ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2

MODULE 1
Basic Considerations and Formation of Partnership
Week 1

INTRODUCTION

When we talk about forms of business organization a business can take, one of the most prominent
ones is partnership. In this era of modern age where technology continued to evolve like a rocket,
thanks to the increasing number of tech savvy populace, one of the many ways to form alliances is
through partnership. Behind the success of businesses namely Microsoft of Bill Gates & Paul Allen;
Google of Larry Page & Sergey Brin , Apple of Steve Jobs, Steve Wozniak & Ronald Wayne , the
so called giants in the business world, they formed meaningful partnerships which not only gave
them riches but created also shared opportunities for communities and people around the world.

Learning Objectives: After studying the module, the students should be able to

● understand how the partnership business operates, its characteristics, the advantages
and disadvantages,
● distinguish a partnership business from other forms of business organization,
● identify and describe the different classifications of partnerships and the different
types of partners,
● recognize the different problems peculiar to partnership and the different ways of
forming a partnership business including knowledge of various laws inherent in its
formation,
● familiarize the process of adjusting and revaluation of accounts of an existing
business,
● prepare entries necessary to record and effect partnership formation.

DISCUSSION

I. HISTORY & NATURE OF A PARTNERSHIP BUSINESS

Partnership is not a new venture because as early as 2200 B.C., Hammurabi, the King of Babylon,
already provided for the regulation of partnerships. In ancient Rome the partnership is called a
“societa”. During the middle ages, the laws on partnership began to develop in Italy and Italian
merchants operated as limited partners until such time that the approach was introduced throughout
Europe. The English settlers then brought the concept of partnership to the US thus the partnership
law in US evolved from the English law “Partnership Act of 1890”. United States’ own law on
partnership, Uniform Partnership Act was approved in 1914 and later, the Uniform Limited
Partnership Act in 1916.

In the Philippines, there are two types of partnerships: Commercial which was about
commercial and mercantile partnerships governed by the Code of Commerce and Civil Code (old),
which governed the civil or non-commercial partnerships but later on to be known as the new civil
code after the provisions of the two codes relating to mercantile and civil partnerships was repealed
and where the rules from the two American Uniform Partnership Acts was incorporated to the new
civil code.(Ballada, 2020)

DEFINITION
● By the contract of partnership two or more persons contribute money, property or
industry to a common fund with the intention of dividing the profits among
themselves. (Article 1767, Civil Code of the Phils.).
● An arrangement between two or more people to oversee business operations and
share its profits and liabilities (Investopedia).
● An arrangement where parties, known as business partners, agree to cooperate to
advance their mutual interests. Partners could be individuals, businesses, interest-
based organizations, schools, governments or organizations. (Wikipedia)
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The partnership is a legal relationship among the contracting parties which originates from a
voluntary contract between them which maybe done orally or in writing or simply implied from the
acts of the parties and as long as the elements of mutual contribution and intent to divide profits are
present as stated in Article 1767, Civil Code of the Phils. (Palma, 2015). It has juridical personality
separate and distinct from that of each of the partners. (Art 1768, Civil Code of the Phils.). Each
owner of a partnership is called Partner.

CHARACTERISTICS OF A PARTNERSHIP (Palma, 2015)

1. Mutual Contribution. There cannot be a partnership without mutual contribution of
money, property or industry/skills to a common fund.
2. Division of Profits & Losses. The essence of a partnership is that each partner must share
in the profits or losses of the venture. Each partner is entitled to share in the profits earned
by the business
during the period as a return of investment and in losses according to partnership agreement.
3. Mutual Agency. Each partner has the authority to act for the partnership and to enter into
contracts binding upon it, provided these are within his expressed or implied authority. Any
act of the partner which will not fall into the category “within the normal course of business
“will not bind the partnership.
4. Limited Life or Easily dissolved. Its life is limited to the duration of the contract. Any
change in the relationship among partners terminates the contract and therefore, dissolves
the partnership.
It may be dissolved for the following reasons:
a) Admission of new partner
b) Death of any of the partners
c) Insolvency
d) Incapacity
e) Withdrawal of a partner or expiration of the term specified in the partnership
agreement.
5. Unlimited Liability. All partners except limited partners, including industrial partners are
personally liable for the debts or unpaid obligations of the partnership. Creditor’s claims
will be satisfied from the personal assets of the partners without prejudice to the rights of
separate creditors of the partners.
6. Co-ownership of contributed property. All assets invested by the partners to the
partnership will not anymore separately owned but now belong to the partnership by virtue
of its separate and distinct juridical personality. The partners jointly owned the asset.
7. Separate legal entity. It has separate juridical personality distinct from the partners. It can
sue and be sued. It can acquire assets and incur liabilities or enter into a contract with third
parties on its own name.

8. Partner’s Equity Accounts. The partnership equity accounts depend on the number of
partners. Each partner has a capital account and a withdrawal account similar in function to
that of sole proprietorship.

9. Income Taxes. A partnership is subject to 30% tax on income (RA No. 9337), except, for
general professional partnership.

ADVANTAGES
1. Easily formed. May be created orally or in writing.
2. Greater amount of capital. It brings greater financial capability to the business because
partners can easily raise capital needed.
3. Relative freedom and flexibility in decision-making. Decisions are made by the managing
partner and changes in the enterprise may simply be implemented by agreement among
partners without so much formalities provided it complies with the provisions of Partnership
Law.
4. Better management. Combined skills, expertise and experience of each partner will result
in better operations of the firm.
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DISADVANTAGES

1. Unlimited liability. Each partner is personally liable to partnership’s debts except for
limited partners.
2. Easily dissolved and unstable. There is lack of partnership continuity once the relationship
among partners changed.
3. Difficulty in the transfer of ownership interest. The interest of a partner cannot be
transferred to another without the consent of the other partners which is not true in the case
of a Corporation.
4. Limited Capital. Partnership is less effective compared to Corp. in raising large amount of
Capital.

PARTNERSHIP VERSUS CORPORATION (Ballada, 2020)

Distinguishing Factors Partnership Corporation

a. Manner of Creation Created by mere Created by the operation
agreement of partners. of Law
b. Number of Persons Two or more persons may Not exceeding 15 persons
form a partnership
c. Commencement of It commences from the From the issuance of
juridical personality execution of the Articles certificate of
of Incorporation. incorporation by SEC
d. Management Every partner serves as Management is vested on
agent of the partnership, the BOD.
or a managing a partner is
appointed.
e. Extent of liability Each of the partners is Shareholders are liable
liable to the creditors up only to the extent of their
to the extent of personal interest or investment in
assets except for limited the corporation.
partners.
f. Right of Succession No right of succession. Has right of succession.
The business continued to
exist regardless of death,
withdrawal, incapacity or
insolvency of the
directors or stockholders.
g. Terms of Existence As stipulated in the Perpetual existence unless
agreement or as agreed its articles of
upon by the partners. incorporation provide
otherwise.

CLASSIFICATION OF PARTNERSHIPS (Palma, 2015)

1. According to Object
A. Universal Partnership of all Present Property. All contributions of the partners
become part of the Partnership fund or common Fund (Art. 1778) with the intention of
dividing the same among themselves including the profits that they may have acquired.
The properties which belong to each of the partners at the time of the constitution of the
partnership, becomes the common property of all the partners as well as the profits
that they may have acquired therewith. (Art. 1779).

B. Universal Partnership of Profit. Comprises all that the partners may acquire by their
industry or work during the existence of the partnership (Art. 1780).

Movable or immovable property which each of the partners may possess at the time of
the celebration of the contract shall continue to pertain exclusive to each, only the
usufruct passing to the partnership. The partners retain ownership of the things they
have placed at the disposal of the partnership and only the usufruct of these things plus
their industry or work represent their actual contribution to the partnership. (Civil Code
of the Philippines-RA 386)
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NOTE: If the articles of universal property did not specify the nature, it will be
considered universal partnership of profits.

C. Particular Partnership. A partnership whose object is determinate-its use or fruits,

specific undertaking, or the exercise of a profession or vocation.

2. According to Liability
A. General Partnership. One wherein all partners may publicly act on behalf of the firm
and each partner can be held individually liable for the obligations of the firm to the
extent of their personal property. Such partners are called general partners. The name
of the partners can be used as name of the business and the contract or agreement is
called Articles of Partnership.

B. Limited Partnership. One wherein one or more but not all the partners have limited
liability. The law provides that at least one partner in this type of partnership shall be a
general partner usually he acts as the managing partner responsible for efficient and
profitable management of the partnership’s business. A limited partner can only
contribute money and property but not industry and it cannot participate in the
management of the business.
The name of the firm shall include the word “Limited” and the names of the limited
partners cannot be used in the firm’s name. The contract is called Certificate of
Partnership.

3. According to Purpose
A. Commercial or Trading Partnership. The main activity is the manufacture or
purchase and sale of goods and services or one formed for the transaction of business.
B. Professional or Non-Trading Partnership. One organized for the purpose of
rendering professional services. E.g. professional firm of accountants, lawyers,
engineers, doctors, etc.

4. According to Duration
A. Partnership at Will . The term of existence for this type is unlimited since no
period is fixed. It is formed only for a particular undertaking, however, it can be
terminated anytime by the agreement of the partners.

B. Partnership with Fixed Term. It has specified period or term of existence and the
expiration thereof dissolves the partnership. If the partnership was formed for a
particular undertaking, it is terminated upon completion of such undertaking.

5. According to Legality of Existence

A. De Jure Partnership. One that has complied to all the legal requirements for its
existence.

B. De Facto Partnership. One that has not complied with some or all the legal
requirements for its formation.

6. According to Manner of Creation

A. Orally Agreed Upon. Partnership agreement was formed by means of articulation.
B. Written-
● in Public Instrument. When the partnership agreement was incorporated in an
article of co-partnership and approved by Securities & Exchange Commission
(SEC).
● in Private Instrument. When the partnership agreement was made in writing
but such writing was not submitted and approved by the Securities & Exchange
Commission. (SEC).
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KINDS OF PARTNERS (Ballada, 2020)

1. General partner-one who is liable to pay personally the obligations or debts of the
partnership in case all its assets have been exhausted or not sufficient to cover the claims of
the creditors.
2. Limited partner-liable only up to the extent of his contributed capital.
3. Capitalist partner-one who contributes cash or non-cash properties.
4. Industrial partner-one who contributes only his labor, knowledge and skill or personal
knowledge.
5. Managing partner-one who is chosen or appointed to manage the operation of the
partnership business.
6. Liquidating partner-designated to wind-up or settle the affairs of the business after
dissolution.
7. Dormant partner-not known to be a partner and does not take active part in the
management of the business.
8. Silent partner-known to be a partner but does not take active part in the management of
the affairs of the business.
9. Secret partner-a partner not known to the public as partner but participates actively in the
management of the affairs of the business.
10. Nominal partner-one who is not a partner but allows the use of his name either for
accommodation or for consideration. He does not participate in the management of the
business and has no financial investment in the business. A nominal partner will be liable
as a partner, because of the false appearance the person holds before the world…Generally
a nominal partner is a well-known, well connected individual whose name lends credibility
and recognition to the firm. A nominal partner is paid a fee for this service
11. Partner by estoppel-one who is not a partner but represents himself or consents to another
representing him to a third person as a partner in an existing partnership. The law considers
him to be a partner in that partnership as far as the third person is concerned and can
therefore be held liable for any debts and damages owed to a third party.

OTHER LAWS GOVERNING PARTNERSHIP (Civil Code of the Phils., RA386, Title IX)
ARTICL GENERAL PROVISIONS
E No.
1770 A partnership must have a lawful object or purpose and must be
established for the common benefit or interest of the partners.
When an unlawful partnership is dissolved by a judicial decree, the
profits shall be confiscated in favor of the State, without prejudice to the
provisions of the Penal Code governing the confiscation of the instruments
and effects of a crime.

1771 A partnership maybe constituted in any form except where immovable

property or real rights are contributed thereto, in which case a public
instrument is necessary.

1772 Every contract of partnership having a capital of three thousand pesos or more,
in money or property, shall appear in public instrument, which must be
registered with SEC.
Failure to comply with the requirements of this provision shall not affect
the liability of the partnership and members thereof to third persons.

Effects of failure to Register with SEC:

Lee, Min, and Ho are partners in LeeMinHo Company. Lee contributed P800,
Min contributed 1,200 and Ho contributed 1,000 for a total contribution of
P3,000.
CASE 1: Suppose their agreement is in private document and not filed with
SEC.
LeeMinHo Company entered into contract with Gong Yoo to buy an Equipment.
Can LeeMinho Company compel Gong Yoo to deliver the equipment ordered?
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NO, because it has no juridical personality but the partners can jointly compel
Gong Yoo to deliver the order.

CASE 2: Suppose their agreement is in public document and file with SEC

Can LeeMinHo Company alone sue Gong Yoo in case of breach of contract?
YES, because LeeMinHo Company has a valid juridical personality.

1789 An industrial partner cannot engage in business for himself, unless the
partnership expressly permits him to do so; and if he should do so, the capitalist
partners may either exclude him from the firm or avail themselves of the benefits
he may have obtained in violation of this provision, with rights to damages in
either case.

1797 The losses and profits shall be distributed in conformity with the agreement. If
only the share of each partner in the profits has been agreed upon, the share of
each in the losses shall be in the same proportion. In the absence of stipulation,
the share of each partner in the profits and losses shall be in proportion to what
he may have contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such share as may be
just and equitable under the circumstances.

1799 A stipulation which excludes one or more partners from any share in the profits
or losses is void.

1808 The capitalist partners cannot engage for their own account in any operation
which is of the kind of business the partnership is engaged in, unless there is
stipulation to the contrary.

1805 The partnership books shall be kept, subject to any agreement between partners,
at the principal place of business of the partnership, and every partner
shall at any reasonable hour have access to, inspect and copy any of them.

ARTICLES OF PARTNERSHIP (Ballada, 2020)

The Partnership may be formed through an oral agreement but it is always advisable that the
agreement be in writing referred to as Articles of Partnership. Important provisions that must be
Covered by the agreement are as follows:

1. Partnership name, nature, purpose and location;

2. Names, citizenship and residences of all the partners;
3. Effectivity date of the contract of partnership or date of formation and its duration;
4. The capital contribution of its partner, procedure in valuing non-cash investments,
treatment of excess contribution (as Capital or as Loan) and penalties for partner’s
failure to invest and maintain the agreed capital;
5. Rights, powers and duties of each partners and their limitations;
6. The accounting period to be adopted, nature of accounting records, financial
statements and audits by independent accountants;
7. Profit and loss sharing ratio including any provisions for the recognition of
differences in contributions, frequency of income measurement and distribution;
8. The drawings and salaries allowed to partners;
9. The provision for arbitration of disputes and dissolution of partnership.

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.
(Palma,2015)

SEC REGISTRATION

Though the partnership with a capital of P3,000 or more, in money or property is required to register
the public instrument with SEC, even if unregistered, the partnership with capital of P3,000 or more
is still valid and therefore has legal personality. The purpose of registration is to set a condition for
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the issuance of the licenses to engage in business or trade thus, tax liabilities of big partnerships
cannot be evaded and the public can also determine more accurately their capital and membership.

BASIC STEPS TO REGISTER

⮚ Have the proposed business name verified in the verification unit of SEC. The name must
have the word “Company” or “Co.” or Limited or Ltd for limited partnerships and
“Company”, “Associates” or “partners” for general professional partnerships. (SEC
Memorandum Circular 5, Series of 2008.

⮚ Submit the following documents:

o Articles of Partnership
o Verification slip for the business name.
o Written undertaking to change business name if required.
o Tax Identification numbers of each partner and /or that of the Partnership.
o Registration data sheet for partnership duly accomplished in six (6) copies.
o Other documents that maybe required:
✔ Endorsement from 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 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.

⮚ Forward documents to the SEC Commissioner for signature.

ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY

All Certified Public Accountants(CPAs), firms and partnerships of CPAs, engaged in the practice
of public accountancy, including partners and staff members thereof, shall register with
Professional Regulation Commission and Professional Regulatory Board of Accountancy.
Registration shall be renewed every three (3) years. (Philippine Accountancy Act of 2004, Sec. 31).

CHARACTERISTICS OF A PARTNERSHIP CONTRACT (Palma,2015)

1 Consensual Because it is perfected by mere consent.

2 Nominate It has special nomenclature or designation in law.
3 Preparatory Its organization or formation must be perfected first
before it can validly enter into a contract with third
persons.
4 Onerous It involves contribution of partners to a common fund
5 Bilateral or multi-lateral It is entered into or stipulated by two or more persons
6 Principal It can stand alone , its existence is not dependent in
another contract.

OTHER LEGAL PRINCIPLES (Palma, 2015)

A. Valid contract . A partnership can exist only if there is a valid contract entered into by two or
more persons, the contract of which must contain the following elements namely: Consent,
Object and Cause.The partnership is an association of persons with mutual trust and
confidence under the principle of “delectus personae”.
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*Delectus Personae is the right of partners to exercise their choice and preference
as to admission of new members into the partnership and that NO set of partners can take
another person into the partnership without the consent of each of the other
partners.(thefreedictionary.com)

B. Capacity to Become a Partner. The persons constituting the partnership contract must be
capable of entering into a contractual relation. Un-emancipated minors, insane, demented
persons and deaf mutes (who do not know how to write) cannot give consent to a contract of
partnership. Neither can a corporation be a partner in partnership for reason of public policy.

C. Lawful Purpose. The objective must be lawful and must be established for the common
benefit or interest of the partners. If such purpose is contrary to law, morals, good customs,
public order or public policy, the contract of partnership is considered void.

D. Contribution to Common Fund. Partner’s contribution may include Money, Property (real
or personal, tangible or intangible), or Industry (physical or intellectual)

**Limited partners may contribute money or property only, never industry.

E. Division of Profit. The purpose in which a partnership is formed is to obtain profits and divide
the same among themselves , establishing the common benefit of all the partners, thus ,any
stipulation to exclude one or more partners from any share in the profit of partnership is void.

II. ACCOUNTING FOR PARTNERSHIP FORMATION (Valencia, 2016)

Accounting Principles for a Partnership

The general principles governing Single Proprietorship shall also apply to a Partnership in so far as
ordinary transactions common to both types of business organizations are concerned. The
accounting procedures and books to be used are the same, common accounting procedures and
presentation of Statement of Income, Statement of Financial Position and Statement of Cash Flows.

The difference in accounting procedures exist only with respect to:

1. Sharing of profits and losses. Profits and losses shall be distributed among partners
according to what is agreed upon in the Articles of Partnership.
2. Presentation of Owner’s Equity. Capital and withdrawal accounts depend on the number
of partners the partnership has which means each partner has one capital account and one
withdrawal account.

Example: Anne, Bin and Carl are partners in ABC Partnership. The capital account will be
for the three partners:
Anne Capital, Bin Capital and Carl Capital , same with the number of withdrawal
accounts if any.

3. Liquidation procedures. The winding-up of the affairs of the business provides a priority-
based method followed for distributing or liquidating any remaining partnership’s assets
after dissolution.

PARTNERSHIP ACCOUNTS (Ballada, 2020)

The account titles used in partnership is the same as the one used in sole proprietorship except for
the following :

A. PARTNER’S CAPITAL & DRAWING ACCOUNTS (one for each partner)

Partner’s Capital Accounts

DEBIT CREDIT

Permanent Original investment

Withdrawal
Additional Investment
Debit balance of
the Credit balance of the
drawing account at the end
Drawing of the period
account at the end of
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A partner’s capital account is credited for initial and additional Net investments
(Assets- Liabilities) and credit balance of the drawing account at the end of the period. It is debited
for his permanent withdrawals and the debit balance of the drawing account at the end of the period.
It is used to reflect increases or decreases in the partner’s interest which are permanent in nature.
The balance in the capital account of each partner represents their share in the net assets of the
partnership.

Partner’s Withdrawal Accounts

DEBIT CREDIT

1. Temporary withdrawals 1. Share in profit (maybe credited directly

2. Share in loss (maybe debited to to Capital account)

Capital account)

A partner’s drawing account is debited to reflect assets temporarily withdrawn by him from the
partnership. 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 the profits.

The use of drawing account for temporary withdrawals, provide 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.

B. LOAN RECEIVABLE FROM OR DUE FROM PARTNER

If a partner withdraws a substantial amount of money with the intention of repaying it, the debit
should be to Loan Receivable – Partner account instead of Partner’s Drawing account. This account
is classified separately from the other receivables of the partnership.

C. LOAN PAYABLE TO PARTNER OR DUE TO PARTNER

A partner may lend amounts to the partnership in excess of his intended permanent investment
which shall be treated as advances to the partnership and credited to Loans Payable – Partner’s
Account. This account must be classified separately from other liabilities to outsiders and have
priority of payment over partner’s equity.

VALUATION OF INVESTMENTS BY PARTNERS (Ballada, 2020)

The books of the partnership are opened for entries representing the net contribution of the partners
to the firm. Asset accounts are debited for assets contributed; Liability accounts are credited for
liabilities assumed by the partnership and separate capital accounts are credited for the amount of
each partner’s net investment ( Assets-Liabilities).

In case of non-cash asset investment, valuation of the partner’s investment is based on the
partner’s agreed value. In the absence of agreement, the contribution shall be recognized at fair
market value at the date of transfer to the partnership.

Fair Market Value – 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.

It is the price at which an asset or liability could be exchanged in a current transaction between
unrelated willing parties (IFRS No.3).
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For industrial partner, recording of his contribution is through memo entry in the ledger and the
information about him being an industrial partner is recorded in the Articles of Partnership and his
capital account will have a journal entry only upon the share in the partnership profits is distributed
to the partners.

RULES:

CAPITAL ADJUSTMENT OF ACCOUNTS PRIOR TO FORMATION (Palma 2015)

Before any journal entries to record the investments of any partner is made during the formation
of partnership, the following guidelines should be taken into account:

▪ For Individual Partners – All non-cash assets that are to be invested in the
partnership should be recorded at agreed value or fair market value, not at cost
or book value.

▪ For Sole Proprietor Partners – Only capital accounts will be used in recording any
gain or loss on valuation of non-cash assets. When it is gain on valuation,
capital
account is credited and when it is loss on valuation, capital account is debited.

▪ For Accounts Receivable account adjustment, use the contra-asset account

“ Allowance for Uncollectible/ Doubtful account “.

▪ For adjusting the value of depreciable asset, use the contra-asset account
“Accumulated Depreciation”.

REMINDERS: During adjustments to re-value the accounts of an existing business, always take
into consideration the Accounting Equation (A=L + OE) approach analysis and the Rules of Debit
and Credit. Likewise, understanding of the normal balances of each account where increases or
decreases will be reflected such that Assets increase on the debit side and decrease on the credit
side; Liabilities increase on the credit side and decrease on the debit side; Capital accounts
increase on the credit side and decrease on the debit side same with Income accounts and
Expenses increase on the debit side and decrease on the credit side.

Opening Entries of a partnership upon Formation (Ballada, 2020)

A partnership may be formed in any of the following ways:

I. Two or more individuals with no existing business to form a partnership

The opening entries recognize the contribution of each partner into the partnership.

Illustration: On September 1, 2019, Kang & Dong (both capitalist) formed a partnership
with cash contributions of P300,000 and P200,000 respectively. Kang also contributed an
office equipment costing P10,000 but with an agreed valuation of 7,500. On the other hand,
Dong made additional contribution of a piece of land costing P100,000 but with an agreed
valuation of P150,000. The land was mortgaged with BTS Bank for P50,000 and it was
agreed that the mortgage liability will be absorbed by the partnership. Journalize the
formation in the books of the partnership.

Sept. 1 Cash 300,000

Equipment 7,500
Kang, Capital 307,500
To record investment of Kang.
Cash 200,000
Land 150,000
Mortgage Payable 50,000
Dong, Capital 300,000
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To record investment of Dong.

After formation, the Statement of Financial Position of the partnership is:

Kang-Dong Partnership
Statement of Financial position
September 1, 2019
ASSETS LIABILLITIES
Current Assets: Current Liabilities 0
Non-Current Liabilities
Cash P500,000 Mortgage Payable P50,000
Total Current Assets 500,000 Total Liabilities 50,000

Non-current Assets: OWNER’S EQUITY

Office Equipment 7,500 Kang, Capital 307,500
Land 150,000 Dong, Capital 300,000
Total Non-current Assets 157,500 Total Owner’s Equity 607,500

Total Assets P657,500 Total Liabilities & OE 657,500

NOTE: If one of the partners is an industrial partner, the entry in the general journal and
general ledger would be:

Sept. 1 “ In accordance with the partnership agreement, ________ is an industrial

partner in this partnership and shall earn 20% share in the partnership’s
profit.

II. Partnership between a sole proprietor and an individual with no business

Under this type of formation, all assets and 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:
Min-yuk has been in business for quite sometime as a sole proprietor. Planning to
undertake business expansion, he needs additional working capital, so he decided to
invite his friend Jung-hwa to join him in the new partnership. The name of the new
partnership business will be MinJung Café & Restaurant which will assume all the
assets and liabilities of Min-yuk’s business.

On January 2, 2018, Jung-hwa accepted the offer and they have agreed to the
following adjustments and re-valuation of Min-yuk assets as follows:
Revalued at
a) Accounts receivable P 40,000
b) Inventory 45,000
c) Office Equipment 25,000
d) Land 100,000
e) Building 120,000

Jung-hwa also offered to invest cash equivalent to 40% of the capital of Min-yuk after
re-valuation.

The Statement of Financial Position of Min-yuk’s business at the time of formation is shown
below:

Min-yuk’s Restaurant
Statement of Financial Position
January 2, 2018
ASSETS LIABILITIES & OE
Current Assets: Current Liabilities:
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Cash P 14,000 Accounts Payable 22,000

Account Receivable 45,000 Notes Payable 16,000
Allow. For U/A (1,500) 43,500
Inventory 60,000 Total Liabilities 38,000
Supplies 5,000
Total Current Assets 122,500 Owner’s Equity:
Non-Current Assets: Min-yuk, Capital 311,500
Land 80,000
Building 150,000 Total Owner’s Equity 311,500
Accum. Depreciation (25,000 125,000
Office Equipment )
Accum. Depreciation 30,000 22,000
Total Non-current Assets 8,000 227,000

Total Assets P349,500 Total Liabilities & OE P349,500

As per National Internal Revenue Code (NIRC), new books for the partnership will be used and
partnership formation is as follows:

Books of Min-yuk (old books)

1. Adjust the old books of Min-yuk according to agreement.
2. Close the old books.

Books of the Partnership

1. Journalize the investment of Min-yuk.
2. Journalize the investment of Jung-hwa.
3. Prepare the Statement of Financial Position for the Partnership.

Books of Min-yuk

1. Adjust the books according to agreement:

a.) Min-yuk, Capital 3,500
Allowance for U/A 3,500
To adjust the net realizable value of
A/R from P43,500 to P40,000.
b.) Min-yuk, Capital 15,000
Inventory 15,000
To record loss on revaluation of
inventory.
c.) Accum. Depreciation-Office Equipment 3.000
Min-yuk, Capital 3,000
To revalue Office equipment from
P22,000 to 25,000.

d.) Land 20,000

Min-yuk, Capital
To record increase in value of Land 20,000
from P80,000 to P100,000.

e.) Min-yuk, Capital 5,000

Accum. Depreciation-Building 5,000
To record decrease in value of the
building from P125,000 to P120,000

After adjustments, post to T-account to establish the Capital account balance of

Min-yuk after revaluation:
Min-yuk, Capital

3,500 Beg. 311,500

d) 20,000
15,000 c) 3,000

e) 5,000
 ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2

P 23,500 P 334,500
( 23,500)
Bal. P 311,000
2. Close the books of Min-yuk:

Allowance for Uncollectible Accounts 5,000

Accounts Payable 22,000
Notes Payable 16,000
Accum. Depreciation- Building 30,000
Accum. Depreciation- Office Equipment 5,000
Min-yuk, Capital 311,000
Cash 14,000
Accounts Receivable 45,000
Inventory 45,000
Supplies 5,000
Land 100,000
Building 150,000
Office Equipment 30,000
To close the books of Min-yuk.

Books of Partnership

(1)
Cash 14,000
Accounts Receivable 45,000
Inventory 45,000
Supplies 5,000
Land 100,000
Building 120,000
Office Equipment 25,000 5,000
Allowance for Uncollectible accounts 22,000
Accounts Payable 16,000
Notes Payable 311,000
Min-yuk, Capital
To record investment of Min-yuk.

(2)
Cash 124,400
Jung-hwa, Capital 124,400
To record initial investment of Jung-hwa
(40% of Min-yuk’s capital 311,000)

The capital amount of Min-yuk in the closing entry is the

same amount contributed to the partnership in the opening
entry in the partnership books which in this example is
P311,000, the basis for Jung-hwa’s capital contribution of
40%.

MinJung Café & Restaurant

Statement of Financial Position
January 2, 2018
ASSETS LIABILITIES & OE
Current Assets: Current Liabilities:
 ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2

Cash P138,40 Accounts Payable 22,000

Account Receivable 45,000 0 Notes Payable 16,000
Allow. For U/A (5,000
Inventory ) 40,000 Total Liabilities 38,000
Supplies 45,000
Total Current Assets 5,000 Owner’s Equity:
Non-Current Assets: 228,400 Min-yuk, Capital 311,000
Land Jung-hwa, Capital 124,400
Building 100,000 Total Owner’s Equity 435,400
Office Equipment 120,000
25,000
Total Non-current Assets
245,000
Total Assets Total Liabilities & OE P473,400
P473,40
0

III. Partnership of two or more existing Sole Proprietorship business.

The procedure to form partnership between individuals with both businesses is the same
as in the previous illustration in terms of revaluation of assets according to agreement,
closing of both books of the existing businesses; then opening of the partnership books.

Illustration:
Assume Chang and Wook agreed to combine their businesses by forming a partnership which
they have decided to name” Chang-Wook Trading”. Before the partnership formation, the
Statement of Financial Position of each partner’s businesses are shown below:

Chang Proprietorship
Statement of Financial Position
June 30, 2020
ASSETS LIABILITIES & OE
Current Assets: Current Liabilities:
Cash P 48,600 Accounts Payable 24,000
Account Receivable 60,000 Notes Payable 48,000
Allow. For D/A (3,600) 56,400
Inventory 64,200 Total Liabilities 72,000
Supplies 4,800
Total Current Assets 174,000 Owner’s Equity:
Non-Current Assets: Chang, Capital 121,200
Furniture & Fixtures 36,000 Total Owner’s Equity 121,200
Accum. Depreciation-F&F (16,800) 19,200

Total Non-current Assets 19,200

Total Assets P193,200 Total Liabilities & P193,200

OE

Wook Proprietorship
Statement of Financial Position
June 30, 2020
ASSETS LIABILITIES & OE
 ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2

Current Assets: Current Liabilities:

Cash P 13,400 Accounts Payable 25,000
Account Receivable 24,000 Notes Payable 15,000
Allow. For D/A (2,700 21,300
Notes Receivable ) 30,000 Total Liabilities 40,000
Inventory 60,500
Total Current Assets 125,200 Owner’s Equity:
Wook , Capital 118,200
Non-Current Assets: Total Owner’s Equity 118,200
Office Equipment
Accum. Depreciation-F&F 40,500 33,000
Total Non-current (7,500 33,000
Assets )

P158,200 Total Liabilities & OE P158,200

Total Assets

Both partners agreed for the adjustments of the following asset values:

CHANG’S BUSINESS
1. Bad accounts of P3,000 are to be written off .
2. An allowance of 4% on the remaining receivables shall be recognized.
3. Interest on Notes Payable to be accrued at 18% per annum dated March 1, 2020.
4. Merchandise inventory’s present market value is P70,800.
5. Furnitures and fixtures account should be adjusted to replacement value of P45,000 and
then to be considered 50% depreciated after adjustment.

WOOK’S BUSINESS
1. Only 10% allowance for doubtful accounts is to be recognized on the outstanding
Receivables as of June 30, 2020.
2. 15% annual interest on Notes Receivable dated April 1 shall be recognized.
3. The office equipment shall be depreciated further by 8%.
4. The fair market value of merchandise is P46,450.
5. It was agreed that Wook will invest additional cash to the partnership to make his capital
equal to the value of Chang’s capital after revaluation.

REQUIRED:
1. Prepare necessary entries to effect the formation of the partnership between Chang &
Wook.
2. Prepare Trial Balance for the partnership.

SOLUTION:
Chang’s Books
ADJUSTING ENTRIES:
1. Chang’s Capital 3,000
Accounts Receivable 3,000
To write-off bad accounts.

2. Allowance for doubtful accounts 1,320

Chang’s Capital 1,320
To recognize 4% allowance on the remaining receivables
after write-off. (P60,000-3,000)=57,000 x 4% =2,280 less P3600
=1,320 (amt of adj. to write down to the required allowance)

3. Chang, Capital 2,880

Interest Payable 2,880
To recognize 18% interest on Notes Payable.
(P48,000 x 18% x 4/12 = 2,880)

4. Merchandise Inventory 6,600

Chang, Capital 6,600
 ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2

To record increase in the value of inventory.

5. Furniture and Fixtures 9,000

Chang, Capital 9,000
To record replacement value of furniture from 36,000 to
45,000.
6. Chang, Capital 5,700
Accum. Depreciation-F & F 5,700
To recognize 50% depreciation on Furniture & Fixt after
replacement value (45,000 x 50% =22,500-16,800 bal.)

Wook’s Books

ADJUSTING ENTRIES:

1. Allowance for doubtful accounts 300

Wook, Capital 300
To write-off bad accounts.

2. Interest Receivable 1,125

Wook, Capital 1,125
To recognize 15% interest on Notes receivable
(P30,000 x 15% =4,500 x 3/12)

3. Wook, Capital 3,240

Accum. Depreciation-Office Equipment 3,240
To record additional 8% depreciation
(P40,500 x 8% = 3,240)

4. Wook, Capital 14,050

Merchandise Inventory 14,050
To record decrease in the value of inventory.

The adjusting entries will be posted to the partner’s T-Account

to establish their respective Capital balances after adjustments.

Chang, Capital Wook, Capital

1) 3,000 6/30 121,200
2) 1,320 6/30 118,200
3) 2,880 4) 6,600 3) 3,240 1) 300
6) 5,700 5) 9,000 4) 14,050 2) 1,125

11,580 138,120 17,290 119,625

(11,580) ( 17,290)

Bal. 126,540 Bal. 102,335

CLOSING ENTRIES

CHANG’S BOOKS WOOK’S BOOKS

Allow. For D/A P2,280 Allow. For D/A P

Accum. Depr. – F& F 22,500 Accum.Depreciation-OE 2,400
Interest Payable 2,880 Accounts Payable 10,740
Accounts Payable 24,000 Notes Payable 25,000
Notes Payable 48,000 Wook, Capital 15,000
Chang, Capital 126,540 Cash 102,335 P13,40
Cash P48,600 Account Rec’ble 0
Account Rec’ble 57,000 Interest Receivable
Inventory 70,800 Notes receivable 24,000
 ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2

Supplies 4,800 Inventory 1,125

Furniture & Fixt. 45,000 Office Equipment 30,000
To close Chang’s books. To close Wook’s books. 46,450
40,500
PARTNERSHIP’s BOOKS
6/30 Cash P48,600
Accounts Receivable 57,000
Inventory 70,800
Supplies 4,800
Furniture & Fixtures 22,500
Allowance for D/A P2,280
Interest Payable 2,880
Accounts Payable 24,000
Notes Payable 48,000
Chang, Capital 126,540
To record investment of Chang.

Cash 13,400
Accounts Receivable 24,000
Notes Receivable 30,000
Interest Receivable 1,125
Inventory 46,450
Office Equipment 29,760
Accounts Payable 25,000
Notes Payable 15,000
Allowance for D/A 2,400
Wook, Capital 102,335
To record investment of Wook.

Cash 24,205
Wook, Capital 24,205
To record additional cash investment
of Wook to make his capital equal to Chang’s
Capital.(126,540-102,335)

Chang-Wook Trading
Trial Balance
As of June 30,2020

Account Title Debit Credit

Cash P86,205
Accounts Receivable 81,000
Allowance for Doubtful Accounts P 4,680
Notes Receivable 30,000
Interest Receivable 1,125
Inventory 117,250
Supplies 4,800
Furniture & Fixtures 22,500
Office Equipment 29,760
Accounts Payable 49,000
Notes Payable 63,000
Interest Payable 2,880
Chang, Capital 126,540
Wook, Capital 126,540

TOTAL 372,640 372,640

 ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2

Other Important Terminologies: (Palma, 2015)

● Net Realizable Value. Expected cash collectible as in the case of receivables. It is the
value of receivable less allowance for bad debts or allowance for impairment loss.
Accounts Receivable should be stated at NRV.

● Book Value. Value of an asset after deducting accumulated depreciation from its Cost.
Properties and Equipment subject to wear and tear or depreciation should be stated at book
value.

● Accumulated Depreciation. All fixed assets except Land that are used in business are
subject to economic wear and tear . A portion of the cost is charged to expense periodically
because of the reduction in value called depreciation expense.

● Cost. All acquisitions should be recorded at Cost. Cost is the amount in the invoice (net of
discount) plus insurance, freight, installation cost and other cost necessary in bringing the
asset in good working condition for its intended use.

● Allowance for Impairment Loss. It shows the estimated uncollectible accounts of

customers based on experience and aging of accounts. Also known as Allowance for
Uncollectible Accounts or Allowance for Bad debts.

REFERENCES

Text books-
Ballada, W.L. (2020). Partnership & Corporation Accounting. Manila. Domdane
Publishers
Ballada, W.L.(2018). Basic Accounting: Made Easy. Manila. Domdane Publishers
Palma, R. (2015). Basic Accounting 2. Partnership & Corporation. Manila. REX
Valencia, E. G. et al (2016). Basic accounting: Concepts, principles, procedures
and applications. Baguio City. Valencia Educational Supply

Internet:
www.accountancysa.org.za
www.swlearning.com
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www.investopedia.com
www.coursehero.com
www.accountingverse.com
www.accountingtools.com
thefreedictionary.com