PARTNERSHIP

ACCOUNTING
FORMATION,OPERARTION,
DISSOLUTION AND LIQUIDATION
 BASIC
PRINCIPLES AND
PARTNERSHIP
FORMATION
LEARNING OBJECTIVES
Knows how to differentiate between the
accounting for partnerships, sole
proprietorships, and corporations.
Can state the valuation of contributions of
partners.
Can account for the initial investments of
the partners to the partnership.
LET’S RECALL!
Can you still remember the
definition of partnership?
LET’S RECALL! Definition in the Civil Code
Can you still remember the
definition of partnership? “by the contract of partnership
two or more persons contribute
money, property or industry into a
common fund with the intention
of dividing the profits among
themselves”
LET’S RECALL!
How does a partnership differ from
a corporation and a joint venture?
LET’S RECALL! Partnership vs Corporation
-difference in its mode of creation

How does a partnership differ from

a corporation and a joint venture?

Partnership vs Joint Venture

-difference length of existence
CHARACTERISTIC
a. Ease of Formation
b. Separate Legal Personality
c. Mutual Agency
d. Co-ownership of Property
e. Co-ownership of Profits
f. Limited life
g. Unlimited Liability
h. Strictness in Transferring ownership
 ACCOUNTING FOR
PARTNERSHIP OPERATION
What is the standard used by
Partnership?
1. Full PFRS
2. PFRS for SMEs
3. PFRS for SE
4. PFRS for MSMEs
5. 1,2,3, or 4
6. None of the above
PARTNERSHIP LIFE CYCLE?
Partnership Partnership
Liquidation Formation

Partnership Partnership
Dissolution Operation
PARTNERSHIP
FORMATION Let’s go back to the definition:

“by the contract of partnership

A contract of partnership is
two or more persons contribute
consensual in nature. money, property or industry into a
XPN: it should be in public common fund with the intention
instrument when: of dividing the profits among
themselves”
a. immovable property are
contributed How do we value the contribution
b. the capital is 3,000 or more. of partners?
VALUATION OF its appraisal must be made in the manner
prescribed in the contract of partnership,

CONTRIBUTIONS and in the absence of stipulation, it shall be

made by expert chosen by partners and
according to current prices

In short it shall be valued

following this hierarchy :
a. Agreed Value
b. Fair Value Cash Face Value
c. Book Value of CA
d. Cost Inventory Lower of Cost or NRV
How do we record contribution by the partners

Cash
Non-Cash Assets
Liabilities*
Partner, capital

*if the partnership assumed the liabilities

 PARTNER’S ACCOUNT
How do we record accounting transactions related to
partner’s account?
Partner’s equity is increased any addt’l
investments and any share in the net income.
Partner’s equity is decreased by any
withdrawal of cash or other assets and share
in the net losses.
ILLUSTRATION:
Melai admits Nora as a partner in business. Just
before the partnership’s formation. Melai’s book
showed the following:
The following relates to the
valuation of Melai’s investment in
Cash 2,600 the firm:
a. allowance for bad debts of 2%
Accounts Receivable 12,000 should be established.
b. the merchandise inventory is
Merchandise, Inventory 18,000 agreed to be valued at 20,200.
c. prepaid expenses of 350 and
Accounts Payable 6,200 accrued expenses of 400 should be
recognized.
Melai, Capital 26,400
ILLUSTRATION:
Requirements:
a. How much is the adjusted capital
of Melai prior to admission of Nora?
b. If Nora will invest cash, how
much cash would she need to
secure 1/3 interest in the
partnership?
ILLUSTRATION:
Requirements:
a. How much is the adjusted capital of Melai prior to admission of Nora?
b. If Nora will invest cash, how much cash would she need to secure 1/3
interest in the partnership?

Melai, Capital 26,400 Adj. Melai, Capital 28,310

AFDA (240) Divide: Melai’s interest 2/3

Merchandise, Inventory 2,200 Total Partnership

42,465
Capital
Accrued Expense (400)
Multiply: Nora’s interest 1/3
Prepaid Expenses 350
Nora’s Cash investment 14,155
Adj. Melai, Capital 28,310
OPENING ENTRIES OF PARTNERSHIP UPON
FORMATION

Partnership may be formed in any of the

following:
Individual with no business form a partnership
Conversion of a sole proprietorship
Admission or retirement of a partner
WHAT ABOUT ITEMS THAT HAS
CONTRA-ACCOUNTS?
ACCOUNTS RECEIVABLE:
“BOTH THE ASSET AND CONTRA-ASSET
ACCOUNT WILL BE RECORDED IN THE
BOOKS”

PROPERTY, PLANT AND EQUIPMENT:

“ONLY THE ASSET ACCOUNT WILL BE
RECORDED IN THE BOOKS”
WHAT ABOUT ITEMS THAT HAS
CONTRA-ACCOUNTS?
ACCOUNTS RECEIVABLE:
“BOTH THE ASSET AND CONTRA-ASSET
ACCOUNT WILL BE RECORDED IN THE
BOOKS”

PROPERTY, PLANT AND EQUIPMENT:

“ONLY THE ASSET ACCOUNT WILL BE
RECORDED IN THE BOOKS”
METHODS IN ACCOUNTING CAPITAL
ACCOUNTS
What if the capital contributed is not equal
to capital credit?

a. Net Investment Method

b. Bonus Method
c. Revaluation Method
RE-ALIGNMENT
OF CAPITAL An accounting problem exist when the
partner’s capital contribution is not equal to

ACCOUNTS partner’s capital credit

It shall be accounted by
either: transfer of capital from one partner to another.
a. Bonus Method. Bonus no need for any additional investment or any
b. Revaluation Method. Method withdrawal.
TCC=TAC

Revaluation requires further revaluation of assets or liabilities.

Method TCC=TAC
TRY THIS!
Alexander and Hendrickson were the main competitors in the helmet industry. Due to unhealthy
competition between them, On May 15, 2023, they decided to form a new partnership entity with
the name of AH & Co. by merging out their businesses. On 15th May, 2023, their accounts
balances are as follows:
Alexander Hendrickson

Cash 16,000 24,000

Account receivable 80,000 96,000
Inventory 64,000 40,000
Machinery – cost 120,000 96,000
Factory equipment – cost 56,000 64,000
Accumulated depreciation – machinery 64,000 32,000
Accumulated depreciation – factory equipment 24,000 40,000
Allowance for doubtful debts 5,600 3200
Accounts payable 64,000 76,000
TRY THIS!
In order to complete the formation of a new partnership, the following valuations were agreed
upon between Alexander and Hendrickson as follows:
Alexander:
Accounts receivable: 51,000, inventory at: 56,000 & machinery at: 30,000.
Hendrickson:
Accounts receivable: 16,000, factory equipment: 10,000

Requirements:
1. How much is the capital of Alexander and Hendrickson prior to the formation of partnership.
2. Record the journal entry for the initial contribution of each partner in the formation of
partnership.
3. Assuming the partners agreed that their capital credit will be at the ratio of 50:50. Who will
get a bonus from a partner and for how much.
Capital Balances of Alexander and Hendrickson as of May 15,2023

Alexander Hendrickson

Cash 16,000 24,000

Account receivable 80,000 96,000

Inventory 64,000 40,000

Machinery – cost 120,000 96,000

Factory equipment – cost 56,000 64,000

Accumulated depreciation – machinery 64,000 32,000
Accumulated depreciation – factory equipment 24,000 40,000

Allowance for doubtful debts 5,600 3200

Accounts payable 64,000 76,000
Capital Balances 178,400 168,800
Record the journal entry for the initial contribution of each partner in the formation of
partnership.

Cash 16,000
Accounts receivable 80,000
Inventory 56,000
Machinery 30,000
Factory equipment 32,000
AFDA 23,400
Accounts payable 64,000
Alexander, capital 121,000
Record the journal entry for the initial contribution of each partner in the formation of
partnership.

Cash 24,000
Accounts receivable 96,000
Inventory 40,000
Machinery 32,000
Factory equipment 10,000
AFDA 80,000
Accounts payable 76,000
Hendrickson, capital 78,000
Assuming the partners agreed that their capital credit will be at the ratio of 50:50. Who
among the a partners needs to withdraw cash or invest additional cash and for how
much.
TCC BONUS TCC

Alexander 121,000 (21,500) 99,500

Hendrickson 78,000 21,500 99,500

Total Capital 199,000 0 199,000

Alexander, capital 21,500

Hendrickson, capital 21,500
VARIATION ON BONUS METHOD

a. Cash Settlement
b. Additional or Withdrawal
of Investments
Assuming the partners agreed that their capital credit will be at the ratio of 50:50. Who
among the a partners needs to withdraw cash or invest additional cash and for how
much.

TCC Additional/(Withdrawal TCC

Alexander 121,000 (21,500) 99,500

Hendrickson 78,000 21,500 99,500

Total Capital 199,000 0 199,000

Alexander, capital 21,500 Cash 21,500

Cash 21,500 Hendrickson, capital 21,500
TRY THIS!
Assuming the partners agreed to have a capital ratio of 60:40 and they agreed to have
a total capital of 200,000 by revaluing the machineries. What is the final capital credit
of Alexander and Hendrickson after formation?
TRY THIS!
Assuming the partners agreed to have a capital ratio of 60:40 and they agreed to have
a total capital of 200,000 by revaluing the machineries. What is the final capital credit
of Alexander and Hendrickson after formation?

TCC Revaluation TCC

Machinery 1,000
Alexander 121,000 (1,000) 120,000 Alexander, capital 1,000
Hendrickson, capital 2,000
Hendrickson 78,000 2,000 80,000

Total Capital 199,000 1,000 200,000

TRY THIS!
Assuming the partners agreed to have a capital ratio of 70:30 and they agreed
further revalue the machineries. How much will be the adjusted capital of each
partners?
TRY THIS!
Assuming the partners agreed to have a capital ratio of 70:30 and they agreed
further revalue the machineries. How much will be the adjusted capital of each
partners?

TCC Revaluation TCC

Alexander 121,000 61,000 182,000 Machinery 61,000

Alexander, capital 61,000
Hendrickson 78,000 78,000

Total Capital 199,000 61,000 260,000

TRY THIS!
Assuming the partners agreed to have a capital ratio of 80:20 and they agreed
further revalue down the factory equipment. How much will be the adjusted
capital of Alexander?
TRY THIS!
Assuming the partners agreed to have a capital ratio of 80:20 and they agreed
further revalue down the factory equipment. How much will be the adjusted
capital of Alexander?

TCC Revaluation TCC

Alexander 121,000 121,000

Hendrickson, capital 47,750
Hendrickson 78,000 (47,750) 30,250 Factory Equipment 47,750

Total Capital 199,000 (47,750) 151,250

 LET’S RECALL
Valuation of Contribution

Methods of accounting for capital accounts

Re-alignment of capital credit

PARTNERSHIP
OPERATION
LET’S RECALL! Definition in the Civil Code

“by the contract of partnership

Can you still remember the two or more persons contribute
money, property or industry into a
definition of partnership?
common fund with the intention
of dividing the profits among
themselves”
 Industrial Partner Capitalist Partner

Contributes services to the Contributes cash or other

non-cash assets to the
partnership
partnership

Types of
Partner Industrial Capitalist
Partner

Contributes services , cash

and non-cash to the
partnership
 PROFIT DISTRIBUTION LOSS DISTRIBUTION

Based on agreement Based on agreement

or or
Original Contributed Capital Profit Agreement

INDUSTRIAL INDUSTRIAL
PARTNER is PARTNER'S
1 not liable for share in 2 For industrial-capitalist partner, he shall
losses
profit as also receive a share in the partnership in
may be just
and the profits in proportion to his capital.
equitable
PROFIT DISTRIBUTION BASE
ON AGREEMENT
Equally
Arbitrary Ratio
Capital Balance Ratio using
a. Original Capital
b. Beginning capital for the year
c. Average Capital
d. Ending Capital for the year
Profit Allocation Bases by using
Interest,Salaries and Bonus
ILLUSTRATION:
JEAD partnership begins its first year of operation with JE, capital of
320,000 and AD,capital of 160,000. The partnership generated a net
income of 640,000 on its first year of operation and 400,000 on the second
year.

Requirement:
How much is the capital balances of JE and AD at the end of the year
assuming profits are distributed:
Equally
Arbitrary Ratio (60:40)
ILLUSTRATION: JE AD
Allocation Partnership
income
Beginning Capital 320,000 160,000

JE 50% 320,000
Additional /
0 0
(Withdrawal )
AD 50% 320,000
Share in Income /
Total 100% 640,000 320,000 320,000
(Loss)

Total 640,000 480,000

Requirement:
How much is the capital balances of JE and AD at the end of the year assuming profits are
distributed:
Equally
ILLUSTRATION: JE AD
Allocation Partnership
income
Beginning Capital 320,000 160,000

JE 60% 384,000
Additional /
0 0
(Withdrawal )
AD 40% 256,000
Share in Income /
Total 100% 640,000 384,000 256,000
(Loss)

Total 704,000 416,000

Requirement:
How much is the capital balances of JE and AD at the end of the year assuming profits are
distributed:
Arbitrary Ratio (60:40)
ILLUSTRATION:
JEAD partnership begins its first year of operation with JE, capital of
320,000 and AD,capital of 160,000. The partnership generated a net
income of 640,000 on its first year of operation and 510,000 on the second
year.
The partners made the following additional or withdrawals of investment on
the second year:

Date JE Date AD

02/16 24,000 05/15 12,000

03/20 20,000 07/02 (5,000)

08/16 (22,500) 07/25 7,200

ILLUSTRATION:
Requirement:
How much is the capital balances of JE and AD at the end of the year
assuming profits are distributed based Capital Balance Ratio using
a. Original Capital
b. Beginning capital for the year
c. Average Capital
c.1 Simple Average
c.2 Weighted Average
d. Ending Capital for the year
ILLUSTRATION:
Original Partnership
Allocation
Capital Income / (Loss)

JE 320,000 2/3 340,000

AD 160,000 1/3 170,000

Total 480,000 3/3 510,000

Requirement:
How much is the capital balances of JE and AD at the end of the second year assuming
profits are distributed:
Original Capital Ratio
ILLUSTRATION:
JE AD

Beginning Capital 640,000 480,000

Additional / (Withdrawal ) 21,500 11,800

Share in Income / (Loss) 340,000 170,000

Total 1,001,500 661,800

Requirement:
How much is the capital balances of JE and AD at the end of the second year assuming
profits are distributed:
Original Capital Ratio
ILLUSTRATION:
Beginning Partnership
Allocation
Capitsl Income / (Loss)

JE 640,000 640/1,120 291,429

AD 480,000 480/1.120 218,571

Total 1,120,000 1,120/1,120 510,000

Requirement:
How much is the capital balances of JE and AD at the end of the second year assuming
profits are distributed:
Beginning Capital
ILLUSTRATION:
JE AD

Beginning Capital 640,000 480,000

Additional / (Withdrawal ) 21,500 11,800

Share in Income / (Loss) 291,429 218,571

Total 952,929 710,371

Requirement:
How much is the capital balances of JE and AD at the end of the second year assuming
profits are distributed:
Beginning Capital
ILLUSTRATION:
Simple Partnership
Allocation
Average Income / (Loss)

JE 650,750 650,750/1,136,650 291,983

AD 485,900 485,900/1,136,650 218,017

Total 1,136,650 1,136,650/1,136,650 510,000

Requirement:
How much is the capital balances of JE and AD at the end of the second year assuming
profits are distributed:
Simple Average
ILLUSTRATION:
JE AD

Beginning Capital 640,000 480,000

Additional / (Withdrawal ) 21,500 11,800

Share in Income / (Loss) 291,983 218,017

Total 953,483 709,817

Requirement:
How much is the capital balances of JE and AD at the end of the second year assuming
profits are distributed:
Simple Average
 Interest on Capital
Contribution

For the use of property or

money

Profit/Loss
Sharing Salaries Bonus

Allocation
Bases Compensation for Excellent management
services performance
Possible only if there's
a profit
 INTEREST
Time proportioned
Formula : C*Rate*time
C can be based on the following:
1. Beginning Capital
2. In excess over the amount
3. Simple Average
4. Weighted Average
SALARIES
Time proportioned
Can be annually or monthly
 BONUS
Usually Not Time proportioned
Will be given if there is a net income
and the basis is still positive
Bonus b4 bonus
B= P * Br
Bonus after bonus
B = P - (P/1+Br)
 Partner A Partner B TOTAL

INTEREST xx xx xx

SALARIES xx xx xx

BONUSE xx xx xx

NET PROFIT xx xx xx

TOTAL SHARE xx xx xx
ILLUSTRATION:
Mary and Anna started Fortune Merchandising by investing cash of
247,000 and 156,750 respectively,. Since then both partners made
additional investments and withdrawals. Additional investments by
Mary, 28,500 on March 30 and another 66,500 on May 10 while Anna
added 47,500 on May 18. Mary withdrew 38,00 on July 25 while Anna
took 19,000 for personal use on August 24.
Partnership earned 226,100 for the year ended December 31,2020.
Other than the closing of income and loss to the capital accounts, no
other events would involve the capital accounts .
ILLUSTRATION:
Requirement:
How much is the capital balances of JE and AD at the end of the year assuming
profits are distributed:
Profit allocation bases with the following terms:
CASE 1 Interest of 20% on average capitals, salaries to Mary and Anna of
300,000 and 200,000 respectively and any balance equally. (use weighted
average capital)
CASE 2 Allowance to Mary of a bonus of 25% of the net profit after bonus.
Interest of 10% to be allowed on the excess of the average investment (simple
average) of one partner over that of the other. Any balance in the ratio of 3:2 to
Mary and Anna respectively
CASE 3 Allowance to Mary of a bonus of 20% of the net profit after bonus,
interest and salaries Interest of 10% is to be allowed on the average investment
of each partner. Motnhly salary of 7,500 and 4,000 are also allowed,
respectively. Any balance in the ratio of 3:2 to Mary and Anna respectively
ILLUSTRATION:
MARY ANNA TOTAL

INTEREST (20%) 59,375 35,625 95,000

SALARIES 300,000 200,000 500,000

BONUS 0 0 0

NET (184.450) (184,450) (368,900)

TOTAL 174,925 51,175 226,100

Requirement:
How much is the capital balances of JE and AD at the end of the year assuming profits
are distributed:
Profit allocation bases with the following terms:
a. Interest of 20% on average capitals, salaries to Mary and Anna of 300,000 and
200,000 respectively and any balance equally. (use weighted average capital)
ILLUSTRATION:
MARY ANNA TOTAL

INTEREST (20%) 10,450 0 10,450

SALARIES 0 0 0

BONUS 45,220 0 45,220

NET 102,258 68,172 170,430

TOTAL 157,928 68,172 226,100

Requirement:
How much is the capital balances of JE and AD at the end of the year assuming profits are
distributed: Profit allocation bases with the following terms:
CASE 2 Allowance to Mary of a bonus of 25% of the net profit after bonus. Interest of 10% to be
allowed on the excess of the average investment (simple average) of one partner over that of t
other. Any balance in the ratio of 3:2 to Mary and Anna respectively
 MARY ANNA TOTAL

INTEREST (20%) 29,687.50 17,812.50 47,500

SALARIES 90,000 48,000 138,000

BONUS 6,766.67 0 6,766.67

NET 13,533 20,300 33.833.33

TOTAL 157,928 68,172 226,100

Requirement:
How much is the capital balances of JE and AD at the end of the year assuming profits are
distributed: Profit allocation bases with the following terms:
CASE 3 Allowance to Mary of a bonus of 20% of the net profit after bonus, interest and
salaries Interest of 10% is to be allowed on the average investment of each partner.
Motnhly salary of 7,500 and 4,000 are also allowed, respectively. Any balance in the ratio
of 3:2 to Mary and Anna respectively
PARTNERSHIP
DISSOLUTION
LET’S RECALL!
What is the characteristic of a
partnership implies trust and
confidence between partners and
the partnership?
LET’S RECALL! Definition in the Civil Code
What is the characteristic of a
partnership implies trust and “by the contract of partnership
confidence between partners and two or more persons contribute
money, property or industry into a
the partnership?
common fund with the intention
of dividing the profits among
themselves”
PARTNERSHIP DISSOLUTION

change in the relation of the partners

caused by any partner being disassociated
from the business.
WHY DOES IT HAPPEN?
Retirement
Admission
Incorporation of the
partnership
Death or Insolvency
GENERAL PROCEDURES IN ACCOUNTING
FOR DISSOLUTION

1. Adjust the partner’s capital for any

share in profit or losses
2. Adjust the partners capital for any
agreement
3. Record the Disso
ADMISSION OF
PARTNER A new partner may be admitted
into partnership by:
1. By purchase of interest from
Old partnership is dissolved and
partner/s
new partnership is formed. 2. By investment into
it needs the consent of all partners partnership
ADMISSION BY PURCHASE
personal transaction between the
buying and the selling parties.
partnership’s concern is only on the
transfer of the capital from the the
selling parnter to the incoming
partner.
ADMISSION BY INVESTMENT
contributing cash or other asset.
technically because of the creation
of the new partnership, partners
may agree on an adjustment of the
partnership assets to current market
value.
it is basically like accounting for
partnership formation .
LET’S RECALL!
In analyzing transactions involving
admission of a new partner by
investment, the following may be
used:
a. No Bonus
b. Bonus Method
c.Revaluation Method
LET’S RECALL! IF TCC=TAC
In analyzing transactions involving (NO BONUS)
admission of a new partner by IF TCC>TAC
investment, the following may be (WITHDRAWAL OR
REVALUATION DOWNWARD)
used:
IF TCC<TAC
a. No Bonus (ADDITIONAL INVESTMENT OR
b. Bonus Method REVALUATION UPWARD
c.Revaluation Method
ILLUSTRATION:
Dave and Dan are partners with capitals of 420,000
and 210,000 respectively. They share profits in the
ratio of 3:1. THe partners agree to admit Yam as
memeber of the firm.

Requirement: Answers the following cases

Case 1: Yam purchases 1/3 interest of Dave and Dan for
168,000 which is divided between them in proportion
to equities given up.How much is the personal profit of
Dave and Dan respectively.
ILLUSTRATION:
TCC Transfer of Equitites TAC

Dave 420,000 (140,000) 280,000

Dan 210,000 (70,000) 140,000

Yam 210,000 210,000

Total 630,000 - 630,000

Personal
Selling Price Interest given
Loss

Dave 112,000 (140,000) (28,000)

Dan 56,000 (70,000) (14,000)

ILLUSTRATION:
Dave and Dan are partners with capitals of 420,000
and 210,000 respectively. They share profits in the
ratio of 3:1. THe partners agree to admit Yam as
member of the firm.

Requirement: Answers the following cases

Case 2: Yam purchases 1/3 interest in the firm. Yam
pays the partners 315,000 which is to be divided
between them in proportion to equities given up.The
amount paid by Yam reflects the adjustment recorded
because prior to admission inventory is undervalued.
How much is the capital balances. of partners after
admission?
ILLUSTRATION:
Adj. Capital
Transfer
TCC Revaluation after TAC
Equities
Revaluation

Dave 420,000 236,250 656,250 (218,750) 656,250

Dan 210,000 78,750 288,750 (96,250) 288,750

Yam 315,000 315,000 315,000

Total 630,000 315,000 945,000 - 945,000

ILLUSTRATION:
Dave and Dan are partners with capitals of 420,000
and 210,000 respectively. They share profits in the
ratio of 3:1. THe partners agree to admit Yam as
member of the firm.

Requirement: Answers the following cases

Case 3: Yam invest the amount needed to give him 1/3
interest in the firm. His contribution will be equal to his
capital credit.How much is the capital balances. of
partners after admission?
ILLUSTRATION:

TCC Revaluation TAC

Dave 420,000 0 420,000

Dan 210,000 0 210,000

Yam 315,000 0 315,000

Total 945,000 0 945,000

ILLUSTRATION:
Dave and Dan are partners with capitals of 420,000
and 210,000 respectively. They share profits in the
ratio of 3:1. THe partners agree to admit Yam as
member of the firm.

Requirement: Answers the following cases

Case 4: Yam invest 262,500 for a 1/4 nterest in the firm.
The total firm capital is to be 892,750. How much is the
capital balances. of partners after admission?
ILLUSTRATION:

TCC Bonus TAC

Dave 420,000 29,531.25 449,531.25

Dan 210,000 9,843.75 219,843.75

Yam 262,500 (39,375) 223,125

Total 892,500 0 892,500

ILLUSTRATION:
Dave and Dan are partners with capitals of 420,000
and 210,000 respectively. They share profits in the
ratio of 3:1. THe partners agree to admit Yam as
member of the firm.

Requirement: Answers the following cases

Case 4: Yam invest 288,750 for a 1/4 interest in the firm.
The land of the partnership is undervalued and needed
to be adjusted. How much is the capital balances. of
partners after admission?
ILLUSTRATION:

TCC Revaluation TAC

Dave 420,000 177,187.50 597,187.50

Dan 210,000 59,062.50 269,062.50

Yam 288,750 288,750

Total 918,750 236,250 1,155,000

RETIREMENT OF
A PARTNER Interest in the firm means
partner is entitled to claim full
amount of his interest in the Capital Balance xx
firm. Loans from partner xx
Loans to partner xx
ordinarily partner’s withdrawal Total partner’s interest xx
calls for a revaluation of
partnership assets.
RETIREMENT OF As a result of retirement,
partnership may be terminated or

A PARTNER continued.

If partners may decide to continue the

partner is entitled to claim full operations. Settlement may be made
amount of his interest in the through:
a. Purchase of his interest by an
firm. outsider
ordinarily partner’s withdrawal b. Purchase of his interest by another
partner
calls for a revaluation of c. Purchase of his interest by the
partnership assets. partnership
PURCHASE OF HIS INTEREST BY AN
OUTSIDER OR ANOTHER PARTNER
similar to admission by a
new partner by purchase
, hence it a personal
transaction only.
PURCHASE OF HIS INTEREST BY
THE PARTNERSHIP
it will result to a
reduction of partnership
assets accompanied by
closing of the
withdrawing partner’s
capital account.
PURCHASE OF HIS INTEREST BY
THE PARTNERSHIP
retiring partner’s interest may be purchased
by the partnership either at :
a. at a price equal to his capital contribution
b. a price greater than his capital
contribution
c. a price lesser than his capital
contrilbution
ILLUSTRATION:
AA, BB, and CC are partners sharing profits in the ratio of 2:1:2,
respectively . On December 31,202, CC decided to retire from the
partnership . Their capital balances on this date were as follows.

AA,capital 80,000

BB, Capital 92,000

CC, Capital 164,000

Requirement:
Compute for the capital balances of the remaining partners after
retirement of C, assuming C sold his interest to A and B for 140,000, the
iterest being divided using the profit ratio by the remaining partners.
ILLUSTRATION:
AA BB CC TOTAL

Capital Balances 80,000 92,000 164,000 336,000

Sale of interest to
109,333 54,667 (164,000) 0
partners

Balance 189,333 146,667 0 336,000

ILLUSTRATION:
AA, BB, and CC are partners sharing profits in the ratio of 2:1:2,
respectively . On December 31,202, CC decided to retire from the
partnership . Their capital balances on this date were as follows.

AA,capital 80,000

BB, Capital 92,000

CC, Capital 164,000

Requirement:
Compute for the capital balances of the remaining partners after
retirement of C, assuming C sold his interest to the partnership for
170,000 cash .
ILLUSTRATION:

Sale of
Capital
interest to Bonus Balances
Balances
partnership

AA 80,000 (4,000) 76,000

BB 92,000 (2,000) 90,000

CC 164,000 (170,000) 6,000 0

Total 336,000 (170,000) 166,000

ILLUSTRATION:
AA, BB, and CC are partners sharing profits in the ratio of 2:1:2,
respectively . On December 31,202, CC decided to retire from the
partnership . Their capital balances on this date were as follows.

AA,capital 80,000

BB, Capital 92,000

CC, Capital 164,000

Requirement:
C sold his interest to the partnership for 155,000 cash and partnership
building needs to be revalued by 30,000. Capital of the partnership
after CC’s retirement was 211,000
ILLUSTRATION:

Sale of interest
Capital
Revaluation to the Bonus Balances
Balances
partnership

AA 80,000 12,000 14,000 106,000

BB 92,000 6,000 7,000 105,000

CC 164,000 12,000 (155,000) (21,000) 0

Total 336,000 30,000 (155,000) 0 211,000

ILLUSTRATION:
AA, BB, and CC are partners sharing profits in the ratio of 2:1:2,
respectively . On December 31,202, CC decided to retire from the
partnership . Their capital balances on this date were as follows.

AA,capital 80,000

BB, Capital 92,000

CC, Capital 164,000

Requirement:
C accepts cash of 140,000 and an equipment with current fair value of
18,000. The equipment costs 60,000, is 60% depreciated and has no
residual value. Record any gain or loss on disposal of the equipment
directly to the partner’s capital accounts.
ILLUSTRATION:
Sale of interest
Capital Revaluation
to the Bonus Balances
Balances Downward
partnership

AA 80,000 (2,400) 2,400 80,000

BB 92,000 (1,200) 1,200 92,000

CC 164,000 (2,4000) (158,000) (3,600) 0

Total 336,000 (6,000) (158,000) 0 172,000

DEATH OF A
PARTNER Revaluation of the partnership
assets is required not only in
arriving at fair determination of
closing the nominal accounts
deceased , insolvent of
revaluation of partnership incapacitated partner’s interest
assets but also in stating properly the
payments to the heirs or interest of the remaining partners
representatives of the
deceased, insolvent or
incapacitated partner.
INCORPORATION
OF PARTNERSHIP
Closing of books of the partnership
Opening the books of corporation by recording the assets
and liabilities.
Equity section will be in the form of share capital and share
premium/
PARTNERSHIP
LIQUIDATION
WHAT DOES IT
CAUSES OF LIQUIDATION
MEAN?
termination of the definite term
It happens when a business is or particular undertaking
dissolved and continued to specified in the agreement.
exist only for the sole purpose express will of all the partners to
of winding up the affairs prior terminate the operation
partnership can no longer
to termination prior to
operate except at loss
termination attainment of its particular
ending or termination of the objective.
business
GENERAL LIQUIDATION PROCEDURES
1. conversion of partnership
assets into a distributable
form
2. payment or settlement of
liabilities to outside creditors
3. distribution of remaining
amount to partners
HOW ABOUT THE
LIQUIDATION EXPENSES Accounting procedures prior to
liquidation process:
AND GAIN OR LOSS FROM preparation of adjusting
REALIZATION? entries and financial
statements
must be allocated to the preparation of closing entries
and post closing balances
partners before assets are *** only real accounts should be
actually distributed to open as the liquidation process
individual partners begins
RIGHT OF OFFSET
3 accounts usaully affected by
the right of offset
1. Due from partners
2. Partner’s Loan
3. Partner’s Capital
RIGHT OF OFFSET
Due from partners can be offset the partners
capital if it has a credit balance
Partner’s Loan can be offset to a debit
balance of a partners’ capital
Due from partner in excess of his credit
balance or a capital deficiency in excess f
partners loan shall be collected if he is solvent,
if otherwise it is treated as loss and shall be
absorbed by other partners
TYPES OF LIQUIDATION

1. Lump sum method

2. Installment method
LUMP SUM LIQUIDATION
cash distribution to partners can only be
made after assets were converted into
cash and all liabilities have been paid.
payment to partners will only be made
once
 LUMP SUM METHOD
Realization of assets and distribution of gain or loss on
realization
Paymen of expenses and liabilities
Elimination of partner’s capital deficiency , if after of
distribution of loss on realization , a partner incurs deficit , it
must be eliminated by using one of the following methods:
1. if there’s an existing loan balance, exercise right of offset
2. If the deficient partner is solvent, make him invest
3. If the deficient partner is insolvent, other partner shall absorb the
deficiency
Payment to the partners ( Loan and capital accounts)
ILLUSTRATION:
JJJ Partnership consistently suffer losses for the past months and they
decided to wind the partnership operation. Jan, Jun and Jul share in the
profit and loss ratio of 5:3:2, respectively. This is the financial statement
of the partnership rior to liquidation:
Assets Liabilities and Capital

Cash 50,000 Liabilities 70,000

Other Assets 140,000 Loans from Jan 20,000

Loan to Jul 10,000 Jan, Capital 30,000

Jun,Capital 50,000

Jul, Capital 30,000

Total 200,000 Total 200,000

Partners Jan and Jun are personally insolvent.

ILLUSTRATION:

Requirement:
Case 1: If non cash asset are sold for 150,000 and all
liabilities are paid and the liquidation expenses of
5,000 are also paid. Compute for the total cash
available for distribution and the cash receive by Jan,
Jan and Jul respectively
ILLUSTRATION:

Beginning Cash 50,000

Proceeds from realization 150,000

Liabilities settled (70,000)

Liquidation Expenses (5,000)

Cash Withheld (00000)

Cash Available for distribution 125,000

ILLUSTRATION:
Sale of
Capital
interest to Bonus Balances
Balances
partnership

Capital 30,000 50,000 30,000 106,000

Loan to/ Loans (from) 20,000 (10,000) 105,000

Total Interest 50,000 50,000 20,000 120,000

Adjustment 2,500 1,500 1,000 5,000

CAFD
ILLUSTRATION:

Requirement:
Case 2: If July received a total amount of 8,000
How much cash should Jan receive?
How much is the amount of gain or loss on
realization of other asset?
ILLUSTRATION:
Jan Jun Jul Balances

Capital 30,000 50,000 30,000 106,000

Loan to/ Loans (from) 20,000 (10,000) 105,000

Total Interest 50,000 50,000 20,000 120,000

Adjustment (30,000) (18,000) (12,000) (60,000)

CAFD 20,000 32,000 8,000 60,000

ILLUSTRATION:

Beginning Cash 50,000

Proceeds from realization 40,000

Liabilities settled (70,000)

Liquidation Expenses (10,000)

Cash Withheld (00000)

Cash Available for distribution 10,000

ILLUSTRATION:

Requirement:
Case 3: If non cash asset are sold for 40,000 and all
liabilities are paid and the liquidation expenses of
10,000 are also paid. Compute for the total cash
available for distribution and the cash receive by Jan,
Jan and Jul respectively .
ILLUSTRATION:

Beginning Cash 50,000

Proceeds from realization 40,000

Liabilities settled (70,000)

Liquidation Expenses (10,000)

Cash Withheld (00000)

Cash Available for distribution 10,000

ILLUSTRATION:
Jan Jun Jul Balances

Capital 30,000 50,000 30,000 106,000

Loan to/ Loans (from) 20,000 (10,000) 105,000

Total Interest 50,000 50,000 20,000 120,000

Adjustment (55,000) (33,000) (22,000) (110,000)

CAFD (5,000) 17,000 (2,000) 10,000

Absoprtion 5,000 (3,000) (2,000)

Investment 4,000

Balance 0 14,000 0
INSTALLMENT LIQUIDATION
as non-cash assets are converted into cash
liabilities are also paid
once all liabilities have been oaid, cash
distribution to partners is made periodically as
cash becomes available.
STEPS IN INSTALLMENT LIQUIDATION

1. Record the realization of assets and distribution

of gain or loass in realization
2. Charge the liquidation expenses against partners
capital
3. Settlement of liabilities and reserving of cash for
unpaid liabilities
4. If there is a cash available for the partners but is
insufficient prepare a schedule of safe payment
STEPS IN INSTALLMENT LIQUIDATION
4. If there is a cash available for the partners but is
insufficient prepare a schedule of safe payment
following the rules:
a. Start with the capital balance before cash
distribution
b. Deduct the TOTAL POSSIBLE LOSS ( amount of
Book value of remaining non-cash and cash withheld
for future liquidation expenses)
c. Any capital deficiency of an insolvent paertner will
be absorbed by the remaining
STEPS IN INSTALLMENT LIQUIDATION
5. Repeat the steps until the final sale
 CAN THERE BE AN EASIER WAY TO
PREPARE CASH DISTRIBUTION PROGRAM?
yes , there is a way THROUGH
CASH PRIORITY PROGRAM
This program will show how the cash will
be distributed to the partners as it becomes
available.
 CASH PRIORITY PROGRAM
3 FACTORS TO CONSIDER
1. Total partner’s interest
2. Profit and loss ratio
3. Loss Absorption Capacity ***

***Loss Absorption Capacity is the

maximum amount of partnership loss that
be absorbed by the partner based on his
interest.
 CASH PRIORITY PROGRAM
Reminder
The partner with the highest
loss absorption capacity should
be given a priority in the cash
distribution.
ILLUSTRATION:
D,E, and F decided to liquidate their business on January 31,2014 and showed the
following position:

Assets Liabilities and Equity

It was also agreed that cash
distribution be made at the end of
Cash 35,000 Accounts Payable 18,000 each month provided there was
Non-cash asset 45,000 Loan Payable to D 5,000 sufficient cash for this purpose.
Profit and loss ratio was 1:2
D,Capital 10,000 respectively.
E,Capital 20,000 The liquidation transactions for the
months of February , March and
F, Capital 27,000 April were as follows:
Total 80,000 Total 80,000
ILLUSTRATION:
Restricted
Book Value Liquidation
Cash Liabilities cash for
Month of assets expenses
proceeds paid future
sold paid
expenses

February 15,000 15,000 15,000 3,000 2,000

March 16,000 20,000 3,000 2,000 1,000

April 8,000 10,000 1,000

Requirement:
1. Show the amount of cash distribution to partners for the month of February
and March using:
2. Safe payment Schedule
3. Cash Priority Program
4. Present the Statement of Partnership Liquidation.
THANK YOU!