FAR MILAN TERMINOLOGIES

e.​ Co-ownership of Profits- a

PARTNERSHIP FORMATION partnership is created as a business,
CHAPTER 11 as such, each partner is entitled to
his share the partnership profit.
A stipulation which excludes
The Partnership is an unincorporated one or partners from any share in
association of two or more individuals to the profits or losses is void.
carry on, as co-owners, a business, with the
intention of dividing the profits among f.​ Limited Life- the creation of a
themselves. partnership is basically consensual.
As such, a partnership may be
Characteristics of a Partnership dissolved:

a.​ Ease of Formation - as compared i. By the express will of any partner,

to corporations, the formation ii. By the termination of a definite
requires less formality.
term stipulated in the contract,
b.​ Separate legal personality - the iii. By any event that makes it
partnership has a judicial personality unlawful to carry out the partnership;
separate and distinct from the
iv. When a specific thing which a
partners. The partnership can
transact and acquire properties in its partner had promised to contribute
name. to the partnership perishes before
the delivery;
c.​ Mutual Agency- the partners of the
partnership for the purpose of its v. expulsion, death, insolvency or
business. As such, a partner may civil interdiction of a partner
legally bind the partnership to a
contract or agreement that is in line
g.​ Transfer of Ownership- in case of
with the partnership’s operation.
dissolution, the transfer of
ownership, whether to a new or
d.​ Co-ownership of Property- each
existing partner, requires the
partner is a co-owner of the
approval of the remaining partners.
properties invested in the
partnership and each has an equal
h.​ Unlimited Liability- each partner,
right with his partners to possess
including industrial ones, may be
specific partnership property for
held personally liable for partnership
partnership purposes.
debt after all partnership assets
have been exhausted.
However, a person has no right to
possess a partnership property for
If a partner is personally insolvent,
any other purpose without consent
his share in the partnership shall be
of his partners.
assumed by other solvent partners.

Asis, Margareth C. | ACT233

General Partnership Accounting for Partnership
-​ A partnership in which all partners
are individually liable. The accounting for assets and liabilities
remains the same regardless of the form of
Limited Partnership a business organization. What changes is
-​ At least ONE partner is personally the accounting of a form of a business
liable. organization. What changes is the equity in
partnership.
Capitalist Partner
-​ A partner who capitalize the SEC - Securities and Exchange
partnership; offers cash or equity Commission

Industrial Partner DTI- Department of Trade and Industry

-​ A partner who offers services
instead of cash CDA- Cooperative Development Authority

Managing Partner
-​ A partner responsible for guiding a
business's strategic direction and Formation- accounting for initial
managing day-to-day activities investments to the partnership

Liquidating Partner Operation- division of profit and losses

-​ in charge of selling and distributing
assets as well as settling debts on Dissolution- admission of a new partner
behalf of the partnership, as well as and withdrawal, retirement or death of a
collecting the assets, adjusting the partner
claims, and paying the debts.
Liquidation- winding-up affairs
Ostensible Partner
-​ Active in Partnership, Known to
Public
Formation
Dormant Partner -​ A contract of partnership is
-​ Not Active in Partnership, Known to consensual.
Public
-​ It is created by the agreement of the
Secret Partner partners which may be constituted in
-​ Active in Partnership, Unknown to any forms, such as ORAL or
Public WRITTEN.

Silent Partner -​ A partnership’s legal existence

-​ Not Active in Partnership, Unknown begins from the moment the contract
to Public is executed, unless otherwise
stipulated.

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 ●​ Contributions of partners to the Classification of Partnership
partnership are initially measured at
FAIR VALUE. 1. According to Object

Fair Value a.​ Universal partnership of all present

-​ Is the price that would be received to properties
sell an asset or paid to transfer a b.​ Universal partnership of all profits
liability in an orderly transaction c.​ Particular Partnership (general na
between market participant at the ginagamit) - Explicity or specifically
measurement date. telling the contributed of assets.

Net Realizable Value 2. According to Liability

-​ Is estimated selling price less
estimated costs of completion and a.​ General Partnership
costs to sell. b.​ Limited Partnership

Agreed Values 3. According to Duration

-​ An agreement between partners on
which they choose what to give a.​ Fixed term (specific)
assets. b.​ At will (no indentation)

●​ Each partner’s capital account is 4. According to Purpose

credited for the fair value of his net a.​ Trading (Buy & Sell)
contribution. No contribution shall b.​ Non-Trading (Profession/Service)
be valued at an amount greater
than its fair value. 5. According to Legal Existence
a.​ De Jure (existing, complete,
●​ A partner’s subsequent share in compiled at SEC)
profits (losses) shall also be credited b.​ De Facto ( existing but not compiled
(debited) to his capital account. at SEC)
Likewise, permanent withdrawals of
capital are debited to the partner’s Who can perform Partnership?
capital account.
1.​ 2 or more individuals with no
●​ Temporary withdrawals may be Existing business.
debited to the partner’s drawing’s
account. 2.​ A sole proprietorship and an
individual w/no existing business.
●​ The sum of the balances in the
partner’s individual capital accounts 3.​ 2 sole proprietorship.
represents the total equity of the
partnership.

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Three Steps in Partnership formation 1.​ If only the share of each partner in
which involves a sole proprietorship. the profits has been agreed upon,
the share of each in the losses shall
1.​ Adjusting be in the same proportion.
2.​ Closing Entries
3.​ Transfer to the Book of Partnership 2.​ In the absence of stipulation, the
share of each in the profits and
losses shall be in proportion to what
Bonus Method he may have contributed, but the
-​ Any increase (or decrease) in the industrial partner shall not be
capital credit of a partner is liable for losses.
deducted from (or added to) the
capital credits of the other partners. 3.​ As for the profits, the industrial
partner shall receive such share as
-​ The total partnership capital remains may be just and equitable under the
equal to the Fair value of the circumstances. If beside his service
partner’s net contribution to the he has contributed capital, he shall
partnership. also receive a share in the profits in
proportion to his capital.
●​ A partner’s capital balance is
normally credited for the fair value of 4.​ The designation of losses and profits
his net contribution to the cannot be entrusted to one of the
partnership. If a partner’s capital partners.
balance is credited for an amount
greater than or less than the fair 5.​ A stipulation which excludes one or
value of his net contribution, there is more partners from any share in the
BONUS. profits or losses is void. (Art.1799)

Salaries
-​ Normally, an industrial partner
PARTNERSHIP OPERATION receives salary in addition to his
CHAPTER 12 share in the partnership’s profits as
compensation for his services to the
partnership
Division of Profits and Losses
-​ The partners share in partnership Bonuses
profits or losses in accordance with -​ The Managing partner may be
their partnership agreement. entitled to a bonus for excellent
management performance. Unlike
Article 1797 of the Philippine Civil Code for salaries, a partner is entitled to a
-​ Provides the following additional bonus only if the partnership earns
rules in the profit or loss sharing of profit. The partner is not entitled to
partners: any bonus if the partnership incurs
loss.

Asis, Margareth C. | ACT233

Interest on Capital Contributions The following are major considerations
-​ The partnership agreement may in the accounting partnership
stipulate that capitalist partners are dissolution:
entitled to an annual interest on their
capital contributions. a.​ Admission of a partner
b.​ Withdrawal, retirement or death of a
●​ In the absence of a stipulation, the partner
partners share in profits and losses c.​ Incorporation of a partnership
pro rata based on their
contributions. Notes:

●​ In CPA board exams, the phrase ●​ The admission of a new partner or

“salaries are recognized as the withdrawal, retirement or
expenses” means that the profit death of an existing partner
given in the problem is already net of dissolves the original partnership
the partner’s salaries. agreement because it creates a
change in the relationship of the
●​ “Squeezing” upwards; we use the partners.
opposite arithmetic function.
●​ It should be noted that the admission
●​ Average Capital - The amount of of a new partner requires the
capital invested by a partner consent of all the existing partners.
determined by the time during which
such capital is actually used in the The Admission of Partner
business. -​ May be affected either through;
a.​ Purchase of interest
b.​ Investnement of partnership

PARTNERSHIP DISSOLUTION
CHAPTER 13 Purchase of Interest

-​ A new partner may be admitted

Dissolution when he purchases part or all of the
-​ Is the change in the relation of the interest of one or more of the
partners caused by any partner existing partners.
being disassociated from the
business. -​ This transaction is a personal
transaction between and among the
-​ Dissolution is different from partners. As such, any consideration
Liquidation. paid or r eceived by a partner is not
recorded in the partnership’s books.
-​ Dissolution does not mean
terminate the business

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 -​ The only entry to be made in the -​ Partnership capital increased by the
partnership’s books is a transfer incoming partner’s contribution.
within entity.
-​ A new capital account is established
for the new partner and a Goodwill Method
corresponding decrease is made on -​ Is used to recognize an implied
the capital accounts of the selling value from a partner’s contribution
partners. during admission and payment to a
partner during withdrawal.
-​ No gain or loss is recognized in the
partnership’s books. -​ By its inherent nature, it is difficult to
measure with sufficient reliability,
Revaluation of Assets and it has the tendency to be
measured arbitrarily.
-​ When a partnership is dissolved but
not liquidated, a new partnership is
created. Withdrawal, retirement or death of a
Partner
-​ The assets and liabilities carried
over to the new partnership should -​ When a partner widrawas, retires or
be restated to fair values. dies, his interest may be;

-​ The adjustment to the assets and a.​ Purchased by one or all of

liabilities is allocated first to the the remaining partners
existing partners before recording
the admission of the new partner. b.​ Settled by the partnership

-​ In case of death, the deceased

Investment in the Partnership partner’s estate is entitled to the
value of the partner’s interest at the
-​ Instead of purchasing interest from date of his death.
the existing partners, a new partner
may be admitted by investing The interest of the withdrawing, retiring
directly into the business. or deceased partner is adjusted for the
following:
-​ This transaction is a transaction
between the new partner and the a.​ His share of any profit or loss,
partnership. during the period up to the date of
his withdrawal, retirement or death.
-​ The incoming partner’s contribution
is recorded in the partnership’s b.​ His share of any revaluation gains
books. or losses as the date of his
withdrawal, retirement or death.

Asis, Margareth C. | ACT233

Purchase by one or all of the remaining Deferred Settlement
partners -​ Pending settlement, outgoing
partner’s interest is transferred to a
-​ One or all of the remaining partners liability account, which is considred
may purchase the interest of the an ordinary claim, subordinate to
retiring, withdrawing, or deceased the claims of other outside creditors.
partner.
-​ It may also be agreed that interest
-​ As such, the settlement amount is shall accrue on the outgoing
not recorded in the partnership’s partner’s unpaid balance from the
books date of his disassociation up to the
date of settlement. (Article 1841)
-​ The only entry to be made is a
transfer within equity. -​ In lieu of interest the partner may be
entitled to profits attributable to the
Settlement by the Partnership use of his right in the property of the
dissolved partnership. (Article 1841)
-​ The partnership may settle the
interest of the retiring, withdrawing, Incorporation of a partnership
or deceased partner. This is a -​ Another instance that causes
transaction between the retiring or partnership dissolution is the
withdrawing partner and the incorporation of a partnership. When
partnership. a partnership is converted into a
corporation, the partner’s
-​ As such, the settlement amount is relationship changes– they cease to
recorded in the partnership’s books, be partners and become
alongside any other necessary stockholders.
adjustments.

Bonus Method

-​ When the outgoing partner’s interest PARTNERSHIP LIQUIDATION

is settled at an amount greater than Chapter 14
or less than the value of his interest,
the bonus method is used. Liquidation
-​ This is the termination of business
-​ Under the bonus method, any operations or the winding up of
excess or deficiency in the payment affairs. It is a process by which:
is acccounted for as deduction from
or addition to the remaining partner’s 1.​ Assets are converted into
capital accounts. cash
2.​ Liabilities are settled
3.​ Any remaining amount is
distributed to the owners.

Asis, Margareth C. | ACT233

Liquidation may be either voluntary (e.g., -​ When financial statements are
per agreement of partners of a solvent prepared during the liquidation
partnership) or involuntary (e.g., process, all the partnership assets
bankruptcy) are restated to their realization value
and all the liabilities to their expected
settlement amounts.
CONVERSION OF NON-CASH ASSETS
INTO CASH -​ The use of historical cost, fair value,
present value, or other
Realization measurement basis is appropriate
-​ Is a conversion of non cash assets only when the entity is a going
into cash. concern.

Liquidation
-​ Is the settlement of claims of SETTLEMENT OF CLAIMS
creditors and owners.
The available cash of the partnership is
used to settle claims using the following
METHODS OF LIQUIDATION order of priority:

1.​ Lump-sum Liquidation - all the 1.​ Outside creditors

non-cash assets of the partnership 2.​ Inside creditors (e.g., payables to
are sold simultaneously, or within partners)
a very short period of time, and 3.​ Owner’s capital balances
the proceeds are used to settle first
all the liabilities and any remaining
amount is paid to the partners under RIGHT OF OFFSET
a lump-sum payment ( one time
single payment). -​ A loan payable to a partner has a
-​ Lump sum liquidation is possible higher priority over the partner’s
when a contracted buyer of all the capital balances. However, the legal
non-cash assets or the assets are right of offset allows a deficit in a
sold on a “package deal” basis. partner’s per capita account to be
offset by a loan payable to that
2.​ Installment Liquidation - in most partner.
cases, it would take some time
before all the assets of a business
are converted into cash. In such STATMEMENT OF LIQUIDATION
cases, the partner’s claims are
settled on an installment basis as -​ Is a financial report that highlights
cash becomes available, but only the realization (receipts from assets
after all partnership liabilities are disposal) and liquidation (settlement
fully settled. of creditors’ and partners’ claims) of
a partnership.

Asis, Margareth C. | ACT233

 The claims to the personal assets of a
Notes: partner are ranked in the following order:

In lump-sum & installment liquidation: ○​ Owing to the personal

creditors of a partner.
1.​ Expercted future expenses are ○​ Owing to the partnership
recognized immediately as losses to creditor.
be allocated to the partner’s capital ○​ Owing to partners by way of
balance. contribution
2.​ Unsold non-cash assets are
considered losses to be allocated 3.​ Third, in case some partners are
also to the partner’s capital insolvent, their capital deficiency is
balances. offset by the capital balance of a
partner.

If after allocation the capital

deficiency of an insolvent partner, a
MARSHALLING OF ASSETS solvent partner’s capital balance
results to a negative amount, the
●​ One of the characteristics of a solvent partner is required to
partnership is “unlimited liability”. provide additional contributions.
This is because the personal assets
of the general partners are subject to
the claims of partnership’s creditors
in case of partnership insolvency.
●​ The legal doctrine of marshalling SAFE PAYMENT SCHEDULE AND CASH
of assets is applied when the PRIORITY PROGRAM
partnership and some of the
partners are insolvent. -​ The basic purpose of this schedules
is to prevent overpayments to
The following rules are applied in the partners during installation
doctrine: liquidation.

1.​ First, any available assets of the SAFE PAYMENT SCHEDULE

partnership are used to settle the -​ Shows how much cash can be
partnership’s liabilities. “safely” paid to the partners during
2.​ Second, in case the assets of the installment liquidation, which avoids
partnership are insufficient to pay any overpayment.
all liabilities (insolvency), the
solvent general partners are -​ The safe payment schedule can be
required to provide additional funds used as supporting information
from their personal assets. for a statement of liquidation.

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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
before the sale of any assets.

-​ When preparing a cash priority

program, it ranks the partners
according to their maximum loss
absorption capacity.

-​ Partner with the highest maximum

loss shall be paid first. Vice versa.

Maximum loss absorption capacity = total

partner’s interest in the partnership /
Partner’s P/L ratio

Asis, Margareth C. | ACT233