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1. PARTNERSHIPS:
FORMATION,
OPERATION, AND
CHANGES IN
MEMBERSHIP
Cristela Mejica
BSA 1-22

3. What is a PARTNERSHIP?
An association of 2 or more persons
who:
 are co-owners of a business, and
share profits and losses in an
agreed-upon manner.

4.  an individual
 a corporation
 another
partnership
T&D
Partnership
Z Corp

5. PARTNER
SHIP: Pros
& Cons
Advantages
Ease of formation
Lack of formality
Single taxation
Disadvantages
Unlimited liability (for
general partnerships)
Difficulty in
disposing of
partnership
interests
Mutual agency

6. The
Partnersh
ip
Agreemen
t
A written
expression of
what the
partners have
agreed to.
Examples of areas addressed:
• Manner of sharing profits.
• Limitations on withdrawals.
• Rights of partners.
• Settling with withdrawing partners.
• Expulsion of partners.
• Conflicts of interest.

8. Partners’
Accounts
Each partner can have
• a capital account.
• a drawing account (a contra capital
account—closed out at year-end).
• a loan account (loans usually earn
interest—a partnership expense).
Partnerships do NOT use a retained
earnings account.

9. Initial Investment in a
Partnership
Initial investment in a partnership are recorded in
capital accounts maintained for each partner.
If Arturo and Basilio each invest ₱20,000 cash in a
new partnership, the accounting records:
Cash (+A) ₱ 20,000.00
Arturo, Capital (+OE) ₱ 20,000.00
To record Arturo's original investment of cash
Cash (+A) ₱ 20,000.00
Basilio,Capital (+OE) ₱ 20,000.00
To record Basilio's original investment of cash

10. Noncash Investments
The noncash property is recorded at the fair value
of the property at the time of the investment.
Example, Cora and Edna enter into a partnership
with the following investment:
Cora
(Fair Value)
Edna
(Fair Value)
Cash - ₱ 7,000.00
Land (cost to Cora, ₱5,000) ₱ 10,000.00 -
Building (cost to Cora, ₱30,000) ₱ 40,000.00 -
Inventory item (cost to Edna, ₱28,000) - ₱ 35,000.00
TOTAL ₱ 50,000.00 ₱ 42,000.00

11. Land (+A) ₱ 10,000.00
Building (+A) ₱ 40,000.00
Cora, Capital (+OE) ₱ 50,000.00
To record Cora's original investment of
land and building at fair value
Cash (+A) ₱ 7,000.00
Inventory (+A) ₱ 35,000.00
Edna, Capital (+OE) ₱ 42,000.00
To record Edna's original investment of
cash and inventory at fair value
Recordofthe
investments:
Noncash Investments

12. Bonus or Goodwill in Initial
Investments
The partnership agreement specifies
equal capital interest – account
balances of Cora and Edna to meet
the agreement’s conditions.
• Under the bonus approach, the
unidentifiable asset is not recorded
on the partnership books.
The total identifiable contributed
capital is ₱92,000, each partner will
start with ₱46,000 if the
unidentifiable assets is not recorded.
Bonus Approach:
Cora, Capital (-OE) ₱ 4,000.00
Edna, Capital (+OE) ₱ 4,000.00
To establish equal capital interests
of ₱46,000 by recording a ₱4,000
from Cora to Edna

13. Bonus or Goodwill in Initial
Investments
Goodwill approach:
The unidentifiable asset contributed by
Edna – measured on the basis of Cora’s
₱50,000 investment (50%).
Total partnership capital of ₱100,000
(₱50,000 : 50%)
Total Capital ₱100,000
Identifiable assets (₱96,000)
Goodwill ₱ 8,000
Goodwill (+A) ₱ 8,000.00
Edna, Capital (+OE) ₱ 8,000.00
To establish equal capital interests
of ₱50,000 by recognizing Edna's
investment of an ₱8,000
unidentifiable asset.

14. Additional Investments and
Withdrawals
Additional investments are credited to the
investing partner’s capital account at fair value.
Withdrawals are recorded directly in the
withdrawing partner’s capital account.
Such a withdrawal is:
Flora, Capital (-OE) ₱ 20,000.00
Cash (-A) ₱ 20,000.00
To record the withdrawal of cash

15. Drawing
sExample, if Macoy and Leandro
withdraw ₱1,000 from the
partnership each month, the records:
Macoy, drawing (-OE) ₱ 1,000.00
Cash (-A) ₱ 1,000.00
To record Macoy’s drawing allowance for January
Leandro, drawing (-OE) ₱ 1,000.00
Cash (-A) ₱ 1,000.00
To record Leandro’s drawing allowance for January
If Macoy draws ₱1,000 each month during the
year, at year-end the balance is ₱12,000.
His drawing account is closed:
Macoy, capital (-OE) ₱ 12,000.00
Macoy, drawing (+OE) ₱ 12,000.00
To record Macoy’s drawing allowance forJanuary

16. Partnership
Operations
Assume: Isay & Inah are partners
sharing profits in a 60:40 ratio.
Relevant data for 2011:
Partnership net income 2011 ₱ 34,500
Isay, capital January 1, 2011 40,000
Isay additional investment
2011
5,000
Isay, drawing 2011 6,000
Inah, capital January 1, 2011 35,000
Inah, drawing 2011 9,000
Inah, withdrawal 2011 3,000

17. Statement of Partners’
Capital
Isay and Inah Statement of Partners’ Capital
For the Year Ended December 31, 2011
60% Isay 40% Inah Total
Capital balances January 1, 2011 ₱ 40,000 ₱ 35,000 ₱ 75,000
Add: Additional investment 5,000 - 5,000
Deduct: Withdrawals - (3,000) (3,000)
Deduct: Drawings (6,000) (9,000) (15,000)
Net contributed capital 39,000 23,000 62,000
Add: Net Income for 2011 20,700 13,800 34,500
Capital balances, December 31, 2011 ₱ 59,700 ₱ 36,800 ₱ 96,500