Module 1

Partnership formation

ACCOUNTING
PRINCIPLES

Same accounting procedures and same books are used (general journal,
ledgers and special journals) except that accounting procedures differ in:
Computing and recording the sharing of profit and losses
Presenting the Owners (Partners) Equity
Computing and recording the liquidation of the business

Ways of Forming a Partnership

1. Two or more individuals
a. Two or more capitalist partners
b. A capitalist partner and an industrial partner

2. One sole proprietor and an individual

3. Two or more sole proprietorships

REMEMBER: When recording partners investment:

1. Cash investments are recorded at face value
2. Non-cash investments are recorded at the Fair Market Value at the date of
contribution/transfer to the partnership
3. The AGREED VALUE prevails over the FAIR MARKET VALUE
4. If the a partner is a sole proprietor, only the CAPITAL account is used to record the
adjustment to reflect the investments fair market value. (not the Income and Loss
Summary account)
Capital is credited when the value of the assets increase or the value of the liabilities assumed
decreases
Capital is debited when the value of the assets decrease or the value of the liabilities assumed
increases

5. To revalue the Accounts Receivable account, use its contra-asset account:

Allowance for Bad Debts/Doubtful account.
REMEMBER: Amongst the contra-assets, ONLY the Allowance for Bad Debts is carried in the
partnerships books. WHY?

6. To revalue the Fixed Asset account, use its contra-asset account: Accumulated
Depreciation account.

Partnership between two or

more individuals

Recording the investment of capitalist partners

PROFORMA:
Assets (at FMV)

XX

Liabilities (at FMV) XX

Partner, Capital

XX

Recording the investment of industrial partners

PROFORMA:
No JOURNAL entry is required. Only a MEMORANDUM entry.

CASE 1: Both are capitalist partners

On December 1, 2009, Rody and Lorie formed a partnership. They agreed on
the following contributions:

Prepare the journal entries to record the investment. Assume that the mortgage
liability is a) assumed by partnership and b) not assumed by the partnership.

CASE 1: JOURNAL ENTRIES

CASE 2: One is a capitalist partner and the other is an industrial

partner
On December 1, 2009, Rody and Lorie formed a partnership. They agreed
that Lorie shall manage the partnership business and shall be given a 10% share
in the yearly profits. Rody, on the other hand, shall contribute the following:

Prepare the journal entries to record the partnership formation.

REMEMBER: Generally, Industrial partners share in the profits of the business but
NOT in the losses of the business. He/She, however, is liable to share in the
losses incurred arising from contractual obligations with 3 rd parties.

CASE 2: JOURNAL ENTRIES

Partnership between individuals

and a sole proprietor
Opening entries can be made by using:
a new set of books (preferred) or
the old set of books of the old sole proprietorship

CASE 1: A new set of books is used.

1. Prepare all capital adjusting entries to state the sole proprietors accounts in their agreed/fair market value.
2. Record the investment of the individual partner.

CASE 2: A new set of books is used.

I. In the books of the sole proprietor
1. A. Prepare all capital adjusting entries to state the sole proprietors accounts in their agreed/fair market
value.
2. Prepare adjusted trial balance.
3. Prepare closing entries

II. In the books of the partnership

1. Record the investment of the sole proprietor and the individual partner.

PROBLEM:
The books of Japhs Sari-sari store presents the
following:

On December 1, 2010, he agreed to formed a partnership with Jaja to form JJ

Merchandising. Jaja agreed to invest cash representing a 30% capital
interest in the newly formed business.
Before forming the partnership, Japh and Jaja agreed that 50% of the notes
payable will be settled. They also agreed that the following valuation will
made with regards to Japhs contributed assets.

Prepare the journal entries assuming that:

a. The old books of the sole proprietor is used.
b. A new set of books is used.

CASE 1: OLD SOLE PROPRIETORS BOOKS ARE USED

CASE 1: OLD SOLE PROPRIETORS BOOKS ARE USED

CASE 2: NEW BOOKS ARE USED

CASE 2: NEW BOOKS ARE USED

CASE 2: NEW BOOKS ARE USED

CASE 2: NEW BOOKS ARE USED

Partnership between TWO OR

MORE SOLE proprietorships
Opening entries can be made by using:
a new set of books (preferred) or
the old set of books of the one of the old sole proprietorships

Accounting Procedures:
1. Record the capital adjusting entries in the books of the sole proprietors.
2. Prepare the adjusted trial balance of the sole proprietors
3. Close the books of the sole proprietors. (No need to close the books of the
one that will be used by the partnership)
4. Record the investment of the sole proprietors in the books of the
partnership.
5. Prepare the partnerships initial statement of financial position.

Module 2

Partnership OPERATION & Profit

distribution

RULES ON PROFIT SHARING

1. With profit and loss agreement
Profit is shared amongst ALL partners in accordance with the stipulations
agreed upon by the partners (refer to partnership agreement)

2. No profit and loss agreement

If all are CAPITALIST partners, profits are to be divided in proportion to
their respective (ORIGINAL) capital contribution
If one is an INDUSTRIAL partner, the latter gets a just and equitable share,
and the remaining percentage shall be divided amongst the capitalist
partners in accordance with their respective capital contribution
If one is a CAPITALIST-INDUSTRIAL partner, the latter gets a just share as
industrial and another share as capitalist partner.

RULES ON LOSS SHARING

1. With profit and loss agreement
Loss is shared amongst ALL partners in accordance with the stipulations
agreed upon by the partners (refer to partnership agreement)
REMEMBER: The industrial partner is generally exempt in sharing losses
but may become liable for losses only if there is a stipulation.

2. No profit and loss agreement

If all are CAPITALIST partners, losses are to be divided in accordance
with their profit sharing agreement.
If one is an INDUSTRIAL partner, the latter is exempted and the
capitalist partners share in losses in accordance with their capital
contributions.

Sharing of profits and losses

A, B and C formed a partnership. A and B contributed P50,000
each while C served as the managing partner of the business.
For the first two years of the business, the partnership incurred
net loss of P90,000 in Year 1 and net income of P120,000 in Year
2. How will the results of the operations be distributed amongst
the partner if:
a. The partnership agreement stipulates equal sharing of the
profits and losses of the business; and
b. The partnership does not provide any stipulation on the
division of profits and losses and the managing partner is
provided a 10% share in the profits.

Sharing of profits and losses

A, B and C formed a partnership. A and B contributed P50,000
each while C served as the managing partner of the business.
For the first two years of the business, the partnership incurred
net loss of P90,000 in Year 1 and net income of P120,000 in Year
2. How will the results of the operations be distributed amongst
the partner if:
a. The partnership agreement stipulates equal sharing of the
profits and losses of the business; and
b. The partnership does not provide any stipulation on the
division of profits and losses and the managing partner is
provided a 10% share in the profits.

Sharing of profits and losses

A, B and C formed a partnership. A and B contributed P50,000
each while C served as the managing partner of the business.
For the first two years of the business, the partnership incurred
net loss of P90,000 in Year 1 and net income of P120,000 in Year
2. How will the results of the operations be distributed amongst
the partner if:
a. The partnership agreement stipulates equal sharing of the
profits and losses of the business; and
b. The partnership does not provide any stipulation on the
division of profits and losses and the managing partner is
provided a 10% share in the profits.

Accounting for partnership

operations
1. CAPITAL ACCOUNT ( Name of Partner, Capital)
> Credited for:
a. Initial investments in the form of cash, merchandise or other assets
b. Additional investments in the form of cash, merchandise or other
assets
c. If the partnership has no available fund and the payment of
partnership obligation was made by the partner from his personal
funds and such will be considered as an additional investment
d. Closing the credit balance of a partners drawing account (Indirect
method)
e. Closing the credit balance of income summary account (Direct method)

Accounting for partnership

operations
1. CAPITAL ACCOUNT ( Name of Partner, Capital)
> Debited for:
a. Permanent withdrawals, provided they would not prejudice the
partnership creditors
b. Amount of interest sold with the consent of the other partners
c. Closing the debit balance of a partners Drawing account
(Indirect Method)
d. Closing the debit balance of Income Summary account (Direct
Method)

Accounting for partnership

operations
2. DRAWING or WITHDRAWAL ACCOUNT( Name of Partner,
Drawing/Withdrawal/Personal)
> Credited for:
a. Withdrawals of cash or other partnership assets. These withdrawals are temporary in
nature and to be deducted from the partners share in the profit of the partnership
b. Losses from partnership operations
c. Closing the credit balance of drawing account to capital account.

> Debited for:

d. Allowance for salaries or bonuses not as an expense to the firm but as a share in the
profit or loss of the partnership
e. Interest allowed on their capital balances as per agreement
f. Closing the credit balance of income summary account
g. Closing the debit balance of drawing account to capital account

Accounting for partnership

operations
REMEMBER:
Personal withdrawals of a partner in anticipation of profits is viewed as
a transaction of temporary nature
A partner can only withdraw to the extent of his/her share in the
profits of the business.
Capital and Drawing account balances are not combined to determine
the total interest on the SOFP. Increases and decreases in the accounts
are separately presented in the Statement of Partners Equity.

Accounting for partnership

operations
3. LOAN ACCOUNT
If partnership owes a sum of money to a partner:
Loan Payable Name of Partner
Notes Payable Name of Partner
Due to Partner Name of Partner
If partner owes a sum of money to the partnership
Due from Partner Name of Partner
Receivable from Partner Name of Partner
Notes Receivable Name of Partner

Journal entries: Recording

profit distribution

Journal entries: Recording

profit distribution

Profits may be divided using:

1. Arbitrary or agreed ratios
a. Equally
b. Using agreed ratios as follows:
i. Percentage Ratio
ii. Fractional Ratio
iii. Algebraic Ratio

2. In the ratio of Partners Capital Balances

a. Beginning Capital
b. Ending Capital
c. Average Capital

3. Allowing interest, salaries, bonuses and the remainder divided according

to (1) or (2)

Example
Ki and WangYu are partners in Perennial Partnership. Both have
contributed a certain sum of money. However, Ki is tasked to manage
the business. During the year, the books of the partnership revealed
the following:

The partnership earned a net profit of P140,000 for the year ending
2013.

 Record the distribution of profit and other items using the following
assumptions:
a.Equally
b.1/3 and 2/3 ratio for Ki and WangYu, respectively
c.60% for Ki and 40% for WangYu
d.1:5 ratio for Ki and WangYu, respectively
e.Based on beginning capital balances
f. Based on ending capital balances
g.Based on average capital balances
.Work on the following assumptions
a. A 20% interest on the beginning capital is provided
b. A salary of P10,000 to the managing partner
c. A 10% bonus based on net income to the managing partner

REMINDERS:
1. The industrial partner does not share in the losses of the partnership
unless stipulated.
2. The interest and salary are provided to partners whether it is a net
income or net loss.
3. Bonuses are not provided to partners when there is a net loss.
4. Be careful with the basis of computing for the amount of bonus.
5. A net income is the net results of operations after tax.

ENDING CAPITAL BALANCE

AVERAGE CAPITAL BALANCE