MMCM Financial Accounting & Reporting

ACT115
Partnership - An Overview
Various Organizations are created or formed almost every day in different parts of the country or of the world. These
Organizations are classified in many ways accordingly to their purpose, nature, ownership, formation, capital base,
geographic coverage, or type of industry they belong to.

Based on ownership as the means of classifying an Organization, a business entity can be a sole proprietorship,
partnership, or a corporation.

Sole proprietorship is owned by one person; partnership is owned by two or more persons; and a corporation is formed by
a group of stockholders.

Definition
Article 1767 of the new civil code (NCC) of the Philippines defines partnership as follows:
“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”

Keywords in the definition:

1. Contract
2. Person
3. Money, property or industry
4. Common fund
5. Division of profit

Contract
Article 1395 of NCC of the Philippines state that:
“A contract is a meeting of minds between two persons whereby binds himself, with respect to other, to give something or
to render some service”.

Contract is an agreement between two or more persons that is enforceable by law. It can be oral or in written form.

It is emphasized that a partnership is created by the mere agreement of parties. There are no other formalities required for
a partnership to acquire a legal personality.

The written contract of the partners is called “Article of Co-Partnership”

Person
Partnership involves two or more person owning the business in contrast with a sole proprietorship that is run and owned
by just one person.

Person maybe natural person or juridical entity. A natural or human person is created according to the image and likeness
of God (Bible) while a juridical person is created by operation of law.

A partnership or a corporate cannot become partner in another partnership. Because partners in the partnership has
“intimate personal relationships” and “mutual trust” existing between or among partners - Delectus personae.

Money, property or industry

A partner may contribute the following to the partnership:
Money-may include bills and coins that are considered as legal tender and in circulation.

Property-may include assets whose useful life extend beyond one year and which are subject to depreciation except land.

Industry-refers to the services provided by a partner in the partnership.

Money and property are usually contributed by capitalist partner. Industry or service usually provided by industrial
partner. A general partner can contribute money, property, or industry. Limited partner is allowed to contribute either
money or property only.

Common fund
“The concept of common fund indicates that the contributions of individual partners become properties of the partnership.
The individual distinction and ownership of the properties are removed once the contributions become properties of
partnership.”
Instructor: Melziel Andag Emba
MMCM Financial Accounting & Reporting
ACT115

Division of profit
Partnership is a profit-oriented Organization. The realized profit from operation are divided among the partners. It must
not remain invested and continue to accumulate like in a corporation.

Characteristics of partnership
1. Mutual contribution
2. Mutual agency
3. Co-ownership of contributed property
4. Participation in profits
5. Limited life
6. Unlimited liability
7. Income subject to tax

Mutual Contribution
It is assumed that the contributions of partner are acceptable in form, condition, and valuation to other partners and they
come from the own volition of a partners. The contribution must not be result of force or coercion imposed by the other
parties to a contributing partner.

Mutual Agency
A partner, with expressed or implied authority, acting in behalf of the partnership binds the partnership in his/her activities.

All partners, therefore, can act as agent of the partnership.

A partner can enter into a contract for and in behalf of the partnership, and the contract becomes binding between the
contracting party and the partnership.

Co-ownership of contributed property

The individual personal property of a partner become common property once contributed to the partnership.

All partners become co-owners of the contributed properties with equal rights and obligations. As co-owners, all partners
obliged to protect and preserve the properties of the partnership.

Participation in the profits

All partners share in the profits of the partnership based on their agreement. Partners cannot single out and excluded a
certain partner in the distribution of profits.

A partner, however, who contributes solely his/her industry to the partnership has no obligations on the distribution of
losses.

Limited life
Partnership has limited life. It’s legal existence is vulnerable to dissolution.
1. Admission of new partner
2. Withdrawal of partner
3. Death of one of the partner
4. Insolvency of a partner/partnership
5. Expiration of term specified in the agreement

Unlimited liability
The liability of a partnership extends to the personal property of the partner.

“The concept of unlimited liability does not, however, apply to a limited partner”.

Subject to tax
General Business Partnership is treated like a corporation from the view point of taxation.

General Professional Partnership net income is exempt from taxes.

Advantages of partnership
1. Easy to form or organize. A mere agreement in the form of article of co-partnership already created a juridical
personality of partnership.
Instructor: Melziel Andag Emba
MMCM Financial Accounting & Reporting
ACT115

2. More capital than sole proprietorship.

3. Better management capability compared with sole proprietorship.
4. Creditor consider the unlimited liability of partner beneficial to financial credit extended to the partnership.
5. It is flexible in decision-making. The partner can easily and immediately resolve pressing issues that need immediate
action.

Disadvantages of partnership
1. Limited life
2. Mutual agency feature of the partnership may create conflict because all the partners have equal authority in
management of affairs.
3. Smaller capital compared with corporation resulting limited operating activities.

Classification of partners
1. General partner is the one whose liability in the partnership extends to his/her personal property.
2. Limited partner one whose liability in the partnership is only limited to his/her contribution and not allowed to contribute
service/industry.
3. Capitalist partner one who contribute money and property.
4. Industrial partner one who contribute only industry or expertise.
5. Managing partner one who actively manages the daily affairs of partnership.
6. Liquidating partner one who winds up the dissolution and liquidation of partnership.
7. Silent partner one who has limited participation in daily activities of the partnership but is known to the public as
partner.
8. Secret partner one who participates in partnership activities but not known to the public as partner.
9. Dormant partner one who does not have active participation in the business and is not known to the public as partner.
10. Nominal partner one who does not have active participation since he/her is not actual partner but publicly considered
as one.

Classification of partnership
Broad classification of partnerships are based in the following:
1. Object
2. Liability
3. Taxation

As to Object
1. Universal partnership
-universal partnership of all present property the property and profits which they may acquire therewith becomes
common.
- universal partnership of profits all movable and immovable properties of partner will remains as their properties, only the
usufruct passing to partnership.

2. Particular partnership
Has for its object determine things, their use or fruits, specific undertaking and the exercise of a profession or vacation.
(Defines specific purpose)

As to liability of the partners

1. General partnership is a partnership created and operating with a general partners.
2. Limited partnership a kind of partnership consisting of a general partner and limited partner.

As to taxation
1. General professional partnership is a partnership for the purpose of exercising the partner’s common profession, hence
not subject to tax.
2. General co-partnership is a partnership created for the purpose of obtaining profits from the conduct of trade or
business.

Accounting for partnership

1. Formation
2. Operation
3. Dissolution

Instructor: Melziel Andag Emba

MMCM Financial Accounting & Reporting
ACT115
4. Liquidation

Capital accounts
1. Equity account of the owner
2. Drawing or withdrawal account

Equity account of the owner

The capital account of a partner is Debited by the following transactions:
1. Permanent withdrawal of capital
2. Closing of debit balance of the drawing account = loss

Credited by the following transactions:

1. Original investment
2. Additional investment
3. Closing of credit balance of the drawing account = profit

Drawing or Withdrawal account

The drawing account of a partner is Debited by the following transactions:
1. Temporary withdrawal of capital (drawing)
2. Share in losses

Credited by the share of profit

Salient Features in handling capital account

1. Maximum amount of withdrawal during a particular period.
2. Treatment of withdrawals
3. Recording of the distribution of the profits and losses

For example: the maximum amount that a partner may withdraw during the year is P50,000 and any excess withdrawal
will be treated as permanent withdrawal.

Withdrawals made by partners can be handled as either:

1. Permanent
2. Temporary

A permanent withdrawal indicates that the partner intend to decrease his/her contribution in the partnership this type of
withdrawal is reflected as debit in the capital account.

A temporary withdrawal, is made in anticipation of the expected profit. The drawing account of the partner is debited for
this type of withdrawal.

At the end of accounting period, the profit or loss from the operation can either be closed to the drawing account or the
equity account of the partners depending on their agreement.

Done

Instructor: Melziel Andag Emba