PARTNERSHIP FORMATION LET US ESTABLISH The general principles governing single proprietorships shall also apply to partnerships as far as ordinary transactions common to both types of b! organizations are concerned. Accounting for such transactions like sal purchases, cash receipts and disbursements, accounts with customer: creditors, and other transactions that may occur in either type of or; is very much the same regardless of the type of ownership or 0 Furthermore, accounting procedures are normally standar ; liabilities, revenues, and expenses regardless of the legal for to Therefore, with all of these, one might be inclined to ask if th foran entirely separate study of partnership accounting. Why asole proprietorship or maybe a corporation? In the succeedin would be made clear that partnership accounting exhibits uniqu , warrant separate study. = rty of Fin the first chapter, we have discussed the basic concept nature, characteristics, essential features, and the steps and legal requirements in i organizing a partnership. In this chapter, we focus on the partnership 3 accounting issues regarding partnership formation. Among these topics are the Opening entries in a newly organized partnership business, adjustment of SHSBS ‘COUNTING PARTNERSHIP AND CORPORATION AC hen converted into a partnership, and the union OF ty, : proprietorship assets wl eof the proprietorship’s books, or opening of Ney mn roprietorships using or Bes for the partnership among others. CASE TO REMEMBER Robin and Gabby were partners in an automobile dealership and auto repai, shop. Robin was the active manager of the business, but Gabby had SUpplieg | nearly all the capital. Aware that the firm was quite profitable, Robin devised a Scheme to become the sole owner by buying out his partner. i; 'Derately =nts in a manner In order to persuade Gabby to sell his interest at a bargain, Robin de began falsifying the accounting records and financial stateme that understates the earnings of the business. Much of the rever repair work were not recorded at all, depreciation expense wa ending inventories were Understated, and the Cost of new item ™ auto erstated plant and ‘ T income Statements showing that the business was Operating at a larger loss each Ndings, RobinJit of fact obin ater _| CHAPTER 2 | PARTNERSHIP FORMATION PARTNERSHIP ACCOUNTING Although accounting for a partnersh proprietorship, there are differ equity is the technically correct te: and drawing account, it is nececcary + eae withdrawal accounts for each partner. Th ; reflect transactions affecting rela i partnership business. | On the other hand, and in contrast with a corp accounts do not correspond directly with th partnership's financial records, TI 7 Y ncorporated enterprise displ: precisely defined. These characteristics sity transactions that can occur in ac primarily in the form of individt partner. Unlike a corpor ; is deemed unnecessary sinc 1 with equity transactions that were ra n the The balances of these capital account book value of the net assets of the busine Partnership accounting will cover the procs dures int 1. Partnership formation 2. Partnership operations/divisi 3. Dissolution 4. Liquidation ion of profits or tos 33NT : PARTNERS’ capiTAL ACCO! " Eine Fer reicc si a capita A jetorship, there IS only one Pp! -apital jecounts 2s ere ang De eet hip, are Cd resents the investment of , ship, owner. In a Paes of the capital account mi pried eens folate partners. The iene aE patted ar : partner in the partnershF* transactions: ee a ; eT ae Original investment de i Permanent decrease i" capital Closing of anet debit balance In additional investments Pe i i the partner's drawing accoun ' Partner's share of partnership Partner's share of partnership loss profits a ia accounts of Shown below Is a basic comparison of the capital proprietorship and a partnership: Partnership i eso | ——Poncing, Withdrawal 4 ' P27,0007 well as distrib yt; iff as distributions io the erent events such as ¢ , 01 i MAR i earnings, and any oth ABILITIES ES AND Hes (assumed fig a nee meeation from partners ‘ equity transactions a soleoa ne re ne : / : : the profits, the same shall be c' | CHAPTER 2 | PARTNERSHIP FORMATION ORM — DRAWING ACCOUNT oe The drawing account is a te ‘ 'Mporary accot a artner’s capital acc unt and is periodicall Fee, Si et The statement of financial positlon’of: S peer the capital account balances of the partners The drawing account establishe, d for ea i the following transactions: ch partner is debited and credited for Partners’ Drawing Periodic withdrawals of partnership | Closing of balance to partner's assets up to a specified amount | ’ aoeheane The drawing account may be left open (not closed to Capital account) if the partners have not agreed to make the balance a part of permanent ci Should the partners decide to make their drawing account balan their permanent capital, the drawing accounts should then be clo Capital accounts. In either case, the individual partner's capital account balances are combined in reporting each partner's total statement of financial position PARTNER'S LOAN ACCOUNT This account represents a liability of the partnership to the partner joan from the partner, there must be a term for its payment. If the loan account is open when dissolution comes, it shall be paid together with other liabilities of the partnership before partners are paid back their remaining capital. PARTNER’S RECEIVABLE ACCOUNT et of the partnership. It is different from the This account is used when a partner borrows ding that it shall be paid by the partner This account represents an ass' drawing account of the partner. ii hip with an understan' ; i pa Be ecrecs sens! his share in the profits of the business. If it is the i f the partner in i i ‘ orrowed against the share of |. Tagua ees to the partner’s drawing account. 35ING one RPORAT™ property, o, ee invest money, S OPENING EN partners may oN Reed, fe oat a reributed and crediting th, assets COnM gentry is the same aq s MANY Capity PARTNERSHIP ve learned that ha 7 In Chapter 1, we teri industry into the par ‘ _ enves wi simply vole GOTT ine, The OPE re a capital account of the con " only a single proprietorship, co Dy accounts credited as ther jounts to start thy invest only cash am 4 Hater cantos agreed to form a partnership : sted P200,000. ‘ wae) Cash is Contributes : in the simplest situation, Pa! business. Let us assume that Rey Pe ive Reyes invested cash of 300,000 ant The entry to record the investments of Reyes and Santos will be a: Cash 500,000 Reyes, capital 300,000 Santos, capital 200,000 Money and Property are Contributed When only cash is contributed, complications in valuation avoided since cash is always valued at face value. More oft however, partners transfer noncash assets such as inventory “quipment, and others to start up the business, Let us assy contributed ech ag decided to form a new partnership. T# P2590, | and furnit . tners Ta ee pialires Carry a book Ralt el? fair market value d ,000, On the other han 00 id, Uy j Market value of 'Y invest ed c P1,200,000 wit ash of P450,000 Ith ab anda delivery truck an 00k value of P The entry to recorg the 1,400,000, Cash investment Furniture and fixtures 300,000 Tan, capital 250,009| CHAPTER 2 | PARTNERSHIP FORMATION ship, rely not, ing, Tan » of fait The entry to record the investment of Uy will be: Cash Delivery truck 1, Pai Uy, capital ah 1,650,000 The foregoing simple entries could be compounded as follows: cat) F 750,000 Furniture and fixtures 250,000 Delivery truck 41,200,000 Tan, capital ron Uy, capital 1,650,000 Take note that noncash assets are recorded at their fair market values and not on their book values. The reason for this is fairness to all parties concerned Conceptually, the fair value should be determined by independent valuations, but as a practical matter, the fair value of noncash property is determined by agreement of all partners. brance is contributed to the for such liability, then e capital account at Additionally, when a prope: partnership and the partner the property shall stil! be fair value net of the liab Industry is Contributed If a partner contributes his industry r he is called an industrial partner. The ‘admission of ar recorded by means of a memorandum entry in the g + to a partnership should be neral ledger. partner in the partnership of an industrial by means. Let us assume that Val is admitted as ded in the partnership books Tan and Uy. The admission of Valis recor’ of a memorandum of entry as follows: ___Val, Capital________— lis admitted [as an industrial partner with a 15%|share in the partnership profit 37CCOUNTING __ Z PARTNERSHIP AND CORPORATION ACE — = hould be agree! Y the i industrial partner © y The share in the profits of an industria Pee panay Pets za ental Laie a \e Code of Co! erce, the artners; otherwise, he shall : : Pi Under Article ah the Code me POSTION 8S th d in the distribur Hest interest. under the circumstances. industrial partner is “place capitalist partner having the smal s contributed capital, he shall also receive a share iy his capital. RTED INTO A PARTNERSHIP If besides his services he ha the profits in proportion to ! SOLE PROPRIETORSHIP CONVE When a sole proprietorship is converted into a partnership, the following steps should be followed: 4, Allnominal accounts should be closed to the capital account In drawing account of the proprietor 2. The proprietorship assets should be adjusted to reflk varket values or the values agreed upon by the “to be” part Close the accumulated depreciation accounts (if any + fixed asset accounts so that these will properly ref u e Partnership, The accumulated depreciation acc re Fe rection bat Partnership being lance in its books. Record the investment of the incoming partn artners. ting the 3. anewit is ade to | CHAPTER 2 | PARTNERSHIP FORMATION Illustration Mr. Benin is a single propriet. BEEDATGIEUCEESMY fr the parr we years Lach, Ure tenn cea expand its operations and so he needed additional capital. He invited iCal ie to become his partner investing P800,000 cash. The partnership of canted Carlos shall be registered as 8C Trading which will start its operations on the first working day of January 2020 as per agreement. The Statement of Financial Position of JB Trading immediately before the admission of Carlos is shown below. JB TRADING STATEMENT OF FINANCIAL POSITION December 31, 2020 ASSETS Current Assets: Cash, 256,000 Accounts Receival Allowance for doub’ Merchandise invent Office Supple Total Current Asse “Property plant and equip’ land Furniture and fixtures ‘Accum, depreciation — furn. and fixtures {Total property plant and equipment “Total Assets LIABILITIES AND PROPRIETORSHIP. “Current Liabilities: “___....Aecounts payable 400,000 ____Notes payable 192,000 “Total current liabilities | Proprietorship: Capital L P1,408,000 Proprietorship. 2,000,000 592,000We pation Aco — pARTNERSH! S conditions to arrive at the fy, win tional information ie Aan Mr cats se there u opr ip assets? valuation of the P ip 2st ns should P 1, The Allowance eaeprres “usted to reflect receh leer ory should be adjusted 720,000. ae . Theoffice supplies should be valued BE el Land should be valued at its Be eer i 20% deprec! F * Eumiture and fixtures are ee The liabilities are considered to be at their proper V! 2 10% of the accouny its fair market value 0. t value of P480,000. Simple Entries for Adjustment of Assets ‘ The following are entries for the adjustment of assets T° comply with the agreement of the two partners: a 1. Toadjust the Allowance for doubtful accounts, © i bal. to 10 ‘of accounts receivable. Benin, capital Allowance for doubtful accounts Computation: Required allowance balance (10% x P48 Allowance balance per SOFP Adjustment needed (increase) E To: adjust the merchandise inventory to its f. Merchandise inventory ‘ Benin, capital ; 7 easton: =e lerchandise at fai at fair Mehndi peeenertct value P7 ijustment. Needed (in, “s.00 i. \crease) Swe pees: the Office ae ice supplies SUPPlies to its a : P Breed val ue Benin, capital 40 a