ACCCOB1: ACCOUNTING 1

NOTES
15.​ Going concern
JANUARY 16, 2024

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

1.​ Conservatism
2.​ Relevance
3.​ Full-disclosure
4.​ Historical cost
5.​ Going concern
6.​ Consistency

7.​ Materiality
1.​ H
8.​ Monetary
2.​ I
9.​ Periodicity
3.​ L (?)
10.​ Economic entity
4.​ Economic entity
5.​ Materiality
6.​ L (?)
7.​ Monetary
8.​ C
9.​ Time period
10.​ Conservatism
11.​ Revenue recognition
12.​ Consistency
13.​ Industry practice
14.​ Objectivity
 ACCCOB1: ACCOUNTING 1
NOTES
➔​ Partnership with Contribution of Immovable Property:
◆​ 2 Requirements:
1.​ The contract must be in a public instrument.
2.​ An inventory of the property contributed must be
made, signed by the parties, and attached to the
public instrument.
➔​ Characteristics of a Partnership:
1.​ Mutual Agency: Each partner has the authorit to act for the
partnership and to enter into contracts binding it, provided
these are within the express or implied authority.
2.​ Unlimited Liability: The liability of a partner for partnership
debt goes beyond the amount of his investment. Each
partner is individually liable to creditors for debts incurred by
the partnership up to the extend of his personal assets
except in a limited partner.
1.​ Historical cost 3.​ Co-ownership of Property: Once an asset is invested into the
2.​ Matching business, it ceases to be the investor’s property, since all the
3.​ Time period partners are co-owners of partnership assets.
4.​ Matching 4.​ Co-ownership of Profit: each partner shares in the profits of
5.​ Conservatism the partnership.
5.​ Taxable Entity: The income of a partnership is taxable like a
corporation except a general professional partnership which
is formed for the purpose of exercising their common
profession like accounting, medicine, engineering, etc.
a.​ General Professional Partnership
i.​ Not Taxable: To exercise common
profession, business is not ran because of
money. Individual Income is Taxed.
b.​ Other Kind of Business Partnership
i.​ Taxable
➔​ Advantages of a Partnership
◆​ Ease of formation and dissolution.
◆​ Greater amount of capital may be raised.
6.​ Consistency ◆​ Relative freedom and flexibility in decision-making
7.​ Going concern ➔​ Disadvantages of a Partnership
8.​ Revenue recognition/accrual ◆​ Unlimited liability.
9.​ Full disclosure ◆​ Lack of business continuity.
10.​ Materiality (you dont need to adhere strictly to what is stated ◆​ Difficulties in transferring ownership interest.
by gaap especially when the items are not material enough to ●​ Delectus Personae - Personal Relationship
affect the results in FS, e.g. the value of a building and ◆​ Limited capital.
calculator is not the same) ➔​ Kind of Partnership
◆​ According to its Activities
FEBRUARY 2, 2024 A.​ Trading Partnership - a partnership whose main
activity is the purchase or sale of goods.
INTRODUCTION TO PARTNERSHIP
B.​ Service Partnership - main activity is the rendering of
Definition and Nature of Partnership services.
➔​ In a contract of partnership, two or more persons bind themselves C.​ Manufacturing Partnership - main activity is the
to contribute money, property, or industry, to a common fund, with production of goods.
the intention of dividing the profits among themselves. Two or ◆​ According to Liabilities
more persons may also form a partnership for the exercise of a A.​ General Partnership - is one which all partners may
profession. (Civid Code of the Philippines, Art. 1767) publicly act on behalf of the firm in which case each
➔​ SEC Registration: When the partnership capital is P3,000 or more, partner can be held individually liable for the
in money or property, the public instrument must be registered obligations of the firm.
with the Securities and Exchange Commission.
 ACCCOB1: ACCOUNTING 1
NOTES
B.​ Limited Partnership - a partnership in which one or
more but not all partners have a limited liability.
◆​ According to Object
A.​ Universal Partnership of all Present Property - the
partners contribute all their property to a common
fund with the intention dividing the property and all
the profits they may acquire therewith among 2.​ A & B formed a partnership on January 1, 2022. A
themselves. contributed P150,000 while B contributed a piece of
B.​ Universal Partnership of Profits - comprises all that the land which cost him P200,000 but with an fmv OF
partners may acquire by their industry or work during P300,000 at the time of formation of the partnership.
the existence of the partnership and all the fruits of all The land is presently mortgaged with BPI and has an
the present properties. outstanding balance of P75,000. This liability is to be
C.​ Particular Partnership - has for its object, determinate assumed bu the partnership. Give opening entry in the
things, their use or fruits, or a specific undertaking, or books of the partnership.
the exercise of a profession or a vocation.
➔​ Kind of Partners
1.​ Capitalist partner
2.​ Industrial partner
3.​ General partner
4.​ Limited partner
5.​ Nominal partner
6.​ Secret partner
7.​ Silent partner II.​ CONVERSION OF A SINGLE PROPRIETORSHIP TO PARTNERSHIP
➔​ Articles of Co-Partnership-agreement in writing
◆​ Items covered:
FEBRUARY 16, 2024
●​ Partnership name, nature, purpose, and location.
●​ Effectivity date of partnership and duration of contract. PARTNERSHIP OPERATIONS
●​ Names of partners and the agreed contribution of ➔​ Essentially the same as the operations of a sole proprietorship.
each. ➔​ The only difference between sole proprietorship and partnership in
●​ Rights, power and duties of the partner and their terms of the accounting cycle are the financial statements and
limitations. closing entries.
●​ Accounting period to be adopted and the nature of
accounting record. Financial Statements for Partnership
●​ Profits and loss sharing ratio including and provisions ➔​ Essentially the same as sole proprietorship, with some added
for the recognition of differences in tangible assets and features for equity.
services contribution. ➔​ Provide a column for each partner in the schedule.
●​ Partners investments and withdrawals subsequent to
formation 1.​ Income Statement
●​ Provsions for the arbitration
➔​ 2 ways to form a partnership:
◆​ Organizing a new business.
◆​ Conversion of single proprietorship to partnership.
2.​ Partner’s Equity
FEBRUARY 6, 2024

INTRODUCTION TO PARTNERSHIP

I.​ ORGANIZE A NEW BUSINESS

●​ Illustrative Transactions:
1.​ A and B formed a partnership on January 1, 2022. A
contributed P100,000 cash while B contributed a piece
of land which cost him P200,000 but with an FMV of
P300,000 at the time of the formation of the
partnership. Give the journal entry to record the
formation of the partnership.
 ACCCOB1: ACCOUNTING 1
NOTES
3.​ Financial Position ●​ Industrial Partners
○​ Division of Profits
■​ In accordance with the agreement.
■​ In the absence of an agreement, a just and equitable
share of the profits.
○​ Division of Losses
Year-End Closing Entries
➔​ Accounts with a zero balance.
●​ Capitalist-Industrial Partners
➔​ Accounts that are closed are revenue and expense accounts.
○​ Division of Profits
➔​ Debit revenue accounts.
■​ In accordance with the agreement.
◆​ Credit Income summary.
■​ In the absence of an agreement,
➔​ Debit Income Summary.
●​ As an industrial partner - a just and equitable
◆​ Credit Expense Accounts.
share of the profits.
➔​ If the Income summary resulted in a credit balance, it represents a
●​ As a capitalist partner - according to original
net income.
contribution together with the other capitalist
◆​ To close the income summary, since it is a credit balance,
partners.
then we debit it, and credit the drawing account. (Indirect
○​ Division of Losses
Method)
■​ In accordance with the agreement.
●​ Income Summary
■​ In the absence of an agreement,
○​ Alpha, Drawing
●​ As an industrial partner - shall have no share in
○​ Bravo, Drawing
the losses.
➔​ If the Income summary resulted in a debit balance, it represents a
●​ As a capitalist partner - will sare in the losses
net loss.
according to original contribution together with
◆​ To close the income summary, since it is a debit balance, then
the other capitalist partners.
we credit it, and debit drawing account. (Indirect Method)
●​ Alpha, Drawing
Factors to consider in the division of profit or loss
●​ Bravi, Drawing
➔​ Partners’ Capital contribution
○​ Income Summary
➔​ Services rendered
➔​ Managerial ability
Divison of Profit Rules
➔​ Economic or pure profit
1.​ In accordance with the partners’ agreement.
2.​ In the absence of an agreement, profit shall be divided based on
Methods of dividing profit & loss
partners’ capital contribution.
1.​ Equally
2.​ Arbitrary ratio
Divison of Losses Rules
3.​ Based on partners’ capital contribution
1.​ In accordance with the partners’ agreement.
a.​ Beginning Capital Balance
2.​ In the absence of an agreement, losses shall be divided based on
b.​ Ending Capital Balance
the partners’ capital contribution.
c.​ Average Capital Balance
3.​ If only the division of profit has been agreed upon, then division of
4.​ Allowing salaries, bonus, interest on capital and dividing the
losses will follow the same profit sharing ratio.
remainder in an agreed ratio.

Rules on Distribution of Profits

1.)​ Illustration:
●​ Capitalist Partners
●​ Alpha and Bravo are partners with capital balances of
○​ Division of Profits
P100,000 and P200,000 respectively. The partnership earned a
■​ In accordance with the agreement.
net income of P36,000 at the end of its first year of operation.
■​ In the absence of an agreement, according to the
original contribution.
Required:
○​ Division of Losses
1.​ Determine the share of each partner in the net income based
■​ In accordance with the agreement
on the following independent situations.
■​ If the agreement is only on division of profits, the
a.​ Equally
division of losses is the same with the agreement on
b.​ 60:40 respectively
the vision of profits.
c.​ 2:3
■​ In the absence of any agreement, according to original
d.​ No agreements were made between partners.
contribution.
2.​ Give the journal entry to record the distribution of the profit.
 ACCCOB1: ACCOUNTING 1
NOTES
A.​ Equally​ Entry:
Alpha = 18,000 Income Summary 48,000
Bravo = 18,000 ​ Charlie, Drawing 28,800
Entry: ​ Delta, Drawing 19,200
Income Summary 36,000
​ Alpha, Drawing 18,000 C.​ Average Capital Balance
​ Bravo, Drawing 18,000

B.​ 60:40 respectively

Alpha = 21,600 (36,000 x 60%)
Bravo = 14,400 (36,000 x 40%)
Entry:
Income Summary 36,000
​ Alpha, Drawing 21,600
​ Bravo, Drawing 14,400

C.​ 2:3 Entry:

Alpha = 14,400 (36,000 x 2/5)
Bravo = 21,600 (36,000 x 3/5)
Entry:
Income Summary 36,000
​ Alpha, Drawing 14,400 3.)​ Illustration:
​ Bravo, Drawing 21,600 ●​ Triple R partnership was formed by Ron, Rey and Rex by
investing P100,000, P200,000 and P300,000 respectively.
Based on their agreement, the profit or loss is to be divided
2.)​ Illustration: among the partners as follows:
●​ Given below are the capital balances of Charlie and Delta at
the end of the period before any profit distribution. The net 1.​ Annual salaries of P12,000 for Ron, P6,000 for Rey and P4,000
income for the year is P48,000. for Rex.
2.​ Interest of 5% on the original capital balances.
3.​ Bonus of 20% to Rex, the managing partner, of the profit after
salary and interest allowances.
4.​ Remainder is to be divided in a ratio of 2:1:1 respectively.

Required: Record the distribution of the profit based on the following Required: record the distribution of the profit or loss under each of the
independent assumptions: following independent assumptions.
a.​ Beginning capital balance a.​ Net income for the year of P60,000
b.​ Ending capital balance b.​ Net income for the year of P42,000
c.​ Average capital balance c.​ Net income for a month period of P40,000
d.​ Net loss for the year of P36,000
A.​ Beginning capital balance
A.​ Net income for the year of P60,000

​ Entry:
​ Income Summary 48,000
​ Charlie, Drawing 16,000
​ Delta, Drawing 32,000

B.​ Ending capital balance ​

 ACCCOB1: ACCOUNTING 1
NOTES
Entry: Illustration No. 2 - Purchasing Part of the Interest of One or More
Partners

II.​ Using the same information in No. 1 except that C is admitted

by purchasing one-half of each partner’s interest paying them
P180,000 cash.

Give the journal entry to record admission of C.

MARCH 1, 2024
Entry:
PARTNERSHIP DISSOLUTION A, Capital 100,000
B, Capital 100,000
Partnership Dissolution
C, Capital 150,000
➔​ Termination of the legal life of a partnership.
➔​ Change in the relationship of the partners.
Partnership Capitalization Before and After Admission of a New
➔​ End the association of individuals for their original purpose.
Partner
◆​ Causes of Dissolution
●​ Admission of a new partner
●​ Withdrawal or retirement of a partner
●​ Death of a partner
●​ Incorporation of the partnership
◆​ Admission of a Partner
●​ 2 ways:
1.​ By Purchase of Interest
2.​ By Investment

By Purchase of Interest
Illustration: purchasing all of the interests of one partner By Investment - Bonus Method
I.​ A & B are partners with capital balances of P100,000 and *Bonus: It is the amount of capital or equity transferred by one partner
P200,000 respectively. They share profits and losses equally. C to another partner.
is admitted as a new partner by purchasing all of A’s interest Illustration:
paying him P120,000 cash. 1.​ A & B are partners with capital balances of P200,000 and
P300,000 respectively. Their P&L ratio is 2:3 respectively. C is
Give the journal entry to record admission of C. admitted by investing P100,000 cash and given a capital credit
equal to his investment.
Entry: 2.​ Using the same information above except that C is admitted by
A, Capital 100,000 investing P100,000 cash but given a capital credit of P150,000
C, Capital 100,000 in the new firm’s capital.
3.​ Using the same information above except that C is admitted by
Partnership Capitalization Before and After Admission of a New investing p100,000 cash but given a capital credit of P80,000 in
Partner the new firm’s capital.

Record the admission of C under the 3 independent cases:

A & B are partners with capital balances of P200,000 and P300,000

respectively. Their P&L ratio is 2:3 respectively. C is admitted by
investing P100,000 cash and given a capital credit equal to his
investment.
 ACCCOB1: ACCOUNTING 1
NOTES

1.​ C is admitted by investing P100,000 and given a capital credit By Investment - Asset Revaluation
equal to his investment. Illustration:
●​ Positive Asset Revaluation/Assets Undervalued
➔​ Alpha and Bravo are partners with capital balances of
P100,000 and P200,000, respectively. They share profits and
losses equally. Charlie is admitted by investing P100,000 for ⅕
interest in the agreed capital of P500,000.

2.​ Using the same information above except that C is admitted by

investing P100,000 cash but given a capital credit of P150,000
in the new firm’s capital.

●​ Negative Asset Revaluation/Assets Overvalued

➔​ Using the same information above, except that Charlie is
admitted by investing P60,000 for a ⅕ interest in the agreed
capital of P300,000.

3.​ Using the same information above except that C is admitted by

investing P100,000 cash but given a capital credit of P80,000 in
the new firm’s capital.

*if silent, capital isn't mentioned, use bonus method

-​ So tcc and tac are equal
 ACCCOB1: ACCOUNTING 1
NOTES
b.) MORE THAN BALANCE - BONUS TO THE WITHDRAWING PARTNER
MARCH 5, 2024
A, B, and C are partners with capital balances of P100,000, P200,000,
PARTNERSHIP DISSOLUTION and P300,000 respectively. They share profits and losses equally. C
withdraws from the partnership and he is paid P400,000 cash.
Withdrawal or Retirement of a Partner
Entry:
●​ Sale of interest to:
C, Capital 300,000
1.​ The remaining partners or to an outsider.
A, Capital 50,000
2.​ The partnership.
B, Capital 50,000
Cash 400,000
Sale of interest to:
Sale of Interest to the Remaining Partners
c.) LESS THAN CAPITAL BALANCE - BONUS TO THE REMAINING
Illustration:
PARTNERS
I.​ A, B, and C are partners with capital balances of P100,000,
A, B, and C are partners with capital balances of P100,000, P200,000,
P200,000, and P300,000 respectively. They share profits and
and P300,000 respectively. They share profits and losses equally. C
losses equally. C withdraws from the partnership and his
withdraws from the partnership and he is paid P280,000 cash.
interest is sold to A&B. Each purchases one-half of C’s
interest-paying C P320,000 cash. Give the journal entry to
Entry:
record the withdrawal of C.
C, Capital 300,000
Cash 280,000
Entry:
A, Capital 10,000
C, Capital 300,000
B, Capital 10,000
A, Capital 150,000
B, Capital 150,000

Withdrawal of a Partner with Asset Revaluation

Sale of Interest to an Outsider
a.) MORE THAN CAPITAL BALANCE - UPWARD ASSET REVALUATION
II.​ Using the same information above except that C’s interest is
A, B, and C are partners with capital balances of P100,000, P200,000,
sol dot D, an outside: D pays C P340,000 cahs. Give the journal
and P300,000 respectively. They share profits and losses equally. C
entry to record the withdrawal of C.
withdraws from the partnership and he is paid P400,000 cash.
Entry:
C, Capital
Amount paid to C P400,000
B, Capital
C, Capital 300,000
Share in Upward Asset Revaluation 100,000
Divid by equivalent ratio 1/3
Sale of Interest to the Partnership
Total Upward Asset Revaluation P300,000
●​ The interest of a withdrawing partner may be sold to the
partnership at an amount:
Entry:
a.​ Equal to capital balance
Assets 300,000
b.​ More than capital balance
A, Capital 100,000
c.​ Less than capital balance
B, Capital 100,000
C, Capital 100,000
Illustration:
a.) EQUAL TO CAPITAL BALANCE
C, Capital 300,000
A, B, and C are partners with capital balances of P100,000, P200,000,
Share in Upward Asset Revaluation 100,000
and P300,000 respectively. They share profits and losses equally. C
Adjusted C, Capital P400,000
withdraws from the partnership and he is paid P300,000 cash.

Entry:
Entry:
C, Capital 400,000
C, Capital 300,000
Cash 400,000
Cash 300,000
 ACCCOB1: ACCOUNTING 1
NOTES
b.) LESS THAN CAPITAL BALANCE - DOWNWARD ASSET REVALUATION ●​ The realization of non-cash assets is
A, B, and C are partners with capital balances of P100,000, P200,000, accomplished over a period of time. When
and P300,000 respectively. They share profits and losses equally. C cash is available, the creditors may be
withdraws from the partnership and he is paid P280,000 cash. partially or fully paid. Any excess cash may
be distributed to the partners in
Amount paid to C P280,000 accordance with the program of safe
C, Capital 300,000 payments of a cash priority program.
Share in Downward Asset Revaluation (20,000)
Divid by equivalent ratio 1/3
Total Upward Asset Revaluation ( P60,000) PROCEDURE IN LIQUIDATION
➔​ When a partnership is to be liquidated, the books should be
Entry: adjusted and closed and the net income or loss for the period
A, Capital 20,000 should be carried to the partners’ capital accounts. The partnership
B, Capital 20,000 is then ready to proceed with liquidation.
C, Capital 20,000 ➔​ As assets are converted into cash. Any differences between the
Asset 60,000 book values and the cash realized represent gains or losses to be
divided among partners in the profit and loss ratio. Such gains or
losses are carried to the capital accounts. The capital balances then
C, Capital 300,000 become the basis for settlement.
Share in Downward Asset Revaluation (20,000) ➔​ In the course of liquidation, when a partner’s capital account
Adjusted C, Capital P280,000 reports a debit balance and such partner has a loan balance, the
law permits the exercise of the right of offset, that is, the offset of a
Entry: part or all of the loan against the capital deficiency. A debit balance
C, Capital 280,000 indicates the need for a contribution by the deficient partner. The
Cash 280,000 inability of a partnership to recover a capital deficiency will mean
that the remaining partners will have to absorb such an amount.
➔​ As cash becomes available for distribution, it is first applied to the
MARCH 12, 2024
payment of outside creditors. It may then be applied in the
PARTNERSHIP LIQUIDATION (LUMP SUM METHOD) settlement of the partner’s loan and capital balances. It may be
observed that the Philippine Partnership law provides that the
partners’ loans shall rank ahead of the partners’ capital in order of
●​ Dissolution ends the legal life of the partnership but does not payment.
mean termination of business activities
●​ Liquidation, it means that its the termination of business LOSS ON REALIZATION
activities - partnership will go out of business. ➔​ Case 1 - Loss on realization fully absorbed by partners’ capital
balances
●​ Liquidation ➔​ Case 2 - Loss on realization requiring transfer from partner’s loan
➔​ Winding up the affairs of the partnership. account to capital.
➔​ When a partnership goes out of business, it ordinarily sells ➔​ Case 3 - Loss on realization resulting in a capital deficiency for one
most of the assets, pays the creditors, and distributes the partner.
remaining cash or other assets to the partners in accordance ➔​ Case 4 - Loss on realization resulting in capital deficiencies for more
with their claims. than one partner.
➔​ The conversion of assets into cash is referred to as realization;
the payment of liabilities is referred to as liquidation. The *personally insolvent - the partner does not have enough personal
latter term is also used in a broader sense to refer to the assets to cover his own personal liabilities
complete winding-up process. *loss on realization - if the carrying value or book value of the
➔​ Two methods of Liquidation non-current assets is more than the cash realized.
◆​ LUMP SUM METHOD
●​ All non-cash assets are realized and the
related gains or losses are distributed and
liabilities are paid followed by a single cash
distribution to the partners.
◆​ INSTALLMENT METHOD
 ACCCOB1: ACCOUNTING 1
NOTES
Case 4 - Loss on realization resulting in capital deficiencies for more
than one partner
Cash realized: P125,000

Required:
1.​ For each case below, prepare a statement of liquidation,
assuming that cash is realized for the other assets as indicated
and that all available cash is immediately distributed to the
proper parties. Assume further that deficient partners are
personally insolvent.
a.​ P250,000
b.​ P185,000
c.​ P170,000
d.​ P125,000

Case 1 - Loss on realization fully absorbed by partners’ capital balances

Cash realized: P250,000

MARCH 15, 2024

PARTNERSHIP LIQUIDATION (LUMP SUM METHOD) - cont.

Case 3 - Loss on realization resulting in a capital deficiency for one

partner
Cash realized: P170,000

Entry:
 ACCCOB1: ACCOUNTING 1
NOTES

Exercise 4-17

Exercise 4-18
 ACCCOB1: ACCOUNTING 1
NOTES

MARCH 22, 2024

PARTNERSHIP LIQUIDATION (LUMP SUM METHOD) - cont.

Installment Liquidation

Required:
Exercise 5-3
1.​ Journalize the foregoing transactions.
2.​ Prepare a statement of installment liquidation and safe
payments schedule for immediate distribution of all cash on
hand.

Exercise 5-5
 ACCCOB1: ACCOUNTING 1
NOTES
Exercise 5-6

Exercise 5-11