1

Requires the contribution of money, property or

ACCTNG 102 REVIEWER industry to a common fund
MIDTERM COVERAGE (2) Division of Profits or Losses
Module 1 Nature & Formation of Each partner must share in the profits or losses
Partnership of the venture
Module 2 Partner Operations & Financial
Reporting
(3) Co-Ownership of Contributed Assets
Module 3 Partnership Dissolution All assets are contributed, owned by the
Module 4 Liquidation partnership by virtue of its separate and distinct
juridical personality.
◉ CHAPTER 1 – NATURE & FORM
All partners jointly own a contribution of asset of
Brief History a partner.

 Partnership Act of 1890 (4) Mutual Agency

 Uniform Partnership Act (1914)
Any partner can bind the other partners to a
 Uniform Limited Partnership Act (1916)
contract if he is acting within his express or
Two types of Partnership (Aug. 30, 1950) implied authority

 Commercial / Mercantile – governed by the Code (5) Limited Life

of Commerce
It may be dissolved by the admission, death,
 Civil – governed by the old Civil Code insolvency, incapacity, withdrawal of a partner or
expiration of the term specified.
PARTNERSHIP
(6) Unlimited Liability
by Article 1767 of the Civil Code of the Philippines:
Partners are liable for all debts incurred by the
- A contract whereby two or more persons bind partnership. (except for limited partners)
themselves to contribute money, property, or
industry into a common fund with the intention of Creditor’s claims will extend to the personal
dividing profits among themselves. assets of the partners if the partnership cannot
settle its debts.
- Two or more persons may also form a partnership
for the exercise of profession. (7) Income Taxes
(except general professional partnerships) they
Article 1768 are subject to tax at the rate of 30% of taxable
- Partnership has a juridical personality separate income.
and distinct from that each of the partners
(8) Partner’s Equity Accounts
By Uniform Partnership Act, Sec. 6 Each partner has a capital account and a
- An association of two or more persons to carry on, withdrawal account that serves similar functions
as co-owners, a business for profit as the related accounts for sole proprietorships

- This resembles sole proprietorships, except that (9) Legal Entity

there are two or more owners of the business. Is a distinct legal entity separate from that each
- Each owner is a PARTNER of the partners.

- Partnerships in practice of their profession are called

General Professional Partnerships ADVANTAGES of a Partnership
 Versus Proprietorships
CHARACTERISTICS of Partnership:
 Brings greater financial capability to the
(1) Mutual Contribution business – combined personal credit
 Combines special skills, expertise and
experience of the partners.
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Partnership, (except limited partner) is liable to the

extent of his personal assets
 Versus Corporations Corporation, stockholders are liable only to the extent of
their interest or investment in the corporation
 Easier and Less Expensive to Organize
 More personal and Informal
Right of Succession.
Partnership has no rights of succession
 Other Advantages
Corporation has right of succession, and has the
 Unlimited Liability of Partners makes it capacity to continue its existence regardless of death,
reliable for Creditors withdrawal, etc.

 Participation by more than one person allow Terms of Existence.

closer supervision of activities Partnership, for any period stipulated by the partners
 The direct gain to the partners is an Corporation, perpetual existence unless it’s provided in
incentive for them to give close attention to the articles of incorporation
the business
CLASSIFICATIONS OF PARTNERSHIPS
 The personal element in the characters of
the partners is retained According to OBJECT

DISADVANTAGES of a Partnership a. Universal Partnership of Profits.

All that the partners may acquire by their
 Easily dissolved and thus unstable compared to industry or work during the existence of the
a corporation partnership contract belongs to the
partnership
 Mutual agency and unlimited liability may create
personal obligations to partners – deters b. Uni. Partnership of all present properties.
investors All contribution become part of the partnership
 Less Effective than a corporation in raising large fund.
amounts of capital c. Particular Partnership.
The object of the partnership is determinate – its
 Divided Authority among partners
use or fruit, specific undertaking, or the exercise
 Constant likelihood of dissension and of a profession or vocation.
disagreement If the partnership is formed only to carry out one
business venture or to complete one undertaking
PARTNERSHIP DISTINGUISHED FROM
According to LIABILITY
CORPORATION
a. General.
Manner of Creation. All partners are liable to the extent of their
Partnership is made by mere agreement separate properties
Corporation is through operation of law.
b. Limited.
Number of Persons. Are only liable to the extent of their personal
contributions.
Partnership can be two or more persons
Corporation must not exceed fifteen (15) In a limited partnership, there must be at least
one general partner.
Commencement of Juridical Personality.
Partnership from Articles of Partnership According to DURATION
Corporation from Issuance of Certificate of Incorporation a. Partnership at will
from (SEC) One in which no term is specified and is not
formed for any particular undertaking
Management.
Partnership, every agent is an agent of the partnership b. Partnership with a fixed term
Corporation, management is vested by the Board
According to PURPOSE / ACTIVITY
Extent of Liability. a. Commercial or Trading Partnership
 3

One formed for the transaction of business 2. Silent Partner

Organized for the manufacturing, purchase and One who does not take active part
sale of goods
b. Professional or Non-Trading Partnership OTHERS
Formed for the exercise of profession
Organized for the purpose of rendering services 1. Liquidating Partner
One who is designed to wind up or settle the
According to LEGALITY OF EXISTENCE affairs of the partnership after dissolution
a. De Jure Partnership
2. Nominal Partner – Partner by Estoppel
One that has complied all the legal requirements
One who is not a partner but represents himself
for its establishment
as one

b. De Facto Partnership 3. Ostensible Partner

One which has failed to comply with all the legal One who appears to be a partner in a business,
requirements for its establishment but actually has no real interest in the
partnership
According to REPRESENTATION TO OTHERS
4. Secret Partner
a. Ordinary Partnership One who takes active part but is not known
Agreement between two or more people to go
into business together 5. Dormant Partner
One who does not take active part, and not
b. Partnership by Estoppel known as a partner
Partnership that may arise where, in fact, no
formal partnership agreement is, in effect ARTICLES OF PARTNERSHIP – SEC REG.
According to PUBLICITY  A Partnership is created by an Oral or Written
a. Secret Partnership Agreement.
 The written contract agreement is also known as
b. Open Partnership the Partnership Contract.

The ff. essential provisions may be contained in the

CLASSES OF PARTNERS agreement:
As to CONTRIBUTION 1. Partnership Name, Nature, Purpose and Location
1. Capitalist Partner 2. Names, Citizenship and Residences of the Partners
One who contributes money/property
3. Date of Formation and the Duration of the Partnership
2. Industrial Partner
One who contributes knowledge or personal 4. Capital Contribution of Each Partner; valuing non
cash, treatment of excess contribution (as capital or
service
as loan), and penalties for partner’s failure to invest
3. Capitalist-Industrial Partner
5. The rights and duties of each partner
As to LIABILITY 6. Accounting Period to be adopted, nature of
1. General Partner accounting records
Liable to the extent of his separate property after
all the assets of the partnership are exhausted 7. Method of Sharing Profits or Loss, Distribution

2. Limited Partner 8. Drawings and Salaries to be allowed to partners

Liable only to the extent of his capital
9. Provision for Arbitration of disputes, dissolution, and
contribution liquidation.
As to MANAGEMENT
 When is a Written Contract Required?
1. Managing Partner  When immovable property OR real rights are
One whom the partners has appointed as contributed
manager of the partnership
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 When the partnership capital is three thousand ACCOUNTING FOR PARTNERSHIPS

pesos (PHP3,000) or more - Sole Proprietorship GAAP also apply to
partnership
 Articles of Co-Partnership is a written - Comparing two businesses of the same nature,
agreement among partners one organized as a sole proprietorship and
another as a partnership, there will be no
 ; filed with the office of Securities and marked difference in their operations.
Exchange Commission
- Since a partnership has two or more owners,
 Contract of Partnership is void whenever separate capital and drawing accounts are
immovable property or real rights are established for each partner.
contributed and a signed inventory of the said
property is not made and attached to the
public instrument PARTNER’S CAPITAL ACCOUNT (CR.)
Debit Credit
SEC Registration
Permanent Withdrawals Original Investment
- Even if the partnership is not registered, the
partnership having a capital of P3,000 or more is Additional Investment
still VALID and therefore has legal personality
Debit balance of the Credit balance of the
drawing account at the drawing account at the
- The SEC shall not register any corporation
end of the period end of the period
organized for the practice of public accountancy
Share in partnership loss Share in partnership
from operations profits from operations
REASONS FOR PARTNERSHIP FORM. (added to capital)
(1) A larger amount of capital can be raised
(2) Easy to form a partnership DRAWING ACCOUNT (DR.)
(3) Partners contribute diverse skills, expertise
& ideas Debit Credit
(4) Workload is shared among partners Temporary Withdrawals Original Investment
Share in partnership loss Share in partnership
ESSENTIAL FEATURES OF A PARTNERSHIP
from operations (Direct profits from operations
AGREEMENT – Partnership Deed DR from partner’s capital (Direct credit to the
(1) Distribution of Profits & Losses among accounts) partner’s capital account)
partners
(2) Interest on Capital - A Partner’s Capital account is credited for his initial
and additional net investments
(3) Interest on Drawing
(4) Partnership Salary - A partner’s drawing account is debited to reflect
assets temporarily withdrawn by him from the
ACCOUNTING FOR PARTNERSHIPS partnership.
 Plurality of Capital and Drawing Accounts
 Loans Receivable and Loans Payable - At the end of each accounting period, the
balances in the drawing accounts are closed to
 Opening Entries the related capital accounts.
 Formation A: 2 or more persons in a
partnership - Permanent withdrawals are made with the
intention of permanently decreasing the partner’s
 Formation B: Sole Proprietor +
capital
Individual
 Formation C: Sole Proprietorship + - Temporary withdrawals are regular advances
Sole Proprietorship made by the partners in anticipation of their share in
profits
 Problems on Accounting
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- The use of drawing acc. For temporary withdrawals - (IFRS no.3) is the price at which an asset or liability could
provides a record of each partner’s drawings during be exchanged in a current transaction between
an accounting period – drawings in excess of the knowledgeable, unrelated parties.
allowed amounts as stated in the partnership
agreement may be controlled

- Profit or Loss is credited or debited either to the PARTNERSHIP: 2 OR MORE PERSONS

drawing or capital account – the choice to either  Case 1
debit or credit depends on the partners. Jun & Jing agreed to form a partnership by
contributing P50,000 cash each.
 If they wish to maintain their capital accounts for
investments and permanent withdrawals, then profit Entry
or loss should be entered in the drawing account. Cash P100,000
- not unless they intended it to be part of their Jun, Capital P50,000
capital. Jing, Capital P50,000

LOANS RECEIVABLE  Case 2

1. Money advanced by the partnership to partners Vikki – Cash; P20,000
2. Payable with interest by partners Equipment; P80,000
3. Due from partners Nikki - Cash; P100,000
Inventories; P50,000
- If the partner withdraws a substantial amount of money
with the intention of repaying it, the debit should be to Entry
Loans Receivable-Partner account instead of to Cash P120,000
Partner’s Drawing account – should be classified in a Inventories P50,000
separate receivable Equipment P 80,000
Nikki, Capital P150,000
LOANS PAYABLE Vikki, Capital P100,000
1. Money advanced by partners to the partnership
2. Payable with interest by the partnership  Case 3
3. Due to Partners Carol, Beth and Louella formed a partnership.
Carol contributed cash of P100k, Beth contributed
- A partner may lend amounts to the partnership in excess cash P50k and equipment valued at P25k
of his intended permanent investment. This should be ; Louella is an industrial partner. Profit or Loss to
credited to a Loans Payable-Partner account – not to
be shared equally among partners.
Partner’s capital since it is a liability.

- Loans payable to partners must be paid after the claims of Entry

outside creditors have been paid in full.
Cash P150,000
Equipment P25,000
PARTNERSHIP FORMATION Carol, Capital P100,000
Beth, Capital P75,000
 Valuation of Investments by Partners
- Assets debited for assets contributed; Liabilities credited Entry for Louella: Louella is admitted into the partnership as
an industrial partner for a 1/3 share in the partnership profit
for any liabilities, assumed by the partnership
See more examples in Page 25-26
- separate capital accounts are credited for the amount of
each partner’s net investment (assets less liabilities)
PARTNERSHIP: SOLE + INDIVIDUAL

- can either invest Cash / Non-Cash assets  Adjustment of Accounts prior to Formation
; Non-Cash assets are recorded at agreed value by
partners. If not stated – FAIR MARKET VALUE at - A business is not viewed as a going concern if
the date of transfer to the partnership. liquidation appears imminent (about to happen)

FAIR MARKET VALUE. The ff. T-Account will serve to summarize the
necessary adjustments to the capital account
- it is an estimated amount that a willing seller would receive
from a financially capable buyer for the sale of asset in a Owner’s Equity Account
free market. Debit Credit
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Decrease in Asset Increase in Asset

Increase in Liability Decrease in Liability (2)
Increase in Contra-Asset Decrease in Contra-Asset
Inventory P5,000
Paul, Capital P5,000
(P45,000 – P40,000)

GENERAL GUIDELINES ON CHANGE IN VALUES

Debit Credit (3)
Increase in Capital
Assets
ASSET VALUES Prepaid Expense P2,000
Contra-Asset Capital Accrued Expenses Payable P800
Decrease in Paul, Capital P1,200
Capital Assets
ASSET VALUES
Capital Contra-Asset
Decrease in Balance of Paul Cap. – P152,450 (current balance +
LIABILITY Liabilities Capital
BALANCES the adjusted entries)
Increase in Liabilities
Capital
LIABILITY John Capital

Cash P152,450
John, Capital P152,450

 Case Assumption; New Set of Books for the Partnership

John and Paul formed a partnership wherein John
contributes cash while Paul is to transfer the assets - The only entry required is recording the investments
and liabilities of his business. of Partners at agreed values

Account Balances on the books of Paul are as follows Note: In some instances, entries to adjust and close the
books of the sole proprietor may be required in the
Account Debit Credit
problem.
Cash 50,000
A/R 75,000 Step 1: Pass the Adjusting Entries
Inventories 40,000 Step 2: Close the Accounts in the Books of Paul)
A/P 15,000
Paul, Capital 150,000
(1)
The partners agreed on the following; Cash P50,000
Accounts Receivable P750,000
1. An allowance for doubtful accounts of 5% of A/R is Inventories P45,000
to be established. Prepaid Expenses P 2,000
2. The inventories are to be valued at their current AFDA P3,750
replacement cost of P45,000. A/P P15,000
3. Prepaid expenses of P2,000 and accrued of P800 Accrued Exp. Payable P800
are to be recognized. Paul, Capital P152,450
4. Paul is to be credited for amount equal to the net
assets transferred. To record the investment of Paul
5. John is to contribute sufficient cash to have an
equal interest in the partnership.
(2)
Assumption: Sole Proprietor’s books will be used. Cash P152,450
John, Capital P152,450
(1)

Paul, Capital P3,750 See more examples in Pages 26-29 of the book
Allowance for Doubtful Acc. P3,750
(75,000 x %5) PARTNERSHIP: SOLE + SOLE
AFDA is a contra asset account. When it is increased, the effect is to
decrease the related asset account. Owner’s Equity is also decreased  Case
since this provision for uncollectible is considered as an expense
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Maricar, owner of Maricar Variety Store and Alexis, Books of the Partnership;
owner of Alexis Trading, decided to combine their
1. Record the investment of Maricar Variety Store
businesses on July 1, 2001. 2. Record the investment of Alexis
Each is to transfer business assets and liabilities at
Agreed values. Balance sheets for the two proprietors as
of July 1,2001 are shown.

The partners agreed on the following conditions: ALEXIS TRADING

1.) Adjusting Entry
1. Partners’ capital in the partnership shall be equal
to the net assets transferred Merchandise Inventory 84,000
Alexis, Capital 75,000
Adjustments are as follows Allowance for D/A 3,000
1. Allowance for doubtful accounts shall be Accumulated Depreciation 6,000
increased to 10% of Accounts Receivable To record adjustments to restate Alexis’ Capital
2. Inventories are to be valued at 120% of book 2.) Closing Entry
value (20%)
3. Fixed assets are 5% depreciated Accounts Payable 111,000
Allowance for D/A 10,000
The following SFP for each owner before formation of Accumulated Depreciation 8,000
Alexis, Capital 645,000
partnership;
Cash 10,000
Accounts Receivable 100,000
MARICAR VARIETY STORE Merchandise Inventory 504,000
ASSETS Store Equipment 160,000
Cash 40,000 To close the books of Alexis’ Capital
Accounts Receivable 24,000
Less: Allowance for DA (2,000) 22,000 Computation for Adjustments
Merchandise Inventory 110,000
Store Equipment 200,000 (1) (A/R) 100,000 X 10% - 7,000 = 3,000
increased to 10% of Accounts Receivable
Less: Accu Depreciation (10,000) 190,000
Total Assets 362,000 (2) 420,000 X 20% = 84,000
100% is 420,000 – 20% of 420,000 is added to get book value of
LIABILITIES & CAPITAL Inventory
Accounts payable 44,000
(3) 160,000 X 5% = 8,000 – 2,000 (current balance) = 6,000
Maricar, capital 318,000 5% is the expected depreciation, add 6,000 to get the 5%
Total Liabilities & Capital 362,000 value of the fixed asset

ALEXIS TRADING
ASSETS MARICAR VARIETY STORE
Cash 10,000 1.) Adjusting Entry
Accounts Receivable 100,000 Merchandise Inventory 22,000
Less: Allowance for DA (7,000) 93,000 Alexis, Capital 21,600
Merchandise Inventory 420,000 Allowance for D/A 400
To record adjustments to restate Maricar’s Capital
Delivery Equipment 160,000
Less: Accu Depreciation (2,000) 158,000 2.) Closing Entry
Total Assets 681,000
Accounts Payable 44,000
LIABILITIES & CAPITAL Allowance for D/A 2,400
Accounts payable 111,000 Accumulated Depreciation 10,000
Alexis, capital 570,000 Maricar, Capital 339,000
Total Liabilities & Capital 681,000 Cash 40,000
Accounts Receivable 24,000
Merchandise Inventory 132,000
Store Equipment 200,000
The following procedures may be used in recording the
To close the books of Maricar’s Capital
formation of the partnership;
1. Adjust accounts of both parties in accordance with the Computation for Adjustments
agreement – adjustments are to be made to their
respective capital accounts (1) (A/R) 24,000 X 10% - 2,000 = 400
increased to 10% of Accounts Receivable
2. Close the books
(2) 110,000 X 20% = 22,000
 8

100% is 110,000 – 20% of 110,000 is added to get the book value - Owners of LLC are called members – it may be
Of inventory
individuals, partnerships, corporations or other
(3) No computation for fixed assets since it is already depreciated entities
By 5% (200,000 x 5% = 10,000)
- Many states allow one-person LLCs – the members
have limited liability even if they are active in the
company
Books of Partnership
For a new set of books, the only entries required will be  LIMITED LIABILITY PARTNERSHIP
to record the investments of partners at agreed values. - Is very similar to an LLC except that investment in
LLP is restricted to professionals
NOTE:
 Plant assets are recorded at NET AMOUNT –
Suggested Activities to answer
because it represents the cost to the partnership
and becomes the basis for future depreciation by  Theories | pages 1-24 to 1-33
partnership  Practical | pages 1-34 to 1-48

 AR is recorded at gross amount – because

some of the accounts receivable may eventually be
identified as definitely uncollectible. The net ◉ CHAPTER 2 – PARTNERSHIP OP &
realizable value of accounts receivable will depend FINANCIAL REPORTING
on the agreement among partners.
NATURE OF PARTNERSHIP
BOOKS OF PARTNERSHIP - Accounting for Partnership Operations is essentially
To record investment of Maricar
the same as accounting for operations of a sole
Cash 40,000 proprietorship except for the following special
Accounts Receivable 24,000 problems;
Merchandise Inventory 132,000
Store Equipment 190,000
Allowance for DA 2,400  Closing Entries of a Partnership
Accounts Payable 44,000  Distribution of Profits and Losses
Maricar, Capital 339,000  Preparation of a Worksheet
To record investment of Maricar
 Preparation of Financial Statements
To record investment of Alexis Income Statement
Statement of Changes in Partner’s
Cash 10,000
Capital
Accounts Receivable 100,000
Merchandise Inventory 504,000 Balance Sheet
Delivery Equipment 152,000
Allowance for DA 10,000 CLOSING ENTRIES of a PARTNERSHIP
Accounts Payable 111,000
Alexis, Capital 645,000
To close the books of Alexis’ Capital DEBIT CREDIT

Combine both accounts for the statement of financial position Close Revenue Revenue Acct Income
and Nominal Summary
See more examples in Pages 30-33 of the book Accounts with Nominal Acct
credit balance
View examples 4 and 5 in [ACCTNG102-Module-1 File] (Purchase
Discounts)
 LIMITED LIABILITY COMPANY

- Is a hybrid form of business for it combines both the Close expense Income Expense Acct
best features of a partnership and a corporation and nominal Summary
accounts with Nominal Acct
- It is a form of legal entity that provides limited liability debit balance
to its owners (Sale Returns
and
Allowances)
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; The amount of time each partner devotes to the

Transfer Income Capital Drawing business
Summary Acct Acct
; Other contributions are the factors being
Account to
capital or considered in the formulation of an equitable profit
drawing and loss ratio
accounts of
partners - Some agreements consider the importance of both
the amount and quality of managerial services
rendered, and the amount capital invested by the
Depending on the partnership agreement, the partners for the success or failure of a partnership.
balance of the income summary may be: in this case;

1. Transferred to the drawing accounts  allowances may be provided for salaries to

2. Transferred to the capital accounts of partners partners

 Credit balance in income summary represents  interest on their respective capital balance as a
NET INCOME preliminary step in the division of profits and losses
-- balances may then be divided in a specified ratio
Debit Credit
INCOME SUMMARY CAPITAL ACCOUNTS Among the other factors which may be considered
are as follows;
 Debit balance in income summary represents
NET LOSS 1. A partner has considerable personal financial
resources, thus giving the partnership a strong credit
Debit Credit rating. In general, partners have unlimited liability. A
CAPITAL ACCOUNTS INCOME SUMMARY very solvent partner will make the partnership
attractive to creditor.
 Partner’s Equity in Assets Contrasted with
2. A partner who is well known in a profession or an
Share in Profits or Losses
industry may contribute immensely to the success of
the partnership although he may not participate
- The basis on which profits or losses are shared is a actively in the operations of the partnership.
matter of agreement among the partners and may
not necessarily be the same as their capital These two factors may be incorporated in the plan to arrive at a
contribution ratio. ratio by which any remaining profits or losses are to be divided.

- The equity of a partner in the net assets of the  Performance Methods

partnership should be distinguished from a partner’s
share in profits or losses. - Many partnerships use profit and loss sharing
arrangements that give some weight to the specific
- Simply put, partners may agree on any type of profit performance of each partner to provide incentives to
and loss ratio regardless of the amount of their perform well – frequently referred to as bonus
respective capital account balance
Other examples of the use of performance criteria are;

DISTRIBUTION OF PROFITS & LOSSES 1. Changeable hours. These are the total number of
(1) Services rendered by the partners hours that a partner incurred on client-related
(2) Amount of Capital Contributed assignments. Weight may be given to hours in excess
(3) Entrepreneurial Ability or Managerial Skill of the of a standard.
Partner 2. Total Billings. The total amount billed to clients for
work performed and supervised by a partner
FACTORS TO CONSIDER IN ARRIVING AT A constitutes total billings. Weight may be given to
PLAN FOR DIVIDING PROFITS AND LOSSES billings in excess of norm.

 Money, Property or Industry 3. Write-Offs. Consist of uncollectible billings. Weight

may be given to a write-off percentage below a norm.
- The amount invested by each partner 4. Promotional and Civic Activities. Time devoted
to developing future business and enhancing the
 10

partnership name in the community is considered  As to purely industrial partners, shall not be
promotional and civic activity. Weight may be given to liable for any losses
time spend in excess of a norm or to specific
accomplishments resulting in new clients.
PRIOR PERIOD ERRORS
- Omissions from and other misstatements of the
5. Profits in excess of specified levels. entity’s financial statements for one or more prior
Designated partners commonly receive a certain
period that are discovered in the current period.
percentage of profits in excess of a specified level of
earnings.
- E.g., estimation of depreciation, errors in
inventory, fraud or oversights

- Material Error must be restated

RULES FOR DISTRIBUTION OF PROFITS & LOSS
- Prior period error that relates to prior periods should
- Profits or losses shall be distributed in conformity be reported by adjusting the opening balance of
with the agreement. partner’s equity & affected assets

- If only the share of each partner in the profits has - Correction for prior period error is excluded from
been agreed upon, the share of each in losses shall profit & loss for the period in which the error is
be in the same proportion discovered.

- In the absence of stipulation, the share of each - The effect of the error correction will be divided
partner in profits or losses shall be in proportion to based on the application profit and loss ratio.
what he may have contributed (according to the ratio
of original capital investments or in its absence, the DISTRIBUTION BASED ON PARTNERS’ AGREEMENT
ratio of capital balance at the beginning of the year)
Example: Black & White are partners sharing profit and
(1) Profits losses based on their capital contributions of P40,000 &
P60,000, respectively. Their profit & loss sharing may be
a. The profits will be divided according to expressed as follows:
partner’s agreement

b. If there is no agreement; Percentage Fraction Decimal Ratio

B: 40% B: 4/10 B: 0.4 4:6 or
 As to capitalist partners, the profits shall be W: 60% W: 6/10 W: 0.6 2:3
divided according to their capital contributions
(according to the ratio of original capital investments METHODS OF DISTRIBUTING PROFIT & LOSS
or in its absence, the ratio of original capital
1. Equally
investments or in its absence, the ratio of capital
2. Arbitrary Ratio (Percent, Decimal, Fraction, Ratio)
balances at the beginning of the year.)
3. Capital Ratio (Original, Beginning, Ending, Average)
4. Interest on Capital and the Balance of Agreed Ratio
 As to industrial partners (if any), such share as
5. Salary allowances to partners balance on agreed
may be just and equitable under the circumstances,
ratio
provided, that the industrial partner shall receive
6. Bonus to managing partner – balance on agreed
such share before the capitalist partners shall
ratio
divide the profits
7. Interest, Salaries, Bonus – balance on agreed ratio
(2) Losses
ILLUSRATIVE PROBLEM ON DISTRIBUTION OF
PROFITS
a. The losses will be divided according to
partner’s agreement
The following data are available in the books of Alice
b. If there is no agreement as to distribution
& Louella Partnership for 2001:
losses
c. In the absence of any agreement:
Alice
Capital Drawing
 As to capitalist partners, the ratio of their capital
Debit Credit Debit Credit
balances at the beginning of the year 5/1 10,000 1/01 30,000
1/01 250,000
4/01 25,000
 11

10/1 50,000 Decrease in Capital Additional Investments

Decreases in Capital caused Increases in capital caused
Louella by net loss (as agreed) by share in net income
Capital Drawing DRAWING ACCOUNT ENTRIES
Debit Credit Debit Credit Debit Credit
6/01 15,000 1/0 22,500 Temporary Withdrawals Increases in capital caused
1 by share in net income
01/1 150,000 Decrease in Capital caused
9/01 50,000 by net loss
12/01 5,000 Withdrawal of assets in
anticipation of profits

Income Summary RATIO OF AVERAGE CAPITAL BALANCES

Date Debit Credit
12/21 60,000
 When the beginning capital balances are used in
Case 1 - Net Income divided Equally allocating profits, add. Investments are discouraged
Debit Credit – partners are not compensated in the division of
Income Summary 60,000 profits until the next year.
Alice, Capital 30,000
Louella, Capital 30,000  When the ending capital balances are used, year-
Case 2 – Divided ¾ & ¼, Alice and Louella end investments are encouraged, but no incentive
Debit Credit for a partner to make any investments before year
Income Summary 60,000
Alice, Capital 45,000
end.
(60,000 X 3/4)
Louella, Capital 15,000 - In addition, amounts earlier withdrawn may be
(60,000 X 1/4) reinvested before year-end.
Case 3 – Ratio of 1:4
Debit Credit  The agreement should state the number of
Income Summary 60,000 drawings each partner may make.
Alice, Capital 12,000
(60,000 X1/5)
Louella, Capital 48,000
 Drawings are considered temporary and are
(60,000 x 4/5) debited to the partner’s drawing account.
Case 4 – Beg. Capital Ratio
Debit Credit  Drawings within the allowable amount will not
Income Summary 60,000
affect the computation of the average capital
Alice, Capital 37,500
(60,000 X 250k / 400k) balance.
Louella, Capital 22,500
(60,000 X 150k / 400k)
Case 5 – End. Capital Ratio Case 6 – Simple Average Capital
Debit Credit Debit Credit
Income Summary 60,000 Income Summary 60,000
Alice, Capital 38,182 Alice, Capital 37,877
(60,000 X 315 / 495)
Louella, Capital 21,818 Louella, Capital 22,123
(60,000 X 180 / 495)

Computing the Ending Capital Computing Simple Average Capital Method:

Alice Louella
Step 1 – Determine Average Capital of Partners
Beg Capital 250,000 150,000
Additional 75,000 50,000
Alice, Capital 250,000 + 315,000 / 2 = 282,500
Investment Louella, Capital 150,000 + 180,000 / 2 = 165,000
Drawings (10,000) (20,000)
End Capital 315,000 180,000 Step 2 – Compute the ratio of each Partner
Alice, Capital 282,500 / 447,500 x 60,000 = 37,877
Note: Entries in drawing accounts are not considered in
establishing the ratio Louella, Cap 165,000 / 447,500 x 60,000 = 22,123

Remember: Case 7 – Average Capital Ratio

CAPITAL ACCOUNT ENTRIES Debit Credit
Debit Credit Income Summary 60,000
Permanent Withdrawals Initial Investments Alice, Capital 38,129
 12

Louella, Capital 21,871

Average Capital Ratio.

INTEREST ON CAPITAL
A method of dividing profits based on the amount of
capital invested and the time during which such capital is
actually used in the business.  If the partners agree to allow interest on capital as
first step in the division of profit, they should specify
Computing Average Capital Ratio: the interest rate to be used.

1. Multiply beginning capital by the # of months that it  Interest on partners’ capital – they are not
remained unchanged.
considered as expenses in a partnership
2. Determine each new capital balance in chronological
order and multiply by the number of months it remained  Interest on loans – recognized as expense, and
unchanged. interest earned on loans are considered as
3. Add the products which represent peso months and partnership income.
divide the total by twelve (mos.) to obtain the average
monthly capital
AVE. CAPITAL RATIOS FOR ALICE & LOUELLA

ALICE CAPITAL
PERIOD CAPITAL # OF PESO ALICE LOUELLA
Case 8 – 10% Interest
DESCRIPTION BALANCE MONTHS MONTHS CAPITAL CAPITAL
UNCHANGE
Interest on ending
D
capital
Jan 1 250,000 3 750,000 315,000 x 10% 31,500
Investment 180,000 x 10% 18,000
Apr 1 Invested 275,000 1 275,000 Remainder (60k-31.5k-
25k 18k) at agreed ratio
May 1 Draw 10k 265,000 5 1,325,000 60:40
Oct 1 Invested 315,000 3 945,000 10,500 x60% 6,300
50k 10,500 x 40% 4,200
12 3,295,000 TOTAL SHARE 37,800 22,200

Average Capital 274,583

Entries
LOUELLA CAPITAL DEBIT CREDIT
Income Summary 49,500
PERIOD CAPITAL # OF PESO
DESCRIPTION BALANCE MONTHS MONTHS Alice, Capital 31,500
UNCHANGE Louella, Capital. 18,000
D To record 10% interest of each
partner
Jan 1 150,000 5 750,000
Investment
June 1 Draw 135,000 3 405,000 Income Summary 10,500
15k Alice Capital 6,300
Sept 1 Invested 185,000 3 555,000 Louella, Capital 4,200
10k To record division of remaining
Dec 1 Draw 5k 180,000 1 180,000 income balance.

12 1,890,000

Average Capital 157,500 For Loss in a Partnership.

Under the capital ratio plan, the partner who
invested more capital will ultimately shoulder a bigger
TOTAL AVERAGE CAPITAL: 274,583 + 157,500 – 432,083 share of the loss.
To Compute Distribution of Profit:
ALICE: 60,000 X 274,583/432,083 = 38,129 SALARIES TO PARTNERS
LOUELLA: 60,000 X 157,500/432,083 = 21,871
 13

 Salary allowances will be provided even when Remaining (60k-17,647)

operations yielded losses
42,353 x 250/400 26,471
 When partners calculate the profit of the partnership, 42,353 x 150/400 15,882
salaries to the partners are not deducted as
expenses in the statement of comprehensive TOTAL SHARES 26,471 33,529
income.
ENTRY DEBIT CREDIT
Case 9 – Louella Salary 50k, remaining divided at 1:4
Income Summary 60,000
ALICE LOUELLA
Alice, Capital. CAPITAL 26,471
CAPITAL
Salary Louella, Capital. 33,529
50,000
Remaining (60k – 50k)
ENTRY DEBIT CREDIT at 1:4 ratio
Income Summary 60,000 10,000 x 1/5 2,000
10,000 X 4/5 8,000
Alice, Capital. 2,000
Total Shares 2,000 58,000
Louella, Capital. 58,000
Case 11 – Partners allowed 500 and 1,000 weekly
COMPUTATION OF BONUS - MANAGING PARTNER salaries, respectively plus 10% interest on average
capital. Remaining balance to be divided in the ratio
 The contract may provide for a special 2:3
compensation in the form of bonus to the managing
partner when the results of operations of the
partnership are favorable. ENTRY DEBIT CREDIT
 Bonus = Incentive Income Summary 60,000
 Based on Income Alice, Capital. 28,975
 Bonus allowed only if net income is sufficient Louella, Capital. 31,025

Could either be: ALICE LOUELLA

1. Net income before bonus & income tax Salaries
2. Net income after bonus, before income tax 500 X 52 weeks in a year 26,000
3. Net income before bonus, after tax
1000 x 52 weeks in a year 52,000
4. Net income after bonus & income tax
Interest On Average
Capital
Case 10 – Louella (managing partner) allowed a
274,583 X 10% 27,458
bonus of income before bonus and tax. Remaining
balance to be divided in the ratio of the beginning 157,500 X 10% 15,750
capital. Assume 32% tax rate, with Net income Remaining Balance - 2:3
before tax as 88,235. (Net income of 60K/68%) P121,208-60,000 = (61,208)
(61,208) x 2/5 (24,483)
ALICE LOUELLA 61,208 x 3/5 (36,725)
NET SHARES 28,975 31,025
BONUS (88,235 X 20%) 17,647
Case 11 – Assume that the Partnership incurred a
Net loss of 10,000. The partners allowed 500 and
1,000 weekly salaries, respectively plus 10% interest
on average capital. Remaining balance to be divided
in the ratio of 2:3

ENTRY DEBIT CREDIT

Louella, Capital 10,975
Alice, Capital. 975
Income Summary 10,000
 14

ALICE LOUELLA NOTE: In these illustrations, bonus, salaries and interest

Salaries on capital are treated as a distribution of partnership
500 X 52 weeks in a year 26,000 income, not as expense
1000 x 52 weeks in a year 52,000
Interest On Average  BONUS TREATED AS AN EXPENSE
Capital
CASE 1:
274,583 X 10% 27,458
Bonus is based on income before deducting bonus,
157,500 X 10% 15,750
but after deducting income tax.
Remaining Balance - 2:3
P121,208 – (10,000) = (131,
208) FORMULAS:
(131,208) x 2/5 (52,483) If B=0.20 (88,235 – T) and T=0.32 (88,235 – B)
131,208 x 3/5 (78,725)
Therefore:
NET SHARES 975 (10,975)
B = 0.20 {88,235- 0.32 (88,235-B)}
B = 0.20 {88,235 – 28,235 + 0.32B}
◉ PROBLEMS ON COMPUTATION B = 0.20 {60,000 + 0.32B}
B = 12,000 + 0.64B
CASE 1: B= 0.20 x (P88,235-B) B – 0.64B = 12,000
Bonus is based on B =17,647 – 0.20B 0.936B = 12,000
income after deducting B + 0.20B.= P17,647 B = 12,000/0.936B
bonus but before 1.20B = P17,647 B = 12,820.50
deducting income tax. B = 17,647/1.2
Assume a bonus rate B = 14,706
of 20%.
CASE 2:
Bonus is based on income after deducting both
bonus & income tax

CASE 2:
Bonus is based on income before deducting bonus FORMULAS:
but after deducting income tax. Assume a bonus rate If B=0.20 (88,235 – T-B) and T=0.32 (88,235 – B)
of 20%.
Therefore:
B = 0.20 {88,235- B -0.32 (88,235-B)}
FORMULA:
B = 0.20 {88,235 – B - 28,235 + 0.32B}
B= 0.20 x (P88,235-T) B = 0.20 {60,000 - 0.68B}
B = 12,000 - 0.136B
To compute Income tax:
B + 0.136B = 12,000
T= 0.32 x (88,235)
1.136B = 12,000
= 28,235
B = 12,000/1.136
Substituting value for T, to compute for B: B = 10,563
B = 0.20 x (88,235-28,235)
B = 0.20 (60,000)
B = 12,000 Suggested Activities to answer

Note: Bonus being computed is not an expense but a  Theories | pages 2-30 to 2-39
distribution of net income after tax  Practical | pages2-40 to 2-66
 Mapalad Company | PPT
 Review Q2
CASE 3: B = 0.20 (88,235 – B – 28,235)  Review Canvas Quiz
Bonus is based B = 0.20 x (60,000-B)
on income after B = 12,000 – 0.20B
deducting both B + 0.20B = 12,000 ◉ CHAPTER 3 – DISSOLUTION
bonus and income 1.20B = 12,000
tax. Assume a B = 12,000/1.20
bonus rate of 20% B = 10,000 DISSOLUTION
 15

- The change in the relation of the partners caused by Similar in the sense that the old partnership is legally
any partner ceasing to be associated in carrying out dissolved; capital, profit and loss ratio will be based on a new
the business. Refers to the termination of the life partnership agreement
of an existing partnership. (Art. 1828)
Dissimilar in the sense that the partnership receives no new
resources when a third party purchases an interest; does
- On dissolution, the partnership is not terminated, but
receive new resources when the third party invests in the
continues until the winding up of partnership affairs partnership
is completed (Art. 1829)

- Dissolution of the partnership does not necessarily

imply that business operations will come to an end ACCOUNTING PROBLEMS RELATED TO
ADMISSION
 Winding Up OF A NEW PARTNER
The process of settling the business or
partnership affairs after dissolution. 1.) Determination of profit/loss up to time of
partnership admission – distribution of profit/loss
 Termination 2.) Correction of accounting errors in prior periods
The point in time when all partnership affairs are 3.) Closing of the partnership books
wound up or completed, and is the end of the 4.) Revaluation of accounts
partnership life
Note: a partner is liable for all the obligations of the
What follows after the dissolution of a partnership? partnership incurred before his admission as
1. Formation of a new partnership though he had been a partner when such
Also known as dissolution by change in obligations were incurred. – only to the extent of
ownership structure contribution

2. Liquidation 1.1 PURCHASE OF INTEREST

Refers to the termination of the business
activities carried on by the partnership & winding  With the consent of all continuing partners, a
up of partnership affairs person may be admitted into an existing partnership
by purchasing an interest directly from one or more
Note:
of the existing partners.
Dissolution does not always result to liquidation.
Liquidation is always preceded by a dissolution.
 Admission by purchase is indicated by terms like
purchases, sells, pays, bought, sold and transferred.
CONDITIONS RESULTING TO PARTNERSHIP
DISSOLUTION
 The sale of a partnership interest in an existing
1. Admission of a partner partnership is a personal transaction between the
2. Withdrawal or retirement of a partner selling partner and the buying of a new partner.
3. Death of a partner
4. Incorporation of the partnership  The amount paid by the new partner goes
personally to the partner selling his interest and
1.) Admission of a new partner
not to the partnership.
- A new partner with the consent of all the partners,
may be admitted in an existing partnership.  Debit capital account of selling partner for interest
sold – credit to the capital account of the buying
- Delectus personae: since partnership is based on partner for the interest purchased
mutual trust and confidence of the partners, no one
becomes a member of the partnership without the  The amount debited is not affected by the actual
consent of all the members price for the equity interest.
Type of Admission
 In this type of admission, total assets, liabilities and
 By purchase of interest from one or more of the partners’ equity of the partnership are not affected
original partners upon admission.
 By investment or asset contributions to the
partnership
The amount of capital transferred will be equal to the
book value of the interest sold. The Pro forma entry will
Foregoing situations are;
therefore be:
 16

The negotiated price of 25,000 does not affect the entry

Debit Credit because the exchange is between Con and the old partners
Seller, Capital xxx and
Buyer, Capital xxx does not involve partnership assets.

GOODWILL
In the first 2 assumptions, the profit or loss to the old
partner is not recognized in the partnership books.  The summation of all the good attributes of a person
or a company that enables that person or
Value of purchase price of interest sold company to earn more than what is normal.
1. Equal to book value
2. Less than book value  Is an intangible advantage that increases earnings
3. More than book value w/o implied goodwill over what is normal.
With implied goodwill
 Reported in the balance Balance Sheet as an
Problem A. Lhod and Alice are partners with capital Intangible asset
balances of 100,000 and 50,000, respectively. They
 Calculated as the excess of agreed capital over
share profits and losses equally. Con is a new partner
contributed capital
At Book Value  Recorded in the books only when it is acquired by
Case 1A. Purchase is made at book value from 1 purchase or when certain transactions require it to
partner only be recorded.
Con purchases a 1/5 interest from Lhod by paying 20,000.
 An example is the admission of a new partner and
Based on Lhod, capital, the 1/5 of the book value is 100,000 x
the retirement or withdrawal of a partner.
1/5. The admission of con with payment of 20,000 does not
result in any personal gain or loss.
More than Book Value
Debit Credit
Lhod, Capital 20,000 Assumptions. Purchase at more than book value
Con, Capital 20,000
 Implied goodwill will be recognized by the
Case 1B. Purchase at book value from more than one partnership
partner
Case 3A. Purchase at more than book value. Implied
Con purchases 1/5 interest from the old partners by goodwill is not recognized
paying 30,000. To compute the book value of 1/5 of shares of
each partner: Con pays 40,000 for a 1/5 interest of the old partners. They
Lhod, capital: 100,000 x 1/5 = 20,000 entry shall therefore be:
Alice, capital: 50,000 x 1/5 = 10,000
Debit Credit
Lhod, Capital 20,000
Debit Credit
Alice, Capital 10,000
Lhod, Capital 20,000
Con, Capital 30,000
Alice, Capital 10,000
Con, Capital 30,000
NOTE: The P40,000 payment is a personal transaction
between Con and the old partners.
Less than Book Value
As agreed, it is not reflected in the partnership
Case 2. Purchase at less than book value books. What we recognized in the books is the transfer of 1/5
Con purchases 1/5 interest from the old partners by of the capital of each of the old partners to the new one.
paying 25,000. To compute the book value of 1/5 of the shares
of each partner: The P10,000 excess payment is a personal gain of Lhod and
Alice and is therefore not in the books
Lhod, Capital: 100,000 x 1/5 = 20,000
Alice, Capital: 50,000 x 1/5 = 10,000
1.2 ADMISSION BY INVESTMENT
Debit Credit
Lhod, Capital 20,000 - The admission of a new partner by investment is A
Alice, Capital 10,000 transaction between the original partnership &
Con, Capital 30,000 the new partner
 17

- Investment increases total asset and total capital of

the partnership. - A partner is willing to give a premium by allowing a
capital credit greater than the prospective partner’s
Definition of Terms investment just to ensure a new partner’s
association with the partnership.
1. Agreed Capital – amount of new capital set by the
- This premium will be treated as a bonus from the
partners for the new partnership
equities of the old partners and credited to the new
partner.
Agreed Capitalization – Terms of admission of a new
partner may indicate agreed capital. If agreed capital is See pages 3-7 to 3-9 for examples of
not indicated, it can be computed in two ways: 1. Total Agreed capital is stated
2. Total Agreed capital is not explicitly stated.
- Investment of the new partner divided by the new
partner’s fraction of interest
WITHDRAWAL OR RETIREMENT OF A PARTNER
- Investment of the old partners (net assets or
capital of the old partnership) divided by the old
The withdrawal of a partner dissolves a partnership, and
partner’s fraction of interest
this dissolution may be accomplished by either of the ff.
ways:
2. Total Contributed Capital – Investment of all the
partners (old & new) to the partnership 1. Selling equity interest to remaining partners
2. Selling equity interest to an outsider
3. Total Agreed Capital – The total capital of the 3. Selling equity interest to the partnership
partnership considered the capital credits given to
each of the partners To an Outsider – similar to purchase of interest
 The withdrawing partner is paid from the personal
Is equal to the total contributed capital through the assets of the buyer.
capital credits; may be equal to, greater than or
less than his capital contribution.  The total assets of the partnership are not affected
by the consideration involved.
4. Capital Credit – Interest or equity of a partner in the
firm; obtained by multiplying total agreed capital by  Debit: Seller’s Capital Account
the applicable percentage interest of the partner. Credit: Buyer’s Capital Account
To the partnership – similar to admission by investment
5. Goodwill – excess of agreed capital over
contributed capital  The partner is paid from the assets of the
partnership
6. Bonus – the transfer of capital from one partner to
another. Bonus of old partners may come from the  May receive an amount equal to, greater than or less
new partner. than the balance of his capital account

Bonus to Old Partners  The effect of withdrawal is to reduce the assets and
the owner’s equity of the partnership
- A premium increases the old partner’s capital
interest
- This premium is either affected either by allocating a DEATH OF A PARTNER
portion of the investment of the new partner to the  Death dissolves a partnership
old partners.
 Accounting procedures is similar to those discussed
- The capital accounts of the old partners are credited in the withdrawal of a partner
for the premium according to their profit and loss
ratio.  The deceased partner’s heirs or estate can expect to
receive the amount of his interest from the business
See pages 3-5 to 3-7 for examples of
 If payment not made immediately, the balance of the
1. Total Agreed capital is stated
partner is transferred to a liability account, payable
2. Total Agreed capital is not explicitly stated.
to the estate
Bonus to New Partners
 18

INCORPORATION OF A PARTNER

 A partnership may decide to incorporate after

evaluation the various advantages of having a
corporate form of business organization.

 The assets and liabilities of the partnership are

transferred to the corporation in exchange for shares
of stock.

 Shares received are distributed to the partners

based on their equity interests

◉ CHAPTER 4 – LIQUIDATION

Liquidation
 Winding up of its business activities characterized by
sale of all non-cash assets, settlement of all liabilities
and distribution of the remaining cash to the
partners.

Realization
- The conversion of non-cash assets into cash
- Either a gain on loss on realization
- Shall be divided in the profit and loss ratio of the
partners

 A substantial loss on the realization may yield for a

partner a Capital Deficiency – excess of a partner’s
share in losses over the partner’s capital credit
balance which will the affect the Partner’s interest

RULES IN SETTLING ACCOUNTS AFTER

DISSOLUTION