ADVANCED ACCOUNTING

PARTNERSHIP AND CORPORATION ACCOUNTING

LEARNING OUTCOMES
 Describe the nature, scope and objectives of partnership accounting and conceptually
differentiate it from single proprietorship and corporation accounting.
 Explain the concepts, principles, rules, practices and procedures applicable to partnership
accounting.
 Determine the initial capital contribution of the partners.
 Compute the changes in the capital balances of the partners as a result of the operations and /or
changes in the composition of the partners.
 Compute the amount of settlement of the partners after liquidating the partnership under the
lump-sum liquidation or installment liquidation.
 Determine the order of priority of the claimants to the assets of corporation subject to liquidation.
 Compute the Statement of Affairs and Statement of Deficiency in partnership liquidation.

PARTNERSHIPS: BASIC CONSIDERATIONS AND FORMATION

 DEFINITION: BY THE CONTRACT OF PARTNERSHIP, TWO OR MORE PERSONS BIND

THEMSELVES TO CONTRIBUTE MONEY, PROPERTY, OR INDUSTRY TO A COMMON
FUND WITH THE INTENTION OF DIVIDING PROFITS AMONG THEMSELVES. (ART. 1767 OF
THE PARTNERSHIP LAW-NCC)

 THREE DISTINCT FACTORS

◦ ASSOCIATION OF TWO OR MORE PERSONS
◦ TO CARRY ON AS COOWNERS
◦ BUSINESS FOR PROFIT
◦
CHARACTERISTICS OF A PARTNERSHIP

 SEPARATE LEGAL PERSONALITY( ART 1768)

 EASE OF FORMATION
 CO-OWNERSHIP OF PROPERTY AND PROFITS
 LIMITED LIFE
 MUTUAL AGENCY
 UNLIMITED LIABILITY

PARTNERSHIP AGREEMENT-ARTICLES OF COPARTNERSHIP

 Names of the partners, and the name and nature of the partnership
 The date of effectivity and the duration of the contract.
 The capital contributions of the partners, the procedure for the valuation of noncash contribution,
the treatment of any contribution (whether as capital or as a loan) in excess of the agreed
amounts, and the penalties for failure to contribute and maintain the agreed amount of capital.
 The power, rights and duties of each partner.
 The accounting period to be used, the nature of the accounting records, preparation of financial
statements and auditing of partnership books.
 The methods of sharing of profits and losses and the frequency of distribution to partners.
 The drawings or salaries to each partners.
 Provisions for arbitration of disputes and liquidation.

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PARTNESHIP AGREEMENT

 DONE IN CONSULTATION WITH CPA AND/OR LAWYERS

◦ DETERMINATION OF CURRENT FAIR MARKET VALUE FOR NON-CASH ASSET
◦ ASCERTAINMENT OF EACH PARTNER’S INITIAL INTEREST IN CAPITAL
◦ FORMULATION OF PROFIT/LOSS SHARING
◦ TERMS FOR DISSOLUTION AND/OR LIQUIDATION
◦ PARTNERS’ CAPITAL STRUCTURE

COMPARISON OF BUSINESS ORGANIZATIONS

 SIMILARITIES AND DIFFERENCES

 ADVANTAGES AND DISADVANTAGES
 RIGHTS OFO A PARTNERS
 BUSINESS ENTITY CONCEPT-PROPRIETORY THEORY

PARTNERS’ LEDGER ACCOUNTS

◦ CAPITAL ACCOUNTS
◦ CREDITED FOR:
 ORIGINAL AND ADDITIONAL INVESTMENT
 PARTNER’S SHARE IN PROFITS

◦ DEBITED FOR:
 PERMANENT WITHDRAWAL OF CAPITAL
 DEBIT BALANCE OF THE DRAWING ACCOUNT
 PARTNER’S SHARE IN THE LOSSES

◦ DRAWING/PERSONAL ACCOUNTS

◦ DEBITED FOR:
 WITHDRAWAL OF ASSETS BY THE PARTNERS IN ANTICIPATION OF NET
INCOME
 PARTNER’S PERSONAL INDEBTEDNESS PAID OR ASSUMED BY THE
PARTNERSHIP
 FUNDS OF CCLAIMS OF PARTNERSHIP COLLECTED AND RETAINED BY
THE PARTNER.

◦ CREDITED FOR:
 PARTNERSHIP OBLIGATIONS ASSUMED OR PAID BY THE PARTNER
 PERSONAL FUNDS OR CLAIMS OF PARTNER COLLECTED AND RETAINED
BY THE PARTNESHIP.
 PERIODIC PARTNER’S SALARIES DEPENDING ON THE ACCOUNTING AND
DISBURSEMENT PROCEDURES AGREED UPON

◦ ACCOUNT FOR LOANS TO OR FROM PARTNERS

o DEBITED FOR:
 RECEIVABLE FROM PARTNER

◦ CREDITED FOR:
 LOAN PAYABLE TO PARTNER

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ACCOUNTING FOR PARTNERSHIP FORMATION

 ACCOUNTING WILL DEPEND UPON HOW THE PARTNERSHIP IS FORMED, NAMELY:

◦ FORMATION OF THE PARTNERSHIP FOR THE FIRST TIME
◦ CONVERSION OF A SOLE PROPRIETORSHIP TO A PARTNERSHIP
 A SOLE PROPRIETOR ALLOWS ANOTHER INDIVIDUAL, WHO HAS NO
BUSINESS OF HIS OWN TO JOIN HIS BUSINESS.
 TWO OR MORE SOLE PROPRIETORS FORM A PARTNERSHIP
 ADMISSION OF A NEW PARTNER

 PARTNERSHIP FORMATION FOR THE FIRST TIME:

◦ CASH INVESTMENTS
◦ NONCASH INVESTMENTS
 CURRENT FAIR VALUE AS AGREED BY PARTNERS
◦ BONUS OR GOODWILL ON INITIAL INVESTMENT
 BONUS APPROACH
 GOODWILL APPROACH

 SOLE PROPRIETOR AND ANOTHER INDIVIDUAL FORM A PARTNERSHIP

◦ OLD BOOKS ARE KEPT/USED

 ADJUST THE ASSETS AND LIABILITIES TO THEIR FAIR MARKET VALUES
AS AGREED BY THE PARTNERS.
 RECORD THE INVESTMENT OF THE OTHER PARTNER
◦ NEW BOOKS ARE OPENED
 ADJUST THE ASSETS AND LIABILITIES ACCORDING TO THE AGREEMENT
IN THE BOOKS OF THE PROPRIETOR
 CLOSE THE PROPRIETOR’S BOOKS
 RECORD THE INVESTMENT OF THE PROPRIETOR, HIS ASSETS AND
LIABILITIES
 RECORD THE CASH INVESTMENT OF OTHER PARTNER.

 TWO PROPRIETORS FORM A PARTNERSHIP

◦ SAME ACCOUNTING PROCEDURES AS IN THE PRECEDING
◦ OLD BOOKS OF ANY OF THE PROPRIETOR/NEW BOOK OF THE PARTNERSHIP IS
OPENED

REVIEW QUESTIONS

 Define a partnership.
 Give reasons why one would want to partner with another in operating a business rather than he
is a sole proprietor or shareholder?
 Give the disadvantages of a partnership over a sole proprietorship and over a corporation.
 Unlimited liability is a characteristic present in both a sole proprietorship and a partnership.
Explain why this may be a disadvantage from the viewpoint of the owner but an advantage from
the viewpoint of the creditor.
 Differentiate a general partnership from a limited partnership.
 Give the difference and similarities of a capital partner and an industrial partner.
 What are the forms of contributions of a partner?
 Why is an article of co-partnership necessary? Enumerate the information contained therein.
 STP Ltd is a partnership that is liable only up to the partnership assets. Is the statement correct?

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  What two accounts represent a partner’s equity?
 Give the transactions affecting the capital account and the drawing account of a partner.
 A partner extended a loan to the partnership. This was credited to the partner’s capital account.
Explain why this is not correct.
 What is the reason why assets and liabilities of a sole proprietorship must be adjusted before
these are to be taken over by the partnership?

PROBLEMS SOLVING

1. On April 1, 2018, A and B formed a partnership and agreed to share profits and losses in the ratio
of 4:6, respectively. A contributed an equipment that he acquired for P 70,000. B contributed P
250,000 in cash. The equipment was sold for P 50,000 immediately after the partnership was
formed. What amount should be recorded as capital of A and B in the books of the new
partnership?

2. X, Y and Z formed a resto-bar partnership. They agreed that X would contribute furniture and
equipment with a total fair value of P 125,000; Y would contribute transport equipment with a fair
value of P 450,000; and Z would contribute cash. If Z wanted a one third interest in the capital
and profits, how much cash he should contribute?

3. Jack and Jill formed a partnership on June 1 and contributed the following assets:

◦ Jack: Cash-P 500,000; Land-P 1.5 Million

◦ Jill: Cash-P 1.8 Million

The land has a mortgage of P 500,000, which was assumed by the partnership. Jack and Jill
agreed to share profit or loss in the ratio of 40:60, respectively. How much is Jill’s capital balance
on June 1?

4. Pepe and Pilar formed a partnership and agreed to divide initial capital equally. Pepe
contributed P 1 million and Pilar contributed P 800,000 in specified assets. Using the bonus approach,
how much should Pilar’s identified assets be debited to adjust the capital accounts? Under the goodwill
approach, what is the journal entry to record the capital contributions of the partners?

5. KIT AND KAT ARE JOINING THEIR RESPECTIVE BUSINESSES TO FORM A PARTNERSHIP.
CASH AND NONCASH WILL BE CONTRIBUTED BY PARTNERS TO PRODUCE A TOTAL CAPITAL
OF P 3 MILLION. THE DETAILS OF NONCASH ASSETS AND LIABILITIES ARE AS FOLLOWS:

KIT KIT KAT KAT

Book Value Fair Value Book Value Fair Value
Accounts Receivable P 200,000 P 200,000
Inventories 300,000 400,000 P 200,000 P 250,000
Machineries 600,000 450,000 400,000 500,000
Accounts Payable 150,000 150,000 100,000 100,000

REQUIRED: The partner’s capital account should be equal after all the contributions of Assets and the
assumption of liabilities. How much cash is to be contributed by KIT?

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6. On May 31, 2018, Matt and Jeff decided to form a partnership with a profit sharing of 65% and 35%,
respectively. Jeff has a merchandising firm and presented the following statement of financial position as
of May 31, 2018:

Cash P 5,000
Accounts Receivable P 60,000
Less: Estimated Uncollectible Accounts 6,000 54,000
Merchandise Inventory 100,000
Furniture and Fixture P 50,000
Less: Accumulated depreciation 10,000 40,000
Total Assets P 199,000
Accounts Payable P 10,000
Jeff, Capital 189,000
Total Liabilities and Capital P 199,000

6. Continued
Matt and Jeff agreed to the following conditions:
 The accounts receivable is estimated to be realizable at 70%
 The furniture and fixture is under depreciated by P 1,000.
 All the payables are to be assumed by the partnership.
 The capital of the partnership is based on the adjusted capital balance of Jeff and Matt is to contribute cash
to make the partner’s capital balances proportionate to the profit sharing ratio.
 A new set of books will be used by the partnership.
 REQUIRED:
◦ 1. Prepare the necessary adjusting entries in the books of Jeff.
◦ 2. Prepare the necessary journal entries in the books of the partnership .

PARTNERSHIP OPERATIONS

 ACCOUNTING SYSTEM AND CLASSIFICATION OF ACCOUNTS OF A PARTNERSHIP IS

ESSENTIALLY THE SAME AS OTHER PROFIT-ORIENTED BUSINESSES.
 ACCURATE DETERMINATION OF PERIODIC NET INCOME AND ITS DISTRIBUTION TO
PARTNERS IS THE PRIMARY OBJECTIVE OF THE ACCOUNTING PROCESS.
 A PARTNERSHIP IS A DISTINCT AND SEPARATE ACCOUNTING ENTITY.

ACCOUNTING PROBLEMS IN PARTNERSHIP OPERATIONS

 DETERMINATION OF THE PROPER DISTRIBUTION OF PARTNERSHIP PROFITS AND
LOSSES AMONG PARTNERS
 PREPARATION OF FINANCIAL STATEMENTS FOR THE PARTNERSHIP.
 CHANGES IN THE PROFIT AND LOSS RATIOS
 CORRECTION OF NET INCOME(LOSS) OF PRIOR YEARS

DIVISION OF PROFITS AND LOSSES

 IF NO AGREEMENT, BASED ON ORIGINAL CAPITAL CONTRIBUTIONS.

 IF AGREEMENT IS ONLY FOR PROFITS, LOSSES SHALL BE DIVIDED IN THE SAME
MANNER AS PROFITS.
 IF AGREEMENT IS ONLY FOR LOSSES, PROFITS SHALL BE DIVIDED BASED ON ORIGINAL
CAPITAL CONTRIBUTIONS.
 OTHER POSSIBLE METHODS ARE AS FOLLOWS:
◦ EQUALLY

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 ◦ ARBITRARY RATIO
◦ PARTNERS’ CAPITAL ACCCOUNT BALANCES ON A PARTICULAR DATE.
◦ PARTNERS’ AVERAGE CAPITAL ACCOUNT BALANCES DURING THE YEAR.
◦ ALLOWING INTEREST ON PARTNERS’ ACCOUNT BALANCES

DIVISION OF PROFIT AND LOSS –ILLUSTRATED

 Assume that on January 1, 2017, S and T formed a partnership with an investment of P 30,000
by S and P 60,000 by T. On December 31, 2017, after closing all the income and expense
accounts, the Income and Expense Summary account shows a credit balance of P 60,000,
representing the profit for the year 2017. Changes in the capital accounts during 2017 are as
follows:

S T
CAPITAL BALANCE, JANUARY 1, 2017 P 40,000 P 60,000
ADDITIONAL INVESTIMENT, MARCH 1 20,000 50,000
ADDITIONAL INVESTMENT, AUGUST 1 20,000 40,000
WITHDRAWAL, OCTOBER 1 (20,000)
WITHDRAWAL, NOVEMBER 1 (50,000)
CAPITAL BALANCE, DECEMBER 31, 2017 P 60,000 P100,000

DIVISION OF PROFIT OR LOSS EQUALLY

 On Dec. 31, 2017, the Net Income is P 60,000

◦ Income Summary 60,000
 S, Capital 30,000
 T, Capital 30,000
 To record division of net income for 2017

 If the firm resulted to a loss of P 10,000

◦ S, Capital 5,000
◦ T, Capital 5,000
 Income Summary 10,000
 To record division of net loss for 2017

DIVISION OF PROFIT OR LOSS IN AN ARBITRARY RATIO

 60:40 to S and T, respectively

◦ Income Summary 60,000
 S, Capital 36,000
 T, Capital 24,000
 To record division of net profit in 2017 of P 60,000.

◦ S, Capital 6,000
◦ T, Capital 4,000
 Income Summary 10,000
 To record the sharing of loss of P 10,000 in 2017

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DISTRIBUTION OF PROFIT OR LOSS BASED ON PARTNERS’ CAPITAL ACCOUNT BALANCES

 ORIGINAL CAPITAL CONTRIBUTION

◦ S: P 60,000 X P 30,000/P 90,000= P 20,000
◦ T: P 60,000X P 60,000/P 90,000= P 40,000

 BEGINNING CAPITAL BALANCES

◦ S: P 60,000 X P 40,000/P 100,000= P 24,000
◦ T: P 60,000 X P 60,000/P 100,000= P 36,000

 ENDING CAPITAL BALANCES

◦ S: P 60,000 X P 60,000/ P 160,000 = P 22,500
◦ T: P 60,000 X P100,000/P 160,00000=P 37,500

DISTRIBUTION OF PROFIT OR LOSS BASED ON PARTNERS’ CAPITAL ACCOUNT BALANCES

 AVERAGE CAPITAL BALANCES

◦ SIMPLE AVERAGE METHOD
 S: (P40,000 + p 60,000)/2= P 50,000
 T: ( P 60,000 + P 100,000)/2= 80,000
 TOTAL P 130,000

◦ The net income is divided as follows:

 S: P 60,000X P 50,000/P130,000= P 23,077
 T: P 60,000 X P 80,000/P 130,000= P 36,923

PARTNER DATE INVESTMENT CAPITAL FRACTION AVERAGE

(WITHDRAWAL) BALANCE OF YEAR CAPITAL
UNCHANGED
S January 1 P 40,000 P 40,000 2/12 P 6,667
March 1 20,000 60,000 5/12 25,000
August 1 20,000 80,000 2/12 13,333
October 1 (20,000) 60,000 3/12 15,000
P 60,000

T January 1 P 60,000 P 60,000 2/12 P 10,000

March 1 50,000 110,000 5/12 45,833
August 1 40,000 150,000 3/12 37,500
October 1 (50,000) 100,000 2/12 16,667
P110,000

Total average capital account balances P170,000

The net income of P60,000 is divided as follows:

S: P60,000 X P60,000 / P 170,000 = P 21,177
T: P60,000 X P110,000 / P170,000 = P 38,823
INTEREST ON PARTNERS’ CAPITAL AND THE REMAINING PROFIT OR LOSS DIVIDED ON
AGREED RATIO

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INTEREST OF 12% ON AVERAGE CAPITAL AND THE BALANCE DIVIDED EQUALLY
 S: P 60,000 X 12%= P 7,200
 T: P 110,000 X 12%=P 13,200

REMAINDER: P 60,000 – P 20,400=P 39,600

 S: P 39,600/2= P 19,800
 T: P 39,600/2= P 19,800

TOTAL PROFIT SHARING

 S: P 7,200 + P 19,800=P 27,000
 T: P 13,200+ P19,800= 33,000
 TOTAL…………………..P 60,000