basic considerations and formation

8/10/2019 Basic Considerations and Formation

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Accounting for

PartnershipsBasic Considerations and Formation


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In a contract of partnership, two or more

persons bind themselves to contribute

money, property, or industry to a common

fund, with the intention of dividing the profit

among themselves.

For the exercise of profession

Juridical personality

Owner called Partner

DEFINITION


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Professionan occupation that involves a

higher education or its equivalent, and

mental rather than manual labor.

GPPnot a business or an enterprise for

profit; the law allows 2 or more persons to

act as partners in the practice of their

profession

General Professional P/ship


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Mutual contribution

Division of profits or losses

Co-ownership of contributed assets Mutual agency

Limited life

Unlimited liability Income taxes

Partners' equity accounts

Characteristics of P/ship


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Brings greater financial capability to the

business

Combines special skills, expertise and

experience of the partners

Offers relative freedom and flexibility of

action in decision-making

Advantages vs. Proprietorship


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Easier and less expensive to organize

More personal and informal

Advantages vs. Corporation


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Easily dissolved and thus unstable

compared to a corporation

Mutual agency and unlimited liability may

create personal obligation to partners

Less effective than a corporation in raising

large amounts of capital

Disadvantages


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Manner of creation

Number of persons

Commencement of juridical personality Management

Extent of liability

Right of succession Terms of existence

P/ship vs. Corporation


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According to...

Object

Universal p/ship of all present property Universal p/ship of profits

Particular p/ship

Liability General

Limited

Classifications of P/ships


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According to...

Duration

With a fixed termAt will

Purpose

Commercial or trading Professional or non-trading



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According to...

Legality of existence

De jure De facto



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General

Limited

Capitalist Industrial

Managing

Liquidating Dormant

Kinds of partners


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Silent

Secret

Nominal / partner by estoppel

Kinds of partners


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Features of both general p/ships and

professional corporations

Individual partners of LLPs are personally

responsible for their own actions and for

the actions of partnership employees

under their supervision. The LLP as a

whole is responsible for the actions of allpartners and employees.

Limited Liability P/ships (LLP)


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P/ship name, nature, purpose and location

Names, citizenship and residences of

partners

Date of formation and the duration of the

partnership

Articles of Partnership


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Capital contribution of each partner, the

procedure for valuing non-cash

investments, treatment of excess

contribution (as capital or as loan) and thepenalties for failure to invest and maintain

the agreed capital

Rights and duties of each partner



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Accounting period to be adopted, nature of

accounting records, financial statements

and external audits

Method of sharing profit or loss, frequency

of income measurement and distribution

Drawings or salaries to be allowed to

partners

Provision for arbitration of disputes,

dissolution and liquidation



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A contract of partnership is VOID whenever

immovable property or real rights are

contributed and a signed inventory of the

said property is not made and attached toa public instrument.


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Partnership capital is P3,000 or more, in

money or property

SEC Registration


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Similar to sole proprietorship

Differenceowner's equity

Accounting for Partnerships


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Debit:

Permanent withdrawals

Debit balance of the drawing account at the

end of the period

Credit:

Original investment

Additional investment

Credit balance of the drawing account at the

end of the period

Partner's capital account


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Debit:

Temporary withdrawals

Share in losses

Credit:

Share in profits

Partner's drawing account


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Partner withdraws substantial amount of

money with the intention of REPAYING:

(dr) Loans Receivable - Partner

(cr) Cash / a more appropriate account

Partner lends money to the partnership

other than his intended permanent

investment:

(dr) Cash / a more appropriate account

(cr) Loans Payable - Partner

Loans receivable from and payable to

Partners


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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 priorityover partners' equity.


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FORMATION

Entry to open p/ship books:

Debit assets

Credit Liabilities

Credit partners capital account


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Valuation of Investment by Partners

Cash or non-cash assets

For non-cash assetsvalues agreed upon by

the partners OR fair values

Fair valuethe price that would be received to sell

an asset or paid to transfer a liability in an orderly

transaction between market participants at the

measurement date.

Formation


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Adjustment of Accounts Prior to Formation

Example:

Book value of equipmentP730,000

Fair market valueP800,000

What amount will be recorded in the partnership

for the asset contributed and the capital of the

contributing partner?

Formation


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Increases in asset values accruing BEFORE

formation should be for the benefit of the

contributing partner.


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When the adjustment involves a debit or

credit to a nominal account, the Capital

account would instead be debited or

credited because the business has ceasedto be a going concern.


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Individuals with no existing business

Conversion of a sole proprietorship to a

p/ship

A sole proprietor and an individual without an

existing business

Two or more sole proprietors

Admission or retirement of a partner

(Ch.3)

FormationWays of forming p/ships


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Cash 300,000

Computer Equipment 300,000

Jack, Capital 300,000

Jill, Capital 300,000



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On December 1, 2013, Jack and Jill agreed to form a

p/ship. Jack had an existing business with the following

information: Cash 25,000; Accounts Receivable 46,000;

Furniture and Fixtures 37,000; Accounts Payable 32,000;

and Jack, Capital 76,000. Prior to p/ship formation, it wasdetermined that P5,000 of the Accounts Receivable was

doubtful of collection and a P2,000 payment for Accounts

Payable was unrecorded. Jill will invest cash to get a

capital credit equal to one half of Jacks adjusted capital.

Required: Prepare the entry to open the books of Jack&Jill Co.

A sole proprietor and an individual with

no existing business


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Cash 23,000

Accounts Receivable 46,000

Furniture and Fixture 37,000

Allow. for Uncoll. Accts 5,000Accounts Payable 30,000


Cash 35,500




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On December 1, 2013, Jack and Jill agreed to form a

p/ship. Both had existing business prior to formation.

Two or more sole proprietors form a

partnership

Jack Jill

Cash 25,000 40,000

Accounts Receivable 46,000 18,000


Equipment 45,000

Accumulated Depreciation - Equipment 2,250

Accounts Payable 32,000 29,000




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Adjustments prior to formation:

JACK

P5,000 of the Accounts Receivable was doubtful of

collection P2,000 payment for Accounts Payable was unrecorded.

JILL

Additional depreciation to be recognized, P2,250.

Required: Prepare the entry to open the books of Jack&Jill Co.

Two or more sole proprietors form a

partnership


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Cash 23,000



Allow. for Uncoll. Accts 5,000

Accounts Payable 30,000




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Cash 40,000


Equipment 40,500

Accounts Payable 29,000



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