Unit I and 2 Nature and Formation of a Partnership A partnership is a contract whereby two or more persons bind themselves to contribute money, property or industry into a common fund with the intention of dividing the profit among themselves (Article 1767 of the Civil Code of the Philippines) Philippines) !his "oint effort of Co-Partnership Co-Partnership, may be supported by a partnership agreement #nown as the Articles of which is an agreement in writing among the partners governing the nature and terms of the partnership contract A written agreement is re$uired when partnership capital is P %,&&& or more in money or in property !he Article of Co'partnership helps in avoid misunderstanding among the partners !he written agreement agreement among the partners governs the formation, operation and dissolution of the partnership and is re$uired to be registered with C !he Article of Co'partnership Co'partnership contains the following information* 1 !he !he name name of the the part partne ners rshi hip+ p+ !he names, names, addresses addresses of the the partners, partners, classes classes of partners partners stating stating whether whether the the partner is a general or a limited partner+ % !he effe effecti ctive ve date date of of the the contra contract+ ct+ - !he purpose purpose and and principal principal place of business business of the busines business+ s+ . !he capital capital of the partne partnership rship statin stating g the contribut contributions ions of each each of the partners partners++ 6 !he righ rights ts and and duties duties of of each each of the the partne partners+ rs+ 7 !he manner manner of dividing dividing profit profit or loss loss among among the partners+ partners+ / !he conditions conditions under under which which the partners partners may may withdraw withdraw money or other other assets+ assets+ 0 !he manne mannerr of #eepi #eeping ng the the boo#s boo#s of account accounts+ s+ 1& !he causes for dissolution dissolution and the provision for arbitration arbitration in settling settling disputes
Characteristics of a Partnership 1 ased on contrac contractt 2 partnership partnership is is formed formed through through the mutual mutual agreement agreement of all the the partners !he contract may be written or oral 3oluntary 3oluntary associat association ion 2 no one should be forced forced or coerced coerced in "oining "oining a partnership % 4utual 4utual agency 2 any partner partner may act act as an agent of the partners partnership hip in conducti conducting ng its affairs - 5imited 5imited life life 2 a partnership partnership may may be dissolved dissolved at any any time by action action of the the partners partners or by operation of law !he withdrawal, death, retirement, ban#ruptcy, incapacity of a partner and the admission ad mission of a new partner dissolves the partnership . nlimited nlimited liabili liability ty 2 the personal personal assets assets of a general general partner partner may may be used to satisfy the claims of the creditors of the partnership if the partnership assets are not enough to settle the liabilities to outsiders upon li$uidation 6 Co'ownershi Co'ownership p of property property 2 properties properties contrib contributed uted to the the partnership partnership are are owned by the partnership Properties invested by a partner cease to be his own personal property
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7 Co'ownershi Co'ownership p of profit profit 2 a partner partner has the right right to share share in partners partnership hip profits profits !he partners are entitled to share in the firm8s profits as a return on their investment / 5egal entity entity 2 a partners partnership hip has a legal legal personalit personality y separate separate and distinct distinct from from that that of each of the partners 0 9ncome 9ncome ta: 2 partners partnerships hips are are sub"ect sub"ect to income income ta: ta: rate of of %&; beginnin beginning g the fiscal year &1& with the e:ception of general professional partnerships (ie, those partnerships organied for the e:ercise of professions, eg, CPAs, doctors, lawyers, etc)
Advantages of a Partnership Partnership 1 9t is easy and and ine:pensi ine:pensive ve to form form and to dissolv dissolve e 9t may may be created created orally orally e:cept when partnership capital is P%,&&& or more A partnership is ended whenever there are changes in the ownership structure such as withdrawal of a partner or admission of a new partner
Disadvantages of a Partnership 1 !here is is lac# of business business continui continuity ty because because it can can be easily easily dissolv dissolved ed 5imited 5imited amount amount of capital capital may may be raised raised compared compared to a corporation corporation % !he unlimite unlimited d liability liability of a partners partnership hip deters deters many from from "oining "oining in a partners partnership hip form of business - A general general partner partner may be be sub"ected sub"ected to a personal personal liabili liability ty for erroneous erroneous management decisions made by his associates . !here is is li#elihood li#elihood of dissens dissension ion and disagree disagreement ment when when each of the partner partnerss has the same authority in the management of the firm 6 !here is diffic difficulty ulty in transfer transferring ring ownershi ownership p interest interest because because ownership ownership interest interest in the partnership cannot be transferred without the consent of all the partners
Kinds of Partnerships Partnerships 1 Acco Accord rdin ing g to acti activi viti ties es a ervic ervicee 2 main main acti activit vity y is the the rend renderi ering ng of servic services es b 4erchandising or !rading 2 main activity is the purchase or sale of goods c 4anufacturi 4anufacturing ng 2 main main activity activity is the production production of goods
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Acco Accord rdin ing g to liab liabil ilit ity y a i:ed !erm 2 one in which the term or period for which the partnership is to e:ist is agreed upon (aysa and 5upisan, &&&)
Kinds of Partners Partners 1
%
Acco Accord rdiing to cont contrribut ibutio ion n a Capitalist 2 one who contributes capital in money or property b 9ndustrial 2 one who contributes industry, labor, s#ill or service c Capitalist'9ndustrial 2 one who contributes money, property and industry According to 5iability a
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a
-
4anaging Partner 2 one who manages actively the business of the partnership b ilent 2 one who does not participate in the management of partnership affairs ?thers a @ominal' a partner in name only b ecret 2 one who ta#es active part in the business but whose connection with the partnership is concealed on un#nown to the public c =ormant partner 2 one who does not ta#e active part in the business and is not #nown to the public as a partner
Basic Features of Partnership Partnership Accounting Accounting 1 4ore than than one capital capital and and drawing drawing accounts accounts 2 there there will will be as many capital capital accounts and as many drawing accounts as there are partners Partner8s Partner8s loans loans 2 partners partners may may advance money money to the partners partnership hip in the the form of loans when the business is in need of additional funds !he account title to be credited is Loans is Loans Payable to Partner or Partner, or Partner, Loan % Partner8s Partner8s borrowi borrowings ngs 2 the partners partnership hip may advance advance money money to partners partners other other than withdrawals in the form form of loans !he account title to be debited is is Receivable from Partner. - Partner8s Partner8s salarie salariess 2 partners partners are paid salaries salaries for servic services es rendered rendered in the conduct of partnership business . 9nterest 9nterest on investme investment nt 2 interest interest is allowe allowed d to earn on the the asset investm investment ent of the partners 6 =ivision =ivision of profit profit and losses losses 2 net net profit profit or net loss loss is to be be divided divided among the partners based on their agreement
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PARTNERS!P PARTNERS!P F"R#AT!"N T$o Kinds of Partnership For%ation 1.
Two or more individuals form a business for the first time.
DATE P AR T IC U L AR S Cash investment July 1 Cas h Ros e, Caital To !e"o!# initial investment$
P/R
Investment in the %o!m o% non&"ash assets July 1 'on&" ah ass ets Ros e, Caital To !e"o!# initial investment$ Note: Fair market value of the non-cash asset is used in recording the investment. Investment in the %o!m o% non&"ash assets (ith assumtion o% lia)ility July 1 'on&" ah ass ets Li L ia)ility Ros e, Caital To !e"o!# initial investment$ Note: Fair market value of the non-cash asset is used in recording the investment; credit the applicable liabilily account using the loan balanceto be assumed by the partnebrship; partnebrship; and credit the capital capital account account of the partner using the net amount (I.e., non cash assets - liability.
D E B I
T
C R E D I
T
X X X X X X X X X X
X X X X X X X X X X
X X X X X X X X X X X X X X X
Investment in the %o!m o% se!vi"e o! in#ust!y *emo!an#um ent!y+ ua#a is a#mitte# as an in#ust!ial a!tne! (ith ---- sha!e in !o%its$
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2. An individual forms a business with a sole sole proprietor or a sole proprietorship(s) onverted into a partnership
!he following are the accounting procedures in converting a sole proprietorship form of business into partnership a& Ad'us Ad'ustt the the e(ist e(istin ing g )oo* )oo*ss of the the sole sole prop proprie rietor torshi ship+s p+s,& ,& Date P AR TIC ULARS P/R In"!ease in the asset value (ith no "ont!a&asset a""ount Asset Ros e, Caital
DEBIT
CREDIT
X X X X X X X X
De"!ease in the asset value (ith no "ont!a&asset a""ount Ros e, Caital As As s et
X X X X
In"!ease in the asset value (ith "ont!a&asset a""ount Cont!a&as s et Ros e, Caital
X X X X
De"!ease in the asset value (ith "ont!a&asset a""ount Ros e, Caital Co Cont!a&as set
X X X X
X X X X
X X X X
X X X X
'ote+ 'ote+ These a#.ustin ent!ies ent!ies a!e simila! to yea!&en# a#.ustments$ a#.ustments$ The only only #i%%e!en"e is that the the Caital a""ount !ela"es all the nominal a""ounts $
)& Date
c&
Close Close the the e(ist e(isting ing )oo* )oo*ss of the sole sole prop proprie rietor torsh ship+ ip+s,& s,& P AR TIC ULAR S All All "ont!a "ont!a asset asset a""ounts All All lia) lia)ili ility ty a"" a""ou ounts nts Ros e, Caital All as s et a" " ounts
P/R
DEBIT X X X X X X X X X X X X
CREDIT
X X X X X
Record Rec ord the invest% invest%ent ent of all all the the partner partnerss in the ne$ set of partn partners ership hip )oo*s& )oo*s&
D ate P AR T IC U L AR S P/R To !e"o!# the investment o% the sole !o!ieto! All All assets %!om %!om the o!iin o!iinal al )usiness )usiness Allo(an"e %o! #ou)t%ul a" " ounts All lia)ilty a"" ounts Ros e, C aital
D EBIT
CR ED IT
X X X X X X X X X X X X X X X X X
'ote 1+ I% the the sole !o!ieto! assets ass ets in"lu#es A""ounts R e"eiva)le, the sai# a""ount mus t )e !e"o!#e# at !oss !oss amount an# the allo(an"e %o! #ou)t%ul a""ounts is "a!!ie# ove! in the ne( set o% a!tne!shi )oo0s$ 'ote + De!e"ia)le ass ets a!e !e"o!#e# in the ne( set o% a!tne!shi )oo0s at thei! net "va!!yin value, value, i$e$, the a""umulate# #e!e"iation a""ount is not !e"o!#e# in the a!tne!shi )oo0s $
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