FOR PARTNERSHIP FORMATION
ACCOUNTING FOR PARTNERSHIP FORMATION

ESPANOL AND QUINO PARTNERSHIP

BALANCE SHEET
AS OF JANUARY 1, 2018

ASSETS
CURRENT
Cash 766,000
Accounts Receivable 150,000
Less: Allowanc of Uncollectible Accounts 10,000 140,000
Inventory 460,000 1,366,000
NONCURRENT
Equipment 124,000
TOTAL ASSETS 1,490,000

LIABILITIES AND CAPITAL

CURRENT LIABILITIES
Accounts Payable 30,000

PARTNER'S CAPITAL
Espanol, Capital 730,000
Quino, Capital 730,000 1,460,000
TOTAL ASSETS AND CAPITAL 1,490,000
ACCOUNTING FOR PARTNERSHIP FORMATION

THANK YOU!!!