• Offers relative freedom and flexibility of action in decision-

making.
•

PARTNERSHIP Advantages vs. Corporation

• Easier and less expensive to organize.
• two or more persons bind themselves to contribute
• More personal and informal.
money, property, or industry to a common fund with the
intention of dividing the profit among themselves.
Disadvantages
• an association of two or more persons to carry on, as co-
owner, a business for profit. • Easily dissolved and thus unstable compared to a
• each owners are called partners. corporation.
• has a juridical personality separate and distinct from that • Mutual agency and unlimited liability may create personal
of each of the partners. obligations to partners.
• agree to operate a business together • Less effective than a corporation in raising large amounts
• usually formed to bring together various talents and of capital.
knowledge.
CLASSIFICATIONS OF PARTNERSHIP
GENERAL PROFESSIONAL PARTNERSHIPS 1. According to object:
• Universal partnership of all present property. All
• formed by persons for the sole purpose of exercising their contributions become part of the partnership fund.
common profession, such as practice of law, public
• Universal partnership of profits. If the articles of
accounting, medicine and other professions.
universal partnership did not specify its nature, it will be
CHARACTERISTICS OF PARTNERSHIP considered a universal partnership of profits.
• Particular partnership. The object of the partnership is
1. Mutual Contribution – there cannot be a partnership determinate.
without contribution of money, property or industry. 2. According to liability:
2. Division of Profits or Losses – each partner must share • General. Liable to the extent of their separate
in the profits or losses of the venture. properties.
3. Co-Ownership of Contributed Asset – asset • Limited. Liable only to the extent of their personal
contributed to the partnership are owned by the contributions. The law states that there shall be at least
partnership by virtue of its separate and distinct juridical one general partner.
personality. 3. According to duration:
4. Mutual Agency – any partner can bind the other partners • Fixed term. Fixed time to be dissolved.
to a contact if he is acting within his express or implied • At will. No term expiration; can be dissolved anytime.
authority.
5. Limited life – may be dissolved at any time by the 4. According to purpose:
admission, death, insolvency, incapacity, withdrawal of a • Commercial of Trading Partnership. Transaction of
partner or expiration of the term specified in the Business
agreement. • Professional or non-trading partnership. Exercise of
6. Unlimited Liability – All partners (except limited profession
partners), including industrial partners are personally 5. According to legality of existence:
liable for all debts incurred by the partnership. If the • De jure partnership. Complied with legal requirements
partnership can not settle its obligations, creditor’s claim for its establishment
will be satisfied from the personal assets of the partners • De facto partnership. Has failed to comply with all legal
without prejudice to the rights of the separate creditors of requirements for its establishment.
the partners.
7. Income Taxes – except general professional KINDS OF PARTNERS
partnerships, are subject to tax at the rate of 30% of 1. General Partner – liable to the extent of his separate
taxable income. property after all the assets of the partnership are
exhausted.
8. Partner’s Equity Accounts – each partner has a capital
account and withdrawal account that serves similar 2. Limited Partner - Liable only to the extent of his capital
contribution.
functions as the related accounts for sole proprietorships.
3. Capitalist Partner – contributes money or property.
ADVANTAGES & DISADVANTAGES 4. Industrial partner – contributes his knowledge or
personal service.
Advantages vs. Sole Proprietorship 5. Managing partner – manager of a partnership.
• Brings greater financial capability to the business. 6. Liquidating partner – designated to wind up or settle
• Combine special skills, expertise and experience of the affairs of the partnership after dissolution.
partners. 7. Dormant partner – not active and not known as a
partner.
8. Silent partner – not active but known as partner. RULES FOR THE DISTRIBUTION OF PROFITS OR LOSSES
9. Secret partner – active but not known by outside parties • Shall be distributed in conformity with the agreement.
10. Nominal partner or partner by estoppel – not a • If only the share of each partner in the profits has been
partner but represent himself as one. agreed upon, the share of each in the losses shall be in
ARTICLES OF PARTNERSHIP the same proportion.
• A partnership may be constituted orally or in writing. 1. PROFITS
• Required capital of at least P3,000. ➢ will be divided according to partners’ agreement.
• Helps in avoiding misunderstanding among partners. ➢ if there is no agreement:
• Govern the formation, operation and dissolution of the − as to capitalist partners, profit shall be divided
partnership. according to their capital contributions.
• Required to be registered with the Securities and − as to industrial partners, share as may be just and
Exchange Commission (SEC) equitable under the circumstances, provided, that
the industrial partner shall receive such share
1. The partnership name, nature, purpose and location; before the capitalist partners shall divided the
2. The names, citizenship and residences of the profits.
partners; 2. LOSSES
3. The date of formation and the duration of the
➢ will be divided according to partners’ agreement.
partnership;
➢ if there is no agreements as to distribution of losses
4. The capital contribution of each partner, the
but there is an agreement as the profits, the losses
procedure for valuing non-cash investments,
treatment of excess contribution (as capital or as shall be distributed according to the profit sharing ratio.
loan) and the penalties for a partner's failure to invest ➢ in the absence of any agreement:
and maintain the agreed capital; − as to capitalist partners, losses shall be divided
5. The rights and duties of each partner; according to their capital contributions.
6. The accounting period to be adopted, the nature of − as to purely industrial partners, shall not be liable
accounting records, financial statements and audits for any losses.
by independent public accountants;
DISTRIBUTION OF PROFITS AND LOSSES BASED ON
7. The method of sharing profit or loss, frequency of
income measurement and distribution, including any PARTNERS’ AGREEMENT
provisions for the recognition of differences in 1. Equally or in other agreed ratio
contributions; 2. Based on partners’ capital distribution.
8. The drawings or salaries to be allowed to partners; a. Ratio of original capital investments
9. The provision for arbitration of disputes, dissolution, b. Ratio of capital balances at the beginning of the
and liquidation. year
FAIR MARKET VALUE c. Ratio of capital balances at the end of the year
d. Ratio of average capital balances
• Estimated amount that a willing seller would receive from 3. By allowing interest on partners’ capital and the balance
a financially capable buyer for the sale of the asset in in an agreed ratio
market. 4. By allowing salaries to partners and the balance in an
• The partners may invest cash or non-cash assets. If the agreed ratio
investment is non-cash, they are recorded at the values 5. By allowing bonus to the managing partner based on
agreed upon by the partners. profit and the balance in an agreed ratio
• In the absence of any agreement, the contributions will be
6. By allowing salaries, interest on partners’ capital, bonus
recognized at their fair market values at the date of the
to the managing partner based on profit and the balance
transfer to the partnership.
in an agreed ratio
PARTNERS’ EQUITY IN ASSETS CONSTRASTED W/
SHARE IN PROFITS AND LOSSES DISSOLUTION OF PARTNERSHIP
• The change in the relation of the partners caused by any
• The equity of a partner in the net assets of the partnership partner ceasing to be associated in the carrying on as
should be distinguished from partner's share in profits and distinguished from the winding up of the partnership.
losses. In other words, partners may agree on any type of • Does not necessarily imply that a business operation will
profit and loss ratio regardless of the amount of their come to an end.
respective capital account balances.
• When occurs, new accounting entity is formed
FACTORS TO CONSIDER IN ARRIVING AT PLAN FOR • The old partners should first adjust the book so that all
DIVIDING PROFITS AND LOSSES accounts are properly stated at the date of dissolution.

• Money
• Property
• Industry
 CAUSES OF DISSOLUTION SALE OF INTEREST TO A PARTNER OR AN OUTSIDER
1. Admission of a Partner • the withdrawing partner is paid from the personal assets
2. Withdrawal or Retirement of a partner of a buyer.
3. Death of a Partner • total assets if the partnership are not affected since it is
4. Incorporation of the partnership considered personal among the parties involved.
• any gain or loss realized is not reflected in the partnership
ADMISSION OF A PARTNER books.
• Delectus Personae – No one becomes member of the
partnership without the consent of all members, because SALE OF INTEREST TO THE PARTNERSHIP
a partnership is based on mutual trust, and confidence of • the withdrawing partners is paid from the assets of the
all partners. partnership
• A person admitted is liable for all obligations of a • it affects and reduce the assets of the partnership
partnership incurred before his admission. • withdrawing partner may receive his share of the business
in partnership other than cash.
1. Purchase of an interest from a one or more of existing
DEATH OF A PARTNER
partners
• dissolves the partnership
• A person can be admitted by purchasing an interest
• if the death of the partner does not result to liquidation,
directly from one or more of the existing partners
the Accounting procedure to be followed are similar to the
• Payment is made personally to the partner from whom withdrawal of the partner.
the interest. • the deceased partner may consider to have retired from
• Transferring of capital accounts the partnership and his heirs or estate can expect to
2. Investment of Asset in a Partnership receive the amount of his interest.
• A person can be admitted by investing cash or other INCORPORATION OF A PARTNERSHIP
assets in the business.
• partnership may decide to incorporate after evaluating the
• Total Contributed Capital – sum of the capital various advantage of a corporate business organization
balances of the old partners and the actual investment • after adjusting and closing the accounts, the assets and
of the new partner. liabilities of partnership is transferred to corporation in the
• Total Agreed Capital – total capital of the partnership exchange for shares stock.
after considering the capital credits given to each of • shares received by partnership are distributed to the
the partners. partners base on their equity interest.
• Bonus – the amount of capital or equity transferred by
one partner to another partner. LIQUIDATION
• Capital Credit – It is the equity of a partner in the new • the winding up of its business activities characterized by
partnership and is obtained by multiplying the total sale of all non-cash assets, settlement of all liabilities and
agreed capital by the applicable percentage interest of distribution of the remaining cash to the partners.
the partner. CAPITAL DEFICIENCY
• Bonus to Old Partners – old partners may demand a • the excess of a partner's share in losses over the partner's
premium from a new partner. This premium increases capital credit balance.
the old partners' capital interest. • affect the partner's interest-the sum of his capital and loan
• Bonus to New Partners – a old partners may be accounts-in the partnership.
willing to give a bonus to the new partner by allowing
RULES IN SETTLING ACCOUNTS AFTER DISSOLUTION
a capital credit greater than the prospective partners’
• partnership property,
investment just to ensure his admission to the
• additional contributions of the partners needed for the
partnership because of his vast financial resources,
payment of all liabilities consistent
extensive business network, distinct reputation,
unique management or his technical skills. ORDER OF PREFERENCE
1. those owing to outside creditors,
WITHDRAWAL OR RETIREMENT OF A PARTNER 2. those owing to inside creditors in the form of loans or
• A partnership may be dissolved through withdrawal, advances for business expenses by the partners,
retirement or death of a partner 3. those owing to the partners with respect to their capital
• withdrawal of partner dissolves the old partnership. contributions,
• Business may continue without interruption with the 4. those owing to the partners with respect to their share of
assets of the business revalued to reflect the present the profits.
market values of the properties
RIGHT OF OFFSET
• May be accomplished by either of the following ways:
• legal right of a partner to apply part or all of his loan
➢ By selling hi equity interest to one or more of the
account balance against his capital deficiency resulting
remaining partners
from losses in the realization of the partnership assets.
➢ By selling his equity interest to an outsider
➢ By selling his equity interest to the partnership
 INSUFFICIENT PARTNERSHIP ASSETS Lump-Sum Method
• when the partnership assets are insufficient to settle all • all non-cash assets are realized and the related gains or
outside liabilities, the partners should make additional losses distributed and all liabilities are paid before a single
contributions in the partnership. final cash distribution is made to the partners.
• partner who contributed in excess of his share in this 1. Realization of non-cash assets and distribution of gain or
liability has a right to collect the additional contributions loss on realization among the partners based on their
from the other partners. profit and loss ratio.
2. Payment of liabilities.
DISTRIBUTION OF SEPARATE PROPERTIES OF AN
INSOLVENT PARTNER
3. Elimination of partners' capital deficiencies. If after the
If a partner is insolvent, his personal properties shall be distribution of loss on realization a partner incurs a capital
distributed as follows: deficiency, this deficiency must be eliminated by using
1. those owing to separate creditors, one of the following methods, in the order of priority:
2. those owing to partnership creditors, a. If the deficient partner has a loan balance, then
3. those owing to the partners by way of additional exercise the right of offset.
contributions when the assets of the partnership were b. If the deficient partner is solvent, then he should
insufficient to settle all obligations. invest cash to eliminate his deficiency.
c. If the deficient partner is insolvent, then the other
PRO-FORMA ENTRIES partners should absorb his deficiency.
4. Payments to partners, in the order of priority:
1. Sale of Non-Cash a. Loan accounts
b. Capital accounts

INSTALLMENT METHOD
• realization of non-cash assets is accomplished over an
extended period of time.
• Process of selling assets, paying the creditors, distribution
of remain cash to partners
• creditors may be partially or fully paid (if cash is available)
• the liquidation will continue until all assets have been
2. Distribution of Gain/Loss on realization of P/L realized, paid the creditors and the remaining cash is
distributed to partners

1. Realization of non-cash assets and distribution of gain or

loss on realization among the partners based on their
profit and loss ratio.
2. Payment of liquidation expenses and adjustment for
unrecorded liabilities; both of these items will be
distributed among the partners in their profit and loss
ratio.
3. Payment of liabilities to outsiders.
3. Payment of liabilities 4. Distribution of available cash based on a schedule of safe
payments which assumes possible losses due to inability
of the partnership to dispose of part or all the remaining
non-cash assets and failure of the partners with capital
deficiencies to make additional contributions
4. Exercise of right of offset
CASH PRIORITY PROGRAM
• this program is prepared at the start of the liquidation
process will help the partners project when they can
5. Additional investment by Deficient partner
expect to be included in the cash distribution
• any amount cash received from the realization of non-
cash may be paid immediately creditors.
6. Deficiency absorbed by solvent partner
LOSS ABSORPTION BALANCES
• maximum loss that the partners can absorb without
7. Distribution of Cash to partners reducing their equity below zero.