Partnership and Corporation Accounting (PCA)

Definition of Partnership
In a contract of partnership, two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profit
among themselves.
Characteristics of a Partnership
1. Mutual Contribution - there cannot be a partnership without contribution of money,
property, or industry to a common fund.
2. Division of Profits or Losses - The essence of partnership is that each partner must
share in the profits or losses of the venture.
3. Co-Ownership of Contributed Assets - All assets contributed into the partnership
are owned by the partnership by virtue of its separate and distinct juridical personality. If
one partners contributes an asset to the business, all partners jointly own it in a special
sense.
4. Mutual Agency - Any partner can bind the other partners to a contract if he is acting
within his express or implied authority.
5. Limited Life - A partnership has a limited life. It may be dissolved by the admission,
death, insolvency, incapacity, withdrawal of a partner or expiration of the term specified
in the partnership agreement.
6. Unlimited Liability - All partners (except limited partners), including industrial not
settle its obligations, creditors' claims will be satisfied from the personal assets of the
partners without prejudice to the rights of the separate creditors of the partners.
7. Income Taxes - Partnerships, except general professional partnerships, are subject
to tax at the rate of 25% (per R.A. No. 9337) of taxable income.
8. Partners' Equity Accounts - Accounting for partnerships are much like accounting
for sole proprietorships. The difference lies in the number of partners' equity accounts.
Each partner has a capital account and a withdrawal account that serves similar
functions as the related accounts for sole proprietorships.
ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP
A partnership offers certain advantages over a sole proprietorship and a corporation. It
also has a number of disadvantages. They are as follows:
Advantages versus Proprietorships
1. Brings greater financial capability to the business.
2. Combines special skills, expertise, and flexibility of action in decision making.
3. Offers relative freedom and flexibility of action in decision making.
Advantages versus Corporations
1. Easier and less expensive
2. Mutual agency and unlimited liability may create personal obligations to partners.
3. Less effective than a corporation in raising large amounts of capital.
PARTNERHSIP DISTINGUISHED FROM CORPORATION
Manner of Creation. A partnership is created by mere agreement of the partners while
a corporation is created by operation of law.
Number of Persons. Two or more persons may form a partnership; in a corporation, at
least five (5) persons, not exceeding fifteen (15).
Commencement of Juridical Personality. In a partnership, juridical personality
commences from the execution of the articles of partnership, in a corporation, from the
issuance of certificate of incorporation by the Securities and Exchange Commission.
Management. In a partnership, every partner is an agent of the partnership if the
partners did not appoint a managing partner, in a corporation, management is vested on
the Board of Directors.
Extent of Liability. In a partnership, each of the partners except a limited partner is
liable to the extent of his personal assets; in a corporation, stockholders are liable only
to the extent of their interest or investments in the corporation.
Right of Succession. In a partnership, there is no right of succession; in a corporation,
there is right of succession. A corporation has the capacity of continued existence
regardless of the death, withdrawal, insolvency or incapacity of its directors or
stockholders.
Terms of Existence. In a partnership, for any period stipulated by the partners; in a
corporation, in perpetuity.
CLASSIFICATION OF PARTNERSHIPS
1. According to object:
A. Universal partnership of all present property. All contributions become part of the
partnership fund.
B. Universal partnership of profits. All that the partners may acquire by their industry or
work during the existence of the partnership and the use of whatever the partners
contributed at the time of the institution of the contract belong to the partnership. If the
articles of universal partnership did not specify its nature, it will be considered a
universal partnership of profits.
C. Particular partnership. The object of the partnership is determinate - its use or fruit,
specific undertaking, or the exercise of a profession or vocation.
2. According to liability
A. General - All partners are liable to the extent of their separate properties.
B. Limited - The limited partners are liable only to the extent of their personal
contributions, in a limited partnership; the law states that there shall be at least one
general partner.
3. According to duration
A. Partnership with a fixed term or for a particular undertaking.
B. Partnership at will. One in which no term is specified and is not formed for any
particular undertaking.
4. According to purpose
A. Commercial or trading partnership. One formed for the transaction of business
B. Professional or non-trading partnership. One formed for the exercise of profession
5. According to legality of existence
A. De jure partnership. One which has complied withal the legal requirements for its
establishment
B. De facto partnership. One which has failed to comply with all the legal requirements
for its establishment
KINDS OF PARTNERS
1. General partner - one who is liable to the extent of his separate property after all the
assets of the partnership are exhausted
2. Limited partner - one who is liable only to the extent of his capital contribution He is
not allowed to contribute industry or services only.
3. Capitalist partner - one who contributes money or property to the common fund of
the partnership
4. Industrial partner - one who contributes his knowledge or personal service to the
partnership.
5. Managing partner - one whom the partners have appointed as manager of the
partnership.
6. Liquidating partner - one who is designated to wind up or settle the affairs of the
partnership after dissolution
7. Dormant partner - one who does not take active part in the business but is not
known to be a partner by outside parties.
8. Silent partner - one who does not take active part in the business of the partnership
though may be known as a partner.
9. Secret partner - one who takes part in the business but is not known to be partner by
outside parties.
10. Nominal partner or partner by estoppels - one who is actually not a partner but
who represents himself as one.
ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in writing. In the latter case, partnership
agreements are embodied in the Articles of Partnership. The following essential
provisions may be contained in the agreement:
1. The partnership name, nature, purpose, and location;
2. The names, citizenship and residences of the partners;
3. The date of formation and the duration of the partnership;
4. The capital contribution of each partner, the procedure for valuing noncash
investments, treatment of excess contribution (as capital or as loan) and the penalties
for a partner's failure to invest and maintain the agreed capital ;
5. The rights and duties of each partner;
6. The accounting period to be adopted, the nature of accounting records, financial
statements, and audits by independent public accountants;
7. The method of sharing profit or loss, frequency of income measurement and
distribution, including any provisions for the recognition of differences in contributions;
8. The drawings or salaries to be allowed to partners;
9. The provision for arbitration of disputes, dissolution, and liquidation.
A contract of partnership is void whenever immovable property or real rights are
contributed and a signed inventory of the said property is not made and attached to a
public instrument.
SEC REGISTRATION
When the partnership capital is P3,000 or more, in money or property, the public
instrument must be recorded with the Securities and Exchange Commission (SEC).
Even if it not registered, the partnership having a capital of P 3,000 or more is still valid
and therefore has legal personality.
The SEC shall not register any corporation organized for the practice of public
accountancy (The Philippine Accountancy Act 2004, Sec. 28).
The purpose of the registration is to set " a condition for the issuance of the licenses to
engage in business or trade. In this way, the tax liabilities of big partnerships cannot be
evaded, and the public can also determine more accurately their membership and
capital before dealing with them." (Dean Capistrano, IV Civil Code of the Philippines)
To register a partnership with the SEC, here are the basic steps to follow:
Have your proposed business name verified in the verification unit of SEC; Submit the
following documents:
 Articles of Partnership
 Verification Slip for the Business Name
 Written undertaking to change business name if required
 Tax identification number of each partner and/or that of the partnership
 Registration data sheet for partnership duly accomplished in tax copies
 Other documents that may be required
 Pay the registration/filing and miscellaneous fees;
 Forward documents to the SEC commissioner for signature.
ACCOUNTING FOR PARTNERSHIPS
Owners' Equity Accounts
In Basic Accounting, generally accepted accounting principles were discussed in the
context of a sole proprietorship. These accounting principles also apply to a partnership.
Thus, the recording of assets, liabilities, income, and expenses is considered for both
proprietorships and partnerships. Comparing two business of the same nature, one
organized as a sole proprietorship and another as a partnership, there will be no
marked difference in their operations.
However, differences arise between the two forms of business concerning owners'
equity. For a proprietorship, there is only a single owner. Therefore, there is only one
capital account and one drawing account. On the other hand, since a partnership has
two or more owners, separate capital and drawing accounts are established for each
partner.
A partner's capital account is credited for his initial and additional net investments
(assets contributed less liabilities assumed by the partnership), and credit balance of
the drawing account at the end of the period. It is debited for his permanent withdrawals
and debit balance of the drawing account at the end of the period.
A partner's drawing account is debited to reflect assets temporarily withdrawn by him
from the partnership. At the end of each accounting period, the balances in the drawing
accounts are closed to the related capital accounts.
Partner's Capital Account
Debit Credit
1. Permanent Withdrawals 1. Original investment
2. Debit balance of the drawing account 2. Additional investment
at the end of the period. 3. Credit balance of the drawing account at
the end of the period
 Partner's Drawing Account
Debit Credit
1. Temporary Withdrawals 1. Share in profit (this may be credited
2. Share in loss (this may be debited directly to Capital)
directly to Capital)

Loans Receivable from or Payable to Partners

If a partner withdraws a substantial amount of money with the intention of repaying it,
the debit should be to Loans Receivable-Partner account instead of to Partner's
Drawing account. This account should be classified separately from the other
receivables of the partnerships.
A partner may lend amounts to the partnership in excess of his intended permanent
investment. These advances should be credited to Loans Payable-Partner account and
not to Partner's Capital account classified among the liabilities but separate from
liabilities to outsiders. This distinction is important in case of liquidation. Loans payable
to partners must be paid after the claims of outside creditors have been paid in full
These loans have priority over partners' equity.
PARTNERSHIP FORMATION
Valuation of Investments by Partners
The books of the partnership are opened with entries reflecting the net contributions of
the partners to the firm Asset accounts are debited for assets contributed to the
partnership. liability accounts are credited for the amount of each partner's net
investment (assets less liabilities).
Partners may invest cash or non-cash assets in the partnership. When a partner invests
non-cash assets, they are to be recorded at values agreed upon by the partners. In the
absence of any agreement, the contributions will be recognized at their fair market
values at the date of transfer to the partnership.
The fair market value of an asset 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. Per
International Financial Reporting Standards (IFRS) No. 3, fair value is the price at which
an asset or liability could be exchanged in a current transaction between
knowledgeable, unrelated willing parties.
Adjustments of Accounts Prior to Formation
In cases when the prospective partners have existing business, their respective books
will have to be adjusted to reflect the fair market values of their assets or to correct
misstatements in the accounts. If the adjustments will not be made, the initial capital
balances of the partners may be inequitable.
The adjustments of the assets and liabilities prior to formation will be similar to the
adjustments that we are already familiar with. However, when the adjustment involves a
debit or credit to a nominal account, the Capital account would instead be debited or
credited. This is so because the business has ceased to be a going concern.
Opening Entries of a Partnership Upon Formation
A partnership may be formed in any of the following ways:
1. Individuals with no existing business from a partnership.
2. Conversion of a sole proprietorship top a partnership.
a. A sole proprietor and an individual without an existing business form a partnership
b. Two or more sole proprietors form a partnership
3. Admission or retirement of a partner (to be covered in Chapter 3).
Individuals with No Existing Business Form a Partnership
The opening entry to recognize the contribution of each partner into the partnership is
simply to debit the assets contributed, and to credit the liabilities assumed and he
capital account of each partner.
A sole proprietor and Another Individual Form a Partnership
Under this type of formation, the assets and the liabilities of the proprietorship will be
transferred to the newly formed partnership at values agreed upon by all the partners at
their current fair prices.
New books for the Partnership
The following procedures may be used in recording the formation of the partnership:
Books of Existing Sole Proprietor.
1. Adjust the assets and liabilities of existing of sole proprietor in accordance with the
agreement. Adjustments are to be made to his capital account.
2. Close the books
Books of Individual:
1. Record the investment of existing sole proprietor.
2. Record the investment of the individual.
Two or More Sole Proprietors Form a Partnership
New books for the Partnership
The following procedures may be used in recording the formation of the partnership:
Books of the two sole proprietors:
1. Adjust the accounts of both parties in accordance with the agreement. Adjustments
are to be made to their respective capital accounts.
2. Close the books
Books of the Partnership:
1. Record the investment of the two sole proprietors.
2. Record the investment of the individual.
Problem #1
Partner’s Original Investment
Froilan Labausa contributed land, inventory, and P280,000 cash to a partnership. The
land has a book value of P650,000 and a market value of P1,350,000. The inventory
has a book value of P600,000 and a market value of P510,000. The partnership also
assumed a P350,000 note payable owned by Labausa that was used to purchase the
land. Rosalie Balhag agreed to put up cash equivalent to Labausa’s net investment.
Required:
Prepare the journal entry to record Labausa’s and Balhag’s investment in the
partnership.
Problem #2
Formation of a Partnership
Sabio, as her original investment in the firm of Sabio and Mariano, contributed
equipment that had been recorded in the books of her own business as costing
P900,000, with accumulated depreciation of P620,000. The partners agreed on a
valuation of P400,000. They also agreed to accept Sabio’s accounts receivable of
P360,000, realization to the extent of 85%.
Required:
Prepare the journal entry to record Sabio’s investment in the partnership on June 13.
Problem #3
Formation of a Partnership
Gogola and Paglinawan have just formed a partnership. Gogola contributed cash of
P1,260,000 and computer equipment that cost P540,000. The fair value of the computer
is P360,000. Gogola has notes payable on the computer of P120,000 to be assumed by
the partnership. Gogola is to have 60% capital interest in the partnership. Paglinawan
contributed only P900,000. The partners agreed to share profit and loss equally.
Gogola should make an additional investment of (withdrawal) of ___________.
Problem #4
Two Sole Proprietorship Form a Partnership
Calaguas and Dela Cruz formed a partnership and invested the following assets and
liabilities:
Fair Market Value Carrying Value
Calaguas:
Cash P300,000 P300,000
Land 450,000 280,000
Dela Cruz:
Cash 100,000 100,000
Building 600,000 520,000
Mortgage Payable (400,000) (400,000)

The partners will share profits and losses equally.

Required:
Prepare the opening journal entry in the books of the partnership.
Problem #5

Sole Proprietor and an

Individual with NO
Business Form a
Partnership

Espanol Operated a
specialty shop that
sold fishing equipment
and accessories. post-
closing trial balance
Sole Proprietor and an Individual with No Business Form a Partnership
Espanol Operated a specialty shop that sold fishing equipment and accessories. Her
post-closing trial balance on December 31, 2007, is as follows:

Espanol plans to enter

into a partnership with
trusted associate, Quino,
effective
Jan. 1, 2008. Profits or
losses will be shared
equally. Espanol is to
transfer all assets
and liabilities of her shop
to the partnership after
revaluation.

Quino will invest cash
equal to Espanol’s
investment after
revaluation. The agreed
values are as follows:
accounts receivable
(net), P140,000;
inventory, P460,000;
equipment (net),
P124,000.
The partnership will
operate under the
business name of Fish R
Us

Required:
1 Prepare the opening
journal entries in the
books of the partnership.
2 Prepare the
partnership’s statement
of financial position as at
the date of formation of
the partnership
Espanol plans to enter into a partnership with trusted associate, Quino, effective Jan. 1,
2008. Profits or losses will be shared equally. Espanol is to transfer all assets and
liabilities of her shop to the partnership after revaluation.

Quino will invest cash equal to Espanol’s investment after revaluation. The agreed
values are as follows: accounts receivable (net), P140,000; inventory, P460,000;
equipment (net), P124,000. The partnership will operate under the business name of
Fish R Us.

Required:
1. Prepare the opening journal entries in the books of the partnership.
2. Prepare the partnership’s statement of financial position as at the date of
formation of the partnership.

Problem #6
A Sole Proprietor and
an Individual with No
Business Form a
Partnership
On April 8, 2020,
Pascua who has her
own retail business
and Dela Cruz,
decided to form a
partnership wherein
they will divide profits
in the ratio of 40:60,
respectively. The
statement of
financial position of
Pascua is as follows:
Pascua Marketing
Statement Financial
Position
April 8, 2020
A Sole Proprietor and an Individual with No Business Form a Partnership
On April 8, 2021, Pascua who has her own retail business and Dela Cruz, decided to
form a partnership wherein they will divide profits in the ratio of 40:60, respectively. The
Statement of Financial Position of Pascua is as follows:

Pascua Marketing
Statement Financial Position
April 8, 2021

Assets
Cash P 40,000
Accounts Receivable P 160,000
Less: Allowance for Uncollectible Accounts 16,000 144,000
Inventory 164,000
Equipment P 50,000
Less: Accumulated Depreciation 10,000 40,000
Total Assets P 388,000
Liabilities & Capital
Accounts Payable P 36,000
Pascua, capital 352,000
Total Liabilities & Capital P 388,000
Conditions agreed upon before the formation of the partnership:
a) The account receivable of Pascua is estimated to be 70% realizable.
b) The accumulated depreciation of the equipment will be increased by P10,000.
c) The account payable will be assumed by the partnership.
d) The capital of the partnership is based on the adjusted capital balance of
Pascua. Dela Cruz is to contribute cash in order to make the partner’s capital
balances proportionate to the profit and loss ratio.

Required:

1. Prepare the necessary

journal entries in the
books of Pascua.
2. Prepare the opening
journal entries in the
books of the partnership.
1. Prepare the necessary journal entries in the books of Pascua.
2. Prepare the opening journal entries in the books of the partnership.

Problem #7

Two Sole Proprietors Form a Partnership

The business assets of Geron and Yumol appear below:

Geron and Yumol agreed to form a partnership contributing their assets and equities
subject to the following adjustments:
a) Accounts receivable of P20,000 in Geron’s books and P35,000 in Yumol’s are
uncollectible.
b) Inventories of P5,500 and P6,700 are worthless in Geron’s and Yumol’s
respective books.
c) Other assets of P2,000 for Geron and P3,600 for Yumol are to be written off.

Required:

Prepare the journal entries for the formation of the partnership as at July 1.

Problem #8

Two Sole Proprietorship Form a Partnership

Medina and Loqueloque are fierce competitors who sell hunting equipment. They finally
decided to join forces in order to increase their business and reduce costs. An
agreement is reached between two to begin operations as a partnership on Mar 1,
2021.

Medina and Loqueloque have decided to share profits and losses in the ratio of 60:40,
respectively.

The statements of financial position of Medina and Loqueloque as at Mar 1, 2021 are as
follows:
The name of the partnership will be Medina and Loqueloque Hunting Gears. The
partners have agreed to effect the following adjustment:
a) Medina’s merchandise Inventory is to be reduced by P105,200. The inventory of
Loqueloque will be increased by P7,200.
b) The following are fair market values of the various assets:
Medina Loqueloque
Land P 108,000 -
Building 192,000 -
Office Equipment 16,000 P40,000
Repair Equipment 124,000 -
c) One-half of the notes payable of Medina are personal notes. All other liabilities of
the partners are assumed by the partnership.
d) The prepaid rent in the books of Loqueloque will be consumed by the
partnership.

Required:

Prepare the journal entries to record the formation of the partnership.