PARTNERSHIP FORMATION

Accounting entries to record the formation of a partnership will depend upon how the partnership is formed. A partnership may be formed in the following ways, namely: 1. Formation of a partnership for the first time by individuals. 2. Conversion of a sole proprietorship to a partnership a. A sole proprietor allows another individual who has no business of his own to join the business. b. Two or more sole proprietors form a partnership.

General Guidelines
1. Cash investments are recorded using their face values. 2. Non-cash asset investment is recorded at the current fair value of the property at the time of investment. Independent professional appraisals should be made to determine the fair value. Fair value is the amount to be obtained when the asset is sold at the present time in its present condition. 3. Accounts receivable are recorded in the books of the partnership at gross amount. Allowance for bad debts is carried forward to the partnership. 4. Depreciable property assets are recorded in the books of the partnership at carrying value. Accumulated depreciation is not carried forward to the partnership. 5. When a sole proprietorship is converted into a partnership, the following books may be used: a. Books of the sole proprietorship may be used as books of the partnership. b. Books of the sole proprietorship will be closed and a new set of books will be used for the partnership.

Two Kinds of Partnership Formation

1. Formed by individuals Cash investment Non-cash asset investment Cash X, Capital Asset X, Capital Note: Use the fair value of the asset. Non-cash asset investment with assumption of liability Asset Liability X, Capital Note: Debit the asset account using its fair value; credit the liability account using the loan balance to be assumed by the partnership; and credit the capital account of the partner using the net amount. Service or Industry Memo Entry Mr. X is admitted as an industrial partner with a ____ share in xxx xxx xxx xxx xxx xxx xxx

profits. 2. Sole proprietorship(s) converted into a partnership accounting procedures are as follows: a. Adjust the books of the sole proprietorship(s). Increase in value Asset xxx of an asset X, Capital without a contraasset account Decrease in value of an asset without a contra asset account X, Capital Asset xxx xxx

xxx

Increase in value Contra- asset of an asset X, Capital with a contra asset account Decrease in value of an asset with a contra asset account X, Capital Contra- asset

xxx xxx

xxx xxx

Increase in value X, Capital of a liability Liability Decrease in value of a liability Liability X, Capital Note: These adjustments are similar to the year-end adjusting entries. Only, replace the nominal accounts with

xxx xxx xxx xxx

the Owner, Capital account.

b. Close the books of the sole proprietorship(s). Closing entry Contra-asset Liabilities X, Capital Assets xxx xxx xxx xxx

c. Record the investment of the partners in the books of the partnership assume new set of books. Opening entry to record investment of sole proprietor Assets Allowance for Bad Debts Liabilities X, Capital Notes: 1. Accounts receivable is taken at gross amount; allowance for bad debts is carried over in the books of the partnership. 2. Depreciable property assets are recorded at carrying value; accumulated depreciation is not carried over in the xxx xxx xxx xxx

books of the partnership.

January 2012

Classroom Exercises Partnership Formation

1. A partnership is formed by four (4) individuals who make the following investments: Allan Cash of P100,000 Bob Land costing P150,000 with a fair market value of P200,000 Carl Delivery van costing P350,000

Dan

on which there is an outstanding liability of P50,000 to be assumed by the new business. Labor/skills with a 10% share in profits. Prepare journal entries to record the investment of the partners.

2. Jowie is operating an ice cream parlor. She admits Gloria as a partner in her business. Accounts in the ledgers of Jowies business as of December 31, 2012 show the following balances: Cash Accounts receivable Merchandise Inventory Office equipment Total assets Accounts Payable Notes Payable Jowie, Capital Total liabilities and owners equity P 6,000 120,000 180,000 20,000 P326,000 P32,000 30,000 264,000 P326,000

For purposes of establishing the interest of Gloria, the following adjustments in the books of Jowie are agreed upon. a. An allowance for bad debts of 2% of accounts receivable is to be set up. b. The merchandise inventory is to be valued at P202,000. c. Office equipment is to be depreciated by 10% of its cost. d. Prepaid expense of P6,500 and accrued expenses of P4,000 are to be recognized. Gloria will invest cash to give her a 1/3 interest in the partnership. Prepare all necessary journal entries in the books of Jowie. Prepare all necessary entries in the books of the partnership. Assume new set of books.
January 2012