Review on Basic Accounting •
ASSETS = LIABILITIES + CAPITAL
PARTNERSHIP FORMATION FORMATION Accounting for Partnerships
The accounting equation:
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Double-entry accounting
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Rules of Debit and Credit
•
Normal balance of accounts
Partners’ Equity Accounts
Partners’ Equity Accounts
PARTNER’S CAPITAL ACCOUNT
PARTNER’S DRAWING ACCOUNT
Debit
1. Permanent withdrawals
Credit
1. Original investment
2. Debit balance of the drawing 2. Additional investment account at the end of the period. 3. Credit balance of the drawing account at the end of the period.
Debit
1. Temporary withdrawals
2. Share in the loss (if capital account is intended for investments and permanent withdrawals)
Credit
1. Share in the profit (if capital account is intended for investments and permanent withdrawals)
Loans Receivable from Partners •
•
Also called “loans to partner” or “due from partner”, represent the substantial amount borrowed by a partner from the partnership.
Loans Receivable from Partners •
The partner’s drawing/capital account is not used because of the creditor-debtor relationship between the partnership (creditor) and the partner (debtor).
The loans receivable from partners account is generally classified as part of the current assets except when the agreed collection period extends beyond one year wherein the account is classified as noncurrent.
Illustration •
Illustration
Assume that Daniel, a partner, borrowed money from the partnership amounting to P20,000 with interest rate of 12% per year. He promised to settle his obligation in 3 months.
•
Subsequent payment of Daniel to settle his obligation would be: Debit
Cash Debit Loans receivable from partner - Daniel Cash
Credit
20,600 Loans receivable from partner – Daniel Interest income (20,000 x 12% x 3/12)
20,000 20,000
To record partner's advances.
Credit
To record collection of loan due from partner.
20,000 600
Loans Payable to Partners •
•
Illustration
Also called “loans from partner” or “due to partner”, this account represents the substantial amount lent to the partnership by a partner which the partnership is obliged to pay. Again, the partner’s capital account is not used because of the creditor-debtor relationship between the partnership (debtor) and the partner (creditor).
•
Assume that Kathryn, a partner, lent money to the partnership amounting to P50,000 with an interest rate of 6% per year. The loan agreement provides that the partnership will pay the entire amount due within 6 months. Debit
Cash
Credit 50,000
Loans payable to partner – Kathryn
50,000
To record loan from partner.
Illustration •
PARTNERSHIP FORMATION
Subsequent payment of the partnership to Kathryn: Debit
Loans payable to partner – Kathryn Interest expense (50,000 x 6% x 6/12)
Credit 50,000 1,500
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A partnership is formed or perfected from the time the partners agreed on the terms and conditions of the partnership contracts. When a partnership is formed, partners commonly observe the following to ensure fair and honest business: –
Cash
51,500 To record payment of loan due to partner.
–
–
Execution of p artners’ agreement. Valuation of partners’ investments. Adjustment of accounts.
PARTNERSHIP FORMATION •
The books of partnership are opened with entries reflecting the net contributions of each partner to the firm. Asset accounts are debited for assets contributed into the partnership, liabilities are credited for any liabilities assumed by the partnership, and separate capital accounts are credited for the amount of each partner’s net investment.
Rules on Initial Investment: A. Amount of contribution.
1. based on the partners agreement. 2. in the absence of any agreement, it shall be contributed equally. B. Valuation of partners’ contribution.
a. cash contribution: the face value of cash
INITIAL INVESTMENT BY PARTNERS •
•
Accounting issues regarding initial investments and other capital contribution are: how much the contribution to be made by the partners and at what amount the capital contribution shall be recognized. The following rules shall be observed when capital contribution issues arise: –
–
Illustration with agreement on individual contribution •
Jose and Maria form a partnership with a total agreed capitalization of P150,000 to be contributed in cash of 40% and 60% by Jo se and Maria, respectively, through the issuance of their personal checks. Debit
Cash
it shall be recorded at the agreed value
2.
otherwise, it will be recorded at fair market value
Credit 60,000
Jose, Capital To record Jose’s initial investment.
b. noncash contribution: 1.
Amount of contribution. The amount shall be based on the partners agreement. In the absence of any agreement, it shall be contributed equally. Valuation of partners’ contribution. If cash contribution is made, the face value of cash is the amount to be recognized. If noncash is to be made, it shall be recorded at the agreed value, otherwise, it will be recorded at the fair value of the property.
Cash
90,000 Maria, Capital To record Maria’s initial investment.
60,000
90,000
Illustration
Valuation of Investments by Partners
w/out agreement on individual contribution •
Jose and Maria decided to form a partnership with a total agreed capitalization of P200,000 to be contributed in cash.
Debit Credit Cash 200,000 Jose, Capital 100,000 Maria, Capital 100,000 To record initial investments of Jose and Maria.
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Partners may invest cash or non-cash assets in the partnership. Non-cash assets are to be recorded at the values agreed upon by the partners. In the absence of any agreement, the contributions will be recognized at their fair market value s at the date of transfer to the partnership.
Illustration •
Abel and Cain formed a partnership. They agreed that the total capital of the partnership is P 120,000, two-thirds of which is to be contributed by Abel. Abel will contribute P80,000 in cash while Cain will contribute cash aside from the P30,000 worth of merchandise taken from his business with outstanding accounts payable of P5,000 to be assumed by the partnership.
Illustration
Assets (Dr.)
=
Liability (Cr.)
+
Cain, Capital (Cr.)
Cash
Merchandise
=
A ccounts Payable
+
Required Capital
?
30,000
=
5,000
+
40,000
=40,000+5000-30,000
=(120,000/3)
Illustration Debit Cash (80,000 + 15,000)
95,000
Merchandise
30,000
Accounts Payable
Recording Industrial Partner’s Contribution Credit
•
To record the contribution of a purely industrial partner, a memorandum entry in the general ledger is prepared.
5,000
Abel, Capital
80,000
Cain, Capital
40,000
To record the initial investments of Abel and Cain.
Opening Entries of a Partnership Upon Formation A partnership may be formed in the following ways: 1. Individuals with no existing business form a partnership (first time in business). 2. Conversion of a sole proprietorship to a partnership. a.
A sole proprietor and an individual without existing business form a partnership.
b. Two or more sole proprietors form a partnership.
3. Admission of a new partner to an existing partnership.
I. Individuals with no existing business form a partnership. •
I. Individuals with no existing business form a partnership.
Illustration: A, B, and C formed a partnership with agreed total capitalization of P300,000 which should be contributed equally by A and B. C was designated to manage the operation of the partnership as an industrial partner with a share of 20% from partnership profits. A and B contribute the following: Carryi ng Value
•
Cash Supplies Equipment (60,000 + 40,000) Land
Fair Market Value
AccountsPayable
Contributions of A Land Equipment Accounts Payable
50,000 70,000 20,000
110,000 60,000 20,000
100,000 50,000 20,000
100,000 40,000 10,000
Contributions of B Cash Equipment Supplies
A, Capital B, Capital
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•
1. Record the adjustments (based on agreed valuation or fair value) of the assets and liabilities directly to the sole proprietor’s capital account. 2. Close the books of the sole proprietorship. 3. Open the new set of partnership books by recording the partners’ contribution.
Debit 100,000 10,000 100,000 110,000
Credit
20,000 150,000 150,000
To record initial investments by A and B.
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II. Conversion of a Single Proprietorship to a Partnership •
To record:
C’s contribution as industrial partner will be a memorandum entry in the general ledger.
Illustration •
A is the owner of an existing single proprietorship. A, together with B and C, decides to convert his business into a partnership. They agreed to start the partnership wi th a total capitalization of P 150,000 to be contributed equally by partners. B and C are to contribute cash. Partner A also contribute additional cash if the net assets of his business after the agreed valuation will not be enough to cover his contribution requirement.
Illustration •
Illustration Suppose that the ff valuation adjustments were agreed upon: a. Accounts receivable is 98% realizable. b. Merchandise inventory is to be valued at P9,000. c. Interest of P 600 on note payable should be recognized. d. Furniture and Fixtures are to be valued at P16,500.
A’s single proprietorship Trial Balance shows the following: Account Title
Debit
Cash
Credit
5,000
Accounts Receivable
20,000
Allowance for Uncollectible Accounts Merchandise Inventory, end Furniture and Fixtures
200 8,000 22,000
Accumulated Depreciation
4,400
Notes Payable
10,000
A, Capital
40,400
TOTAL
55,000
55,000
Illustration •
Illustration
In the books of A’s Proprietorship: Description A, Capital
Debit 200
Credit •
A’s Proprietorship Adjusted Trial Balance:
200 To record adjustment on accts. receivable. (20,000 x 2%)-200
Allowance for Uncollectible Accounts
Account Title
Cash
Merchandise inventory 1,000 A, Capital 1,000 To record adjustment in merchandise inventory. (9,000 - 8,000) A, Capital Interest Payable
Accounts Receivable
600
To record accrued interest on notes payable.
Furniture and Fixtures
20,000 400 9,000 22,000
Accumulated Depreciation
5,500
Notes Payable
A, Capital 1,100 Accumulated Depreciation To record adjustment of furniture and fixtures. (22,000 - 4,400 - 16,500)
10,000
Accrued Interest Payable
1,100
600
A, Capital TOTAL
Credit
5,000
Allowance for Uncollectible Accounts Merchandise Inventory, end
600
Debit
39,500 56,000
56,000
Illustration •
Illustration
To close A’s Proprietorship account: Description Allowance for Uncollectible Accounts Accumulated Depreciation Notes Payable Accrued Interest Payable A, Capital Cash
Debit 400 5,500 10,000 600 39,500
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Credit
Description Debit Credit Cash (5,000 + 10,500) 15,500 Accounts Receivable 20,000 Merchandise Inventory 9,000 Furniture and Fixtures 16,500 Allowance for Uncollectible Accounts 400 Notes Payable 10,000 Accrued Interest Payable 600 A, Capital 50,000 To record A’s contribution to the Partnership.
5,000 20,000 9,000 22,000
Accounts Receivable
Merchandise Inventory Furniture and Fixtures To close the books of A’s Proprietorship
To record partners’ contribution on the Partnership’s books:
Illustration Description Cash B, Capital C, Capital To record contribution of B and C.
Illustration Debit 100,000
Credit
•
ABC Partnership Trial Balance Account Title
50,00 50,00
Cash Accounts Receivable
Debit
20,000
Allowance for Uncollectible Accounts Merchandise Inventory, end Furniture and Fixtures
Credit
115,500
400 9,000 16,500
Notes Payable
10,000
Accrued Interest Payable
600
A, Capital
50,000
B, Capital
50,000
C, Capital
50,000
TOTAL
161,000
161,000
III. TWO OR MORE PROPRIETORS FORM A PARTNERSHIP
ILLUSTRATION
ILLUSTRATION Digong and Miriam are both business owners of single proprietorship businesses. They agreed to combine their businesses into a par tnership. They agree to start with a total capitalization of P 400,000 to be contributed equally. They also agreed to the ff. valuation of their businesses’ non-cash assets: a. Their receivables are 95% collectible. b. The inventory has realizable value of P 30,000. c. The equipment has fair value of P50,000. They will invest additional cash if needed to complete their agreed contribution. •
Trial balance of their businesses upon formation of partnership: Digong’s Business:
Dr.
Cr.
Miriam’s Business:
Dr. 5,000
Cash
20,000
Cash
Accounts Receivable
60,000
Accounts Receivable
Inventory
25,000
Equipment
45,000 120,000
Accounts Payable
70,000 Accumulated Depreciation
Digong, Capital
35,000 Miriam, Capital
Closing of Digong and Miriam’s books (entries):
Digong' s Books:
Dr.
Digong, Capital
Accounts Payable
Allow. for Bad Debts
Cr.
Dr.
Dr.
37,000
Miriam, Capital
97,750
70,000
Accumulated Depreciation
70,000
Allow. for Bad Debts
Cash
20,000
Cash
Accounts Receivable
60,000
Accounts Receivable
Inventory
30,000
Equipment
Opening of DM Partnership’s Books (entries): Cash
Miriam' s Books:
3,000
170,000 170,000
ILLUSTRATION •
•
30,000 140,000
105,000 105,000
ILLUSTRATION
Cr.
Cr.
Cr.
183,000
Accounts Receivable
60,000
Inventory
30,000
Allow. for Bad Debts
3,000
Accounts Payable
70,000
Digong, Capital
200,000
To record Digong's contribution to the Partnership.
2,250
Cash 5,000
45,000
120,000
107,250
Accounts Receivable
45,000
Equipment
50,000
Allow. for Bad Debts Miriam, Capital To record Miriam’s contribution to the Partnership.
2,250 200,000
ILLUSTRATION •
ILLUSTRATION
Agreed valuation adjustments (entries):
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DM Partnership Trial Balance Account Title
igong's Books:
nventory
Dr.
Cr.
5,000
Allowance for Uncollectible ccounts
Miriam's Books:
Miriam, Capital
3,000
Allowance for Uncollectible Accounts
Dr.
Cr.
Debit
Cash
290,250
Accounts Receivable
105,000
Allow. for Bad Debts
42,250
2,250
5,250
Inventory
30,000
Equipment
50,000
Accounts Payable Digong, Capital
2,000
Accumulated Depreciation
40,000
70,000
Digong, Capital
200,000
Miriam, Capital TOTAL
Credit
200,000 475,250
475,250
