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
Classifications of P/ships
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According to...
Legality of existence
De jure De facto
Classifications of P/ships
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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
Articles of Partnership
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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
Articles of Partnership
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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
Individuals with no existing business
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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
Jack, Capital 71,000
Cash 35,500
Jill, Capital 35,500
Individuals with no existing business
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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
Furniture and Fixture 37,000
Equipment 45,000
Accumulated Depreciation - Equipment 2,250
Accounts Payable 32,000 29,000
Jack, Capital 76,000
Jill, Capital 71,750
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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
Accounts Receivable 46,000
Furniture and Fixture 37,000
Allow. for Uncoll. Accts 5,000
Accounts Payable 30,000
Jack, Capital 71,000
Individuals with no existing business
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Cash 40,000
Accounts Receivable 18,000
Equipment 40,500
Accounts Payable 29,000
Jill, Capital 69,500
Individuals with no existing business