Financial Accounting and Reporting
B-ACTG112 : Partnership Formation to Partnership Liquidation
PARTNERSHIP CONCEPTS
A partnership is a business with 2 or more people that are not organized as a corporation. Partnerships, as well as corporations, are
governed by the “New Civil Code of the Philippines - Articles 1767 to 1867”
● (New) Civil Code of the Philippines Article 1767
○ A partnership is an organization where two or more people bind themselves to contribute money, property, or
industry into a common fund with the intention of dividing profits among themselves
ELEMENTS OF A PARTNERSHIP
1. There must be a valid contract, whether oral or written
- a written contract is required when a partner invests an immovable asset or property into the partnership in which a public
instrument is necessary (Article 1667)
- in addition, Article 1772 states that every contract of partnership having a capital of P3000 or more, in property or
money, shall appear in a public instrument which must be recorded in the office of the SEC
- however, failure to do so doesn’t negate the recognition of the partnership as juridical personality
2. Partners must be of legal capacity to contract
- the partnership must be put up by persons who are of legal age, physically and mentally capable of entering into a contract
3. The contributions made by the partners must only be in the form of money, property, and industry or service
- in accordance with the New Civil Code of the Philippines Article 1767
4. The purpose of the partnership or business is to divide the profit among themselves
FEATURES OF A PARTNERSHIP
1. Legal Entity
- a partnership has a juridical personality separate and distinct from the partners (Article 1678) meaning that it can acquire,
sell, and dispose of properties on its own and incur obligations and transact in the business’ name
- Articles of Partnership / Articles of Co-Partnership (contract between partners)
- a written agreement that specifies the rules of the partnership that is governed by contract laws ad is to
be submitted to Security and Exchange Commission (SEC) to be granted registration
- it specifies the following:
a. name, location, and nature of business
b. name, capital contribution, and audits of each partner
c. procedures for admitting new partners
d. methods of sharing profits and losses among partners
e. procedures for withdrawal of assets by partners
f. procedures for withdrawal of partners from the partnership
g. procedures for liquidating the partnership
2. Co-ownership of Property
1
,Financial Accounting and Reporting
B-ACTG112 : Partnership Formation to Partnership Liquidation
- any asset contributed by a partner becomes property of the partnership (the partner who contributed the property is no
longer its sole owner)
- any NEW assets purchased by the partnership are owned by the partners
3. Mutual Agency
- every partner is a mutual agent of the firm meaning that any partner can bind the partnership to any contract BUT NOT to
contracts associated with his/her personal matter
- despite this, all contracts are still subject to approval by the managing partner
4. Limited Life
- a partnership can operate for an indefinite period of time but in practice, it can easily be dissolved or terminated by the
following terms that’s why it’s considered to have a limited life
a. adding or changing of partner → withdrawal of partner
b. death of a partner → transitioning to a corporation
5. Unlimited Liability
- according to Articles 1791 and 1835, in a general partnership, partners must be willing to pay off the debts of the
partnership with their personal assets if the business becomes insolvent
- all partners have unlimited personal liability for the debts of the business
6. Taxable Entity (Taxability)
- the income of ordinary partnerships and corporations are taxed at 30% based on the TRAIN Law
- however, a general professional partnership that is formed by professionals for the sole purpose of exercising their
common profession does NOT get taxed but instead, its members individually receive the taxes once the profit is
distributed among them
7. Partner’s Capital Account
- each partner needs a separate capital and drawing account (ex. Amoyo, Capital, Perea, Capital, Amoyo, Drawing, Perea,
Drawing)
8. Voluntary Association
- individuals who agree to join together to form a partnership should join of their own free will
KINDS OF PARTNERSHIP
A. As to Liability
1. General Partnership
- all partners are general partners with each having unlimited liability
- all profits and losses pass through all partners, who then pay their personal income tax based on such cash flow
2. Limited Partnership
- has at least 1 general partner and 2 or more limited partners (if a partner/partners are limited, then the
partnership is automatically limited – Article 1816-1843)
B. As to Property
1. Universal Partnership of Property
- all partners contribute all their investments and properties into a common fund (Article 1778)
2. Universal Partnership of Profits
- partners contribute all that they received as a result of their service rendered during the lifetime of the
partnership (the partners retain ownership over their present and future property – Article 1780)
2
, Financial Accounting and Reporting
B-ACTG112 : Partnership Formation to Partnership Liquidation
AAA KINDS OF PARTNERS AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
General and Limited Partners
● general partner is the one who manages the partnership, contributes property or service, and has unlimited liability (also the
last one to receive shares in a limited partnership set up). On the other hand, a limited partner is one who invests cash or
property has no unlimited liability, and has no active role in the management of the partnership (usually the first to claim
his/her share in profits)
Capitalist and Industrial Partners
● capitalist partner is the one who contributes money or property into the partnership fund while the industrial partner is the
one who contributes industry or service only
Real and Nominal Partners
● a real partner is the one who is an actual partner and a nominal partner is the one who is a partner in name only
Ostensible and Secret Partners
● ostensible partner is the one who is known to the public that he is a partner whereas a secret partner is the one who is not
known to the public
Universal and Particular Partners
● universal partner is one whose participation extends to the entire business while a particular partner is one whose
participation is limited to a unit or part of the business
According to Article 1789, an industrial partner is also a general parter, with unlimited liability, and is not allowed to engage in any other kind
of business unless expressly authorized by the other partners.
It is easy to form a partnership. No permits are required from the government if magfoform palang but when starting, registrations
in the SEC, BIR, Mayor’s office, etc. are needed. When making a written agreement about the formation of a partnership, it is wise to
enlist the assistance of an attorney.
Those who can form a partnership are the following: (a) 2 or more individuals with no existing business, (b) 2 or more individuals with
existing business, (c) one individual with business, and the other without. These people can contribute cash, ppe (to be recorded at current
fair market value), service (only a memorandum entry would be recorded), an already existing business, and assets with attached liabilities
AAA PARTNERS’ EQUITY AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
Partners’ equity refers to the rights of the partners over the net assets of the business. In a partnership, there is a plurality of capital
and drawing accounts.
The accountant uses the Articles of Co-Partnership as a guide in recording transactions regarding the partners’ capital contributions,
distribution of profit or loss, dissolution, and liquidation.
● accounting procedures for assets, liabilities, revenue, and expenses are the same in the sole proprietorship
(ASSETS=LIABILITIES + OWNER’S EQUITY)
A. Partner’s Capital Account
● this represents an original investment which becomes its permanent or fixed interest/ratio in sharing profits
3
B-ACTG112 : Partnership Formation to Partnership Liquidation
PARTNERSHIP CONCEPTS
A partnership is a business with 2 or more people that are not organized as a corporation. Partnerships, as well as corporations, are
governed by the “New Civil Code of the Philippines - Articles 1767 to 1867”
● (New) Civil Code of the Philippines Article 1767
○ A partnership is an organization where two or more people bind themselves to contribute money, property, or
industry into a common fund with the intention of dividing profits among themselves
ELEMENTS OF A PARTNERSHIP
1. There must be a valid contract, whether oral or written
- a written contract is required when a partner invests an immovable asset or property into the partnership in which a public
instrument is necessary (Article 1667)
- in addition, Article 1772 states that every contract of partnership having a capital of P3000 or more, in property or
money, shall appear in a public instrument which must be recorded in the office of the SEC
- however, failure to do so doesn’t negate the recognition of the partnership as juridical personality
2. Partners must be of legal capacity to contract
- the partnership must be put up by persons who are of legal age, physically and mentally capable of entering into a contract
3. The contributions made by the partners must only be in the form of money, property, and industry or service
- in accordance with the New Civil Code of the Philippines Article 1767
4. The purpose of the partnership or business is to divide the profit among themselves
FEATURES OF A PARTNERSHIP
1. Legal Entity
- a partnership has a juridical personality separate and distinct from the partners (Article 1678) meaning that it can acquire,
sell, and dispose of properties on its own and incur obligations and transact in the business’ name
- Articles of Partnership / Articles of Co-Partnership (contract between partners)
- a written agreement that specifies the rules of the partnership that is governed by contract laws ad is to
be submitted to Security and Exchange Commission (SEC) to be granted registration
- it specifies the following:
a. name, location, and nature of business
b. name, capital contribution, and audits of each partner
c. procedures for admitting new partners
d. methods of sharing profits and losses among partners
e. procedures for withdrawal of assets by partners
f. procedures for withdrawal of partners from the partnership
g. procedures for liquidating the partnership
2. Co-ownership of Property
1
,Financial Accounting and Reporting
B-ACTG112 : Partnership Formation to Partnership Liquidation
- any asset contributed by a partner becomes property of the partnership (the partner who contributed the property is no
longer its sole owner)
- any NEW assets purchased by the partnership are owned by the partners
3. Mutual Agency
- every partner is a mutual agent of the firm meaning that any partner can bind the partnership to any contract BUT NOT to
contracts associated with his/her personal matter
- despite this, all contracts are still subject to approval by the managing partner
4. Limited Life
- a partnership can operate for an indefinite period of time but in practice, it can easily be dissolved or terminated by the
following terms that’s why it’s considered to have a limited life
a. adding or changing of partner → withdrawal of partner
b. death of a partner → transitioning to a corporation
5. Unlimited Liability
- according to Articles 1791 and 1835, in a general partnership, partners must be willing to pay off the debts of the
partnership with their personal assets if the business becomes insolvent
- all partners have unlimited personal liability for the debts of the business
6. Taxable Entity (Taxability)
- the income of ordinary partnerships and corporations are taxed at 30% based on the TRAIN Law
- however, a general professional partnership that is formed by professionals for the sole purpose of exercising their
common profession does NOT get taxed but instead, its members individually receive the taxes once the profit is
distributed among them
7. Partner’s Capital Account
- each partner needs a separate capital and drawing account (ex. Amoyo, Capital, Perea, Capital, Amoyo, Drawing, Perea,
Drawing)
8. Voluntary Association
- individuals who agree to join together to form a partnership should join of their own free will
KINDS OF PARTNERSHIP
A. As to Liability
1. General Partnership
- all partners are general partners with each having unlimited liability
- all profits and losses pass through all partners, who then pay their personal income tax based on such cash flow
2. Limited Partnership
- has at least 1 general partner and 2 or more limited partners (if a partner/partners are limited, then the
partnership is automatically limited – Article 1816-1843)
B. As to Property
1. Universal Partnership of Property
- all partners contribute all their investments and properties into a common fund (Article 1778)
2. Universal Partnership of Profits
- partners contribute all that they received as a result of their service rendered during the lifetime of the
partnership (the partners retain ownership over their present and future property – Article 1780)
2
, Financial Accounting and Reporting
B-ACTG112 : Partnership Formation to Partnership Liquidation
AAA KINDS OF PARTNERS AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
General and Limited Partners
● general partner is the one who manages the partnership, contributes property or service, and has unlimited liability (also the
last one to receive shares in a limited partnership set up). On the other hand, a limited partner is one who invests cash or
property has no unlimited liability, and has no active role in the management of the partnership (usually the first to claim
his/her share in profits)
Capitalist and Industrial Partners
● capitalist partner is the one who contributes money or property into the partnership fund while the industrial partner is the
one who contributes industry or service only
Real and Nominal Partners
● a real partner is the one who is an actual partner and a nominal partner is the one who is a partner in name only
Ostensible and Secret Partners
● ostensible partner is the one who is known to the public that he is a partner whereas a secret partner is the one who is not
known to the public
Universal and Particular Partners
● universal partner is one whose participation extends to the entire business while a particular partner is one whose
participation is limited to a unit or part of the business
According to Article 1789, an industrial partner is also a general parter, with unlimited liability, and is not allowed to engage in any other kind
of business unless expressly authorized by the other partners.
It is easy to form a partnership. No permits are required from the government if magfoform palang but when starting, registrations
in the SEC, BIR, Mayor’s office, etc. are needed. When making a written agreement about the formation of a partnership, it is wise to
enlist the assistance of an attorney.
Those who can form a partnership are the following: (a) 2 or more individuals with no existing business, (b) 2 or more individuals with
existing business, (c) one individual with business, and the other without. These people can contribute cash, ppe (to be recorded at current
fair market value), service (only a memorandum entry would be recorded), an already existing business, and assets with attached liabilities
AAA PARTNERS’ EQUITY AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
Partners’ equity refers to the rights of the partners over the net assets of the business. In a partnership, there is a plurality of capital
and drawing accounts.
The accountant uses the Articles of Co-Partnership as a guide in recording transactions regarding the partners’ capital contributions,
distribution of profit or loss, dissolution, and liquidation.
● accounting procedures for assets, liabilities, revenue, and expenses are the same in the sole proprietorship
(ASSETS=LIABILITIES + OWNER’S EQUITY)
A. Partner’s Capital Account
● this represents an original investment which becomes its permanent or fixed interest/ratio in sharing profits
3
