Partnership

COLEGIO DE LA PURISIMA CONCEPCION
School of the Archdiocese of Capiz

Roxas City
Partnership Formation
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 profits among themselves. Two or more persons
may also form a partnership for the exercise of profession.
Characteristics of a Partnership
1. Limited Life – It may be dissolved by the admission, death insolvency, and withdrawal of a partner or by
expiration of term of partnership agreement.
2. Unlimited Liability – If the partnership cannot settle its obligation, claims will be satisfied from the personal
assets of the partners.
3. Mutual Agency – every partner is an agent of and has the authority to act for the partnership within his
express or implied authority.
4. Sharing of Profits and Losses – each partner must share in the profits and losses of the partnership.
5. Mutual Contribution – there cannot be a partnership without the contribution of each partner to a common
fund.
6. Partner’s Equity Accounts – each partner has a capital and withdrawal account.
7. Co-ownership of Contributed Assets – all assets contributed are owned by the partnership by virtue of its
separate and distinct juridical personality. If one partner contributes, all partners own it in a special
sense.
Advantages and Disadvantages of Partnership
Advantages versus Proprietorships

1. Greater financial capability
2. Combines special skills, expertise, and experience of partners.
3. Offers relative freedom and flexibility of action in decision-making.
Advantages versus Corporation

1. Easier and less expensive to organize
2. More personal and Informal
Disadvantages
1. Easily dissolved and more unstable compared to corporation.
2. Mutual agency and unlimited liability may create personal obligations to partners.
3. Less effective than a corporation in raising large amounts of capital.
Classifications of Partnership
1. According to Object
A. Universal Partnership of All Present Property
B. Universal Partnership of All Profits
C. Particular Partnership
2. According to Liability
A. General Partnership
B. Limited Liability Partnership
3. According to Duration
A. Partnership with a Fixed Term
B. Partnership at Will
4. According to Purpose
A. Commercial or Trading Partnership – formed for transaction of business.
B. Professional or Non-Trading Partnership – formed for the exercise of profession
Roxas City
5. According to Legality of Existence

A. De Jure Partnership – complied with all the legal requirements for its establishment.
B. De Facto Partnership – failed to comply with the legal requirements for establishment.
Kinds of Partners
1. General Partner – liable to the extent of his separate personal property.
2. Limited Partner – liable only to the extent of his capital contribution. He is not allowed to contribute
industry/services only.
3. Capitalist Partner – contributes money or property to the common fund.
4. Industrial Partner – contributes industry or services.
5. Managing Partner – appointed as the manager of the partnership.
6. Liquidating Partner – designated to wind up the affairs of the partnership after dissolution.
7. Dormant Partner – does not take active part and is not known as a partner.
8 Silent Partner – does not take active part in the business though known as a partner.
9. Secret Partner – takes active part in the business but is not known to be a partner by outside parties.
10. Nominal Partner or Partner by Estoppel – actually not a partner but represents himself as one.
Accounting for Partnership

1. Individuals with no existing business form a partnership
2. Conversion of sole proprietor to partnership
A. Sole proprietor and an individual without existing business form a partnership
B. Two or more sole proprietor form a partnership
3. Admission or Retirement of partner (Dissolution)
Individual with no Existing Business form a Partnership

Illustration 1.
Naruto Uzumaki and Sasuke Uchiha agreed to form a partnership. The partnership agreement specified
that Naruto is to invest cash of P700,000 and Sasuke is to contribute land with a fair market value of P1,300,000
and mortgage of P300,000 to be assumed by the partnership.
Sole Proprietor and an Individual without Existing Business form a Partnership

Illustration 2.
Monkey D. Luffy Roronoa Zoro offered to invest cash equal to

Statement of Financial Position one-half of Luffy’s capital after the following
As of December 2018 adjustments
Assets - Inventory is to be valued at P20,000.
Cash 45,000 - Furniture and Fixture are to be valued at P25,000.
Inventory 15,000
Furniture and Fixture 35,000 Luffy accepted the offer.
Total Assets 95,000
Liabilities and Owner’s Equity

Accounts Payable 20,000
Luffy, Capital 75,000
Total Liabilities and Equity 95,000
Owner's Equity Accounts

Debit Credit
1. Decrease in Asset 1. Increase in Asset

2. Increase in Liability 2. Decrease in Liability
3. Increase in contra-asset 3. Decrease in contra-asset
Roxas City
Articles of Partnership
A partnership may be constituted orally or in writing, embodied in the articles of partnership. The
following essential provisions may be contained in the agreement:
1. The partnership name, nature, purpose and location;

2. The names, citizenship and residences of the partners;
3. The date of formation and the duration of the partnership;
4. The capital contribution of each partner, procedure for valuing non-cash investments, treatment of excess
contribution (as capital or loan) and the penalties for a partner’s failure to invest and maintain the agreed
capital;
5. The rights and duties of each partner;
6. The accounting period to be adopted, the nature of accounting records, financial statements and audits by
independent public accountants;
7. The method of sharing profits or loss, frequency of income measurement and distribution, including any
provisions for the recognition of differences in contributions;
8. The drawings or salaries to be allowed to partners;
9. The provision for arbitration of disputes, dissolution, and liquidation.
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 to a public instrument.
SEC Registration
When the capital is P3,000 or more, in money or property, the public instrument must be recorded with
the Securities and Exchange Commission (SEC). Even if it is not registered, the partnership having a capital of
P3,000 or more is still valid and therefore has a legal personality.
Valuation of Investments by Partners
Asset accounts are debited for assets contributed in the partnership, liability accounts are credited for
any liabilities assumed by the partnership and separate capital accounts are credited for the amount of each
partner’s net investment (assets less liabilities).
Partners may invest cash or non-cash assets to the partnership. When a partner invests non-cash assets,
they are to be recorded at values agreed upon by partners. In the absence of any agreement, the contributions
will be recognized at their fair market value at the date of transfer to the partnership.
The fair market value of an asset is the estimated amount that a willing seller would receive from a
financially capable buyer for the sale of the asset in the free market.
Limited Liability Partnership
A limited partnership is one formed by two or more persons under the Civil Code, having as members of
at least one general partners and one or more limited partners. The limited partners do not participate in the
control of the business of the partnership and are not bound by the obligation of the partnership.
Partner's Capital Account Partner's Drawing Account

Debit Credit Debit Credit
1. Permanent Withdrawals 1. Original Investment 1. Temporary Withdrawals 1. Share in profit (this may be
2. Debit balance of the drawing 2. Additional Investment 2. Share loss (this may be debited credited directly to the capital)
account at the end of the period 3. Credit balance of the drawing directly to capital
account at the end of th period
Roxas City
Illustration 3. Two or More Sole Proprietor form a Partnership

Monkey D. Luffy and Roronoa Zoro, friendly competitors in a certain line of business, decided to form a
partnership. Their statements of financial position are:
Monkey D. Luffy Roronoa Zoro

Statement of Financial Position Statement of Financial Position
December 31, 20XX December 31, 20XX
Assets Assets
Cash 50,000 Cash 40,000
Accounts Receivable 20,000 Accounts Receivable 30,000
Merchandise Inventory 80,000 Merchandise Inventory 60,000
Furniture & Fixtures 60,000 Delivery Equipment 90,000
Total Assets 210,000 Total Assets 220,000
Liabilities and Owner’s Equity Liabilities and Owner’s Equity

Accounts Payable 50,000 Accounts Payable 40,000
Luffy, Capital 160,000 Zoro, Capital 180,000
Total Liabilities & Equity 210,000 Total Liabilities & Equity 220,000
1. The merchandise inventory of Luffy is to be increased by 10,000 and of Zoro to 70,000.

2. The furniture and fixture of Luffy is to be depreciated by 5,000.
3. The delivery equipment of Zoro is to be depreciated by 10,000.
Roxas City
Partnership Operations
Rules for the Distribution of Profits or Losses
1. Profits
A. the profits will be divided according to the partner’s agreement
B. if there is no agreement:
- as to capitalist partners, according to capital contributions (ratio of original capital
contributions, or in its absence, beginning capital balances of the year).
C. as to industrial partners (if any), such share may be just and equitable under the
circumstances, provided, that the industrial partner shall receive such share before the capitalist
partners shall divide profits.
2. Losses
A. the losses will be divided according to the partners’ agreement.
B. if there is no agreement as to distribution of losses but there is an agreement as to profits,
the profit shall be distributed according to profit sharing ratio.
C. in the absence of any agreement:
- as to capitalist partners, according to capital contributions (ratio of original capital
contributions, or in its absence, beginning capital balances of the year).
D. as to purely industrial partners (if there’s any), shall not be liable for any losses.
Distribution Of Profits and Losses Based on Partners’ Agreement

1. Equally or in other agreed ratio
2. Based on Partners’ capital contributions:
a. ratio of original capital investments
b. ratio of capital balances at the beginning of the year
c. ratio of capital balances at the end of the year
d. ratio of average capital balances
3. By allowing interest on partners’ capital and balance in an agreed ratio
4. By allowing salaries to partners and the balance in an agreed ratio
5. By allowing bonus to the managing partner based on profit and the balance in an agreed ratio
6. By allowing salaries, interest on partner’s capital, bonus to the managing partner, and the balance in an
agreed ratio.
Illustration 1.
The following information are based on the figures obtained from the Clover Partnership which had a
year-end profit of P300,000 in its first year. The partnership contract provided that each partner may
withdraw P5,000 on the last day of each month: both partners did so during the year.
Asta invested P400,000 on January 1 and an additional 100,000 on April 1. Yuno invested P800,000 on
January 1 and withdrew P50,000 on July 1.
Equally or in other Agreed Ratio

Case 1. The profit of P300,000 will be divided equally for the Clover Partnership.
Income Summary 300,000
Asta, Capital 150,000
Yuno, Capital 150,000
Case 2. If the partnership had a loss of P200,000 for the year end. It is the intention of every partner that each
partners share in losses will be debited to the drawing account.
Roxas City
Case3. Assume instead that Asta and Yuno share profits and losses in a ratio of 60:40 and profit was P300,000,
the profit would divided as follows:
Based on Partners’ Capital Contributions

Case 1. Ratio of Original Capital Investments
Assume that the partnership agreement provides for the division of profits in the original capital
investments. The profit of P300,000 will be divided as follows:
Case 2. Ratio of Capital Balances at the Beginning of the Year

Assume that the partnership agreement provides for the division of profits in the ratio of capital
balances in the beginning of the year. The profit is P300,000.
Case 3. Ratio of Capital Balances at the end of the Year After drawings
balances in the end of the year after drawings.
Asta, Capital 116,814.16
Yuno, Capital 183,185.84
Case 4. Ratio of Capital Balances at the end of the Year Before Drawings
balances in the end of the year before drawings.
Case 5. Ratio of Average Capital Balances at the end of the Year Before Drawings
Assume that the partnership agreement provides for the division of profits in the ratio of average
capital balances for the year.
By Allowing Interest on Capital and the Balance in an Agreed Ratio
Case 1. Assume that the partnership agreement allowed 15% interest on average capital account balances,
with the balance divided equally. There is a profit of P300,000.
Case 2. If the partnership agreement provided for interest on capital accounts, this provision must be honored
regardless of whether operations yielded profits or not.
Assume the partnership had a loss of P10,000.
Asta,Capital 27,500
Roxas City
Partners invested in the partnership for profits, not for interest. The interest on partners’ capital,
along with the other profit sharing plans to be discussed in the remainder of the chapter, are to be considered
as mere techniques to share partnership profits and losses equitably and not as expenses of the partnership.
On the other hand, the interest on loans from partners is recognized as expense and a factor in the
measurement of profit or loss in the partnership. Similarly, interest earned on loans to partners is recognized
as partnership income.
By Allowing Salaries to Partners and the Balance in an Agreed Ratio

Case 1. Assume the partnership agreement provided for an annual salary of P100,000 to Asta and P60,000 to
Yuno, and the balance to be divided equally. The profit is P300,000.

By Allowing Bonus to Managing Partner Based on Profit and the Balance in an Agreed Ratio
A partnership contract may provide for a special compensation in the form of bonus to the managing partner
when the results of operations of the partnership are favourable.
Case 1. Assume that the partnership agreement provided for bonus of 25% of the profit before bonus to
Partner Asta and the balance to be divided equally with a profit of P300,000.
Case 2. Assume instead that the agreement provided for a bonus of 25% of profit after bonus rate.
By Allowing Salaries, Interest on Capital, Bonus to the Managing Partner and the Balance in an Agreed Ratio
Case 1. Assume that the profit for the year is P400,000 and the partnership agreement provided the following
a. Bonus to Asta of 25% after salaries and interest but before bonus.
b. Annual salaries of P100,000 to Asta and P60,000 to Yuno.
c. Interest of 15% on average capital balances to both partners.
d. balance to be divided in a ratio of 40:60.

Case 2. Assume instead that the bonus to Asta is 25% of profit after salaries, interest and after bonus.

Roxas City
Partnership Dissolution
The dissolution of a partnership is the change in relation of the partners caused by any partner ceasing
to be associated in the carrying on as distinguished from the winding up of the business of the partnership (Civil
Code of the Philippines, Article 1828). On dissolution, the partnership is not terminated, but continues until the
winding up of partnership affairs is completed (Article 1829).
Winding Up – process of settling the business or partnership affairs after dissolution.

Termination – point in time when all partnership affairs are wound up or completed, and is the
end of the partnership life.
Causes of Dissolution
1. Admission of a new partner
2. Withdrawal of retirement of a partner
3. Death of a Partner
4. Incorporation of a partnership
Admission of a New Partner

A new partner can only be admitted into a partnership with the consent of all the continuing partners.
This is based on the principle of delectus personae: No one becomes a member of the partnership without the
consent of all the members. This is because a partnership is based on mutual trust and confidence of the
partners.
By admission of a new partner, the old partnership has been dissolved and it is important that a new
agreement be formulated to govern continuing business operations.
1. Purchase of interest from one or more of the existing partners.
2. Investment of assets in the partnership by the new partner.
Liability of an Incoming Partner

A person admitted as a partner into an existing partnership is liable for all the obligation of the
partnership incurred before his admission as though he had been a partner, when such obligations are incurred.
Such liability is limited to his capital contribution, unless otherwise agreed.
Illustration. Meliodas, King and Merlin formed a partnership, with a capital of P50,000 each on February 14,
2018. On April 8, the partnership incurred an obligation of P200,000 to Escanor which will be payable on Dec.
16. On June 13, Diane was admitted to the partnership; she contributed P20,000.
Answer. Even if the obligation was incurred before Diane is admitted into the partnership, she is still liable to
Escanor but only to the extent of contribution. Total partnership capital upon admission is P170,000 leaving a
balance of P30,000 deficit which will be shared by the old partners.
Purchase of an Interest from Existing Partners

Illustration. Vegeta and Goku are partner’s with capital balances of P400,000 and P200,000 respectively. They
share profits in the ratio of 3:1. Their business has been very successful.
Case 1. Payment to old partners is equal to interest purchased

Partner’s Vegeta and Goku received an offer from Bulma to purchase directly one fourth of each of their interest
in the partnership for P150,000. The partner’s agreed to admit Bulma into the firm.
Vegeta, Capital 100,000
Goku, Capital 50,000
Bulma, Capital 150,000
Case 2. Payment to old partners is less than interest purchased

Assume that Bulma directly purchase one third of each partner’s interest in the firm. Bulma paid P160,000 for
one third of each partner’s capital.
Roxas City

Case 3. Payment to old partners is more than interest purchased

Partners Vegeta and Goku received an offer from Bulma to directly purchase 30% of each of their interest in the
partnership for P200,000. The partners agreed to admit Bulma to the firm.

Investment of Assets in a Partnership
Total Contributed Capital - sum of the capital balances of the old partners and the actual investment of the
new partner.
Total Agreed Capital – total capital of the partnership after considering the capital credits given to each of the
partners.
Bonus – amount of capital or equity transferred by one partner to another.
Capital credit – the equity of a partner in the new partnership and is obtained by multiplying the total agreed
capital by the applicable percentage to partners.
Illustration.
Illustration. Vegeta and Goku are partner’s with capital balances of P400,000 and P200,000 respectively. They
share profits in the ratio of 3:1. Their business has been very successful. The partners agreed to admit Bulma as
a member to the firm.
BONUS TO OLD PARTNERS

Case 1. Total agreed capital is stated.
Assume that Bulma invested P250,000 for one fourth interest in the business. The partners decided not to
revalue assets of the partnership and the total agreed capital is P850,000.
(1) (2)
Cash 250,000 Bulma, Capital 37,500
Bulma, Capital 250,000 Vegeta, Capital 28,125
Goku, Capital 9,375
Case 2. Total agreed capital not explicitly stated.
Assume that Bulma invested P400,000 in the business. Out of the total cash investment, P100,000 is
considered as a bonus to Vgeta and Goku.
(1) (2)
Cash 400,000 Bulma, Capital 100,000
Bulma, Capital 400,000 Vegeta, Capital 75,000
BONUS TO NEW PARTNERS

Case 1. Total agreed capital is stated.
Assume that Bulma invested P240,000 for one third interest in the business. The total agreed capital is
P840,000.
Cash 240,000 Vegeta, Capital 30,000
Bulma, Capital 240,000 Goku, Capital 10,000
Case 2. Total agreed capital not explicitly stated.

Assume that Bulma invested P300,000 for a 50% interest in business. Vegeta and Goku transferred a
part of their of their capital balance to that of Bulma as a bonus.
Roxas City
Cash 300,000 Vegeta, Capital 112,500

Bulma, Capital 300,000 Goku, Capital 37,500
Withdrawal or retirement of partner

Disputes with other partners, old age, and pursuit of better opportunities are among the possible
explanations. The withdrawal of a partner dissolves the partnership.
1. by selling his equity to the remaining partners
2. by selling his equity to an outsider
3. by selling his equity interest to the partnership
Sale of Interest to a Partner or an Outsider

When a partner’s interest is sold to another partner or an outsider, the withdrawing partner is paid from the
personal assets of the buyer. Accounting for this sale is similar to admission by purchase of interest. The total
assets of the partnership are not affected by the consideration involved. The required entry will only be a
debit to the seller’s capital account for his capital balance and a credit to the buyer’s capital account for the
same amount.
Sale of Interest to the Partnership

When a withdrawing partner sells his interest to the partnership, the partnership is paid from the assets of the
partnership. The effect of withdrawal is to reduce the assets and owner’s equity of the partnership. Note that
the withdrawing partner may receive his share of the business in the partnership assets other than cash.
Illustration.
Suppose that Ice Bear is retiring from the We Bare Bears partnership in midyear because of family problems.
After the books have been adjusted for the semi-annual profits but before revaluation, their capital balances
are as follows:
Grizz, Capital P540,000
Panpan, Capital 430,000
Ice Bear, Capital 210,000
An independent appraiser revalued their inventory to P380,000 ( a decrease of P60,000) and their land to
P1,010,000 ( an increase of P460,000). The profit and loss ratio of the partners is 1:2:1.
TO record the revaluation of assets:
Grizz, Capital 15,000

Inventory 60,000
Land 460,000
Case 1. Withdrawal at book value

Assume that Ice Bear agreed to accept payment equal to his interest.
Ice Bear, Capital 310000

Cash 310,000
Case 2. Withdrawal at more than book value.

If the current fair value of the partnership’s net assets exceeded the book value, the settlement price to the
withdrawing partner will be greater than hi capital account balance. The excess payment is treated either as a
bonus to the retiring partner from the continuing partners.
Roxas City
Assume that Ice Bear demanded a P400,000 settlement for his interest because he firmly believed that he
contributed so much to the success of the business. The remaining partner’s agreed for the old time’s sake.

Cash 400,000
Case 3. Withdrawal at less than book value.

When the retiring partner received settlement at less than his/her capital balance, in effect, the partner is
giving a part of equity interest to the continuing partners as a bonus. The amount of bonus The amount of
bonus is credited to the capital accounts of the continuing partners.
Assume that Ice Bear is very eager to retire and is willing to accept settlement at P280,000.

Cash 280,000
Payment to a withdrawing partner at less than book value may also imply that the partnership assets are
overvalued. In this case, the overvalued assets should be identified and reduced to their fair values.
Death of a partner
The death of a partner dissolves the partnership. When the death of the partner does not result to
liquidation, the accounting procedure to be followed are similar to those withdrawal of the partner. The
deceased partner may be considered to have retired from the partnership and his heirs or estate can expect to
receive the amount of his interest from the partnership.
Incorporation of a partnership
A partnership may decide to incorporate after evaluating various advantages of having corporate form of
business organization. After the necessary adjusting and closing entries, the assets and liabilities of the
partnership are transferred to the corporation in exchange for the shares of stock. The shares received by the
partnership are distributed to the partners based on their equity interests.
Illustration. Partners Daffy Duck and Bugs Bunny, who equally share in profits and losses, have the following in
their financial statements.
Cash 120,000 Accounts Payable 172,000
Acc. Rec. 100,000 Accum. Depreciation 8,000
Inventory 140,000 Daffy, Capital 140,000
Equipment 80,000 Bugs, Capital 120,000
Total 440,000 Total 440,000
They agreed to incorporate their partnership with the following adjustment: providing for allowance for
doubtful accounts of P10,000; restatement of inventory to P160,000; and additional depreciation on the
equipment of P3,000. The par value of share capital is P100.
Cash 120,000
Accounts Receivable 100,000
Inventory 160,000
Equipment 69,000
Allowance for Doubtful Accounts 10,000
Accounts Payable 172,000
Ordinary Shares 267,000
Roxas City
Partnership Liquidation
The liquidation of a partnership is the winding up of its business activities characterized by the sale of all
non-cash assets, settlement of all liabilities and distribution of the remaining cash to the partners. The conversion
of non-cash assets into cash is referred to as realization. This may either result to a gain or loss on realization
and shall be divided in the profit and loss ratio of the partners. In some cases, a substantial loss on realization
may yield for a partner a capital deficiency, which is the excess of a partner’s share in losses over the partner’s
capital credit balance. This deficiency will certainly affect the partner’s interest – the sum of his capital and loan
accounts in the partnership.
RULES IN SETTLING ACCOUNTS AFTER DISSOLUTION
Assets of the Partnership

1. Partnership property;
2. Additional contributions of the partners needed for the payment of all liabilities.
Order of Preference
1. First, those owing to outside creditors;
2. Second, those owing to inside creditors in the form of loans or advances for business expenses by the
owners;
3. Third, those owing to the partners with respect to their capital contributions;
4. Lastly, those owing to the partners with respect to their share of profits.
Illustration 1. Partners A, B and C are partners in an export business. Initially, A contributed P300,000; B,
P200,000 and C, P100,000. On the date of dissolution, the remaining assets of the partnership amounted to P
1,000,000. The partnership has outstanding obligations to D, P140,000 and E, P100,000 and loans payable to A,
P40,000.
1. First, D and E who are outside creditors shall be paid the total sum of P240,000; thus, leaving a balance of
P760,000 (P1,000,000 – P240,000) in partnership assets.
2. Second, A who is an inside creditor shall be paid his loan to the partnership of P40,000; balance at P720,000
(P760,000 – P40,000)
3. Third, the total contributions of A, B and C to the partnership capital in the amount of P600,000 will be
paid; balance of assets at P120,000 (P720,000 – P600,000)
4. Lastly, the balance of P120,000 shall be distributed to the partners in the ratio of their capital contributions
since there was no mention regarding their profit and loss agreement. Therefore A shall be entitle to
P60,000; B, P40,000 and C, P20,000.
Insufficient Partnership Assets
In cases when the partnership assets are insufficient to settle all outside liabilities, the partners should make
additional contributions in the partnership. Any partner who contributed in excess of his share in this liability
has a right to collect the supposed additional contributions from other partners.
Preference of Partnership Creditors and Partners’ Separate Creditors
The creditors of the partnership shall have priority in payments over those of the partners’ separate creditors
as regards the partnership property. On the other hand, the creditors of the partners are preferred with respect to
the separate or personal properties of the partners.
If the partner is insolvent, his personal properties shall be distributed as follows:
1. First, those owing to separate creditors;
2. Second, those owing to partnership creditors;
3. Lastly, those owing to the partners by way of additional contributions when the assets of the
partnership were sufficient to settle the obligations.
Roxas City
METHODS OF PARTNERSHIP LIQUIDATION
1. Lump-sum Method
Under this method, all non-cash assets are realized and the related gains or losses distributed and all
liabilities are paid before a single final cash distribution is made to the partners.
2. Installment Method
Under this method, realization of non-cash assets is accomplished in an extended period of time or by
instalments. When cash is available, creditors may be partially or fully paid. Any excess may be distributed to the
partners in accordance with a program of safe payments or cash priority program. This process continues until all
the non-cash assets are sold.
ENTRIES RELATED TO LIQUIDATION
1. Sale of Non-Cash Assets

a. At Book Value c. Below Book Value
Cash xx Cash xx
Non-Cash Assets xx Loss on Realization xx
Non-Cash Assets xx
b. Above Book Value
Cash xx
Non-Cash Assets xx
Gain on Realization xx
2. Distribution of Gain or Loss on Realization based on Partners’ P/L Ratio

a. Distribution of Gain on Realization b. Distribution of Loss on Realization
Gain on Realization xx A, Capital xx
A, Capital xx B, Capital xx
B, Capital xx C, Capital xx
C, Capital xx Loss on Realization xx
3. Payment of Liabilities 6. Deficiency Absorbed by Solvent Partner

Liabilities xx B, Capital xx
Cash xx A, Capital xx
4. Exercise of the Right of Offset 7. Distribution of Cash to Partners

A, Loan xx A, Capital xx
A, Capital xx B, Capital xx
C, Capital xx
5. Additional Investment by a Deficient Partner Cash xx
Cash xx
A, Capital xx
LUMP-SUM LIQUIDATION
Under this method, all non-cash assets are realized and all liabilities are settled before a single final cash
distribution is made to the partners. The procedures below may be followed in a lump-sum liquidation:
1. Realization of non-cash assets and distribution of gain or loss on realization among the partners based
on their profit and loss ratio.
2. Payment of liabilities.
3. Elimination of partners’ capital deficiencies.
a. If the deficient partner has a loan balance, then exercise the right of offset.
b. If the deficient partner is solvent, the he should invest cash to eliminate his deficiency
c. If the deficient partner is insolvent, other partners should absorb the deficiency.
4. Payment to partners, in the order of priority.
a. Loan accounts
b. Capital accounts
Roxas City
Illustration 2. Grizz, Panda and Ice Bear are partners in a business firm and share profits and losses in the ratio
of 2:2:1, respectively. They decided to liquidate their business.
We Bare Bears
Statement of Financial Position
as of December 31, 20XX
Assets
Cash P 200,000
Non-cash Assets 3,400,000
Total Assets P 3,600,000
Liabilities and Capital

Liabilities P 1,120,000
Panda, Loan 50,000
Ice Bear, Loan 80,000
Panda, Capital 600,000
Total Liabilities and Capital P 3,600,000
Case 1. Loss on Realization Fully Absorbed by Partners’ Capital Balances

Assume that the non-cash assets are sold at P2,500,000 with a resulting loss on realization of P900,000,
which was distributed in the ratio of 2:2:1.
1. Sale of Non-Cash Assets 3. Distribution of Cash to Partners
Cash 2,500,000 Panda, Loan 50,000
Loss on Realization 900,000 Ice Bear, Loan 80,000
Non-Cash Assets 3,400,000 Grizz, Capital 590,000
Distribution of Loss on Realization based on P/L Ratio Panda, Capital 240,000
Grizz, Capital 360,000 Ice Bear, Capital 620,000
Panda, Capital 360,000 Cash 1,580,000
Loss on Realization 900,000
2. Payment of Liabilities
Liabilities 1,120,000
Cash 1,120,000
Case 2. Loss on Realization Resulting to a Capital Deficiency with Right of Offset.

Assume that the non-cash assets are sold at P1,850,000 resulting in a loss on realization to be distributed in
the ratio of 2:2:1. The capital balance of Panda was insufficient to fully absorb the share in loss and thus, incurred
a capital deficiency of P20,000. Instead of making an additional investment, Panda opted to exercise the right of
offset by applying a portion of loan to the deficient capital.
1. Sale of Non-Cash Assets 3. Exercise of Right of Offset

Cash 1,850,000 Panda, Loan 20,000
Loss on Realization 1,550,000 Panda, Capital 20,000
Non-Cash Assets 3,400,000
Distribution of Loss on Realization based on P/L Ratio

Grizz, Capital 620,000 4. Distribution of Cash to Partners
Panda, Capital 620,000 Panda, Loan 30,000
Ice Bear, Capital 310,000 Ice Bear, Loan 80,000
Loss on Realization 1,550,000 Grizz, Capital 330,000
2. Payment of Liabilities Ice Bear, Capital 490,000
Liabilities 1,120,000 Cash 930,000
Roxas City
Cash 1,120,000
Case 3. Loss on Realization Resulting to a Capital Deficiency to a Personally Solvent Partner

Assume that the non-cash assets are sold at P1,700,000 with a resulting loss on realization of P1,700,000
to be distributed in the ratio of 2:2:1.
Cash 1,700,000 Panda, Loan 50,000
Loss on Realization 1,700,000 Panda, Capital 50,000
Non-Cash Assets 3,400,000
Distribution of Loss on Realization based on P/L Ratio

Grizz, Capital 680,000 4. Additional Investment by Partner
Panda, Capital 680,000 Cash 30,000
Ice Bear, Capital 340,000 Panda, Capital 30,000
Loss on Realization 1,700,000
2. Payment of Liabilities 5. Distribution of Cash to Partners

Liabilities 1,120,000 Ice Bear, Loan 80,000
Cash 930,000 Grizz, Capital 270,000
Cash 780,000
Case 4. Loss on Realization Resulting to a Capital Deficiency to a Personally Insolvent Partner

Assume the same facts as Case 3 except that Panda is personally insolvent and is uable to make additional
investments for her remaining deficiency.
4. Deficiency Absorbed by Solvent Partners

5. Distribution of Cash to Partners

Ice Bear, Loan 80,000
Cash 780,000
Case 5. Partnership Insolvent but Partners Personally Solvent

Assume that the non-cash assets are sold at P900,000 with a resulting loss on realization of P2,500,000 to
be distributed in the ratio of 2:2:1.
1. Sale of Non-Cash Assets 4. Additional Investment by Partner

Cash 900,000 Cash 30,000
Loss on Realization 2,500,000 Grizz, Capital 50,000
Non-Cash Assets 3,400,000 Panda, Capital 350,000
Distribution of Loss on Realization based on P/L Ratio 5. Full Payment of Liabilities

Grizz, Capital 1,000,000 Liabilities 20,000 Panda, Capital
1,000,000 Cash 20,000
Loss on Realization 2,500,000 6. Distribution of Cash to Partners
2. Partial Payment of Liabilities Ice Bear, Loan 80,000
Liabilities 1,100,000 Ice Bear, Capital 300,000
Cash 1,100,000 Cash 380,000
Roxas City
3. Exercise of Right of Offset

Panda, Loan 50,000
Illustration 3.
Claudine, Gretchen and Marjorie are partners sharing profits or losses in the ratio of 4:3:2, respectively.
The partnership and partners Gretchen and Marjorie are currently unable to meet their financial obligations.
Barreto Sisters
December 31, 20xx
Assets Liabilities and Capital

Cash P 5,000 Liabilities P370,000
Non-Cash Assets 605,000 Claudine, Capital 100,000
Gretchen, Capital 60,000
Marjorie, Capital 80,000
Total Asset P610,000 Total Liabilities and Capital P610,000
Personal Status of Partners

Partner Personal Assets Personal Liabilities
Claudine P310,000 P200,000
Gretchen 94,500 119,000
Marjorie 40,000 50,000
Case 6. Partnership Insolvent and Partners Personally Insolvent

The non-cash assets were sold for P335,000, resulting to a loss on realization of P270,000.
1. Sale of Non-Cash Assets 4. Additional Investment by Partner

Cash 335,000 Cash 40,000
Loss on Realization 270,000 Claudine, Capital 40,000
Non-Cash Assets 605,000
Distribution of Loss on Realization 5. Full Payment of Liabilities
Claudine, Capital 120,000 Liabilities 30,000
Gretchen, Capital 90,000 Cash 30,000
Loss on Realization 270,000 6. Distribution of Cash to Partner
2. Partial Payment of Liabilities Marjorie, Capital 10,000
Liabilities 340,000 Cash 10,000
Cash 340,000
3. Deficiency Absorbed by Partners
Claudine, Capital 20,000
Gretchen, Capital 30,000
INSTALLMENT LIQUIDATION
Under this method, realization of non-cash assets is accomplished over an extended period of time. It is a
process of selling some assets, paying the creditors, paying the remaining cash to partner, realizing additional
assets and making additional payments to the partners. The liquidation will continue until all the non-cash assets
have been realized and all available cash distributed to partnership creditors and partners. The procedures below
may be followed in instalment liquidation:
1. Realization of non-cash assets and distribution of gain or loss on realization among partners based on their
profit or loss ratio.
2. Payment of liquidation expenses and adjustment for unrecorded liabilities; both of these items will be
distributed among the partners in their profit or loss ratio.
Roxas City
3. Payments of liabilities to outsiders.

4. Distribution of available cash (Schedule of safe payments or Cash priority program).
SCHEDULE OF SAFE PAYMENTS
Illustration. The balance sheet of Blossom, Bubble and Buttercup, partners sharing profits in the ratio of 4:3:3
respectively, showed the following balances on April 30, 20xx, just before the liquidation:
Powerpuff Girls
April 30, 20xx

Cash P 315,000 Liabilities P 435,000
Non-Cash Assets 1,250,000 Buttercup, Loan 30,000
Blossom, Capital 600,000
Bubble, Capital 350,000
Buttercup, Capital 150,000
Total Assets P 1,565,000 Total Liabilities and Capital P 1,565,000
In May, part of the assets are sold at book value, P300,000. In June, the remaining assets are sold for P210,000.
Assume that the available cash is distributed to the proper parties at the end of May and at the end of June.
Assume further that partners are solvent and that any partner who is deficient made appropriate payment to the
partnership on July 31.

Cash 300,000 Buttercup, Loan 30,000
Non-Cash Assets 300,000 Buttercup, Capital 30,000
2. Payment of Liabilities 6. June Distribution of Cash to Partners

Liabilities 435,000 Blossom, Capital 120,000
Cash 435,000 Bubble, Capital 90,000
Cash 210,000
3. May Distribution of Cash to Partners
Blossom, Capital 160,000 7. Additional Investment by a Partner
Bubble, Capital 20,000 Cash 42,000
Cash 180,000 Buttercup, Capital 42,000
4. Sale of Non-cash Assets and Distribution of 8. July Distribution of Cash to Partners

Loss on Realization Blossom, Capital 24,000
Cash 210,000 Bubble, Capital 18,000
Blossom, Capital 296,000 Cash 42,000
Bubble, Capital 222,000
Buttercup, Capital 222,000
CASH PRIORITY PROGRAM
Illustration. Linny the Guinea Pig, Mingming Duckling and Turtle Tuck divide profits 60%, 25% and 15%
respectively. A balance sheet on June 30, 20xx, just before partnership liquidation, showed the following
balances
Wonderpets
Roxas City
June 30, 20xx

Cash P 50,000 Liabilities P 350,000
Linny, Capital 450,000
Mingming, Capital 100,000
Tuck, Capital 75,000
Total Assets P 975,000 Total Liabilities and Capital P 975,000
Certain assets are sold in July at book value of P500,000 and available cash is distributed to appropriate parties,
Remaining assets sold in August for P150,000 and cash is distributed in the final settlement.
For the month of July, 20XX

Cash 500,000 Linny, Capital 190,000
Non-cash Assets 500,000 Tuck, Capital 10,000
Cash 200,000
2. Payment of Liabilities
Liabilities 350,000
Cash 350,000
For the month of August, 20XX

Cash 150,000 Linny, Capital 95,000
Loss on Realization 275,000 Mingming, Capital 31,250
Non-cash Assets 425,000 Tuck, Capital 23,750
Cash 150,000
Distribution of Loss on Realization
Linny, Capital 165,000
Mingming, Capital 68,750
Tuck, Capital 41,250
Loss on Realization 275,000

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COLEGIO DE LA PURISIMA CONCEPCION

School of the Archdiocese of Capiz

Advantages and Disadvantages of Partnership

Advantages versus Proprietorships

Advantages versus Corporation

5. According to Legality of Existence

Accounting for Partnership

Individual with no Existing Business form a Partnership

Sole Proprietor and an Individual without Existing Business form a Partnership

Monkey D. Luffy Roronoa Zoro offered to invest cash equal to

Liabilities and Owner’s Equity

Owner's Equity Accounts

1. Decrease in Asset 1. Increase in Asset

1. The partnership name, nature, purpose and location;

Valuation of Investments by Partners

Limited Liability Partnership

Partner's Capital Account Partner's Drawing Account

Illustration 3. Two or More Sole Proprietor form a Partnership

Monkey D. Luffy Roronoa Zoro

Liabilities and Owner’s Equity Liabilities and Owner’s Equity

1. The merchandise inventory of Luffy is to be increased by 10,000 and of Zoro to 70,000.

Distribution Of Profits and Losses Based on Partners’ Agreement

Equally or in other Agreed Ratio

Based on Partners’ Capital Contributions

Case 2. Ratio of Capital Balances at the Beginning of the Year

By Allowing Salaries to Partners and the Balance in an Agreed Ratio

Income Summary 300,000

Income Summary 400,000

Income Summary 400,000

Winding Up – process of settling the business or partnership affairs after dissolution.

Admission of a New Partner

Liability of an Incoming Partner

Purchase of an Interest from Existing Partners

Case 1. Payment to old partners is equal to interest purchased

Case 2. Payment to old partners is less than interest purchased

Vegeta, Capital 133,333

Case 3. Payment to old partners is more than interest purchased

Vegeta, Capital 120,000

BONUS TO OLD PARTNERS

BONUS TO NEW PARTNERS

Case 2. Total agreed capital not explicitly stated.

Cash 300,000 Vegeta, Capital 112,500

Withdrawal or retirement of partner

Sale of Interest to a Partner or an Outsider

Sale of Interest to the Partnership

TO record the revaluation of assets:

Grizz, Capital 15,000

Case 1. Withdrawal at book value

Ice Bear, Capital 310000

Case 2. Withdrawal at more than book value.

Grizz, Capital 30,000

Case 3. Withdrawal at less than book value.

Ice Bear, Capital 310,000

RULES IN SETTLING ACCOUNTS AFTER DISSOLUTION

Assets of the Partnership

Insufficient Partnership Assets

Preference of Partnership Creditors and Partners’ Separate Creditors

METHODS OF PARTNERSHIP LIQUIDATION

ENTRIES RELATED TO LIQUIDATION

1. Sale of Non-Cash Assets