Week 1 – Partnership Formation Unlimited Liability.
All
partners (except limited
Characteristics of partnership
partners), including industrial
Mutual Contribution. There partners, are personally liable
cannot be a partnership for all debts incurred by the
without contribution of partnership. If the
money, property or industry, partnership cannot settle its
(work or services which may obligations, creditors' claims
either be personal manual will be satisfied from the
effort) or intellectual to a personal assets of the
common fund partners without prejudice to
Division of Profits or the rights of the separate
Losses. The essence of creditors of the partners.
partnership is that each Income Taxes. Partnerships,
partner must share in the except general professional
profits or losses of the partnerships, are subject to
venture tax at the rate of 30% (per
Co-Ownership of R.A. No. 9337) of taxable
Contributed Assets. All income.
assets contributed into the Partners' Equity
partnership are owned by the Accounts. Accounting for
partnership by virtue of its partnerships are much like
separate and distinct juridical accounting for sole
personality. If one partner proprietorships. The
contributes an asset to the difference lies in the number
business, all partners jointly of partners' equity accounts.
own it in a special sense. Each partner has a capital
Mutual Agency. Any partner account and a withdrawal
can bind the other partners account that serves similar
to a contract if he is acting functions as the related
within his express or implied accounts for sole
authority. proprietorships.
Limited Life. A partnership
has a limited life. It may be
dissolved by the admission,
death, insolvency, incapacity,
withdrawal of a partner or
expiration of the term
specified in the partnership
agreement.
Advantage and Disadvantage partnership. Assets contributed are
of Partnership debited to appropriate asset
account and credited to capital
Advantages versus
Proprietorships account of the partner. When
contributions are in form of
1. Brings greater financial services, a memorandum entry is
capability to the business.
prepared.
2. Combines special skills,
expertise and experience of 1. Net Investment Method -
the partners. the partners are credited for
the amount of the net assets
3. Offers relative freedom and
invested (FV of assets minus
flexibility of action in
decision-making. FV of liabilities). This will
happen if the contributions
ratio is equal to capital ratio.
Advantages versus
2. Bonus Method - partners'
Corporations
capital is credited based on
1. Easier and less expensive to their agreed ratio which may
organize. be different from their
2. More personal and informal. contribution ratio. The
difference between the
amount contributed and
Disadvantages amount credited to capital is
1. Easily dissolved and thus the bonus. This is also called
unstable compared to a as the transfer of capital
corporation. method.
2. Mutual agency and unlimited
liability may create personal
obligations to partners.
3. Less effective than a
corporation in raising large Valuation if contribution of
amounts of capital. partners
Partners are credited based on the
Accounting for Partnership value of assets contributed and if
such assets are subject to liabilities
Accounting for Initial
which are to be assumed by the
Investment
partnership, then the partners are
Partners may contribute cash, to be credited for net assets
property, or industry to the
contributed. (net asset is assets
partnership), and credit
minus the liabilities)
balance of the drawing
account at the end of the
a. Cash contributions are valued at period. It is debited for his
its face value (its fair value).
Foreign currency denominated cash permanent withdrawals and
contributions are valued based on debit balance of the drawing
exchange rates on the date of account at the end of the
contribution. However, cash
period.
deposited in a bankrupt or closed
bank is valued at its estimated
recoverable amount (net realizable Typically, partners do not
value).
b. Non-cash contributions are wait until the end of the year
valued at its fair market value. to determine how much of
Normally, the partners agreed to the profits they wish to
value non-cash assets at fair
withdraw from a partnership.
market value.
c. Accounts receivable transferred To meet personal living
to the partnership are to be expenses, partners
recorded at gross amount
customarily withdraw money
accompanied by corresponding
allowance for bad debts. on a periodic basis
d. Fixed assets transferred to the throughout the year. A
partnership are to be recorded at
partner's drawing account is
fair market value. Accumulated
depreciation is not carried forward debited to reflect assets
in the books of the partnership. temporarily withdrawn by
him from the partnership. At
Partner’s capital and drawings the end of each accounting
account period, the balances in the
drawing accounts are closed
A partner's capital account is
to the related capital
credited for his initial and
accounts.
additional net investments
(assets contributed less
liabilities assumed by the
while temporary withdrawals are
regular advances made by the
partners in anticipation of their
share in profit.
The use of drawing accounts for
temporary withdrawals provides a
Partner’s Capital Account record of each partner's drawings
Debit Credit during an accounting period.
1. Permanent 1. Original Hence, drawings in excess of the
withdrawal investment allowed amounts as stated in the
s partnership agreement may be
2. Debit 2. Additional controlled.
balance of investment
the
drawing
Notice that profit (or loss) is
account at
the end of credited (or debited) either to the
the period drawing account or to the capital
3. Credit account. The choice of the account
balance of the to credit or debit depends on the
drawing intention of the partners. If they
account at wish to maintain their capital
the end of the
accounts for investments and
period
permanent withdrawals, then profit
or loss should be entered in the
Partner’s Drawing Account drawing account.
Debit Credit
1. Temporary 1. Share in
withdrawals profit (may be On the other hand, if the purpose
credit directly of the partners is to make profit or
to capital) loss part of their capital, then the
2. Share in loss capital account should be used. In
(may be
either case, the resulting partners'
debited directly
to capital) ending capital balances will be the
same.
Permanent withdrawals are made
with the intention of permanently Receivables from / Payables to
decreasing the partner's capital a partner
If a partner withdraws a substantial
amount of money with the
intention of repaying it, the debit
should be to Loans Receivable-
Partner account instead of to
Partner's Drawing account. This
account should be classified
separately from the other
receivables of the partnership.
A partner may lend amounts to the
partnership in excess of his
intended permanent investment.
These advances should be credited
to Loans Payable-Partner account
and not to Partner's Capital
account classified among the
liabilities but separate from
liabilities to outsiders. This
distinction is important in case of
liquidation. Loans payable to
partners must be paid after the
claims of outside creditors have
been paid in full. These loans have
priority over partners' equity.