Partnership (Hand Out)

PARTNERSHIP
DEFINITION
-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.
- Each owner in the partnership is called a partner.
-Partners in the practice of their profession such as practice of law, public accounting, medicine
and other professions are called General Professional Partnership.
CHARACTERISTICS OF A PARTNERSHIP
1. Mutual Contribution- there cannot be a partnership without contribution of money, property

or industry (i.e. work or services which may either be personal manual efforts or intellectual)
to a common fund.
2. Division of Profits or Losses- The essence of partnership is that each partner must share in
the profits or losses of the venture.
3. Co-Ownership of Contributed Assets- each partner is a co-owner of the properties invested

in the partnership and each has an equal right with his partners to possess specific partnership
property for partnership purposes. However, a partner has no right to possess a partnership
property for any other purpose without the consent of his partners.
4. Mutual Agency- the partners are agent of the partnership for the purpose of its business. As
such, a partner may legally bind the partnership to a contract or agreement that is in line with
the partnership's operation.
5. Limited Life- a partnership is easily dissolved;

i. By the express will of any partner;
ii. By the termination of a definite term stipulated in the contract;
iii. By any event which makes it unlawful to carry out the partnership;
iv. Expulsion, death, insolvency or civil interdiction of a partner.
6. Unlimited Liability- each partner (except limited partners), including industrial ones, may be
held personally liable for partnership debt after all partnership assets have been exhausted. If a
partner is personally insolvent, his share in the partnership debt shall be assumed by the other
solvent partners.
i. A partnership in which all partners are individually liable is called a General
Partnership
ii. A partnership in which at least one partner is personally liable is called a limited
partnership. A limited partnership includes at least one general partner who
maintains unlimited liability. The others, called limited partners, may limit their
liability up to the extent of their contributions to the partnership. A limited liability
partnership usually has "LLP" in its name.
Prepared by:
Roy Kenneth Lingat Renchy Gonzales
Vice President for Academics SC for Literacy and Employment
7. Income Taxes- Partnerships, except General Professional Partnerships, are subject to tax at
the rate of 30%. of taxable income.
8. Partners' Equity Accounts- Accounting for partnerships are much like accounting for sole
proprietorships. The difference lies in the number of partners' equity accounts. Each partner
has a capital account and a withdrawal account that serves similar functions as the related
accounts for sole proprietorships.
9. Ease of Formation- as compared to corporations, the formation of a partnership requires less

formality.
10. Separate Legal Personality- the partnership has a juridical personality separate and distinct
from the partners. The partnership can transact and acquire properties in its name.
11. Transfer of Ownership- in case of dissolution, the transfer of ownership, whether to a new
or existing partner, requires the approval of the remaining partners.
ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP
Advantages Disadvantages
Ease of formation Limited life/ Easily Dissolved
Shared Responsibility of running the Unlimited Liability
business
Greater Capital compared to sole Lesser Capital compared to a corporation
proprietorship
Flexibility in decision making Conflict among partners
Relative lack of regulation by the A partnership (other than a general professional
government as compared to corporations partnership) is taxed like a corporation
Advantages versus Proprietorships
1. Brings greater financial capability to the business

2. Combines special skills, expertise and experience of the partners
3. Offers relative freedom and flexibility of action in decision making
Advantages versus Corporations
1. Easier and less expensive to organize

2. More personal and informal
Disadvantages
1. Easily dissolved and thus unstable compared to a 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
Prepared by:
PARTNERSHIP DISTINGUISHES FROM CORPORATION
DIFFERENCES PARTNERSHIP CORPORATION

1. Manner of Creation Created by mere agreement of Created by operation of law or
the partners created by the state in the form
of a special character or by a
general enabling law (The
Revised Corporation Code-
2019 otherwise known as
Republic Act 11232)
2. Number of Persons Two or more persons may Any person, partnership,
form a partnership association or corporation,
singly or jointly with others
but not more than 15, may
organize a corporation for any
lawful purpose or purposes.
According to the Revised

Corporation Code of the
Philippines, A corporation
with a single stockholder is
considered as One Person
Corporation.
3. Commencement of Juridical Juridical personality The issuance of certificate of
Personality commences from the incorporation by the Securities
execution of the articles of and Exchange Commission.
partnership
4. Management Every partner is an agent of Management is vested on the
the partnership if the partners Board of Directors
did not appoint a managing
partner
5. Extent of Liability Each partner except a limited Stockholders are liable only to
partner is liable to the extent the extent of their interest or
of his personal assets; investment in the corporation
6. Right of Succession No right of succession. Death, The corporation has the
Retirement, Insolvency, Civil capacity of continue existence
Interdiction, or insanity of a regardless of the death,
partner dissolves the withdrawal, insolvency, or
partnership. incapacity of its directors or
stockholders.
7. Terms of Existence For any period of time Shall have perpetual existence
stipulated by the partners or unless its articles of
no time limit except incorporation provides
agreement of parties otherwise
8. Transferability of Interest All partners need to consent to Does not need the consent of
the transfer of interest to the other stockholders
another
9. Ability of owners to bind Generally, partners acting on Generally, stockholders cannot
the firm behalf of the partnership are bind corporation since its
agents thereof; official acts are through a
board of directors
10. Remedies in case of A partner can sue another A stockholder cannot sue a
mismanagement partner who mismanages director who mismanages it
Prepared by:
must be in the name of the
corporation, through a
derivative suit.
CLASSIFICATIONS OF PARTNERSHIPS
1. According to Object
a. Universal Partnership of all present property- all contributions become part of the
partnership fund
b. Universal Partnership of profits- all that the partners may acquire by their industry
or work during the existence of the partnership and the use of whatever the partners contributed
at the time of the institution of the contract belong to the partnership.
c. Particular Partnership- The object of the partnership is determinate-its use or fruit,

specific undertaking, or the exercise of a profession or vocation.
Note: If the articles of Universal Partnership does not specify the nature of the Universal
Partnership, it is deemed that what is constituted is only a Universal Partnership of Profits.
2. According to Liability
a. General- where all the partners are general partners whose liability extends to their
individual properties, after the assets of the partnership have been exhausted
b. Limited- Limited partners are liable only to the extent of their personal contributions.
In a limited partnership, the law states that there shall be at least one general partner.
3. According to Duration
a. Partnership with a fixed term or particular undertaking- upon arrival of the fixed
term or fulfilment of a particular undertaking, partnership is dissolved, and if continued, it will
constitute a partnership at will and the rights and duties of the partners remain the same, so far as
is consistent with a partnership at will
b. Partnership at will- One in which no term is specified and is not formed for any
particular undertaking
4. According to Purpose
a. Commercial or Trading Partnership- One formed for the transaction of business
b. Professional or non-trading partnership- One formed for the exercise of profession
5. According to legality of existence
a. De jure partnership- one which has complied with all the legal requirements for its
establishment
b. De facto partnership- one which has failed to comply with all the legal requirements
for its establishment
Prepared by:
KINDS OF PARTNERS
According to Contributions
a. Capitalist Partner – one who contributes money or property to the common fund of the
partnership.
b. Industrial Partner- one who contributes his knowledge or personal service to the partnership.
c. Capitalist-Industrial Partners- furnishes both
As to Liability
a. General Partner- One who is liable to the extent of his separate property after all the assets of
the partnership are exhausted
b. Limited Partner- One who is liable only to the extent of his capital contributions. He is not
allowed to contribute industry or services only.
Other kinds of Partners
a. Silent Partner-one who does not take active part in the management of the partnership though
may be known as a partner
b. Secret Partner- one who takes active part in the business but it is not known to be a partner
by outside parties
c. Dormant Partner-one who does not take active part in the business of the partnership and is
not known as a partner
d. Ostensible Partner-direct opposite of Dormant partner or one who participates in the

management and is known to third parties as a partner
e. Managing Partner-one whom the partners has appointed as manager of the partnership
f. Liquidating Partner- one who is designated to wind up or settle the affairs of the partnership
after dissolution
g. Nominal or Partner by Estoppel- one who is actually not a partner but who represents
himself as one
h. Income partner- one who is admitted to the partnership after it has already been constituted
ARTICLES OF PARTNERSHIP
A contract of partnership is consensual. It is created by the agreement of the partners which may
be constituted in any form, such as oral or written. In the latter case, partnership agreements are
embodied in the Articles of Partnership.
However, Articles 1771 and 1772 of the Philippine Civil Code require that a partnership
agreement must be made in a public instrument and recorded with the Securities and Exchange
Commission (SEC) when:
a. immovable property or real rights are contributed to the partnership (e.g., PPE); or
b. the partnership has a capital of P3,000 or more.
Prepared by:
Article 1773 further requires an inventory of any immovable property contributed to the
partnership, signed by the parties and attached to the public instrument, otherwise the partnership
is deemed void. A partnership's legal existence begins from the execution of the contract, unless
otherwise stipulated.
ACCOUNTING FOR PARTNERSHIPS
Partner's Capital Account

Debit Credit
1. Permanent Withdrawals 1. Original Investment
2. Debit Balance of the drawing account at
the end of the period 2. Additional Investment
3. Credit balance of the drawing account at the
end of the period
Partner's Drawing Account

Debit Credit
1. Share in Profit (this may be credited directly
1. Temporary Withdrawals to capital)
2. Share in Loss (this may be debited directly
to Capital
LOANS RECEIVABLE FROM OR PAYABLE TO PARTNERS
Receivable Payable
Loan To From
Advances To From PARTNER
Due From To
Loan From To
PARTNERSHIP
Advances From To
Due To From
STAGES IN THE LIFE OF THE PARTNERSHIP
1. Partnership Formation- accounting for initial investments to the partnership
2. Partnership Operations- this is the reason why a partnership is formed, to operate and earn
profit/division of profits and losses.
3. Partnership Dissolution- changes in the partnership agreement or relations among the

partners. Admission of a new partner and withdrawal, retirement or death of a partner.
4. Partnership Liquidation- realization of the assets of the partnership and settlement of

partnership liabilities. It is the winding up of affairs.
Prepared by:
PARTNERSHIP FORMATION
Natural Person + Natural Person

Sole Proprietorship + Natural Person
Sole Proprietorship + Sole Proprietorship
An existing Partnership + Sole Proprietorship
An existing Partnership + An existing Partnership
Note: All of these may form into a partnership but any corporation cannot form a partnership.
Natural Person- means the individual
Juridical Person- Sole Proprietorship Partnership
MAIN ACCOUNTING ISSUE FOR PARTNERSHIP FORMATION
1. Valuation of Investments by Partners
Contributed Capital Measurement

Cash Face Value
Property a. Agreed Value
b. Fair Value
c. Book Value
Inventory Lower of Cost and Net Realizable Value
Fair Value – is the 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.
2. Re-alignment of Capital Contribution VS. Agreed Capital
a. Total Contributed Capital = Total Agreed Capital Use Bonus Method

b. Total Contributed Capital > Total Agreed Capital Withdrawal or Write down of Assets
Additional Investment or Revaluation of
c. Total Contributed Capital < Total Agreed Capital Assets
ADJUSTMENT OF ACCOUNT PRIOR TO FORMATION
Before formation of Partnership, the partners with existing business should adjust their
respective books to reflect the fair market value of their assets or to correct misstatements in the
accounts. Failure to do so would result to inequitable initial capital.
ILLUSTRATION 1: FORMATION OF PARTNERSHIP- WITH REVALUATION OF

ASSETS
Biden and Trump are competitors who sell the same products. After years they decided to form a
partnership to increase their business and reduce costs. An agreement is reached between the two
to begin as a partnership on April 1, 2020. They share profits and losses in the ratio of 60:40.
Prepared by:
The statement of financial position of Biden and Trump as of April 1, 2020 are as follows:
Biden Trump
Cash 58,000 43,000
Accounts Receivable 425,000 260,000
Allowance for Doubtful Accounts (35,000) (20,000)
Merchandise Inventory 512,000 454,000
Prepaid Rent - 10,000
Office Supplies 40,000
Land 150,000 175,000
Building 230,000 180,000
Accumulated Depreciation-Building (30,000) (18,000)
Office Equipment 50,000 72,000
Accumulated Depreciation-Office Equipment (5,000) (7,200)
Repair Equipment 145,000
Accumulated Depreciation-Repair Equipment (25,000)
Total Assets 1,515,000 1,148,800
Notes Payable 130,000 90,000

Accounts Payable 210,000 235,000
Mortgage Payable 250,000
Biden, Capital 925,000
Trump, Capital 823,800
Total Liabilities and Owners' Equity 1,515,000 1,148,800
The name of the partnership will be Biden and Trump Partnership, the partners have agreed to
effect the following adjustments
A. The Accounts Receivable of Biden is estimated to be 95% collectible while Trump is

estimated to be 98% collectible.
Allowance for Doubtful Collection P 13,750

Biden, Capital P 13,750
Allowance for Doubtful Collection 14,800

B. The merchandise Inventory of Biden and Trump are to be decreased by P 62,000 and P 64,000
respectively.

Merchandise Inventory P 62,000

Merchandise Inventory 64,000
C. The Prepaid Rent in the book of Trump will be consumed by the partnership.
NO ENTRY
Prepared by:
D. One-Fourth of Biden’s Notes Payable are personal notes and other liabilities of farmers are
assumed by the partnership.
Notes Payable P 32,500

E. The following are the fair market value of the assets:

Biden Trump
Land P 172,000 P 197,000
Building 185,000 154,000
Office Equipment 42,000 60,500
Land P 22,000
Land 22,000

Accumulated Depreciation - Building 15,000

Accumulated Depreciation- Building 8,000

Accumulated Depreciation – Office Equipment 3,000


Accumulated Depreciation – Repair Equipment 5,000
CLOSING OF BOOKS
BIDEN’S BOOK
Accounts Payable 210,000
Allowance for Doubtful Accounts 21,250
Accumulated Depreciation – Building 45,000
Accumulated Depreciation – Repair Equipment 30,000
Cash P 58,000
Accounts Receivable 425,000
Land 172,000
Building 230,000
Office Equipment 50,0000
Prepared by:
TRUMP’S BOOK
Accumulated Depreciation – Building 26,000
Cash P 43,000
Prepaid Rent 10,000
Land 197,000
Building 180,000
BIDEN AND TRUMP PARTNERSHIP

APRIL 1, 2020
DEBIT CREDIT
Cash P 101,000
Prepaid Rent 10,000
Land 369,000
Building 339,000
Total P 2,601,500 P 2,601,500
Prepared by:
ILLUSTRATION 2: FORMATION OF PARTNERSHIP-VALUATION OF CAPITAL
Geejay and Kyla formed a partnership. The following are their contributions:
Geejay Kyla
Cash 150,000
Land 120,000
Building 130,000
Total 310,000 250,000
Note Payable 60,000

Geejay, Capital 250,000
Kyla, Capital 250,000
Total 310,000 250,000
Additional Information:
 Included in accounts receivable is an account amounting to P20,000 which is deemed
uncollectible
 The merchandise inventory is to be valued at P80,000
 The partnership assumed a P10,000 unpaid mortgage on the land
 Partner (Kyla) assumed a P20,000 unpaid mortgage on the building
 The building is under depreciated by P25,000
 The note payable is stated at face amount. However, the interest on note payable to be
accrued at 15% starting April 1 of the year.
Requirement (a): Compute for the adjusted balances of the partners' capital accounts.
Geejay Kyla Partnership

Cash 150,000 150,000
Accounts Receivable (60,000-
20,000) 40,000 40,000
Merchandise Inventory 80,000 80,000
Land 120,000 120,000
Building (130,000-25,000) 105,000 105,000
Total 270,000 225,000 495,000
Note Payable 60,000 60,000

Interest Payable (60,000 x 15% x
9/12) 6,750 6,750
Mortgage Payable-Land 10,000 10,000
Geejay, Capital 203,250 203,250
Kyla, Capital 215,000 215,000
Total 270,000 225,000 495,000
The unpaid mortgage of Partner (Kyla) is not included because it is not assumed by the
partnership.
Prepared by:
Journal Entries:
Cash 150,000
Land 120,000
Building 105,000
Note Payable 60,000
Interest Payable 6,750
Mortgage Payable-Land 10,000
Requirement (b): Assume that a partner's capital shall be increased accordingly by contributing
additional cash to bring the partners' capital balances proportionate to their profit and loss ratio
which partner should provide additional cash and how much is the additional cash contribution?
The partner's profit or loss ratio is Geejay (60%) and Kyla (40%).
Solution:
Using Geejay's capital first, let us determine if Kyla's capital contribution has any deficiency.

Divide by: Profit (Loss) sharing ratio of Geejay 60%
Total 338,750
Multiply by: Kyla's profit (loss) sharing ratio 40%
Minimum capital required of Kyla 135,500
Kyla's Capital 215,000
Deficiency in Kyla's capital contribution 0
Using Kyla's capital, let us determine if Geejay's capital contribution has any deficiency.

Divide by: Profit (Loss) sharing ratio of Kyla 40%
Total 537,500
Multiply by: Geejay's profit (loss) sharing ratio 60%
Minimum capital required of Geejay 322,500
Geejay's Capital 203,250
Deficiency in Geejay's capital contribution 119,250
Conclusion: Geejay shall contribute additional cash of P119,250 to make his contribution
proportionate to his profit sharing ratio.
Reconciliation:
Geejay's Contribution (203,250 + 119,250) 322,500

Kyla's contribution 215,000
Adjusted Total Contributions 537,500
Prepared by:
ILLUSTRATION 3: BONUS ON INITIAL INVESTMENT
Nicca and Bert agreed to form a partnership. Nicca contributed P80,000 cash while Bert
contributed equipment with a fair value of P200,000 and a book value of P180,000. However,
due to the expertise that Nicca will be bringing to the partnership, the partners agreed that they
should initially have an equal interest in the partnership capital.
Requirement: Provide the journal entry to record the initial investment of the partners.
Actual Contributions Bonus Method

Nicca 80,000 (280,000 x 50%) 140,000
Bert 200,000 (280,000 x 50%) 140,000
Total 280,000 0 280,000
Journal Entry:
Cash 80,000
Equipment 200,000
Nicca, Capital 140,000
Bert, Capital 140,000
ILLUSTRATION 4: CASH SETTLEMENT BETWEEN PARNERS
Duterte, Roque and Duque formed a partnership. Their contributions are as follows:
Duterte Roque Duque

Cash 45,000 5,000 80,000
Building 60,000
Total 45,000 65,000 80,000
Additional Information:
 The Building has an unpaid mortgage of P10,000, which the partnership assumes to
repay.
 The partners agreed to equalize their interests. Cash settlements among the partners are to
be made outside the partnership.
Requirements:
a. Which partner(s) shall receive cash payment from the other partner(s)?
b. Provide the entry to record the contributions of the partners.
Duterte Roque Duque Partnership
Cash 45,000 5,000 80,000 130,000
Building 60,000 60,000
Mortgage Payable (10,000) (10,000)
Net Contribution 45,000 55,000 80,000 180,000
Equal Interests (180,000/3) 60,000 60,000 60,000 180,000
Cash Receipt (Payment) 15,000 5,000 (20,000)
Prepared by:
Journal Entry:
Cash 130,000
Building 60,000
Duterte, Capital 60,000
Roque, Capital 60,000
Duque, Capital 60,000
Note: The cash settlement among the partners is not recorded since this is a transaction of the
partners among themselves and not a transaction of the partnership.
ILLUSTRATION 5: ADDITIONAL INVESTMENT (WITHDRAWAL OF INVESTMENT)
Miriam and Santiago agreed to form a partnership. The partnership agreement stipulates the
following:
 Miriam contributed Cash of 1,500,000 and furniture and fixtures that cost 600,000. The
fair value of the furniture and fixtures is 500,000. Miriam has notes payable on the
computer of 100,000 to be assumed by the partnership. Miriam is to have 60% capital
interest in the partnership.
 Santiago contributed cash of 1,000,000.
 The partners agreed to share profit and losses equally.
Requirement: Which partner shall provide additional investment (or withdraw part of his
investment) in order to bring the partners' capital credits equal to their respective interests in the
equity of the partnership?
Solution:
Agreed Initial Capital (1.5m + 500k – 100k + 1m) 2,900,000
Miriam's required capital balance (2,900,000 x 60%) 1,740,000

Santiago's required capital balance (2,900,000 x 40% 1,160,000
Miriam Santiago Total

Actual Contributions 1,900,000 1,000,000 2,900,000
Required Capital Balances 1,740,000 1,160,000 2,900,000
Additional (Withdrawal) (160,000) 160,000 0
PARTNERSHIP OPERATION
The partners share in partnership profits or losses in accordance with their partnership
agreement.
SCENARIO PROFIT LOSS RESULT

Both P & L agreement are given   Follow Agreement
There's profit agreement but no Follow Profit agreement for Both Profit and
loss agreement  x Loss
There's loss agreement but no For Profit, use original capital contribution
profit agreement x  ratio and for loss, follow loss ratio
Prepared by:
There's no profit or loss Follow original capital contribution ratio or
agreement x x both
Article 1797 of the Philippine Civil Code provides that Industrial Partner should not be liable for
the losses. As for the profits, the industrial partner shall receive such share as may be just and
equitable under the circumstances.
The designation of losses and profits cannot be entrusted to one of the partners (Art. 1798). A
stipulation which excludes one or more partners from any share in the profits or losses is void.
Methods of allocating capital balance

1. Agreed Capital
2. Original Capital Investment
3. Beginning Capital
4. Ending Capital
5. Average Capital
Accounting for Salaries, Interest and Bonus
1. Before Salary, Interest, Bonus (assumed if silent)

2. Before Salary and Interest, but after bonus
3. After Salary and interest, but before bonus
4. After Salary, Interest and Bonus
Salaries- normally, an industrial partner receives salary in addition to his share in the
partnership's profits as compensation for his services to the partnership. Salaries are given,
regardless of the result of operation.
Bonuses- the managing partner may be entitled to a bonus for excellent management
performance. Unlike for salaries, a partner is entitled to a bonus only if the partnership earns
profit. The partner is not entitled to any bonus if the partnership incurs loss.
Interest on capital contributions- the partnership agreement may stipulate that capitalist
partners are entitled to an annual interest on their capital contributions. Salaries are given,
regardless of the result of operation.
ILLUSTRATION 1: SALARIES
Leni and Bong Bong's partnership agreement provides for annual salary allowances of P60,000
for Leni and P40,000 for Bong Bong. The salary allowances are to be withdrawn throughout the
period and are to be debited to the partners' respective drawings accounts.
Case 1: With Remaining Profit-different P/L ratios
The partners share profits equally and losses on a 60:40 ratio. The partnership earned profit of
P120,000 before salary allowances.
Prepared by:
Requirements:
a. Compute for the respective shares of the partners in the profit.

b. Provide the journal entries
Requirement a. Solution:
Bong
Leni Bong Total
Salaries 60,000 40,000 100,000
Allocation of Remaining Profit (120,000profit-
100,000salaries)=20,000 (20,000/2) = 10,000 each partner 10,000 10,000 20,000
Share of Partners in Profits 70,000 50,000 120,000
Requirement b:
Journal Entries:
Leni, Drawings 60,000
Bong Bong, Drawings 40,000
Cash 100,000
To record the withdrawal of salary allowances
Income Summary 120,000

Leni, Capital 70,000
Bong bong, Capital 50,000
To record distribution of profits
Leni, Capital 60,000

Bong Bong, Capital 40,000
Leni, Drawings 60,000
Bong Bong, Drawings 40,000
To close the drawings accounts
Case 2: No Remaining Profit-different P/L ratios
The partners share profits equally and losses on a 60:40 ratio. The partnership earned profits of
Requirement: Compute for the respective shares of the partners in the profit.
Bong
Leni Bong Total
Salaries 60,000 40,000 100,000
Allocation of Remaining loss (90,000profit-100,000 salaries) =
(10,000); (-10,000 x 60%) and (-10,000 x 40%) (6,000) (4,000) (10,000)
Case 3: No P/L ratio
The partnership agreement does not state how profits and losses are to be divided. Leni
contributed P15,000, while Bong Bong contributed P35,000. The partnership earned profit of
Prepared by:
Requirement: Compute for the respective shares of the partners in profit.
Bong
Leni Bong Total
Salaries 60,000 40,000 100,000
Allocation of Remaining loss (110,000-100,000 salaries) =
10,000; (10,000 x 15k/50k) and (10,000 x 35k/50k) 3,000 7,000 10,000
THE FORMULAS FOR BONUS:
𝐵𝑒𝑓𝑜𝑟𝑒 𝑆𝑎𝑙𝑎𝑟𝑦, 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝐵𝑜𝑛𝑢𝑠 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑥 𝐵𝑜𝑛𝑢𝑠 𝑅𝑎𝑡𝑒
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐵𝑒𝑓𝑜𝑟𝑒 𝑆𝑎𝑙𝑎𝑟𝑦, 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑎𝑓𝑡𝑒𝑟 𝑏𝑜𝑛𝑢𝑠 = 𝑥 𝐵𝑜𝑛𝑢𝑠 𝑅𝑎𝑡𝑒
1 + 𝐵𝑜𝑛𝑢𝑠 𝑅𝑎𝑡𝑒
𝐴𝑓𝑡𝑒𝑟 𝑆𝑎𝑙𝑎𝑟𝑦 𝑎𝑛𝑑 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑢𝑡 𝐵𝑒𝑓𝑜𝑟𝑒 𝐵𝑜𝑛𝑢𝑠 = (𝑁𝐼 − 𝑆 − 𝐼 )𝑥 𝐵𝑜𝑛𝑢𝑠 𝑅𝑎𝑡𝑒
(𝑁𝐼 − 𝑆 − 𝐼)
𝐴𝑓𝑡𝑒𝑟 𝑆𝑎𝑙𝑎𝑟𝑦, 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑎𝑓𝑡𝑒𝑟 𝑏𝑜𝑛𝑢𝑠 = 𝑥 𝐵𝑜𝑛𝑢𝑠 𝑅𝑎𝑡𝑒
1 + 𝐵𝑅
ILLUSTRATION 2: BONUS
Trump and Biden's partnership agreement stipulates the following:
 Annual Salary allowances of P40,000 for Trump and P10,000 for Biden
 Bonus to Trump of 8% after partner's salaries and bonus
 The profit and loss sharing ratio is 60% and 40%
Case 1: With Profit
The partnership earned profit of 212,000 before deductions for Salaries and Bonus
Requirement: Compute for the respective shares of the partners in the profit.
Trump Biden Total

Salaries 40,000 10,000 50,000
Bonus 12,000 12,000
Allocation of Remaining Profit (212k-50k-12k)=150k;
(150k x 60%) and (150k x 40%) 90,000 60,000 150,000
The bonus is computed as follows:
212,000 − 50,000
𝐴𝑓𝑡𝑒𝑟 𝑆𝑎𝑙𝑎𝑟𝑖𝑒𝑠 𝑎𝑛𝑑 𝐵𝑜𝑛𝑢𝑠 = 𝑥 8% = 12,000
1 + 8%
Case 2: With loss
The partnership incurred loss of 10,000 before deductions for salaries and bonus.
Requirements:
a. Compute for the respective shares of the partners in the profits
Prepared by:
b. By what amount did Trump's capital account change
Requirement a:
Trump Biden Total
Salaries 40,000 10,000 50,000
Bonus 0 0
Allocation of Remaining losses (-10k – 50k) =-60k; (-
60k x 60%) and (-60k x 40%) (36,000) (24,000) (60,000)
Share of Partners in Profits 4,000 (14,000) (10,000)
Requirement b:
Trump's capital increased by P4,000. Notice that a partner's capital can increase despite of
partnership loss. The entry to record the allocation of loss is as follows:
Income Summary 10,000
ILLUSTRATION 3: INTEREST ON CAPITAL
LP and PDP's partnership agreement stipulates the following:
 Annual Salary allowance of P100,000 for LP

 Interest of 10% on the weighted average capital balance of PDP
 The partners share profits and losses equally
 The partnership earned profit of P200,000
 The movements in PDP's capital account are as follows:
PDP Capital
Investment Withdrawal
Jan-01 60,000
Apr-01 20,000
Jul-31 30,000
Sep-30 40,000
Dec-31 10,000
Requirement: Compute for the respective shares of the partners in profit.
Solution:
Months Outstanding/Total
Balances months in a year Weighted Average
Jan-01 60,000 12/12 60,000
Apr-01 20,000 9/12 15,000
Jul-31 (30,000) 5/12 (12,500)
Sep-30 40,000 3/12 10,000
Dec-31 10,000 0/12 0
Weighted Average capital balance 72,500
Prepared by:
LP PDP Total
Salaries 100,000 100,000
Interest (72,500 x 10%) 7,250 7,250
Allocation of Remaining Profit (200,000-100,000-
7,250)=92,750; (92,750/2) = 46,375 for each partner 46,375 46,375 92,750
ILLUSTRATION 3.1: INTEREST ON CAPITAL AND BONUS
BUJPIA and CBAA's partnership agreement stipulates the following:
 Monthly Salary of P5,000 for BUJPIA

 20% bonus to BUJPIA, based on profit before deductions for salary, interest and bonus
 10% interest on the weighted average capital of CBAA
 The partnership reported profit of P30,000, net of salary, interest and bonus.
 CBAA's weighted average capital balance is P100,000
Requirement: How much is the bonus of BUJPIA?
Solution:
Profit after Salary, Interest and Bonus 30,000

Add back: Annual Salary (5,000 x 12 months) 60,000
Add back: Interest on Capital (100k x 10%) 10,000
Profit before annual salary and interest but after bonus 100,000
Divide by: (100% less 20% bonus rate) 80%
Profit before annual salary, interest and bonus 125,000
Multiply by: Bonus rate 20%
Bonus 25,000
ILLUSTRATION 3.2: INTEREST ON CAPITAL-PARTIAL YEAR
Sinas and Bato formed a partnership on March 1, 2020. The partnership agreement stipulates a
10% interest on Bato's weighted average capital balance. The movements in Bato's capital
account are as follows:
Investment Withdrawal
Mar-01 80,000
Jul-31 30,000
Sep-30 40,000
Dec-31 10,000
Requirement: Compute for the interest on the weighted average balance of Bato's capital.
Prepared by:
Solution:
Months Outstanding/Total
Balances months in a year Weighted Average
Mar-01 80,000 10/10 80,000
Jul-31 (30,000) 5/10 (15,000)
Sep-30 40,000 3/10 12,000
Dec-31 10,000 0/10 0
Weighted Average capital balance 77,000
Multiple by: Interest Rate 10%
Total 7,000
Multiply by: 10/12
Interest on Weighted Average Capital 6,417
PARTNERSHIP DISSOLUTION
- is the change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on as distinguished from winding up of the business of the partnership.
-On dissolution, the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.
-One of the characteristic of the partnership is that it has limited life, in the sense that the
partnership agreement can be easily dissolved.
CAUSES OF DISSOLUTION
1. Admission of a 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 Delectus Personae.
 By Purchase of an interest from one or more of the existing partners

-payment is made personally to the partner whom the interest is obtained. A debit
to the capital account of the selling partner and a credit to the capital account of
the buying partner
 Investment of assets in the partnership by the new partner
-will increase the total assets and the total partner's equity
-the consideration paid by the incoming partner is recorded in the partnership
books
Definition of terms under investment of assets:
 Total Contributed Capital (TCC)- sum of the capital balances of the old
partners and the actual investment of the new partner.
 Total Agreed Capital (TAC)-total capital of the partnership after
considering the capital credits given to each of the partners. Under the
bonus method, TAC = TCC.
 Bonus-amount of capital or equity transferred by one partner to another
partner
 Capital Credit-equity of a partner in the new partnership and is obtained
by this formula; TAC x %interest of the partner.
Prepared by:
2. Withdrawal and retirement of a partner
 by selling his equity interest to one or more of the remaining partners – 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
 by selling his equity interest to an outsider 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
 by selling his equity interest to the partnership- reduce the assets and the owner's equity
of the partnership. The withdrawing partner may receive an amount equal to, greater than
or less than the balance of his capital account.
3. Death of a Partner
-the balance in the capital account of the deceased partner should be transferred to a
liability account or payable to the estate.
4. Incorporation of the Partnership
-Partnership to Corporation
ILLUSTRATION 1: PURCHASE OF INTEREST
The capital balances and profit and loss ratios of the partners in Funds Co. are as follows:
Capital P/L
Duque 80,000 40%
Philhealth 120,000 30%
Billions 160,000 30%
360,000
Case 1: Purchase of Interest from one partner
Money purchases one-half of Billions' capital interest for P96,000.
Requirement: Provide the journal entry to record the transaction.
Billions, Capital 80,000

Money, Capital 80,000
To record the admission of Money to the partnership
The P80,000 payment of Money to Billions is not recorded in the partnership books.
Case 2: Purchase of interest from more than one partner
Money purchases 25% of Duque's, Philhealth's, Billion's capital interest for P120,000.
Requirements:
a. Provide the journal entry to record the transaction.

b. How much are the capital balances of the partners after the admission of Money
c. How much is the gain or loss to be recognized in the partnership books
d. How much is the payment of Money divided between the old partners and how much are the
old partners respective personal gains?
Prepared by:
Requirement a.
Duque, Capital (80k x 25%) 20,000

Philhealth, Capital (120k x 25%) 30,000
Billions, Capital (160k x 25%) 40,000
Money, Capital 90,000
Requirement b.
Duque Philhealth Billions Money Total
Capital, beg 80,000 120,000 160,000 0 360,000
Sale of Interest (20,000) (30,000) (40,000) 90,000 0
Capital, ending 60,000 90,000 120,000 90,000 360,000
Requirement c.
Zero. No gain or loss is recognized in the partnership's books when a new partner is admitted.
Requirement d.
Duque Philhealth Billions Total
Share in Payment of Money (120k credit
to money) x 40%; x 30%; x 30% 48,000 36,000 36,000 120,000
Debit to Capital Account 20,000 30,000 40,000 90,000
Personal Gain (Loss) 28,000 6,000 (4,000) 30,000
Illustration 2: Revaluation of Assets
China purchases 20% of Luzon's and Visayas' capital interests for P100,000. The carrying
amounts and fair values of the partnership's assets immediately before China's admission are as
follows:
Carrying Amount Fair Value

Cash 20,000 20,000
Building 340,000 390,000
Accounts Payable 10,000 10,000
Luzon's, Capital (40%) 130,000 ?
Visayas, Capital (60%) 220,000 ?
Requirements:
a. Provide the journal entries.

b. Compute for the partners' capital balances after China's admission
Requirement a.
Adjustment of the existing partners capital balances for the revaluation increase before recording
the admission of China.
Building 50,000
Luzon's, Capital 20,000
Visayas, Capital 30,000
Prepared by:
Adjusted capital balances are as follows:
Luzon Visayas Total
Unadjusted Capital 130,000 220,000 350,000
Share in Revaluation 20,000 30,000 50,000
Adjusted Capital 150,000 250,000 400,000
China's admission is recorded as follows:

Luzon's, Capital(150k x 20%) 30,000
Visayas, Capital (250k x 20%) 50,000
China's Capital 80,000
Requirement b:
Luzon Visayas China Total
Adjusted Capital 150,000 250,000 0 400,000
Sale of Interest to China (30,000) (50,000) 80,000 0
Adjusted Capital 120,000 200,000 80,000 400,000
ILLUSTRATION 3: INVESTMENT IN THE PARTNERSHIP
Madara and Obito are partners with capital balances of P800,000 and P400,000 respectively.
They share profits in the ratio of 3:1. The partners agreed to admit Black Zetsu as a member of
the firm. The foregoing information will be the basis of the following cases.
Case 1: Bonus to old partner-total agreed capital is stated
Assume that Black Zetsu invested P500,000 for a one-fourth interest in the business. The
partners decided not to revalue the assets of the partnership and that the total agreed capital is
P1,700,000.
Requirement:
a. Compute for the bonus for old or new partner/s.
b. Provide the journal entry for this transaction
TCC Bonus TAC

Madara 800,000 56,250 856,250
Obito 400,000 18,750 418,750
Total 1,200,000 75,000 1,275,000
Black Zetsu 500,000 (75,000) 425,000*
Total 1,700,000 0 1,700,000
*1,700,000 x ¼ = P425,000
Distribution of Bonus:
Madara: 75,000 x ¾ = 56,250
Obito: 75,000 x ¼ = 18,750
Cash 500,000
Black Zetsu, Capital 500,000
to record the investment of Zetsu
Prepared by:
Madara, Capital 56,250
Obito, Capital 18,750
to record the bonus to old partners
Case 2: Bonus to old partners-total Agreed Capital is not explicitly stated
Assume that Black Zetsu invested P800,000 in the business. Out of the total cash investment,
P200,000 is considered as a bonus to Partners Madara and Obito.
Requirement:
a. Compute for the bonus for old or new partner/s.
b. Provide the journal entry for this transaction
TCC Bonus TAC

Madara 800,000 150,000 950,000
Obito 400,000 50,000 450,000
Total 1,200,000 200,000 1,400,000
Black Zetsu 800,000 (200,000) 600,000
Total 2,000,000 0 2,000,000
Madara: 200,000 x ¾ =150,000
Obito: 200,000 x ¼ = 50,000
Cash 800,000

to record the bonus to old partners
Case 3: Bonus to New Partner-total agreed capital is stated
Assume that Black Zetsu invested P480,000 for a one-third interest in the business. The total
agreed capital is P1,680,000.
TCC Bonus TAC
Madara 800,000 (60,000) 740,000
Obito 400,000 (20,000) 380,000
Total 1,200,000 (80,000) 1,120,000
Black Zetsu 480,000 80,000 560,000*
Total 1,680,000 0 1,680,000
*1,680,000 x 1/3 = 560,000

Madara: 80,000 x ¾ = (60,000)
Obito: 80,000 x ¼ = (20,000)
Prepared by:
Cash 480,000

to record the bonus to new partner
Case 4: Bonus to New Partner-total agreed capital is not explicitly stated
Assume that Black Zetsu invested P600,000 for a 50% interest in the business.
TCC Bonus TAC

Madara 800,000 (225,000) 740,000
Obito 400,000 (75,000) 380,000
Total 1,200,000 (300,000) 1,120,000
Black Zetsu 600,000 300,000 900,000*
Total 1,800,000 0 1,800,000
*1,800,000 x 50% = 900,000

Madara: 300,000 x ¾ = 225,000
Obito: 300,000 x ¼ = 75,000
Cash 600,000

to record the bonus to new partner
ILLUSTRATION 4: WITHDRAWAL OF A PARTNER
Suppose that Uzumaki Naruto is retiring in midyear from the partnership of Uchiha Sasuke,
Sakura Haruno and Uzumaki Naruto because of family relocation. Physical distance will prevent
her from coping with the daily rigors of their fashion and beauty consulting business. After the
books have been adjusted for the semi-annual profits but before revaluation, their capital
balances are as follows:
Uchiha Sasuke, Capital P1,080,000

Sakura Haruno, Capital 860,000
Uzumaki, Naruto Capital 420,000
An independent appraiser revalued their cosmetics inventory to P760,000 (a decrease of

120,000) and their land to P2,020,000 (an increase of 920,000). The profit and loss ratio of the
partners is 1:2:1:
Prepared by:
The entry to record the revaluation of assets follow:
Uchiha Sasuke, Capital 30,000
Uzumaki Naruto, Capital 30,000
Cosmetics Inventory 120,000
Computation:
Uchiha Sasuke, Capital 120,000 x ¼= 30,000
Sakura Haruno, Capital 120,000 x 2/4 =60,000
Uzumaki Naruto, Capital 120,000 x ¼ = 30,000
Land 920,000
Computation:
Uchiha Sasuke, Capital 920,000 x ¼= 230,000
Uzumaki Naruto, Capital 920,000 x ¼ = 230,000
After Revaluation, the capital balances of the partners are shown below:
Uchiha Sasuke, Capital P1,280,000

Sakura Haruno, Capital 1,260,000
Uzumaki, Naruto Capital 620,000
Case 1: Withdrawal at book value
Assume that Uzumaki Naruto agreed to accept payment equal to his interest. The entry to record
the payment of cash and the closing of his capital will be:

Cash 620,000
To record retirement of Naruto
Case 2: Withdrawal at more than book value
Assume that Uzumaki Naruto demanded a P800,000 settlement of his interest because he firmly
believed that he has contributed so much to the success of the business. The remaining partners
agreed for old time's sake.

Cash 800,000
To record retirement of Naruto with bonus from continuing partners
Computation:
Uchiha Sasuke, Capital 180,000 x 1/3= (60,000)
Sakura Haruno, Capital 920,000 x 2/3 =(120,000)
Prepared by:
Case 3: Withdrawal at less than book value
Assume that Uzumaki Naruto is very eager to retire and is willing to accept settlement at
P560,000.

Cash 560,000
Computation:
Uchiha Sasuke, Capital 60,000 x 1/3= 20,000
Case 4: Death of a Partner-settlement of interest by partnership
Use the same information in Case 2, except that Naruto dies.

Liability to the estate of Naruto 800,000
Liability to the Estate of Naruto 800,000

Cash 800,000
To record the settlement of estate liability
PARTNERSHIP LIQUIDATION
-it is the termination of the business operations or the winding up of affairs. It is a process by
which
1. assets are converted into cash or what we known as Realization,

2. liabilities are settled, and
3. any remaining amount is distributed to the owners
RULES IN SETTLING ACCOUNTS AFTER DISSOLUTION
Assets of the Partnership consist of the following:
1. Partnership property
2. Additional contributions of the partners needed for the payment of all liabilities consistent
with the discussion below.
Settlement of Claims
The available cash of the partnership is used to settle claims in the following order of priority:
1. Outside Creditors
Prepared by:
2. Inside Creditors (e.g., payable to partners
3. Owners' capital balances
4. Owners' share in profits
Right of Offset
As shown above, a loan payable to a partner has a higher priority over the partner's capital
balance. However, the legal right of offset allows a deficit in a partner's capital account to be
offset by a loan payable to that partner
Insufficient Partnership Assets
In cases when the partnership assets are insufficient to settle all liabilities, the partners should
make additional contributions in the partnership. In the absence of any agreement, the basis of
the additional contributions shall be the ratio of their capital contribution.
Distribution of Separate Properties of an Insolvent Partner

1. Those owing to separate Creditors
2. Those owing to partnership Creditors
3. Those owing to partners by way of additional contribution when the assets of the partnership
were insufficient to settle all obligations.
Methods of Partnership Liquidation
Lump Sum Installment

1. All of the non-cash assets are
converted into cash 1. Some of the non-cash assets are converted to cash
2. The total gain or loss on the sale 2. The carrying amount of the unsold non-cash assets is
is allocate to the partners' capital considered as a loss. This is allocated to the partner
balances based on their P/L ratios capital balances based on their P/L ratios
3. The liabilities to outside creditors 3. The liabilities to outside creditors are partially or
are fully settled fully settled
4. The liabilities to inside creditors are partially or fully
4. The liabilities to inside creditors settled but only after the full settlement of the liabilities
are fully settled to outside creditors
5. Any remaining cash is distributed 5. If both the liabilities to outside and inside creditors
to the owners in full settlement of are fully settled, any remaining cash is distributed to the
their interests owners as partial settlement of their interest.
**In installment liquidation it may be presented in a formal manner through either:

a. Safe Payments Schedule – it shows how much cash can be safely paid to the partners during
installment liquidation, which avoids any overpayment
b. Cash Priority Program- this schedule determines which partner shall be paid first and which
partner shall be paid last, after all the liabilities are settled. This schedule can be prepared even
prior to the sale of any asset.
Prepared by:
ILLUSTRATION 1: PARTNERSHIP LIQUIDATION- LUMP SUM PAYMENTS FOR NON-CASH ASSETS
Andrhea Sanchez, Danrie Intacto and Jandel Dela Pena are partners in a public relations firm and share profits and losses in the ratio of 2:2:1, respectively. They
decided to liquidate their business on December 31, 2016. The following is the condensed statement of financial position prepared prior to liquidation.
Sanchez, Intacto, Dela Pena

Statement of Financial Position Case 1: Loss on Realization fully absorbed by Partners' Capital Balances
December 31, 2020 Assume that the non-cash assets are sold at P5,000,000
Assets Case 2: Loss on Realization resulting to a Capital Deficiency with Right of Offset
Cash 400,000 Assume that the non-cash assets are sold at P3,700,000
Non-Cash Assets 6,800,000
Total Assets 7,200,000 Case 3: Loss on Realization resulting to a Capital Deficiency to a Personally Solvent
Assume that the non-cash assets are sold at P3,400,000.
Liabilities and Capital
Case 4: Loss on Realization Resulting to a Capital Deficiency to a Personally Insolvent Partner
Liabilities 2,240,000 Assume the same facts as in Illustration 3 except that Danrie Intacto is personally insolvent and is unable to
Intacto, Loan 100,000 Make additional investments for her remaining deficiency.
Dela Pena, Loan 160,000
Sanchez, Capital 1,900,000 Case 5: Partnership Insolvent but Partners Personally Solvent
Intacto, Capital 1,200,000 Assume that the non-cash assets are sold at P1,800,000
Dela Pena, Capital 1,600,000
Total Liabilities and Capital 7,200,000
Prepared by:
Non-Cash Intacto, Dela Pena, Sanchez, Intacto, Dela Pena,
CASE 1 Cash Assets Liabilities Loan Loan Capital Capital Capital
P/L Percentages 40% 40% 20%
Balances before Liquidation 400,000 6,800,000 2,240,000 100,000 160,000 1,900,000 1,200,000 1,600,000
Sale of Non-Cash Assets and
Distribution of Losses 5,000,000 (6,800,000) (720,000) (720,000) (360,000)
Balances 5,400,000 0 2,240,000 100,000 160,000 1,180,000 480,000 1,240,000
Payment of Liabilities to
Outsiders (2,240,000) (2,240,000)
Balances 3,160,000 0 100,000 160,000 1,180,000 480,000 1,240,000
Payment to Partners (3,160,000) (100,000) (160,000) (1,180,000) (480,000) (1,240,000)
0 0 0 0 0 0
Journal Entries:
Payment of Liabilities
Sale of Non-Cash Assets Liabilities 2,240,000
Cash 2,500,000 Cash 2,240,000
Loss on Realization 900,000
Non-Cash Assets 3,400,000 Distribution of Cash to Partners
Intacto, Loan 100,000
Distribution of Loss on Realization based on Partners' P/L ratio Dela Pena, Loan 160,000
Sanchez, Capital 720,000 Sanchez, Capital 1,180,000
Intacto, Capital 720,000 Intacto, Capital 480,000
Dela Pena, Capital 360,000 Dela Pena, Capital 1,240,000
Loss on Realization 1,800,000 Cash 3,160,000
Prepared by:
Distribution of Losses 3,700,000 (6,800,000) (1,240,000) (1,240,000) (620,000)
Balances 4,100,000 0 2,240,000 100,000 160,000 660,000 (40,000) 980,000
Outsiders (2,240,000) (2,240,000)
Balances 1,860,000 0 100,000 160,000 660,000 (40,000) 980,000
Exercise Right of Offset of Intacto (40,000) 40,000
Balances 1,860,000 0 60,000 160,000 660,000 0 980,000
Payment to Partners (1,860,000) (60,000) (160,000) (660,000) (980,000)
0 0 0 0 0
Sale of Non-Cash Assets

Exercise Right of Offset
Cash 3,700,000
Loss on Realization 3,100,000
Intacto, Capital 40,000
Distribution of Cash to Partners
Distribution of Loss on Realization based on Partners' P/L
ratio Intacto, Loan 60,000
Sanchez, Capital 1,240,000 Dela Pena, Loan 160,000
Intacto, Capital 1,240,000 Sanchez, Capital 660,000
Dela Pena, Capital 620,000 Dela Pena, Capital 980,000
Loss on Realization 3,100,000 Cash 1,860,000
Liabilities 2,240,000
Cash 2,240,000
Prepared by:
Balances 3,800,000 0 2,240,000 100,000 160,000 540,000 (160,000) 920,000
Outsiders (2,240,000) (2,240,000)
Balances 1,560,000 0 100,000 160,000 540,000 (160,0000) 920,000
Balances 1,560,000 0 160,000 540,000 (60,000) 920,000
Additional Investment by Tria 60,000 60,000
Balances 1,620,000 160,000 540,000 0 920,000
Payment to Partners (1,620,000) (160,000) (540,000) (920,000)
Exercise Right of Offset

Sale of Non-Cash Assets
Cash 3,400,000
Additional Investment by Deficient Partner
Cash 60,000
Distribution of Loss on Realization based on Partners' P/L ratio
Sanchez, Capital 1,360,000
Intacto, Capital 1,360,000
Distribution of Cash to Partners
Dela Pena, Capital 680,000
Dela Pena, Loan 160,000
Sanchez, Capital 540,000
Dela Pena, Capital 920,000
Liabilities 2,240,000
Cash 1,620,000
Cash 2,240,000
Prepared by:
Balances 3,800,000 0 2,240,000 100,000 160,000 540,000 (160,000) 920,000
Outsiders (2,240,000) (2,240,000)
Balances 1,560,000 0 100,000 160,000 540,000 (160,0000) 920,000
Balances 1,560,000 0 160,000 540,000 (60,000) 920,000
Additional losses to Sanchez
and Dela Pena (40,000) 60,000 (20,000)
Balances 1,560,000 160,000 500,000 0 900,000
Payment to Partners (1,560,000) (160,000) (500,000) (900,000)
Sale of Non-Cash Assets Exercise Right of Offset
Cash 3,400,000 Intacto, Loan 100,000
Loss on Realization 3,400,000 Intacto, Capital 100,000
Deficiency Absorbed by Solvent Partners
Distribution of Loss on Realization based on Partners' P/L ratio Sanchez, Capital 40,000
Sanchez, Capital 1,360,000 Dela Pena, Capital 20,000
Intacto, Capital 1,360,000 Intacto, Capital 60,000
Dela Pena, Capital 680,000 Distribution of Cash to Partners
Loss on Realization 3,400,000 Dela Pena, Loan 160,000
Payment of Liabilities Sanchez, Capital 500,000
Liabilities 2,240,000 Dela Pena, Capital 900,000
Cash 2,240,000 Cash 1,560,000
Prepared by:
Distribution of Losses 1,800,000 (6,800,000) (2,000,000) (2,000,000) (1,000,000)
Balances 2,200,000 0 2,240,000 100,000 160,000 (100,000) (800,000) 600,000
(partial) (2,200,000) (2,200,000)
Balances 0 40,000 100,000 160,000 (100,000) (800,000) 600,000
Balances 40,000 0 160,000 (100,000) (700,000) 600,000
Additional Investment 800,000 100,000 700,000
Balances 800,000 40,000 160,000 0 0 600,000
Payment of Liabilities (full) (40,000) (40,000)
Payment to Partners (760,000) (160,000) (600,000)
Sale of Non-Cash Assets Exercise Right of Offset Distribution of Cash to Partners

Cash 1,800,000 Intacto, Loan 100,000 Dela Pena, Loan 160,000
Loss on Realization 5,000,000 Intacto, Capital 100,000 Dela Pena, Capital 600,000
Non-Cash Assets 6,800,000 Cash 760,000
Additional Investment by Partners
Distribution of Loss on Realization based on Partners' P/L ratio Cash 800,000
Sanchez, Capital 2,000,000 Sanchez, Capital 100,000
Intacto, Capital 2,000,000 Intacto, Capital 700,000
Dela Pena, Capital 1,000,000
Loss on Realization 5,000,000 Payment of Liabilities (Full)
Payment of Liabilities (Partial) Liabilities 40,000
Liabilities 2,200,000 Cash 40,000
Cash 2,200,000
Prepared by:
ILLUSTRATION 2: INSTALLMENT METHOD-SAFE PAYMENTS
The balance sheet for Helaisa Tadeo, Abigail Tayao and Ellaine Bunagan, partners sharing profits in the ratio of 4:3:3 respectively, showed the following balances on
April 30, 2020, just before liquidation:
Tadeo, Tayao, Bunagan  May 31- Part of the assets are sold at book value, P300,000.
Statement of Financial Position
April 30, 2020  June 30- the remaining assets are sold at P210,000.
 Assume that available cash is distributed to the proper parties at the end of May and at the end of June.
Assets
Cash 315,000
 Assume further that partners are solvent and that any partner who is deficient made appropriate payment to
Non-Cash Assets 1,250,000 partnership on July 31.
Total Assets 1,565,000
Liabilities 435,000
Bunagan, Loan 30,000
Tadeo, Capital 600,000
Tayao, Capital 350,000
Bunagan, Capital 150,000
Total Liabilities and
Capital 1,565,000
Prepared by:
Schedule A.
Tadeo, Tayao, Bunagan
Schedule of Safe Payments
May 31, 2020
Tadeo Tayao Bunagan

Cash Balances before Distribution of Cash 600,000 350,000 150,000
Cash balance 30,000
Partners' Total Interests 600,000 350,000 180,000
Restricted Interests- possible loss if P950,000 if nothing is
realized on the remaining non-cash assets; 4:3:3 ratio (380,000) (285,000) (285,000)
Balances 220,000 65,000 (105,000)
Restricted Interests- additional possible loss of P105,000 if
Bunagan is unable to satisfy her possible deficiency; 4:3 ratio (60,000) (45,000) 105,000
Free Interests- amounts to be paid to partners 160,000 20,000 0
Schedule B.
Tadeo, Tayao, Bunagan
Schedule of Safe Payments
June 30, 2020
Tadeo Tayao Bunagan

Cash Balances before Distribution of Cash 144,000 108,000 -42,000
Restricted Interests- additional possible loss of P42,000 if
Bunagan is unable to satisfy her possible deficiency; 4:3 ratio (24,000) (18,000) 42,000
Free Interests- amounts to be paid to partners 120,000 20,000 0
Prepared by:
TADEO, TAYAO, BUNAGAN
STATEMENT OF LIQUIDATION
MAY 1 TO JULY 31, 2016
Cash Non- Cash Assets Liabilities Bunagan, Loan Tadeo, Capital Tayao, Capital Bunagan, Capital
Balances before Liquidation 315,000 1,250,000 435,000 30,000 600,000 350,000 150,000
May-Sale of Non-Cash Assets 300,000 (300,000)
Balances 615,000 950,000 435,000 30,000 600,000 350,000 150,000
May- Payment of Liabilities (435,000) (435,000)
Balances 180,000 950,000 0 30,000 600,000 350,000 150,000
May- Installment to Partners (Schedule A) (180,000) (160,000) (20,000)
Balances 0 950,000 30,000 440,000 330,000 150,000
June- Sale of Non- Cash Assets and
Distribution of Losses 210,000 (950,000) (296,000) (222,000) (222,000)
Balances 210,000 0 30,000 144,000 108,000 (72,000)
Right of Offset by Bunagan (30,000) 30,000
Balances 210,000 0 144,000 108,000 (42,000)
June- Installment to Partners (Schedule B) (210,000) (120,000) (90,000)
Balances 0 24,000 18,000 (42,000)
July-Investment 42,000 42,000
Balances 42,000 24,000 18,000 0
July- Final Installment (42,000) (24,000) (18,000)
Prepared by:
JOURNAL ENTRIES:
Sale Of Non- Cash Assets Exercise of Right of Offset

Cash 300,000 Bunagan, Loan 30,000
Non-Cash Assets 300,000 Bunagan, Capital 30,000
Payment of Liabilities June Distribution of Cash to Partners

Liabilities 435,000 Tadeo, Capital 120,000
Cash 435,000 Tayao, Capital 90,000
Cash 210,000
May Distribution of Cash to Partners
Tadeo, Capital 160,000 Additional Investment by a Partner
Tayao, Capital 20,000 Cash 42,000
Cash 180,000 Bunagan, Capital 42,000
Sale of Non-Cash Assets and Distribution of Loss on Realization July Distribution of Cash to Partners
Cash 210,000 Tadeo, Capital 24,000
Tadeo, Capital 296,000 Tayao, Capital 18,000
Tayao, Capital 222,000 Cash 42,000
Bunagan, Capital 222,000
Non-Cash Assets 950,000
Prepared by:
ILLUSTRATION 3: INSTALLMENT METHOD- CASH PRIORITY PROGRAM
Kenneth Lingat, Rein Ortega, and Joy Haidee divide profits 60%, 25%, and 15% respectively. A balance sheet on June 30, 2016, just before partnership liquidation,
showed the following balances:
Lingat, Ortega and Haidee  Certain Assets are sold in July at book value of P500,000
Statement of Financial Position
 Available Cash is distributed to appropriate parties
June 30, 2016
 Remaining assets are sold in August for P150,000
Assets
Cash 50,000  Cash is distributed in final settlement
Total Assets 975,000

Liabilities 350,000
Kenneth Lingat, Capital 450,000
Rein Ortega, Capital 100,000
Joy Haidee, Capital 75,000
Total Liabilities and Capital 975,000
Prepared by:
Lingat, Ortega and Haidee
Cash Priority Program
June 30, 2016
Cash Priority Payments to

Lingat Ortega Haidee Lingat Ortega Haidee
Capital Balances 450,000 100,000 75,000
Add: Loan Balances
Partners' Total Interests 450,000 100,000 75,000
Divided by: Profit and Loss Ratio 60% 25% 15%
Loss Absorption Balances 750,000 400,000 500,000
Priority I: To Lingat (250,000) 150,000*
500,000 400,000 500,000
Priority II: To Lingat and Haidee (100,000) (100,000) 60,000** P15,000***
400,000 400,000 400,000 210,000 0 15,000
Priority III: Amounts in excess of
P225,000*** based on P/L Ratio 60% 25% 15%
* P250,000 x 60% = P150,000.

** P100,000 x 60% = P60,000; P100,000 x 15% = P15,000.
*** P210,000 + P15,000 = P225,000.
Prepared by:
Lingat, Capital Ortega, Capital Haidee, Capital Total
Balances before Liquidation 450,000 100,000 75,000 625,000
July- Sale of Non-Cash Assets, No Gain or Loss
Balances 450,000 100,000 75,000 625,000
July- Payments to Partners (190,000) (10,000) (200,000)
Balances 260,000 100,000 65,000 425,000
June- Sale of Non-Cash Assets and Dist. Of
Losses (165,000) (68,750) (41,250) (275,000)
Balances 95,000 31,250 23,750 150,000
August- Payments to Partners, Balance of Priority
II (20,000) (5,000) (25,000)
Balances after 1st Two Priorities 75,000 31,250 18,750 125,000
Ratio of Capital Balances 60% 25% 15% 100%
Prepared by:
For the month of July, 2016 For the month of August, 2016
1. Sale of Non-Cash Assets 1. Sale of Non-Cash Assets

Cash 500,000 Cash 150,000
Non-Cash Assets 500,000 Loss on Realization 275,000
2. Payment of Liabilities
Distribution of Loss on Realization based on
Liabilities 350,000 Partners' P/L Ratio
Cash 350,000 Kenneth Lingat, Capital 165,000
Rein Ortega, Capital 68,750
3. Distribution of Cash to Partners Joy Haidee, Capital 41,250
Kenneth Lingat, Capital 190,000 Loss on Realization 275,000
Joy Haidee, Capital 10,000
Cash 200,000 2. Distribution of Cash to Partners
Kenneth Lingat, Capital 95,000
Computation: Rein Ortega, Capital 31,250
Lingat Haidee Total Joy Haidee, Capital 23,750
Priority I: To Lingat 150,000 150,000 Cash 150,000
Priority II: 60:15 ratio 50,000
Computation:
Lingat: P50,000 x 60/75 40,000 Lingat Ortega Haidee Total
Haidee: P50,000 x 15/75 10,000 Priority II: Balance of P25,000 25,000
190,000 10,000 200,000 Lingat: P25,000 x 60/75 20,000
Haidee: P25,000 x 15/75 5,000
Priority III: To all partners in the ration of 60:25:15 125,000
Lingat: P125,000 x 60% 75,000
Ortega: P125,000 x 25% 31,250
Haidee: P125,000 x 15% 18,750
95,000 31,250 23,750 150,000
Prepared by:
REFERENCES:
Ballada, W., & Ballada, S. (2020). Basic Financial Accounting and Reporting. Manila,
Philippines: DomDane Publishers.
Ballada, W., & Ballada, S. (2020). Partnership and Corporation. Manila, Philippines: DomDane
Publishers.
Millan, Z., (2020). Accounting for Special Transactions. #21 Ville., Sto. Tomas, Baguio City,
Philippines: Bandolin Enterprise.
---We are never given guarantees in life. We are only given the opportunities and it is up to us to
make the BEST out of it.---
---Dream big, and aim your goal toward the stars. You may not be able to reach them, but for
sure they will guide your way through a satisfying successful life. Everything being built is the
fruit of a dream. Dream big but above all, act upon it.---
Prepared by:

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PARTNERSHIP

- Each owner in the partnership is called a partner.

1. Mutual Contribution- there cannot be a partnership without contribution of money, property

3. Co-Ownership of Contributed Assets- each partner is a co-owner of the properties invested

5. Limited Life- a partnership is easily dissolved;

9. Ease of Formation- as compared to corporations, the formation of a partnership requires less

ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP

Advantages versus Proprietorships

1. Brings greater financial capability to the business

Advantages versus Corporations

1. Easier and less expensive to organize

1. Easily dissolved and thus unstable compared to a corporation

DIFFERENCES PARTNERSHIP CORPORATION

According to the Revised

c. Particular Partnership- The object of the partnership is determinate-its use or fruit,

a. Commercial or Trading Partnership- One formed for the transaction of business

b. Professional or non-trading partnership- One formed for the exercise of profession

5. According to legality of existence

c. Capitalist-Industrial Partners- furnishes both

Other kinds of Partners

d. Ostensible Partner-direct opposite of Dormant partner or one who participates in the

b. the partnership has a capital of P3,000 or more.

ACCOUNTING FOR PARTNERSHIPS

Partner's Capital Account

Partner's Drawing Account

LOANS RECEIVABLE FROM OR PAYABLE TO PARTNERS

STAGES IN THE LIFE OF THE PARTNERSHIP

1. Partnership Formation- accounting for initial investments to the partnership

3. Partnership Dissolution- changes in the partnership agreement or relations among the

4. Partnership Liquidation- realization of the assets of the partnership and settlement of

Natural Person + Natural Person

MAIN ACCOUNTING ISSUE FOR PARTNERSHIP FORMATION

1. Valuation of Investments by Partners

Contributed Capital Measurement

2. Re-alignment of Capital Contribution VS. Agreed Capital

a. Total Contributed Capital = Total Agreed Capital Use Bonus Method

ADJUSTMENT OF ACCOUNT PRIOR TO FORMATION

ILLUSTRATION 1: FORMATION OF PARTNERSHIP- WITH REVALUATION OF

Notes Payable 130,000 90,000

A. The Accounts Receivable of Biden is estimated to be 95% collectible while Trump is

Allowance for Doubtful Collection P 13,750

Allowance for Doubtful Collection 14,800

Biden, Capital P 62,000

Trump, Capital 64,000

Notes Payable P 32,500

E. The following are the fair market value of the assets:

Biden, Capital 15,000

Trump, Capital 8,000

Biden, Capital 3,000

Trump, Capital 7,300

Biden, Capital 5,000

BIDEN AND TRUMP PARTNERSHIP

Note Payable 60,000

Geejay Kyla Partnership

Note Payable 60,000 60,000

Geejay, Capital 203,250

Kyla, Capital 215,000

Geejay's Contribution (203,250 + 119,250) 322,500