MODULE

ACCOUNTING
2
For PARTNERSHIP
Alone we can do so little;
together we can do so much."
– Helen Keller

In this Module
 Partnership Basics and Formation
 Partnership Operations
 Partnership Dissolution
 Partnership Liquidation

Accounting provides business owners and management with

information essential to the efficient conduct and evaluation of its activities. It
gathers data which are of financial character, stores these data in the books
of accounts and transform them into more meaningful source of information
concerning the financial position, performance and cash flows from business
operations as well.
At the end of this module, you should be able to
1. Discuss the definition of Partnership
2. Differentiate Partnership from Sole proprietorship and Corporation
3. Differentiate the different profit and loss distribution agreements
4. Apply the various methods of dividing profits/losses
5.Identify and discuss the different ground/reasons for the dissolution
of Partnership
 OBJECTIVES

 Define partnership clearly.

 Identify the advantages and disadvantages of a partnership
as compared to corporation and sole proprietorship.
 Distinguish Partnership from Sole proprietorship and
Corporation.
 Understand the accounting principles in partnership
formation.
 Journalize the accounting entries for the formation of a
partnership

INTRODUCTION

Welcome to Lesson 1 of Module 2! This lesson will provide you with

the rationale and basic concepts involving partnership. Series of activities
and learning tasks are design for you to develop understanding of
partnership formation and other basic consideration. There are activities that
will lead you define partnership, identify its basic characteristics, types of
partners/partnership, and compare it with other business forms. Lastly,
required problems are also included in order for you to apply the concepts
and procedures for partnership business formation. Get started, enjoy and
keep learning!
 Like any form of business organizations, partnership is considered as
an entity that is separate and distinct from the partners. The property invested
in the partnership by a partner becomes the property of the partnership, thus
co-ownership exists. Partners become co-owners not only in the partnership
assets but also, they have their respective shares in partnership obligations,
operating profits and losses.

CHARACTERISTICS OF A PARTNERSHIP
Mutual agency Each partner acts on behalf of the
partnership when engaging in
partnership business. Act of any partner
is binding on all other partners.
Association of Individuals A partnership is a voluntary association
of two or more legally competent
persons (persons who are of age and
sound mental capacity) to carry on as
co-owners a business for profit.
Because a partnership is based on
agreement, no person can be a partner
against her or his will.
Limited Life A partnership is a business carried on
by individuals and cannot exist separate
and apart from those individuals. Should
something happen to take away the
ability of a partner to contract (death,
bankruptcy or lack of legal capacity), the
partnership may be terminated. Also,
the life of a partnership may be limited
by terms in the partnership contract, or it
may be terminated by any one of the
partners at will.
Unlimited Liability Each partner is personally and
individually liable for all partnership
liabilities. Creditors claim attach firstto
partnership assets. In case of
insufficient assets-partnership creditors
can go after to the personal property of
a partner, irrespective of the partners’
capital equity.
Co ownership of partner The assets of the partnership are owned
jointly by all partners.
 PARTNERSHIP DISTINGUISHED FROM CORPORATION
Partnership Corporation
Manner of Creation Mere agreement Operation of law
Number of Persons Two or more persons At least five (5) persons,
not exceeding fifteen(15)
Commencement of From the execution of From the issuance of
Juridical Personality the articles of certificate of incorporation
partnership by the Securities and
Exchange Commission
(SEC)
Management Each partner is an Management is vested on
agent of the the Board of Directors
partnership if the (BOD)
partners did not
appoint managing
partner
Extent of Liability Each of the partenrs Stockholders are liable only
except a limited to the extent of their
partner is liable to the interest or investment in
extent of his personal the corporation
assets
Right of Succession No right of succession There is right of succession
Term of Existence For any period of time Not to exceed fifty (50)
stipulated by the years but subject to
partners extension

ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP

Advantages versus Proprietorship

1. Brings greater financial capabilities to business.

2. Combines special skills, expertise and experience of the partners.

3. Offers relative freedom and flexibility of action in decision-making.
Advantages versus Corporation
1. Easier and less expensive to organize.
2. More Personal and informal
Disadvantages
1. Easily dissolved and thus unstable compared to a corporation
2. Mutual agency and unlimited liability may create personal obligations to
partners.
3. Less effective than a corporation in raising large amount of capital
 CLASSIFICATION OF PARTNERSHIP

1. According to object:

 -Universal partnership of all present property. All contributions

become part of the partnership fund.
 -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.
-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:
 -General. All partners are liable to the extent of their separate
properties.
 -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:
 -Partnership with a fixed term or for a particular undertaking.
 -Partnership at will. One in which no term is specified and is not
formed for any particular undertaking.
4. According to purpose:
 -Commercial or trading partnership. One formed for the
transaction of business.
 -Professional or non-trading partnership. One formed for the
exercise of profession.
5. 5. According to legality of existence:
 -De jure partnership. One which has complied with all the legal
requirements for its establishment.
 -De jure partnership. One which has complied with all the legal
requirements for its establishment.

TYPES OF PARTNER

Capitalist Partner one who gives capital in the form

of money/property

Industrial Partner one who furnishes labor or

industry
General Partner one who is liable only to the
extent of his personal property in
case of partnership bankruptcy
Limited Partner one who is liable only to the
extent of his personal
contribution/capital only in case
of partnership bankruptcy
Managing partner One whom the partners has
appointed as manager of the
partnership.
Liquidating partner One who is designated to wind
up or settle the affairs of the
partnership after dissolution.
Dormant partner One who does not take active
part in the business of the
partnership and is not known as
a partner.
Silent partner One who does not take active
part in the business of the
partnership though may be
known as a partner.
Secret partner One who takes active part in the
business but is not known to be
a partner by outside parties.
Nominal partner or partner by One who is actually not a
estoppel partner but who represents
himself as one.

TYPES OF PARTNERSHIP
 General Partnership
 Limited Partnership
 Professional/Non trading Partnership/General Professional
partnership
 Commercial/Trading Partnership
 Partnership with a fixed term

ARTICLES OF PARTNERSHIP

A partnership may be constituted orally or in wrting. In the latter case,

partnership agreements are embodied in the Articles Of Partnership.the
following essential provision 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
non-cash 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, finanacial statements and audits by independent public
accountants;
7. The method od sharing net income or net loss, frequencecy 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 fpr arbitration of diputes, dissolution, and liquidation.

FORMATION OF PARTNERSHIP
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 to the partnership
and separate capital accounts are credited for the amount of each partner’s
net investment (assets less liabilities). (A= L + E)
Partners may invest cash or non-cash assets in the partnership, they are to
be recorded at values agreed by the partners. In the absence of any
agreement, the noncash contributions will be recognized at their fair market
values at the date of transfer to the partnership.
In cases when the prospective partners have existing businesses, their
respective books will have to be adjusted to reflect the fair market value of
their assets or to correct misstatements in the account. Failure to adjust such,
the initial capital balances may be inequitable.
A partnership may be formed in any of the following:
1. Individuals with no existing business form a partnership.
2. Conversion of a sole proprietorship to 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.
Note: Refer to appendices for sample problems.

PARTNERSHIP FORMATION
A partnership may be formed in any of the following:
1. Individuals with no existing business form a partnership.
2. Conversion of a sole proprietorship to 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.

Sample Problem 1. Individuals with no existing business form a partnership.

Mr Alan, Mr Bond and Mr Charlie created a partnership business with equal
initial capital of P800,000 each. The contributions were as follows:
 Mr Alan - cash 300,000, office equipment worth 500,000.
 Mr Bond - cash 700,000 and merchandise for the balance
amount.
 Mr Charlie - machinery worth 560,000 with mortgage worth
60,000 to be assumed by the partnership and cash for the
balance amount.
Required:
a. Record entries in the general journal for opening of the partnership.
b. Prepare the balance sheet on the formation of the partnership firm in
the classified form.

a. Journal Entries

Date Particulars Debit Credit

Cash
300,000
Office equipment
500,000
Alan, Capital 800,000
To record initial investment of Alan.

Cash
700,000
Merchandise
100,000
Bond, Capital 800,000
To record initial investment of Bond.

Cash
300,000
Machinery
560,000
Mortgage Payable 60,000
Charlie, Capital 800,000
To record initial investment of Charlie.

b. Balance sheet of the newly formed partnership.

 ABC Company
Balance Sheet
12-31-2021
Assets Capital & Liabilities
Cash Mortgage Payable 60,000
1,300,000
Merchandise Mr. Alan’s Capital 800,000
100,000
Office Mr. Bond’s Capital 800,000
500,000
equipment Mr. Charlie’s Capital 800,000
560,000
Machinery
2,460,000 2,460,000

Sample Problem 2: Conversion of a sole proprietorship to a partnership.

Ryan and Smith were the main competitors in the shoe industry. Due to
unhealthy competition between them, On May 15, 2021, they decided to form
a new partnership entity with the name of RS & Co. On 15th May, 2021, their
accounts balances are as follows:

Mr Ryan Mr Smith
Cash 16,000 24,000
Account receivable 80,000 96,000
Inventory 64,000 40,000
Machinery – cost 120,000 96,000
Factory equipment – cost 56,000 64,000
Accumulated depreciation – machinery 64,000 32,000
Accumulated depreciation – factory
24,000 40,000
equipment
Allowance for bad debts 5,600 3200
Accounts payable 64,000 76,000
Ryan, Capital 178,400
Smith, Capital 168,800

In order to complete the formation of a new partnership, the following

valuations were agreed upon between Ryan and Smith as follows:
1. An allowance for uncollectible accounts of 10% of accounts
receivable is to be established.
2. The merchandise inventory of Mr. Ryan is to be valued at
56,000.
3. The machinery of Mr. Ryan and the equipment of Mr. Smith
are to be valued at 30,000 and 10,000 respectively.
To convert a sole proprietorship to a partnership.The following steps must be
followed. (A-C-R)

a. Adjust the book of proprietor’s accounts

b. Close the book of proprietor’s accounts
c. Record the opening journal entries to form the new partnership.
Solution:

Step 1: Adjust the book of proprietor’s accounts

Books of Mr. Ryan
Date Particulars Debit Credit
Ryan, Capital 36,400
Allowance for bad debts 2,400
Merchandise Inventory 8,000
Accumulated Depreciation- Machinery 26,000
To adjust valuation of accounts
Books of Mr. Smith
Date Particulars Debit Credit
Smith, Capital 20,400
Allowance for bad debts 6,400
Accumulated Depreciation- Machinery 14,000
To adjust valuation of accounts

Step 2: Close the book of proprietor’s accounts

Books of Mr. Ryan
Date Particulars Debit Credit
Accumulated Depreciation- Machinery 90,000
Accumulated Depreciation- Factory Equipment 24,000
Allowance for bad debts 8,000
Accounts Payable 64,000
Ryan, Capital 142,000
Cash 16,000
Accounts receivable 80,000
Inventory 56,000
Machinery 120,000
Factory Equipment 56,000
To close the books of Ryan
Books of Mr. Smith
Date Particulars Debit Credit
Accumulated Depreciation- Machinery 32,000
Accumulated Depreciation- Factory Equipment 54,000
Allowance for bad debts 9,600
Accounts Payable 76,000
Smith, Capital 148,800
Cash 24,000
Accounts receivable 96,000
Inventory 40,000
Machinery 96,000
Factory Equipment 64,000
To close the books of Smith

Step 3: Record the opening journal entries to form the new partnership.
RS & Co.
Partnership Accounting Journal Entries
Date Particulars Debit Credit
Cash 16,000
Accounts receivable 80,000
Inventory 56,000
Machinery 30,000
Factory equipment 32,000
Allowance for Doubtful Accounts 8,000
Accounts payable 64,000
Ryan, capital 142,000

To record the investment of Mr. Ryan.

Date Particulars Debit Credit

Cash 24,000
Accounts receivable 96,000
Inventory 40,000
Machinery 64,000
Factory equipment 10,000
Allowance for Doubtful Accounts 9,600
Accounts payable 76,000
Smith, capital 148,400

To record the investment of Mr. Smith.

 RS & Co.
Balance Sheet
As at May 15, 2020

ASSETS CAPITAL & LIABILITIES

Cash 40,000 Accounts 140,000
Accounts receivable 176,000 payable 142,000
Less: Allowance for DA 17,600 Ryan, Capital 148,400
Net accounts receivable 158,400 Smith, Capital
Inventory 96,000
Machinery 94,000
Factory equipment 42,000

Total 430,400 Total 430,400

Congratulations! That was tough! But as expected, you managed to

complete all the activites and learning tasks for Lesson 1 of Module 2.
Hopefully, concepts and key ideas presented will be retained in mind for the
succedding lessons to accomplish!

You are now prepared to proceed to the next lesson. Keep working !