Partnership Formation and Operation

Partnership
Four major considerations in the accounting for the

equity of a partnership:
1. Formation
Formation and 2. Operation

3. Dissolution
4. Liquidation
Operation CLASSIFICATION OF PARTNERSHIPS

1. According to object
a. Universal partnership of all present property
Article 1767. By the contract of partnership, two or b. Universal partnership of profits
more persons bind themselves to contribute money, c. Particular partnership
property, or industry to a common fund, with the
2. According to liability
intention of dividing the profits among themselves.
Two or more persons may also form a partnership a. General
for the exercise of a profession. (1665a) b. Limited
3. According to duration
ADVANTAGES & DISADVANTAGES OF a. Partnership w/ fixed term or a particular
PARTNERSHIP undertaking. b. Partnership at will.
Advantages over Proprietorships: 4. According to purpose
1. Brings greater financial capability to the business. a. Commercial or trading partnerships.
b. Professional or non-trading partnership.
2. Combines special skills, expertise and experience
of the partners. 5. According to legality of existence
3. Offers relative freedom and flexibility of action a. De jure
in decision-making. b. De facto
Advantages over Corporations: KINDS OF PARTNERS
1. Easier and less expensive to organize. 1. General Partner
2. More personal and informal. 2. Limited partner
Disadvantages: 3. Capitalist partner
1. Easily dissolved and thus unstable compared to a 4. Industrial partner
corporation.
5. Managing partner
2. Mutual agency and unlimited liability may create
6. Liquidating partner
personal obligations to a partner.
7. Dormant partner
3. Less effective than a corporation in raising large
amounts of capital. 8. Silent partner
9. Secret partner
10. Nominal partner or partner by estoppel
Type of Contribution instrument, Register with SEC, and Inventory of
Property.
1. Cash and Cash equivalents
“A corporation can enter into a contract of
Measurement: Face amount of cash and cash
partnership”
equivalent contributed (PAS 7).
“No contribution shall be valued at an amount
2. Inventory
greater than its fair value”
Measurement: Net Realizable value (estimated
“A contract of partnership doesn’t need to be in
selling price less costs to complete and sell), if
writing”
lower than cost (PAS 2).
Rule of profits and losses are allocated based on
“The division of profits and losses shall be
agreement.
according to the agreement of the partners. In the
If a partner contributes noncash asset to the absence of the stipulation, it shall be proportionate
partnership subject to mortgage, partner’s capital is to their capital contributions”
credited for the agreed value (or fair values) of the
The profit-sharing ratios will be set out in the
noncash asset less the mortgage assumed by the
partnership agreement . This will show the
partnership.
amount, usually given as a percentage of the total
Profit and loss ratio is totally independent of the profits , attributable to each partner.
partners’ ownership interests. Thus, two partners
may have ownership interests of 80% and 20% but
share profits and losses equally. The partners share in profit or losses in accordance
with their agreement .
Capital contributions of the partners are initially
measured at Fair value. One who contributes services to the partnership
rather than cash or other non-cash assets Industrial
Upon formation of the partnership, inventory is
partner.
measured using Lower of cost and net realizable
value under PAS. In the absence of stipulation as to the sharing of
profit or loss. Their respective shares would be in
Each partners capital account is credited for the
proportion to their contributions .
fair value of his Net contribution .
Cash settlements between and among the partners
“Partners are entitled to a bonus only if the
to equalize their initial capital credits are not
partnership earns a profit”
recorded in the partnership books .
“Partners are not entitled to a salary only if the
The accounting for partnerships differs from the
partnership earns profit”
accounting for sole proprietorships, corporations
A husband and wife CANNOT enter into a and cooperatives in regard to the accounting for
Universal partnership . equity.
In forming a partnership, when the capital exceeds

3,000 and personal property is invested. The legal
requirements for its establishment are a public
instrument and Inventory of Property .
In forming a partnership, when the capital exceeds
3,000 and real property is invested. The legal
requirements for its establishment are a public

Partnership Formation and Operation

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Partnership Formation and Operation

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Partnership

Four major considerations in the accounting for the

Formation and 2. Operation

Operation CLASSIFICATION OF PARTNERSHIPS

In forming a partnership, when the capital exceeds

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