ADVANCED ACCOUNTING 1
CHAPTER 1 – Basic Considerations and Formations
Art. 1767. By the contract of partnership, b. Partner’s personal indebtedness
two or more persons bind themselves to paid or assumed by the partnership.
contribute money, property or industry to a c. Funds or claims of partnership
common fund with the intention of dividing collected and retained by the
the profits among themselves. partner.
3 Distinct Factors ACCOUNTING FOR THE FORMATION OF A
PARTNERSHIP
1. Association of Two or More Persons.
2. Carry on as co-owners A partnership may be formed in several
3. Business for Profit ways, namely:
Characteristics of a Partnership 1. Formation of a partnership for the
first time.
1. Separate Legal Personality
2. Conversion of a sole proprietorship
2. Ease of Formation
to a partnership.
3. Co-ownership of Partnership
a. A sole proprietor allows another
Property and Profits.
individual, who has no business of
4. Limited Life.
his own to join his business.
5. Mutual Agency.
b. Two or more sole proprietors form a
6. Unlimited Liability.
partnership.
Partner’s Ledger Accounts 3. Admission of a new partner.
1. Capital Accounts Partnership Formation for the First time –
2. Drawing or Personal Accounts Initial Investments
3. Account for loans to or from partners
Cash Investments
Capital and Drawings Account
Cash xxx
▪ Journal Entry for the Original X, capital xxx
▪ Investment of Each Partner Y, capital xxx
FV of the Assets Non-cash investments
Accounts Payable ▪ Noncash property, recorded at the
Capital current fair value of the property at
The Capital account is credited for: the time of the investment.
▪ Recording at the current fv ensures
a. Original Investment that any gains or losses on the
b. Additional Investment subsequent sale of the property will
c. Partner’s share in the profits be equitably distributed in
accordance with the partnership
The capital account is debited for:
agreement.
a. Permanent withdrawal of capital. Bonus or Goodwill on Initial Investments
b. Debit Balance of the drawing ▪ Valuation problem arises when
account at the end of the period partners agree on capital interest
c. Partner’s share in the losses that are not equal to their net assets
invested.
The drawing account is debited for: ▪ Capital Account should be adjusted
using:
a. Withdrawal of Assets by the partners a. Bonus Method
in anticipation of net income. - No assets is recorded in the
partnership book
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ADVANCED ACCOUNTING 1
CHAPTER 1 – Basic Considerations and Formations
b. Goodwill Method
- The equalization of capital interests
is accomplished by recording
goodwill of 20,000
Sole Proprietor and Another Individual Form
a partnership
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