XPARCOAC: Accounting for Partnership and Corporation PDF

XPARCOAC: ACCOUNTING FOR PARTNERSHIP AND CORPORATION Junior Philippine Institute of Accountants and Auditors-United ____________________________________________________________________________________________________________________________________________________...

XPARCOAC: ACCOUNTING FOR PARTNERSHIP AND CORPORATION Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ OVERVIEW Advantages of a Partnership from a Sole 1. PARTNERSHIP THEORIES Proprietorship 2. PARTNERSHIP FORMATION 3. PARTNERSHIP OPERATION 1. Brings greater financial capability to the business. 2. The combined personal credit of the partners offers PARTNERSHIP THEORIES better opportunity for obtaining additional capital than does a sole proprietorship. Partnership - Is defined in Article 1767 of the civil code of 3. Combines special skills, expertise and the Philippines as a contract whereby two or more experience of the partners. persons bind themselves to contribute money, property, 4. The participation in the business by more than one or industry to a common fund, with the intention of person makes it possible for a closer supervision of all the dividing the profit among themselves. The term “person” partnership activities. may refer to a natural person or juridical person which 5. Offers relative freedom and flexibility of may either be an individual, a corporation, or other action in decision-making. partnership. Advantages of a Partnership from a Corporation Profession - An occupation that involves a higher education or its equivalent, and mental rather than 1. Easier and less expensive to organize as it is formed by manual labor a simple contract between two or more persons. 2. More personal and informal. The personal element in General Professional Partnerships - Generally associated the characters of the partners is retained. with the practice of law, public accounting, medicine, 3. The unlimited liability of the partners makes it reliable and other professions from the point of view of creditors. CHARACTERISTICS OF A PARTNERSHIP Disadvantages of a Partnership 1. Mutual Contribution - Partners contribute money, 1. Easily dissolved and thus unstable compared to a property, or industry depending on the agreement corporation. 2. Division of Profits or Losses - The intention of a 2. Mutual agency and unlimited liability may create partnership is to divide the profits or losses among the personal obligations to partners. partners. 3. A partner may be subject to personal liability for the 3. Co-ownership of Contributed Assets - Assets wrongful acts or omissions of his/her associates. contributed to the partnership are co-owned by partners. 4. Less effective than a corporation in raising amounts of 4. Mutual Agency - One partner represents the capital. partnership as a whole. Any partner may act as agent of 5. The personal liability of a partner for firm debts deters the partnership in conducting its affairs. many from investing capital in a partnership. 5. Limited Life - Merely based on agreement. A 6. There is divided authority among the partners. partnership may be dissolved at any time by action of 7. There is a constant likelihood of dissension and the partners or by operation of law. disagreement when each of the partners has the same 6. Unlimited Liability - Partners are liable to the extent of authority in the management of the firm. their personal assets. The personal assets (assets not contributed to the partnership) of any partner may be PARTNERSHIPS DISTINGUISHED FROM CORPORATIONS used to satisfy the partnership creditor’s claims upon liquidation, if partnership assets are not enough to settle 1. Manner of creation - Partnership is created by mere the liabilities to outsiders. agreement while a Corporation is created by operation 7. Income Taxes - All partnerships are subject to of law. corporate tax except General Professional Partnerships 2. Number of persons - Two or more persons may form a (GPPs) i.e., those organized for the exercise of pressions partnership; in a Corporation, not exceeding 15. like CPAs, Lawyers, Engineers, etc. are subject to the 25% 3. Commencement of juridical personality - In a income tax (RA 11534, CREATE Act). partnership, juridical personality commences from the 8. Partner’s Equity Accounts - Equity accounts correspond execution of the articles of partnership; in a Corporation to the number of partners. from the issuance of certificate of incorporation by the 9. Legal Entity - A partnership has a legal personality Securities and Exchange Commission. separate and distinct from that of each of the partners. 4. Management - In a partnership every partner is an agent of the partnership. In a Corporation, management is vested on the board of directors. 1  XPARCOAC: ACCOUNTING FOR PARTNERSHIP AND CORPORATION Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ 5. Extent of liability - In a Partnership, each of the partners 3. According to Duration except a limited partner is liable to the extent of his Partnership at will - One for which no term is specified personal assets. In a Corporation, stockholders are liable and is not formed for a particular undertaking or only to the extent of their interest or investment in the venture and which may be terminated any time by Corporation. mutual agreement of the partners or the will of one 6. Right of succession - In a partnership there is no right of partner alone. succession. In a Corporation there is a right Partnership with a fixed term - One in which the term of succession. A Corporation has the capacity of or period for which the partnership is to exist is agreed continued existence regardless of the death, withdrawal, upon. It may also refer to a partnership formed for a insolvency, or incapacity of its directors or stockholders. particular undertaking and upon the expiration of 7. Terms of existence - In a Partnership, any period of time that term or completion of the particular undertaking is stipulated by the partners. In a Corporation, it should the partnership is dissolved; unless continued by the have perpetual existence unless its articles of partners. incorporation provide otherwise. (Usually, it would be subject to renewal every 50 years.) 4. According to Purpose/Activity Commercial or Trading partnership - One whose main CLASSIFICATIONS OF A PARTNERSHIP activity is the manufacture and sale or the purchase and sale of goods. 1. According to Object Professional or Non-Trading partnership - One which is Universal partnership of all present property - One organized for the purpose of rendering services. which the partners contribute, at the time of the constitution of the partnership, all the properties 5. According to Legality of Existence which belong to each of them into a common fund De Jure Partnership - One which has complied with all with the intention of dividing the same among the requirements for its establishment. themselves as well as the profits which they may De Facto Partnership - One which failed to comply acquire therewith. All assets contributed to the with one or more of the legal requirements for its partnership and subsequent acquisitions become establishment. common partnership assets. Universal partnership of all profits - One which 6. According to Publicity comprises all that the partners may acquire by their Secret partnership - One wherein the existence of industry or work during the existence of the certain persons as partners is not made known to the partnership and the usufruct of movable or public by any of the partners. immovable property which each of the partners may Open partnership - One wherein the existence of possess at the time of the institution of the contract. certain persons as partners is made known to the Particular partnership - One which has for its object public by the members of the firm. determinate things, their use or fruits, or specific undertaking or the exercise of a profession or 7. According to Representation to others vocation. Ordinary partnership - One which actually exists among the partners and also as to third persons. 2. According to Liability Partnership by estoppel - One which in reality is not a General partnership - Involves personal liability for partnership but is considered as one only in relation each partner if partnership assets are not sufficient to to those who, by their conduct or omission are pay creditors. precluded to deny or disprove the partnership’s existence. Limited partnership - One formed by two or more persons having as members, one or more general KINDS OF A PARTNERS partners, or one or more limited partners, who as such are not bound by the obligations of the partnership. 1. As to Contribution The word “Limited” or “LTD” is added to the name of Capitalist Partner - Contributes capital in cash or the partnership to inform the public that it is a limited property. partnership. Industrial Partner - Contributes industry, labor, skill, In a limited partnership, there should be one general talent or service. partner, while the remaining partners can be limited, Capitalist-Industrial Partner - Contributes cash, with their obligations to creditors limited to their property, and industry. capital contributions. 2  XPARCOAC: ACCOUNTING FOR PARTNERSHIP AND CORPORATION Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ Trade and Co-partnership Registration 2. As to Liability Industry 2. SEC Certificate of Business General Partner - Liable up to their personal (net) Name assets. (renewable Limited Partner - Liable only up to their contribution. every five years) 3. As to Management Managing Partner - One who actively manages the City or Municipal 2. Certificate of 1. Mayor’s business of the partnership. Contributes managerial Mayor’s Office Registration of permit and skills. Business Name License to Silent Partner - Partner has no active part but known. Operate Does not participate in the management of the (renewable partnership affairs. annually) 4. Other classifications Bureau of Internal 1. SEC Registration 1. BIR Liquidating Partner - Appointed in time of liquidation. Revenue 2. Articles of Registration One who takes charge of the winding up of Co-Partnership No. partnership affairs upon dissolution. 2. Partnership’s Secret Partner - Partner is active but is not known. Tax Dormant Partner - Partner has no active part and is Identification not known; he/she is both a silent and a secret Number (TIN) partner. 3. Registration Nominal Partner or Partner by Estoppel - One who is of books, not really a partner, not being a party to the invoices, and partnership agreement, but is made liable as a official partner for the protection of innocent third persons. receipts Ostensible Partner - One who takes active part in the management of the firm and is known to the public Social Security 1. Filled SSS 1. SSS as a partner in the business. System Application Certificate of form Membership PARTNERSHIP CONTRACT 2. List of 2. SSS Employer employees ID Number A partnership is created by an oral or a written agreement. Since partnerships are required to be Philippine Health 1. SEC Registration 1. PhilHealth registered with the Office of the Securities and Exchange Insurance 2. Employer Data Employer Commissions, it is necessary that the agreement be in Corporation Record or ERI Number writing. In this case, misunderstandings and disputes Form (PEN) and among the partners relative to the nature and terms of 3. Business Permit the the contract may be avoided or minimized. or License Certificate of Registration The written agreement between or among the partners 2. PhilHealth governing the formation, operation and dissolution of the Identification partnership is referred to as the Articles of Partnership. Number (PIN) and ORGANIZING A PARTNERSHIP Member Data Record (MDR) for Place of Requirements Certificates concerned registration Issued employees Securities and 1. Articles of 1. SEC Home Mutual 1. SEC Registration 1. HDMF Exchange Co-partnership Certificate Development 2. Articles of Certificate of Commission 2. Filled SEC Fund (PAG-IBIG Co-Partnership Membership registration Fund) 2. HDMF form Employer ID Number Department of 1. Articles of 1. Certificate of 3  XPARCOAC: ACCOUNTING FOR PARTNERSHIP AND CORPORATION Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ ACCOUNTING FOR PARTNERSHIPS MERCHANDISING WORKSHEET Plurality of Capital and Drawings Accounts – There should be as many capital accounts and as many drawing accounts as there are partners (one capital account and one drawing account is maintained for each partner). SALES FORMULA Sales xxx Less: Sales Returns & Allowances. xxx Sales Discounts xxx Net Sales xxx PURCHASE FORMULA Purchases xxx Add: Freight-in xxx Less: Purchase Returns & Allow. xxx Purchase Discounts xxx ADJUSTING ENTRIES Net Purchases xxx Accrued Expenses Accrued Income COST OF SALES Dr. Expense Dr. Receivable Cr. Payable Cr. Income Merchandise Inventory, Jan. 1 xxx Add: Purchases xxx Prepaid Expenses Unearned Income Freight In xxx Asset Method Liability Method Cost of Delivered Goods xxx Dr. Expense Dr. Unearned Income Less: Purchase Returns & Allowances xxx Cr. Prepaid Expense Cr. Income Purchase Discount xxx Total Goods Available for Sale xxx Expense Method Income Method Less: Merchandise Inventory, Dec. 31 xxx Dr. Prepaid Expense Dr. Income Cost of Sales xxx Cr. Expense Cr. Unearned Income INCOME STATEMENT (MERCHANDISING) Depreciation Dr. Depreciation Expense - PPE Cr. Accumulated Depreciation - PPE Sales xxx Less: Sales Returns & Allowances. xxx Uncollectible Accounts Sales Discounts xxx Allowance Method Net Sales xxx Dr. Doubtful Accounts Expense Less Cost of Sales: Cr. Allowance for Doubtful Accounts Merchandise Inventory, Jan. 1 xxx Add: Purchases xxx Direct Write-Off Method Freight In xxx Dr. Doubtful Accounts Expense Cost of Delivered Goods xxx Cr. Accounts Receivable Less: Purchase Returns & Allowances xxx Purchase Discount xxx Inventory Total Goods Available for Sale xxx Less: Merchandise Inventory, Dec. 31 xxx Gross Income xxx 4  XPARCOAC: ACCOUNTING FOR PARTNERSHIP AND CORPORATION Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ Less Operating Expenses: Non-cash Drawings - Should be valued at their market Expenses xxx value at the date of withdrawal, ensuring accurate Add Other Revenues and Gains xxx representation of partner withdrawals. Total Income xxx Less Other Expenses and Losses xxx Nini Kriz NET INCOME xxx (Fair Value) (Fair Value) OPENING ENTRIES/FORMATION Cash P50,000 Partners may contribute cash, property or industry to Merchandise P20,000 the partnership. Inventory (cost Appropriate asset accounts are debited for the 10,000) assets contributed and partner’s capital accounts are credited for the total amount of assets Computer P30,000 contributed. Equipment If the asset contributed is in the form of cash, it is (cost 50,000) recorded on the partnership book at face value. If the asset contributed is in the form of property or Total P50,000 P50,000 non-cash asset, it is recorded at agreed value, or in the absence of the agreement, at fair market value. When industry is contributed into the partnership, a Cash 50,000 memorandum entry is prepared. Nini, Capital 50,000 # Note: A Memorandum Entry is essential if there is no Merchandize Inventory 20,000 agreed value, otherwise a journal entry would be Computer Equipment 30,000 required in partnership services. Kriz, Capital 50,000 # PARTNERSHIP FORMATION 2. Conversion of a sole proprietorship to a partnership Accounting entries to record the formation will a. A sole proprietor allows another individual, who has no depend upon how the partnership is formed. A business of his own to join in his business – Usually, one of partnership may be formed in several ways, namely: the prospective partners is already engaged in business prior to the formation of the partnership. In such a case, 1. Formation of a partnership for the 1st time. the partner may transfer his/her assets and liabilities (net Cash Investment – Initial cash investments in a assets) to the partnership at agreed values or at fair partnership are recorded in the capital accounts market values if there are no agreed values. maintained for each partner. - The partnership may either: (1) use the books of the sole Valuation: proprietor, or (2) open a new set of books. 1. Face Amount - It is a common practice that a new set of books are opened for any new business marketing. For example, Dawn and Dom each invest P250,000 cash in a new partnership. The entry to Assumption 1: The partnership will use the books of the record the investments would be: sole proprietor. The following procedures should be followed in Cash 250,000 accounting for this type of information: Dawn, Capital 250,000 Dom, Capital 250,000 1. Adjust the books of the sole proprietor to bring the balances to agreed values. Non-cash Investments – The noncash asset is recorded at 2. Record the investment of the other partner. The values agreed upon by the partners. At the absence of following rules will be helpful in making the necessary any agreement, the current fair market value of the adjusting entries: property at the time of investment will be recognized. Debit asset and credit capital for increases in asset values 5  XPARCOAC: ACCOUNTING FOR PARTNERSHIP AND CORPORATION Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ Debit capital and credit asset for decreases in asset Miguel and Martin made the following contributions in values the partnership: Debit capital and credit liabilities for increases in liability balances Miguel Martin Debit liabilities and credit capital for decreases in liability balances Cash P 800,000 P 400,000 In the case of contra asset accounts, the following ruler Inventories 200,000 shall apply: Equipment 500,000 Debit contra asset account and credit capital for increases in asset values Cash 1,200,000 Debit capital and credit contra asset account for Inventories 200,000 decreases in asset values Equipment 500,000 Miguel, Capital 1,000,000 Assumption 2: The partnership will open a new set of Martin, Capital 900,000 books. 3. Contributions in the form of Cash, Non-cash b. Two or more sole proprietors form a partnership. Assets and Industry (Capitalist and Industrial Partners). Assumption 1: The partnership will use the books of the sole proprietor. Caramel, Cake and Cookie formed a partnership. Caramel contributed P600,000 cash, Cake 1. Adjust the books of the sole proprietor to bring the contributed P300,000 cash and equipment balances to agreed values. valued at P450,000; Cookie is an industrial partner to contribute his skills and expertise to 2. Record the investment of the other partner. the partnership. Profit or loss is to be shared equally among the partners. Assumption 2: The partnership will open a new set of books. The entry to record the contributions of partners Caramel and Cake follows: 1. Adjust the books of the sole proprietor to bring the balances to agreed values. Cash 900,000 2. Close the books of the sole proprietor. Equipment 450,000 3. Open the books of the partnership by recording the Caramel, Capital 600,000 investment of the other partners. Cake, Capital 750,000 3. Admission of a new partner (will be discussed in future The entry to record the contributions of partner Cookie lessons). follows: PARTNERSHIP FORMATION PROBLEMS Cookie is admitted into the partnership as an industrial partner to share one-third in the partnership profit. Formation A: Two or More Persons Form a Partnership for the First Time , All Partners Formation B: A Sole Proprietor and an Individual Form a are New in the Business Partnership 1. Cash Contributions only (Capitalist Partners) Usually, one of the prospective partners is already engaged in business prior to the formation of the Maria and Louise agreed to form a partnership by partnership. In such a case, the partner may transfer contributing P700,000 cash each, his/her assets and liabilities (net assets) to the partnership at agreed values or at fair market values if there are no Cash 1,400,000 agreed values. Maria, Capital 700,000 Louise, Capital 700,000 - The partnership may either: (1) use the books of the sole proprietor, or (2) open a new set of books. 2. Cash and Non-Cash Contributions (Capitalist Partners) 6  XPARCOAC: ACCOUNTING FOR PARTNERSHIP AND CORPORATION Junior Philippine Institute of Accountants and Auditors-United _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ______________________ - However, it is common practice that a new set of books a. Rowan, Capital 22,000 are opened for any new business undertaking. Allowance for Bad Debts 22,000 - If the problem is silent, open new books. # b. Inventories 30,000 When individual sets of books are kept by each partner or Rowan, Capital 30,000 by any one of the partners, entries are made on the # separate books of the partners for adjustments to the c. Prepaid Expenses 12,000 recorded values. These adjustments are made through Expenses Payable 5,000 the capital account. The capital account is credited for Rowan, Capital 7,000 increases in the value of net assets and is debited for decreases in the value of net assets. The balance of the capital account of Rowan after the three adjusting entries are posted is P915,000 (P900,000 - Alternatively, a Capital Adjustment Account may also be P22,000 + P30,000 + P7,000). used. The balance of this account, after recording all the necessary adjustments, is transferred to the capital