Art. 1767.

Partnership is an association organized by two or more person who contribute

money, property or industry to a common fund with the intention of dividing the profits
among themselves.
CHARACTERISTICS OF PARTNERSHIP

1. Mutual Agency - each partner has the authority to act for the partnership as the act of one is act
of the other
2. Limited Life or Easy to Dissolve - dissolution and liquidation
3. Unlimited Liability
4. Co-ownership of Partnership Property
5. Share in Partnership Profits
6. Separate Legal Entity

ADVANTAGES OF PARTNERSHIP
1. Easily formed
2. Access to greater capital
3. Freedom and flexibility
4. Better management

DISADVANTAGES OF PARTNERSHIP
1. Unlimited liability
2. Easily dissolved or lack of partnership continuity
3. Difficulties in transparency ownership interest
4. Limited capital

KINDS OF PARTNERS
1. General Partner – one who is liable to pay the debts to the extent of his separate property after
all the assets of the partnership are exhausted
2. Limited Partner – one who is liable only to the extent of his capital contribution, he is not
allowed to contribute industry or services only
3. Capitalist Partner – one who contributes money or property to the common fund of the
partnership
4. Industrial Partner – one who contributes his knowledge or personal service to the partnership
5. Industrial-Capitalist Partner – one who contributes not only his labor, knowledge, and skill but
also cash or non-cash properties
6. Managing Partner – one whom the partners has appointed as manager of the partnership
7. Liquidating Partner – one who is designated to wind up or settle the affairs of the partnership
after dissolution
8. Dormant Partner – one who does not take active part and is not known as a partner
9. Silent Partner – one who take active part in the business but is not known to be a partner
10. Nominal Partner (Psuedo Partner) – one who does not take active part but is known to be a
partner
11. Partner by Estoppel – one who is not a partner but represents himself or consents another to
represent himself as a partner of the existing partnership; the law considers him as a partner as
far as the third person is concern
KINDS OF PARTNERSHIP
1. According to purpose
a. Commercial or trading partnership - partnership whose made activity is the manufactured
or purchase ends sale of goods and services
b. Professional or non-trading partnership – partnership organized for the purpose of
rendering professional services such as professional firm of accountants, lawyers, doctors,
engineers
 General Professional Partnership – is a partnership of individual of the same
profession; exempted from income tax
 Multi-Professional Partnership – a partnership composed of individuals with various
profession; subject to income tax
2. According to liability of partners
a. General Partnership – partnership where in all partners may publicly act on behalf of the
firm and each partner can be held individually liable for the obligations of the partnership up
to the extent of their personal interests
b. Limited Partnership – a partnership where in one or more but not all of the partners have
limited liability; there shall be at least one general partner
3. According to object
a. Universal Partnership of Profits – comprises of all that the partners might have acquired by
their industry or work during the existence of partnership; movable and immovable
property which each partner have acquired or possessed at the time of contract of
partnership shall be exclusively owned by the partners with only the usufruct
b. Universal Partnership of All Present Property – as a rule, all present property contributed to
the common funds shall belong to the partnership to be used by all partners to a common
benefit
4. According to legality of existence
a. De jure – partnership that has complied with all legal requirements for its formation
b. De facto – partnership that has not complied with all legal requirements
5. According to duration
a. Partnership at will – the partnerships term of existence is unlimited since no period is fixed
b. Partnership at a fixed term – the partnership has a specific period for its term upon
completion of specific undertaking it shall be terminated
6. According to manner of creation
a. Orally agreed upon - a partnership agreement formed by means of articulation
b. Written in public or private instrument – public instrument is when the partnership
agreement was incorporated in an article of co-partnership and approved by SEC; private
instrument is when it is written but was not submitted to SEC
CHAPTER 2 – Partnership Operations and Financial Reporting

RULES FOR THE DISTRIBUTION OF PROFITS OR LOSSES

1. Profits
a. The profit will be divided according to the partner’s agreement
b. If there is no agreement :
 As to capitalist partner, the profits shall be divided according to their capital
contributions (according to the ratio of the original capital investments or in its
absence, the ratio of capital balances at the beginning of the year
 As to industrial partners (if any), such share as may be just and equitable under the
circumstances, provided, that the industrial partner shall receive such share before
the capitalist partners shall divide the profits
2. Losses
a. The losses will be divided according to partner’s agreement
b. If there is no agreement as to contribution of losses but there is an agreement as to profits,
the losses shall be distributed according to the profit sharing ratio
c. In the absence of any agreement:
 As to capitalist partners, the losses shall be divided according to their capital
contributions (according to the ratio of original capital investments or in its absence,
the ratio of capital balances at the beginning of the year)
 As to purely industrial partners, shall not be liable for any losses

DISTRIBUTION OF PROFITS OR LOSSES BASED ON PARTNERS’ AGREEMENT

1. Equally or in other agreed ratio
2. Based on partners’ capital contributions:
a. Ratio of original capital investments
b. Ratio of capital balances at the beginning of the year
c. Ratio of capital balances at the end of the year
d. Ratio of average capital balances
3. By allowing interest on partners’ capital and the balance in an agreed ratio
4. By allowing salaries to partners and the capital balance in an agreed ratio
5. By allowing bonus to the managing partner based on profit and the balance in an agreed ratio
6. By allowing salaries, interest on partners’ capital bonus to the managing partner and the balance
in an agreed ratio (combi of 3 to 5)
CHAPTER 3 – Dissolution
DISSOLUTION – the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up of the business; not terminated but
continues until the winding up of partnership affairs is completed
*liquidation is always preceded by dissolution*

Total Contributed Capital – sum of the capital balances

Total Agreed Capital – total capital after considering the capital credits that will be given to each partner
Bonus – amount of capital or equity transferred by one partner to another
Capital Credit – equity of a partner in the new partnership
Causes for Dissolution
1. Admission of a new partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incapacity of a partner
5. Bankruptcy of a partner/Insolvency
6. Conflict within the partnership
7. Incorporation of the partnership

ADMISSION OF A PARTNER
Delectus Personae – no one becomes a member of the partnership without the consent of all members
A person may become a partner in an existing partnership by:
1. Purchase of an interest from one or more of the existing partners
2. Investment of assets in the partnership by the new partner

Purchase of an Interest from Existing Partners

Case 1: Payment told partners is equal to interest purchased
Case 2: Payment told partners is less than the interest purchased
Case 3: Payment told partners is more than the interest purchased

Investment of Assets in a Partnership

Bonus to Old Partners
Case 1: TAP is explicitly stated
Case 2: TAP is not explicitly stated
Bonus to New Partners
Case 3: TAP is explicitly stated
Case 4: TAP is not explicitly stated

Withdrawal or Retirement of a Partner

1. By selling his equity interest to one or more of the remaining partners
 2. By selling his equity interest to an outsider
3. By selling his equity interest to the partnership
Case 1: Withdrawal at book value.
Case 2: Withdrawal at more than book value.
Case 3: Withdrawal at less than book value.

Death of a Partner
 The heirs or estate can expect to receive the amount of deceased partner from the business
 If payment cannot be made immediately, the balance shall be transferred to a liability account,
payable to the estate.

Incorporation of a Partnership - assets and liabilities will be transferred to the corporation in exchange
for shares of stock
CHAPTER 4 – Liquidation
Liquidation – the winding up of its business activities characterized by sale of all non-cash assets,
settlement of all liabilities and distribution of the remaining cash of the partners
Realization – conversion of non-cash assets into cash
Capital Deficiency – the excess of a partner’s share in losses over the partner’s capital credit balance
Partner’s Interest – the sum of his capital and loan accounts in the partnership
Rules in Settling Accounts After Dissolution

 First, outside creditors

 Second, inside creditors
 Third, partner to their capital contribution
 Lastly, partners to their share of profits

Right of offset – partners’ apply a part or all of his share in loan account balance against his capital
deficiency resulting from losses in the realization of the partnership assets

Methods of Partnership Liquidation

1. Lump-sum Method – all non-cash assets are realized and all liabilities are settled before a single
final cash distribution is made to the partners
Procedure:
 Realization of non-cash assets (gain or loss is distributed according to p/l ratio)
 Payment of liabilities
 Eliminate a partner’s capital deficiency
1. Exercise right of offset
2. If solvent, invest cash
3. If insolvent, other partners should absorb it
 Payment to partners in order of priority; loan then capital
2. Installation Method – realization of non-cash assets is accomplished over an extended period of
time; the liquidation will continue until the non-cash assets have been realized and all available
cash distributed to partnership creditors and partners
Procedure:
 Realization non-cash assets; distribution of gain or loss if there’s any
 Payment of liquidation expenses and adjustment for unrecorded liabilities
 Payment of liabilities to outsiders
 Distribution of available cash based on a schedule of safe payment & cash priority
program

Restricted Interest – the portion of a partner’s interest which should remain available to absorb possible
future losses
Free Interest – the amounts to be paid to the partners; first is loan then capital
CHAPTER 5 – Accounting for Corporations
Corporation – as an artificial being created by operation of law, having the right of succession and the
power, attributes and properties expressly authorized by law or incident to its existence.

Characteristics of a Corporation
 Capital Acquisition – easier to acquire debt and equity
 Limited Liability – liability to corporate creditors are not transferable to shareholders
 Life Span – it enjoys a stable life, theoretically, it can operate forever, and sometimes outlasting
its owners unless dissolve for some reasons
 Professional Management – professional managers are hired by the owners/investors to handle
the oversight of the business on their behalf
 Ownership Interest – can be done without the consent of other stockholders
 Separate Entity – grants the corporation a juridical personality

Advantages of a Corporation
1. Limited Liability
2. Can exist without continuity
3. Shares of ownership are transferrable
4. Can attract more investors
5. Centralized management

Disadvantages of Corporation

1. Incorporation and operation is costly

2. Highly regulated
3. Heavier taxation
4. Complicated formation and management
5. Minority shareholders are subservient to the wishes of majority

Kinds of Corporation

1. According to purpose of creation:

a. Public Corporation – organized for the government
b. Private Corporation – created for private aim/profit
2. According to shares authorized to issue
a. Stock Corporation – share capital are divided into shares and shareholders are entitled to
dividends
b. Non-stock Corporations – no stocks are issued and non-profit in nature
3. According to whether for charitable or not
a. Ecclesiastical Corporation – for religious purposes
b. Eleemosynary Corporation – created not for private gain or profit but donated for charity
c. Civil Corporation - established for business; created for profit
4. According to legal right to corporate existence
a. De jure Corporation – exists in fact and in law
 b. De facto Corporation – exists in fact but not in law
5. According to degree of public participation as to share ownership
a. Close Corporation – limited to selected family members not more than 20
b. Open Corporation – shares are available to public; open to public
c. Publicly-Held Corporation – shares listed (on PH Stock Exchange)
6. According to relation to another corporation
a. Parent or holding Corporation
b. Subsidiary Corporation – controlled by another/parent corporation
7. Other kinds of corporation
a. Quasi-public Corporation - a private corporation that has accepted from the state the grant
of a franchise or contract involving performance of public duties
b. Quasi Corporation - association of government or political institution, not a corporation in
full sense but was invested by law with some attributes and rights of a corporation for its
existence unaffected by death or disability of partners

Components of a Corporation

1. Corporators – those who compose the corporation whether as shareholders or member

2. Incorporators – shareholders or members originally forming and composing the corporation and
signatories thereof to the Art. Of Inc.
3. Shareholders/Stakeholders – they are Corporators in a stock corporation which can be a natural
or juridical persons; owners of the corp.
4. Members – are corporations of a non-stock corporation
5. Subscribers – those who have agreed to take the original unissued shares under subscription
agreement
6. Promoters – person who bring about the formation and organization of a corporation
7. Underwriters – investment bankers who agreed to use his best effort to market all or part of an
issue of securities
8. Independent Director – elected by the shareholders, a person who is independent of mgt. and
free from any business relationship to be able to exercise honest judgement

Classes of Shares of Stock

1. Ordinary Shares – a share which entitles the holder to an equal pro-rata division of profits
without any preference
2. Preference Shares – a share which entitles the holder to a fixed dividend whose payment takes
priority over other shares; issued within par value
3. Treasury Shares – are fully paid shares bought back by the issuing company; to reduce the
number of outstanding shares in the market
4. Convertible Share – a share which is convertible or changeable from one class to another class
5. Callable Shares – shares at stake by investor which the issuing company can buy back

Related Terms

 Par Value Share – share with minimum issue price per share as per Art of Inc.
 No Par Value Share – one without any value appearing on the face of stock certificate
 Stated Value Share – a no par value share to which the directors assigned value per share
  Promotion Share – those issued to promoters as compensation
 Stock Certificate – a legal document in a physical piece of paper certifying ownership of specific
number of shares of stock in a corporation

Subscription – an agreement to purchase shares of unissued stock covered by a binding contract called
Subscription Agreement

Components of a Shareholder’s Equity

a. Share Capital – reflects the amount of resource received by the corporation as a result of
investment by stockholders, donation and or other capital stock transactions
 Legal Capital – refers to the amount equal to the aggregate number of all issued and
subscribed par value shares multiplied by par value
 Share Premium or Additional Paid-In Capital – the credited difference in price between
the par value, face value of shares and the total price of a company received for recently
issued share; statutory account and not distributable
b. Retained Earnings – is the capital amount accumulated and retained through the profitable
operations of the business

Terms Related to Share Capital

Authorized Share Capital - it is the maximum amount of share that can lawfully sell to investment; fixed
in Art. Of Inc. and to be paid by the shareholders
Issued Capital Share – shares which have been sold and paid for in full; includes treasury shares
Subscribed Share Capital – it is the portion of the authorized capital stock that has been subscribed but
not fully paid
Outstanding Capital Share – these are issued shares which are in the hands of the stockholders
Treasury Shares – shares bought back by the issuing company, thus reducing the number of shares
outstanding in the open market
Outstanding Shares = Issued Shares – Treasury Shares
Subscription Receivable – a stockholder’s equity account; presented in the equity section of the balance
sheet as a deduction from related subscribed capital stock; if collectible within a year it is considered as
a current asset
Delinquent Shares – when a subscriber fails to settle the subscription in full on the date specified in the
subscription contract or in the call made by the BOD; shall be sold in public auction for the account of
the delinquent shares to the highest bidder
Highest Bidder – a person who is willing to pay the full amount of the “offer price” plus accrued interest,
cost of ads and the expenses related to auction sale in exchange for the smallest number of shares
 If there is only one bidder, the BOD may decide if they will accept the offer or not.
 If there is no bidder, the BOD may bid the delinquent shares and be included in the treasury
share thereafter.
CHAPTER 6 – Share Capital
Treasury Shares – “re-acquired shares” refers to previously issued outstanding shares that has been
repurchased and is being held by the issuing company in its treasury
Earnings per Share (EPS) – company’s profit divided by outstanding shares which indicates how much
money a company makes for each share of stock
Price-Earnings per Share (P/E) – the ratio for valuing a company that measures its current share price
relative to its earning s per share
Retired Shares – are treasury shares that are permanently cancelled and cannot be reissued in the
market and thus considered to have no financial value
Share-Based Payment (SBP) – it is a transaction in which the entity receives goods or services either as
consideration for its equity instruments or by incurring liabilities for amounts based on the price of the
entity’s shares of equity
Can be classified into:
1. Equity Settled – applies when an entity receives goods or services as consideration for its own equity
instruments
2. Cash Settled Share-Based Payment – occurs when goods and services are paid for at amounts that are
based on the price of the company’s equity instruments
3. Equity-Settled with Cash Alternative – entity or the supplier of goods and services has the choice as to
whether the transaction is settled in Cash or Equity Instruments
Related Terms
 Fair Value – the amount for which an asset can be exchanged, liability settled, or an equity instrument
granted could be exchanged
 Organization Expense – an expense account used for services in connection with incorporation
 Share/Stock Option – a right to buy a particular amount of ordinary shares at a fixed price at a future date
over a certain period of time
 Exercise Price – piece which an underlying asset can be purchased or sold when trading a call or puts
option
 Call Price – piece at which the issuer of share can redeem a callable preferred share or a bond;
redemption price
 Grant Date – the date at which the entity and another party agree to share-based payment arrangement
 Vesting Conditions – means condition or restriction that determine whether the entity receives the
services that entitle the counterparty to receive cash or equity instruments of the entity under a shared-
based payment arrangement
 Vesting Period – the period which all the specified vesting conditions of a share-based arrangement are to
satisfied
 Vest – means become an entitlement
Donated Capital – refers to asset, shares, contributions given to corporation as a gift
Callable Preference Shares – a variety of shares that may be redeemed by the issuer at a set value
before maturity date
Call Price – amount of paid to call and retire a preference share
Convertible Preference Shares – a preference which carries or include an option for the holder to
exchange to a fixed number of ordinary shares or a fixed conversion change ratio after a predetermined
date
Watering of Stocks – shares of a company that are issued as a much greater value than its underlying
assets usually to defraud investors which creates artificially inflated value
CHAPTER 7– Retained Earnings
Retained Earnings – is a shareholder’s equity account which refers to the amount of cumulative total earnings
generated by the business through its successful operations; represents income saved by the company overtime
for future use; the unrestricted part is distributed as dividends; the restricted part is used back to invest in the
company; the Income Summary account is close here; normal balance is credit
Dividends in General
- a dividend is distribution of profit by a corporation to the shareholders
May be in form of:
 Cash Dividend – it is possible that a company may have a sizeable amount in its RE account but not
enough amount of cash to pay its shareholders cash dividend
 Stock Dividend – distribution of additional shares of stocks of the company
 Property Dividend – payment is payable in non-cash assets
 Small Share Dividend – which additional shares issued cover less than 20% of the S/O
previously accounted
 Large Share Dividends - share dividend that is 20% or more
Important Dates to Remember:
 Date of Declaration – this is the date when the BOD will adopt a resolution declaring
 Date of Record – the date wherein the list of shareholders entitled to receive dividends are recorded
 Date of Payment – this is the settlement date and an entity to record the payment of the amount is
made by debiting the liability account used and crediting cash or property distributed or share capital
whichever is applicable
Share Split – to increase the number of shares that are outstanding by issuing more shares to current shareholders;
divide existing shares into multiple shares to boast liquidating

Reverse Split – divides the number of shares that shareholders own, raising the market price accordingly

Preference Shares – receive profits before ordinary shares are paid

 Cumulative PS - requires the company to pay the preferred holder not only all current dividends but also
dividend in arrears
 Non-Cumulative – entitled to be paid all current dividends only
 Participating – holders are entitled to participate with ordinary shareholders pro-rata in the remainder
after the ordinary holders have received their initial shares
 Non-Participating – entitled only to the extent of the stipulated preference dividend

Preference Share Dividends – a dividend that is accrued and paid on a company’s preference share

Liquidating Dividends – not a regular dividend but a return of original investments, therefore, they are not usually
taxed; paid out after all creditor and lender obligations have settled; can be in cash or other form of asset; last
action taken before the business is closed

Retained Earnings – not included among the required FS

A. Appropriated – presents the beginning balance of RE appropriated account, any additions or deductions
during the period, and the ending balance
 B. Unappropriated – shows the beginning balance of RE unappropriated account, correction of prior periods,
profit or loss for the period, dividends, transfers to and from appropriated and unappropriated accounts
ending balance

Book Value per Share – the value of equity or the amount to be paid to shareholders of records assuming that the
company after paying up all debts and the company’s assets are to be liquidated