Modul E: Review of Accounting Process

MODUL Review of Accounting Process
01
Overview Learning Outcomes
Concepts, principles and accounting cycle are part At the end of this module, the student should be able
of fundamentals of accounting. There are the to:
foundation and therefor necessary to 1.1 Define and understand the nature of
comprehend different topics in different areas of accounting
accounting. Reviewing the accounting process is 1.2 Understand the accounting cycle
very essential to understand the future topics to 1.3 State the recording phase of accounting
be covered by this course. 1.4 State the summarizing phase of accounting
1.5 Know how to prepare adjusting entries
This module tackles the nature and purpose of
accounting and different users of accounting
information. It also covers the steps of accounting
process from proper documentation to reversing
the adjusting entries made at the end of the
accounting period.
Introduction
Accounting has defined as a service activity. Service is a valuable action, deed, or effort
performed to satisfy a need or to fulfill a demand. Accounting is a service activity in Learning Outcomes
such a way that it provides information to end users. With the help of financial reports,
end users can make an economic decision. 1.1 Define and understand
the nature of accounting.
Accounting serves as a language of business. Accounting is an information system that
measures business activities, processes information into reports, and communicates
the reports to the decision makers. It interprets and communicates the true status of the business in terms of its operating
results and financial condition.
Also, accounting is an art and a discipline. It is designed to render service activity with utmost efficiency. Its services are
performed by highly competent and objective individuals that observe accounting professional standards and ethics.
Accounting Cycle
Accounting cycle, also called “accounting process”, refers to a series of repetitive
activities of recording, summarizing and reporting economic transactions from the Learning Outcomes
beginning to the end of the accounting period.
1.2 Understand the
accounting cycle
1 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

The aspects of accounting process include:
a. Identifying – This aspect includes the recognition of business

transactions or events that reportable. To identify if it is
reportable events or not, it must have monetary effects on any
of the accounting elements such as assets, liabilities and equity.
Examples of these transactions are buying or selling goods,
collecting cash from customer, rendering services, paying
electricity bills, etc.
b. Measuring – This is the aspect of assigning peso amounts to the

economic transaction and events that are to be recorded in the
books of accounts like general journals, etc. Only economic
transactions or events are recorded in the books of accounts. It
is because they have monetary values that can be measurable.
c. Communicating – this process contains the preparation and distribution of accounting reports to potential users of
accounting information. It involves the recording and summarizing phase of accounting.
Recording Phase of Accounting

The recoding phase of accounting includes the following:
Learning Outcomes
1. Documentation – Transactions reported in the books of accounts must have
supporting documents like sales invoice, purchase contract, vouchers, etc. For 1.3 State the recording
example, collection of cash from customer. In this transaction, the supporting phase of accounting
document that is needed is the cash receipt because it can serve as proof or evidence
of the transaction. Before recording the transaction in the general journal, cash receipt must be issued to the
customer and kept the copy of the receipt.
2. Journalizing – Recording to the general journal – Transactions based on the dates of supporting documents are
chronologically recorded with explanations in the general journal or special journal.
Example 1: On June 1, 2020, the entity renders a service to Mr. A on cash amounting to P10,000. The next day, they
bought supplies for the office on cash costing Php 5,000. When journalizing the transaction, the rendering of service
must be recorded first before the buying of supplies because the former transaction happened and dated earlier than
the latter transaction. To illustrate, see the general journal below:
GENERAL JOURNAL
Page: GJ-01
Date Particulars PR Debit Credit
June 01 Cash Php 10,000.00
Service Revenue Php 10,000.00
To record the service rendered to Mr. A
02 Office Supplies 5,000.00

Cash 5,000.00
To record the office supplies bought
Journals are called “books of original entries”. Journalizing is the process of recording the transaction on the journals.
3. Posting to the general ledger – Posting is the process of transferring and summarizing the recorded transactions from
the journals to each account in the ledgers. It can be done at the end of the day, week or month.
Example 2: Use the journal entries above. A Php 10,000 will be added to the debit side and a Php 5,000 on the credit
side of “CASH” account. Also, another Php 10,000 will be added to the credit side of “SERVICE REVENUE” account and
a Php 5,000 on the debit side of “OFFICE SUPPLIES” account. To illustrate, see the general ledger below:
GENERAL LEDGER
Account: CASH Account No.: 101
Date Item PR Dr. Date Item PR Cr.
2020 2020
June 02 Service income GJ-01 10,000.00 June 02 Office supplies GJ-01 5,000.00
Account: SERVICE REVENUE Account No.: 401

2020
June 01 Rendered to Mr. A GJ-01 10,000.00
Account: OFFICE SUPPLIES Account No.: 501

2020
June 02 Coupon bond, etc. GJ-01 5,000.00
Ledgers are called “book of final entries” because the balances of each account shall be used to prepare the financial
statements.
NOTE that all entries must be posted. These includes the adjusting, closing and reversing entries.
Summarizing Phase of Accounting

The summarizing phase of accounting includes the following: Learning Outcomes
1. Preparation of trial balance – The trial balance is prepared to test the equality of 1.4 State the summarizing
total debits and total credits but not the accuracy of the accounts in the accounting phase of accounting
records. Also, this process is optional.
2. Preparation for adjusting entries – This is the process of gathering and putting together various data necessary to
update the balances of certain accounts in the books of the company. Adjustments based on compiled data are then
recorded before the financial statements are prepared. These adjustments are necessary so that income and
expenses will be reported in the period they are earned and incurred, respectively; or else, profit will be misstated.

The most common types of adjusting data are the following: Learning Outcomes
a. Accrued expense – This is an expense incurred but not yet paid as of the
statement of financial position date. Accrued expense is unpaid but is matched 1.5 Know how to prepare
against income or earnings for the current period. adjusting entries
Example 3: The interest incurred on the notes payable amounting to Php 1,000.00. The adjusting entry is
recorded as follows:
Interest expense Php 1,000

Accrued interest expense Php 1,000
b. Accrued income – This is an income earned but not yet received as of the statement of financial position date.
Accrued income is uncollected but is matched with expenses for the current period
Example 4: The interest earned on the notes receivable amounting to Php 500.00. The adjusting entry is recorded
as follows:
Interest receivable Php 500

Interest income Php 500
c. Prepaid expense – This is an expense paid or acquired in advance. An example of prepaid expense is rent paid
in advance. Another example is the office supplies purchased. The adjustment relating to the prepaid expense
at the end of the accounting period depends on the method used in recording the initial payment.
The two methods of recording prepayments are the asset method and the expense method. Under the asset
method, the payment is initially recorded to an asset account. At the end of the accounting period, the used
portion of asset is transferred to an expense account. Under the expense method, the payment is initially debited
to an expense account. At the end of the accounting period, the unused portion of the expense is transferred to
an asset account.
Example 5: On June 1, 2020, an entity paid its rent of Php 24,000 covering a period of two years beginning on
this date. The entity used the calendar year.
To record the initial payment of expense made on June 1, 2020.
ASSET METHOD EXPENSE METHOD

Prepaid rent Php 24,000 Rent expense Php 24,000
Cash Php 24,000 Cash Php 24,000
To record the adjustment at the end of the accounting period.
ASSET METHOD EXPENSE METHOD

Rent expense Php 7,000 Prepaid rent Php 17,000
Prepaid rent Php 7,000 Rent expense Php 17,000
(Php24,000X7/24) (Php24,000X17/24)
d. Unearned income – This is an income already collected but not yet earned as of the statement of financial
position date. It is also known as deferred income. Just like prepaid expense, the adjustment relating to the
unearned income at the end of the accounting period depends on the method used in recording the initial receipt
of cash.

The two methods of recording advance payments are the liability method and the income method. Under the
liability method, the collection is initially recorded to a liability account. At the end of the accounting period, the
earned portion of liability is transferred to an income account. Under the income method, the collection is
initially credited to an income account. At the end of the accounting period, the unearned portion of the income
is transferred to a liability account.
Example 6: On April 1, 2020, an entity received Php 12,000 representing rental of an office space covering a
period of one year beginning on this date. The entity used the calendar year.
To record the initial collection made on April 1, 2020.
LIABILITY METHOD INCOME METHOD

Cash 12,000 Cash 12,000
Unearned rent 12,000 Rent income 12,000
To record the adjustment at the end of the accounting period.
LIABILITY METHOD INCOME METHOD

Unearned rent 9,000 Rent income 3,000
Rent income 9,000 Unearned rent 3,000
(Php12,000X9/12) (Php12,000X3/12)
e. Depreciation – Depreciation is defined as a systematic allocation of the depreciable amount of an item over its
useful life. Depreciable amount is the cost of an asset, or other amounts substituted for cost, less its residual
value.
The depreciation expense for the period id determined using any of the acceptable methods provided in the
standards, “PAS16”, such as straight-line method, diminishing balance method, and units of production method.
Under straight-line method, the annual depreciation expense is computed as follows:
Depreciation expense per year = (Cost – residual value) / Estimated useful life (in years)
If the asset is used for less than a year, the proportionate expense should be computed, unless the company
adopts a different policy such as providing half year depreciation in the year of acquisition of the asset.
NOTE that what method of depreciation and how it is depreciated is all depends on the company’s accounting
policy.
The account” Accumulated Depreciation” is a contra asset account. It is reported in the statement of financial
position as a deduction from the related asset.
Example 7: An entity acquired and used an office equipment on July 1, 2020 for Php 650,000. This asset is
estimated to have a 5-year useful life and Php 50,000.
To record the depreciation expense on December 31, 2020.

Depreciation expense 60,000
Accumulated depreciation – Office equipment 60,000
(Php650,000-Php50,000)/5 yrs. X 6/12
The depreciation expense recorded for 2020 is for 6 months only since it is acquired and used starting from July
1 to December 31, 2020. For 2021 until 2024, the depreciation expense is Php 120,000 per year, (650,000-
50,000)/5 yrs. While for the year 2025, the depreciation expense is only Php 60,000 which is for the remaining 6

months. Observe that at 2025 after the recording of depreciation, it still has a remaining balance of Php 50,000.
It is because the asset has a residual value of Php 50,000.
f. Uncollectible accounts – This expense represents the customers’ accounts that may no longer be collected or
that may possibly become bad debts.
The standard “PAS 39” requires a careful assessment of the collectibility of the receivables. Several
considerations have to be taken into account will be discussed thoroughly in higher accounting subjects.
The amount of uncollectible accounts expense that will be reported in the income statement is computed as
follows:
Required allowance balance XXX

Plus: Allowance debit balance before adjustment XXX
Less: Allowance credit balance before adjustment XXX
Uncollectible accounts expense for the period XXX
The account” Allowance for Uncollectible Accounts” is a contra asset account. It is reported in the statement of
financial position as a deduction from the related asset which is the receivable.
Example 8: An entity’s unadjusted trial balance dated December 31, 2020, contains the following information:
Accounts receivable Php 300,000 debit
Allowance for uncollectible accounts 2,000 credit
Sales 1,500,000 credit
Estimated uncollectible accounts amounted to P10,000.
To record the uncollectible accounts expense for 2020
Uncollectible accounts expense 8,000

Allowance for uncollectible accounts 8,000
Required allowance balance 10,000

Less: Allowance credit balance before adjustment 2,000
Uncollectible accounts expense for the period 8,000
g. Inventory – If the entity used the periodic inventory system, it is necessary to adjust the inventory at the end of
the accounting period. The entity does not record the physical movement of the goods. Acquisition of goods are
recorded in the nominal account “Purchases” but the reduction of goods resulting from sale is not reflected in
the books. Therefore, the balance of Inventory account shown in the trial balance is the beginning balance.
Because of this, adjustments are necessary to reflect the ending balance of the inventory.
To record the transfer of beginning inventory balance to Income Summary
Income Summary XXX

Inventory XXX
To record the ending inventory balance
Inventory XXX
Income Summary XXX

3. Preparation of working paper – The working paper starts with the unadjusted trial balance, adjustments, and
adjusted balances of Statement of Financial Performance and Statement of Financial Position. It makes the
preparation of financial statements more convenient. This process is also optional.
4. Preparation of financial statements – Financial statements can be made directly from the open balances of the
general ledger. It includes:
a. Statement of Financial Performance
b. Statement of Financial Position
c. Statement of Cash flows
d. Statement of Changes in Owners’ equity
e. Notes to the Financial Statements
5. Preparation of post-trial balance – The post-closing trial balance contains the real accounts with open balances after
the adjusting and closing entries are made in the ledger.
6. Preparation of reversing entries – Certain adjusting entries recorded at the end of the accounting period are reversed
at the beginning of a new accounting period. These adjustments include accrued expenses, accrued income, prepaid
expenses under expense method and deferred income under income method.
This process is optional but it facilitates the recording of expense payments and revenue receipts in the new period
in the usual manner.
References
 Advanced Financial Accounting and Reporting, Part 1 (2017). Milan, Z.V. Baguio City: Bandolin Enterprise
 Accounting for Partnership & Corporation (2011). Baysa, G.T., et al.Mandaluyong City: Millenium Books, Inc.
 Valencia, E. (2005). Partnership & Corporation Accounting. Mandaluyong City: Millennium Books, Inc.
Learning Activities
Exercise 1: Discussion Question
1. Explain the definition and nature of accounting.
2. Enumerate and give at least three (3) examples of accounting information users.
3. Enumerate and discuss in order the steps in the accounting process.
4. Explain the rationale for preparing adjusting and closing entries at the end of accounting period.
5. Enumerate adjusting entries that may be reversed and explain the advantage of preparing them.
Exercise 2: Jell’s Trading

Requirements: Journalize the following transactions of Jell’s Trading.
March 1 Jell established the business by investing the following
Cash Php 200,000
Merchandise inventory 300,000
2 Purchased a cash register on cash, Php 30,000 from G Industrial.
2 Bought merchandise on cash from U Ent., Php 20,000 less 5% discount.
3 Purchased goods from T Co. Php 50,000. Terms: 30% down, balance, 2/10, n/30.
6 Sold merchandise to V, P15,000. Terms: 50% down, balance 2/7, n/15.

10 Sold merchandise on cash, P20,000, less 10% discount.
11 Paid the account to T Co.
12 Collected the account from V.
30 Paid the salaries of staff amounting to Php 8,500.
31 Incurred the following unpaid expenses:
Light and water Php 1,800
Rent expense 3,000
Exercise 2: Myla Company

In analyzing the accounts of Myla Company, the information listed below are determined on December 31, 2020, the end
of the first year of operations of the company:
a. The Insurance Expense account shows a total of Php72,000 representing the cost of three-year insurance policy
dated September 1, 2020.
b. On October 1, Unearned Rent was credited for Php135,000 representing rental for nine months beginning on that
date.
c. Supplies of Php24,000 were purchased during the year and were debited to Supplies account. On December 31,
supplies of 5,000 are on hand.
d. The company acquired furniture on March 31, costing 150,000. The assets have estimated useful life of ten (10)
years without any residual value.
e. Accounts receivable balance on December 31 amounted to P2,500,000. Of this amount, Php 8,500 are estimated
to become uncollectible.
f. The notes receivable balance on December 31 amounted to P150,000 representing a 90-day, 10% note received
on December 1. The interest on the note is collectible upon maturity.
g. Unpaid salaries as of December 31 amounted to 25,000.
h. Inventory on December 31 is P220,000.
Requirements:
a. Prepare the necessary adjusting entries as of December 31, 2020.
b. Prepare the appropriate reversing entries as of January 1, 2021.
Self-Evaluation
What have I learned from this module?
What areas or topics I am having difficulties to understand or comprehend?
What are the questions I have formed after reading this module?
What are the answers to my questions formed above?
Overview This module covers the nature, characteristics and

kinds of a partnership. It also covers some reasons
8 why others choose to form a partnership rather than
AC_FAR -FINANCIAL ACCOUNTING AND REPORTING
the other forms of business. Also, it tackles the
different classes of partners in a partnership.
Partnerships are popular form of business because
they are easy to form and they allow several
individuals to combine their talents and skills in a
particular business venture. In addition,
partnerships provide a means of obtaining more
equity capital than a single individual can obtain
and allow a sharing of risks rapidly growing Learning Outcomes
businesses. Partnerships are fairly common in the
service of professions including law, medicine, and At the end of this module, the student should be able
accounting. Historically, these professions have to:
generally not adopted the corporate form of 2.1 Define and understand the nature of a
business because of their long-standing tradition partnership
of close professional association with clients and 2.2 Understand the characteristics of a partnership
the total commitment of the professional business 2.3 Discuss the advantages and disadvantages of
and personal assets to the property of the advice forming a partnership
and service to clients. 2.4 Identify the different kinds of partnership
2.5 Identify the different classes of partners
Introduction
Article 1767 of the Civil Code of the Philippines define partnership as “a contract
whereby two or more persons bind themselves to contribute money, property, or Learning Outcomes
industry into a common fund with the intention of dividing profits among themselves.”
2.1 Define and understand
Also, according to Article 1768 of the Civil Code of the Philippines, “A partnership has the nature of
a judicial personality separate and distinct from that of each of the partners.” partnership.
A partnership comprised two essential elements: (1) an agreement to contribute
money, property, or industry to a common fund; and (2) intent to divide the profits among contracting parties.
The law provides the minimum number of two (2) owners composing a partnership but it does not specify the maximum
number of partners.
Once a partnership is formed, it becomes a separate legal person, with separate and distinct personality from the partners
owning it.
Characteristics of Partnership

1. Based on contract – The relation of partners arises from contract or an agreement
Learning Outcomes
and not from statute, operation of law or inheritance. The agreement of partnership
may be oral or in writing. It binds all the partners. 2.2 Understand the
Since a partnership is a contract, it can only be entered into by persons who are characteristics of a
legally capable to enter into contract. Remember that it can be formed orally but to partnership
avoid misunderstanding and conflict, it must be deduced in writing.
Also, the law requires the contract of partnership to be in public instrument when:
a. An immovable property or real rights are contributed thereto
NOTE that a contract of partnership is void, whenever immovable property is contributed thereto, if an inventory
of said property is not made, signed by the parties, and attached to the public instrument.
b. The partnership capital exceeds P3,000
When the partnership capital exceeds P3,000, the partnership contract must be registered with Securities and
Exchange Commission (SEC). The SEC registration is a condition for the issuance of licenses to engage in business
or trade. Failure of the partnership to comply with SEC registration, however, shall not affect the liability of the
partnership and the members thereof to third parties.
If a partnership fails to register with the SEC, it cannot acquire legal personality to maintain an action against
third persons, but the partners may file a suit jointly against third party persons.
2. Voluntary association of individuals – To constitute a partnership, at least two persons, having reciprocal rights and
obligations towards each other, are necessary. A partnership is formed based on the trust and confidence of partners
to each other. Each partner has the right to choose the people with whom he would like to associate.
A partnership is formed voluntarily by each partner. It would be unfair and unreasonable to force a person to join a
partnership because of the risk it involved. This risk includes the provision of law that the act of partner carrying on
the usual partnership business legally binds the entire partnership. As a result, all partners are liable solidarily with
the partnership for everything chargeable to the partnership.
3. Ease of formation – According to Article 1784 of the Civil Code of the Philippines, “A partnership begins from the
moment of the execution of the contract unless it is otherwise stipulated.” Basically, partnership is perfected by the
mere consent of the parties.
As mentioned earlier, partnership can be formed orally. It means partners does not need the permission of SEC or
BIR to form a partnership, unless the partnership’s capital is P3,000 or more, or/and the investment involves real
property.
4. Co-ownership – Assets invested to the partnership becomes the partnership property. Therefore, these assets
become the property of the all partners since they are co-owners of the partnerships. A partner has an equal right
with his partners to possess specific partnership property for partnership purposes, but no right without the consent
of his partners, if such possession is for any other purposes.
5. Assignment of partner’s interest – According to Article 1812 and 1813 of the Civil Code of the Philippines, the
partner’s interest in the partnership is his share of the profits and surplus. A conveyance by a partner of his whole
interest in the partnership does not of itself dissolve the partnership, or entitle the assignee to interfere in the affairs
of the partnership.

The assignment of partner’s interest to an assignee does not necessarily mean an admittance of a new partner to the
partnership because this assignee does not have the right to participate in managing the partnership business. His
rights are limited to receiving share in the partnership profits and losses or the assignor’s proceeds in case the
partnership dissolved.
6. Mutual agency – According to Article 1818 of the Civil Code of the Philippines, “Every partner is an agent of the
partnership for the purposes of its business, unless the partner so acting has no authority.” This means any partner
can legally bind all the partners by an action that is part of the usual conduct of the partnership business.
7. Mutual participation in profits – According to Article 1799 of the Civil Code of the Philippines, “A stipulation of the
partnership contact excluding a partner from profit sharing is null and void.” The partnership business must be carried
on with the object of sharing profits among the partners. Therefore, all partners have the right to share in the income
of the partnership. The sharing of profit is usually arrived at by mutual consent and is specified in the article of the
partnership. If an agreement is not specified in written or oral form, then profits and losses are shared according to
capital contribution.
8. Unlimited liability – Under separate entity concept for accounting, a business is viewed as existing separately from
other personal interest of the owners. However, legally, a partnership is not considered a separate entity from the
partners when it comes to debts to third party creditors.
Each partner places at risk his personal assets for partnership debts when it comes to partnership insolvency. A
general and industrial partner may be liable to pay the partnership liability using their personal assets; however,
limited partner’s personal assets are not included. This is because the only risk is up to their investments provided,
they do not perform any of the tasks of a general partner.
9. Limited life – A partnership is automatically dissolved when there is a change in the relationship between or among
the partners as this condition terminate the partnership contracts. Partnership dissolution includes when a new
partner is admitted, or when one of the partners withdraws, dies, is forced into personal bankruptcy, or becomes
incapacitated. Also, a partnership is dissolved when the specific objective for which the partnership is formed is
achieved.
Advantages and Disadvantages

Advantages of forming partnership
1. Easy formation – formed by a mere agreement or mutual understanding by the

partners Learning Outcomes
2. Joint resources – provides an opportunity to pool the abilities, experiences and 2.3 Discuss the advantages
resources of two or more persons. and disadvantages of
3. Less government supervision – generally, partnership receives less government forming a partnership
regulations than corporations do
4. Tax exemption – except for business co-partnership, a general professional
partnership is exempted from income taxes
Disadvantages of forming partnership
1. Unlimited liability – general partners are liable up to extent of their personal assets
2. Mutual agency – all partners may be held liable for the actions of one partner

3. Consensual – an acceptance of a new partner or a transfer of one partner’s interest to another must be agreed to by
all partners
4. Limited life – a mere change in the parties of partnership agreement dissolves the partnership
Kinds of Partnership
1. As to nature of business Learning Outcomes
a. Trading Partnership – Also known as “business co-partnership”
- It buys and sells finished merchandise or manufactures goods as its 2.4 Identify the different
primary operational activity. kinds of partnership
b. Non-Trading Partnership – It renders service only for a fee.
2. As to purpose
a. Commercial Partnership – It engages in trading, merchandising or manufacturing of goods for a profit. A
partnership rendering service may be classified as commercial partnership provided, it is not engaged in service
activities related to its practice of a profession.
b. General Professional Partnership – It is organized for the exercise of a common profession, and usually renders
service based on the partners’ acquired profession.
3. As to object
a. Universal partnership
1. Of all present property – Partners contribute all their present property to a common fund with the intention
of dividing among themselves the property and all the profits they may acquire therewith.
2. Of profits – The partners retain ownership of the things they have placed into the common fund. Their
actual contribution will be their industry and the use of the things they have placed into the common fund.
As a result, only the profits during the existence of the partnership will be divided among themselves.
b. Particular Partnership – A partnership which ha for its object determinate things, their use or fruits, or a specific
undertaking, or exercise of a profession or vocation.
4. As to liability
a. General Partnership – It is comprised of general partners or a combination of general and industrial partners
b. Limited Partnership – It is comprised of both limited and general partners. At least one of the partners must be
a general partner to assume the partnership’s unpaid liability.
5. As to duration
a. Partnership at will – It is formed for a particular undertaking and may be terminated any time by the will of any
of the partners or by mutual agreement of the partners.
b. Partnership with a fixed term – It is formed with a specified period of existence.
6. As to legality of existence
a. De Jure Partnership – It is established and organized in accordance with all the legal requirements for its
existence.
b. De Facto Partnership – It is established and organized without complying with the legal requirements for its
existence.
Classes of Partners
1. As to contribution Learning Outcomes
a. Capitalist partner – A partner who contributes money or property to the
partnership 2.5 Identify the different
b. Industrial partner – A partner who contributes his skills, knowledge, industry classes of partners
or service
c. Capitalist-industrial partner – A partner who contributes money, property and industry
2. As to liability
a. General partner – A partner who is liable for the partnership debts to the extent of his personal assets
b. Limited partner – A partner who is liable for the partnership debts up to his capital contribution
3. As to management
a. Managing partner – A partner who is appointed to run the business of the partnership
b. Silent partner – A partner who is known as a partner but does not take active participation in running the
business
c. Liquidating partner – A partner who is appointed to liquidate the partnership assets and settle unfinished
transactions of the partnership after dissolution
4. As to third persons
a. Secret partner – A partner who is not known as a partner but takes active participation in running the business
b. Dormant partner – A partner who is not known as a partner and does not take active participation in running
the business
c. Nominal partner – A partner who permits the partnership to use his use either for accommodation or for
consideration
d. Ostensible partner – A partner who is known as a partner and takes active participation in running the business
References
Learning Activities
Exercise 1: Discussion Questions

1. Define partnership.
2. Enumerate and discuss are the essential characteristics of a partnership.
3. Differentiate sole proprietorship from partnership.
4. Discuss the advantages and disadvantages of forming a partnership.
5. How do dormant, secret and silent differ from one another?
Exercise 2: Modified True or False

Instructions: Write T if the statement is true and F if the statement is false.

1. A written partnership contract is required to be prepared whenever a partnership is formed.
2. All partnerships are subject to income tax.
3. A person’s contribution in the form of industry or service is not a partner.
4. A partnership is much easier and less expensive to organize than a corporation.
5. All partnerships have at least one general partner.
6. Each partner generally has the authority to enter into contracts which are binding upon the partnership.
7. The property invested in a partnership by a partner becomes the property of the partnership.
8. The unlimited liability of partners for partnership debts make the partnership more reliable from the point of view of
creditors.
9. Before a partnership can operate legally, it has to first comply with registration requirements of the SEC, DTI, BIR,
SSS, and Mayor’s Office.
10. There is a required number of limited partners in a general co-partnership; in the same manner that, there is a
required number of general partners in a limited partnership.
11. A partnership is always owned by two individuals.
12. Partners are personally liable for the liabilities of the partnership if the partnership is unable to pay.
13. Heirs of undivided property are partners.
14. All partnerships may be formed by oral contract.
15. Industrial partners are limited partners.
16. The partner investing a particular kind of asset retains his personal rights to the said property. He may receive back
the same property if the partnership is terminated.
17. The sharing of profit is usually arrived at by mutual consent; otherwise, a partnership’s profit and losses are shared
according to their capital contribution.
18. A partnership has no power of succession.
19. A partnership is not considered as a separate entity from the partners when it involves debts to third party creditors.
20. A capitalist-industrial partner could be a limited partner as to liability.
Self-Evaluation
Overview Learning Outcomes

This module tackles the different requirements
At the end of this module, the student should be able
needed to form a partnership. Also, it covers the
to:
measurements and valuations of partners’ initial
3.1 Discuss the requirements in the partnership
investments to the partnership. This module
formation
discusses how to account the partnership
3.2 Discuss the accounting for partners’ initial
formation given the different cases and scenarios.
investments in a partnership
It also covers the accounting for capital shares that
3.3 Discuss the accounting for partner’s assets
is more than or less than the capital contributed
contribution that has attached liabilities
by the partner.
3.4 Discuss how to account the partnership
formation in different scenarios.
3.5 Discuss the accounting for capital share different
from capital contribution
Requirements
Partnership Contract – The written agreement between or among the partners
governing the formation, operation and dissolution of the partnership is referred to as Learning Outcomes
the Articles of Co-Partnership.
3.1 Discuss the
The Articles of Co-Partnership contains the following: requirements in the
1. The name of the partnership partnership formation
2. The names and addresses of the partners, classes of partners, stating whether the
partner is general or limited partner
3. The effective date of the contract
4. The purpose or purposes and principal office of the business
5. The capital of the partnership stating the contributions of individual partners, their description and agreed values
6. The right and duties of each partner
7. The manner of dividing net income or loss among the partners, including salary allowance and interest on capital
8. The conditions under which the partners may withdraw money or other assets for personal use
9. The manner of keeping the books of accounts
10. The causes for dissolution
11. The provision for arbitration in settling disputes
Organizing a partnership – Before a partnership can operate legally, it has to comply first with certain registration
requirements which is summarized as follows:
Place of Registration Requirements for Registration Certificates Issued

Securities and Exchange Articles of Co-Partnership SEC Certificate
Commission Filled SEC Registration form
Department of Trade and Articles of Co-Partnership Certificate of Registration of Business Name
Industry SEC Certificate

City or Municipal Mayor’s Certificate of Registration of Mayor’s Permit and License to Operate
Office Business Name
Bureau of Internal Articles of Co-Partnership BIR registration No.
Revenue SEC Certificate Partnership’s Tax Identification Number
Registration of books, invoices, and official receipts
Social Security System Filled SSS Application form SSS Certificate of Membership
List of employees SSS Employer ID Number
Philippine Health SEC Registration PhilHealth Employer Number
Insurance Corporation Employer Data Record PhilHealth Certificate of Registration
Business Permit or License PhilHealth Identification Number
Member Data Record
Pag-IBIG Fund Articles of Co-Partnership Pag-IBIG Fund Certificate of Membership
SEC Certificate Pag-IBIG Fund Employer ID Number
Initial Investments
1. Amount of contribution – The amount of contribution shall be based on the
Learning Outcomes
partners’ agreement.
3.2 Discuss the
a. With agreement on individual contribution accounting for
Example 1: On July 1, 2020, A and B form a partnership with a total agreed partners’ initial
capitalization of P100,000 to be contributed in cash of 60% and 40% by A and B, investments in a
respectively.
To record the contribution of each partner

GENERAL JOURNAL
Page: GJ-01
July 01 Cash Php 60,000.00
A, Capital Php 60,000.00
To record the initial investment of A
01 Cash 40,000.00
B, Capital 40,000.00
To record the initial investment of B
NOTE that there is a separate capital account as well as withdrawal account for each partner. The journal entries are
the same as journal entries for the investment by a sole proprietorship
b. Without agreement on individual partner’s contribution
Example 2: On July 1, 2020, A and B form a partnership with a total agreed capitalization of P100,000 to be
contributed in cash.
To record the contribution of each partner
GENERAL JOURNAL
Page: GJ-01

A, Capital Php 50,000.00
To record the initial investment of A
01 Cash 50,000.00
B, Capital 50,000.00
To record the initial investment of B
NOTE that in the absence of any agreement, it shall be contributed equally.
2. Valuation of partners’ contribution

a. Cash contribution – If the contribution is in the form of cash, the amount to be recognized is the FACE VALUE of
cash
b. Non-cash contribution – If the contribution is in the form of property, it shall be recorded at AGREED VALUE for
the property; otherwise, it shall be recorded at the FAIR VALUE of the property to effect fair and equitable
valuation
NOTE that industry contribution is recorded in memorandum entry from.
Assets Contribution with Attached Liabilities

a. Liabilities to be assumed by the partnership
Example 3: C and D decided to formed a partnership on July 1, 2020. C contributed assets and liabilities agreed to be
assumed by the partnership, as follows:
COST AGREED VALUE FAIR VALUE Learning Outcomes

Machine Php 200,000 Php 180,000
3.3 Discuss the accounting
Furniture and fixtures 100,000 Php 140,000
for partner’s assets
Notes payable 50,000 50,000
contribution that has
To record the contribution of C. attached liabilities
GENERAL JOURNAL
Page: GJ-01
July 01 Machine Php 180,000.00
Furniture and fixture 140,000.00
Notes payable Php 50,000.00
C, Capital 270,000.00
To record the initial investment of C
Observe that the liability together with the assets is recorded by the partnership.
b. Liabilities not assumed by the partnership

Example 4: C and D decided to formed a partnership on July 1, 2020. C contributed assets but liabilities agreed not
to be assumed by the partnership, as follows:
COST AGREED VALUE FAIR VALUE

Machine Php 200,000 Php 180,000
Furniture and fixtures 100,000 Php 140,000
To record the contribution of C.
GENERAL JOURNAL
Page: GJ-01
July 01 Machine Php 180,000.00
Furniture and fixture 140,000.00
C, Capital Php 320,000.00
To record the initial investment of C
Observe that the liability is no longer recorded because the partnership does not assume or does not agreed to pay
this liability.
Accounting for Partnership Formation
a. Individuals Without Existing Business – This formation of partnership Learning Outcomes

composing two or more individuals who does not have existing businesses. To
account this formation, simply record their individual investments to the 3.4 Discuss how to account the
partnership just like the previous examples. partnership formation in
different scenarios.
b. Conversion of Sole Proprietorship to Partnership – This formation of partnership is composed of one sole proprietor
or individual who has an existing business, and an individual.
This is accounted for by following the procedures:
1. Close the nominal accounts of the sole proprietorship business.

2. Record the adjustments of the assets and liabilities directly to the proprietor’s capital account
3. Close the books of the sole proprietorship.
4. Open the new set of partnership books by recording the partners’ contribution.
Example 5: E and F formed a partnership on July 1, 2020, wherein E is to contribute cash while F is to transfer the
assets and liabilities of his business. Account balances on the books of F are as follows:
Debit Credit
Cash 30,000
Accounts receivable 45,000
Inventories 24,000
Accounts payable 9,000
F, capital 90,000
The partners agreed on the following conditions:
1. An allowance for uncollectible accounts of Php 2,200 is to be established.

2. The inventories are to be valued at their current replacement cost of Php 27,000.
3. Prepaid expenses of Php 1,200 and accrued expenses of Php 500 are to be recognized.

4. F is to be credited for an amount equal to the net assets transferred.
5. E is to contribute sufficient cash to have an equal interest in the partnership.
Step 1: Adjust and close the books of the proprietor F to agreed values.
GENERAL JOURNAL
Page: GJ-10
July 01 F, Capital Php 2,200.00
Allowance for uncollectible accounts Php 2,200.00
01 Inventories 3,000.00
F, Capital 3,000.00
01 Prepaid expenses 1,200.00

Accrued expenses 500.00
F, Capital 700.00
01 F, Capital 91,500.00
Accounts payable 9,000.00
Allowance for uncollectible accounts 2,200.00
Cash 30,000.00
Accounts receivable 45,000.00
Inventories 27,000.00
Prepaid expenses 1,200.00
To close the books of F
Observe that just for illustration, the explanations are ignored for those adjusting entries. Also, the capital balance of
F after the three adjusting entries amounted to Php 91,500.
Step 2: Record the investments of the partners to the new books.
GENERAL JOURNAL
Page: GJ-10
Accounts receivable 45,000.00
Inventories 27,000.00
Prepaid expenses 1,200.00
Allowance for uncollectible accounts Php 2,200.00
Accounts payable 9,000.00
F, Capital 91,500.00
To record the investment of F
Cash 91,500.00
E, Capital 91,500.00
To record the investment of E

c. Two or More Sole Proprietorship Forming Partnership – This formation of partnership is composed of two or more
individuals both having separate existing businesses. To account this formation, follow the procedures mentioned
above on conversion of sole proprietorship to partnership.
Example 6: G and H are both owners of an existing single proprietorship business. They agreed to combine their
businesses into a partnership. They agreed to start with a total capitalization of Php 400,000 to be contributed
equally. They agreed to the following valuation of their business noncash assets:
a. Their receivables are 95% collectible.

b. The inventory has realizable value of Php 30,000.
c. The equipment has a fair value of Php 50,000.
They will invest additional cash if needed to complete their agreed contribution.
The account balances of the sole proprietorship businesses upon formation of GH Partnership is as follows:
G Business H Business
Cash Php 20,000 Php 5,000
Accounts receivable 60,000 45,000
Inventory 25,000
Store equipment 120,000
Accumulated depreciation 30,000
G, capital 50,000
G, drawings 5,000
H, capital 125,000
Income summary (debit) (10,000) 15,000
Step 1: Close the nominal accounts of the sole proprietorship business.
Books of G Books of H
G, capital 15,000 Income summary 15,000
G, drawings 5,000 H, capital 15,000
Income summary 10,000
Step 2: Adjust and close the books of the G and H to agreed values.
Inventory 5,000 H, capital 42,250
Accounts receivable 3,000 Accounts receivable 2,250
G, capital 2,000 Accum. Depreciation 40,000
G, capital 37,000 H, capital 97,750
Accounts payable 70,000 Accum. Depreciation 70,000
Cash 20,000 Cash 5,000
Accounts receivable 57,000 Accounts receivable 42,750
Inventory 30,000 Store equipment 120,000

Step 3: Record the investments of the partners to the new books.
New Books of the Partnership

Cash 183,000
Inventory 30,000
G, capital 200,000
To record the investment of G
Cash 107,250
Store equipment 50,000
G, capital 200,000
To record the investment of G
Capital Share Different from Capital

Contribution
Prior to the recording partners’ initial contributions to the partnership, partners must first agree not only on the valuation
of the net asset contributions but also on their capital share. The capital share of each partner is the percentage of equity
that each partner will have in the net assets of the newly formed partnership. Generally, the capital share of each partner
is equal to their capital contribution. However, partners may agree to a division of capital that is not proportionate to their
capital contribution. This is to recognize the intangible factors such as partner’s special expertise, establishing clientele or
necessary business connections. This situation will give rise to allowing bonus on initial investments.
Example 7: I and J formed a partnership by contributing Php 50,000 and Php 60,000, respectively. To record the investment
of the partners under two approaches are as follows:
Learning Outcomes
a. Full investment approach or Actual investment method
Cash Php 110,000 3.5 Discuss the accounting
I, capital Php 50,000 for capital share
J, capital 60,000 different from capital
b. Bonus approach contribution
Using Example 7, assume the partners agreed to have equal capital in the partnership.
Cash Php 110,000
I, capital Php 55,000
J, capital 55,000
In this case, J’s cash contribution amounts to Php 60,000 yet his capital balance equals to Php 55,000. Therefore, he
gives a Php 5,000 bonus to I.
References

Learning Activities
Exercise 1: Discussion Questions

1. Why is it preferable to have a written contract of partnership? What are the contents of a typical partnership
contract?
2. What is the major difference between a general and a limited partnership? How can they be distinguished? When a
partnership is a limited partnership, does the characteristic of “unlimited liability” still apply? Why or why not?
3. Why are capital accounts and drawing accounts opened for each partner?
4. Why is the Accumulated Depreciation account not carried over to the new books of the partnership?
5. Why is the Allowance for Uncollectible Accounts account carried over to the new books of the partnership? How
does this differ from the Accumulated Depreciation?
Exercise 2: Lynleen Co.

Lyn, the owner of a successful fertilizer business felt that it is time to expand operations. Lyn offered to form a
partnership with Leen, the owner of a nearby warehouse. The partnership would be called Lynleen Co. Leen accepted
Lyn’s offer and the partnership was formed on July 1, 2020.
The assets and liabilities of Lyn’s Fertilizer and their agreed valuation on June 30,2020 before the formation of the
partnership are given below:
Book Value Agreed Valuation

Cash Php 229,500 Php 229,500
Accounts receivable 2,103,000 2,103,000
Allowance for doubtful accounts 117,000 167,500
Inventory 1,012,500 900,000
Prepaid rent 29,250 0
Store equipment 390,000 300,000
Accumulated depreciation 97,500 0
Accounts payable 505,500 505,500
The partners agreed to share profits and losses equally and decided to invest an equal amount in the partnership. Lyn and
Leen agreed that Leen’s land is worth P500,000 and his building is P1,450,000. Both properties will be contributed by Leen
to the partnership. Leen will also invest additional cash sufficient to make his capital equal to Lyn. The partnership will use
a new set book.
Requirements:
1. Give the adjusting journal entries in books of Lyn.
2. Give the journal entries to record the investment of the partners in the partnership books.
3. Prepare Lynleen Co.’s Statement of Financial Position as of July 1, 2020.
Exercise 2: JC Partnership
On August 1, 2020, Jon and Christian formed a partnership. Jon is to invest certain business assets at values which are yet
to be agreed upon. He is to transfer business liabilities and is to contribute sufficient cash to bring his total capital to
P210,000, which is 70% of the total capital as had been agreed upon.
Details regarding the book values of Jon’s business assets and liabilities and their corresponding valuation follows:
Book Values Agreed Valuation

Accounts receivable Php 58,000 Php 58,000

Allowance for doubtful accounts 4,200 5,000
Merchandise inventory 98,400 107,000
Store equipment 32,000 32,000
Accumulated depreciation-Store equipment 19,000 16,400
Office equipment 27,000 27,000
Accumulated depreciation-Office equipment 14,200 8,600
Accounts payable 56,000 56,000
Ira agrees to invest cash of 42,000 and merchandise valued at current market price.
Requirements:
1. Give the adjusting journal entries in books of Jon.
2. Give the journal entries to record the investment of the partners in the partnership books.
3. Prepare JC Partnership’s Statement of Financial Position as of August 1, 2020.
Self-Evaluation

Modul E: Review of Accounting Process

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MODUL Review of Accounting Process

1 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

a. Identifying – This aspect includes the recognition of business

b. Measuring – This is the aspect of assigning peso amounts to the

Recording Phase of Accounting

02 Office Supplies 5,000.00

2 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

Account: SERVICE REVENUE Account No.: 401

Account: OFFICE SUPPLIES Account No.: 501

Summarizing Phase of Accounting

3 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

Interest expense Php 1,000

Interest receivable Php 500

To record the initial payment of expense made on June 1, 2020.

ASSET METHOD EXPENSE METHOD

To record the adjustment at the end of the accounting period.

ASSET METHOD EXPENSE METHOD

4 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

To record the initial collection made on April 1, 2020.

LIABILITY METHOD INCOME METHOD

To record the adjustment at the end of the accounting period.

LIABILITY METHOD INCOME METHOD

To record the depreciation expense on December 31, 2020.

5 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

Required allowance balance XXX

To record the uncollectible accounts expense for 2020

Uncollectible accounts expense 8,000

Required allowance balance 10,000

To record the transfer of beginning inventory balance to Income Summary

Income Summary XXX

To record the ending inventory balance

6 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

Exercise 2: Jell’s Trading

7 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

Exercise 2: Myla Company

What have I learned from this module?

What areas or topics I am having difficulties to understand or comprehend?

What are the answers to my questions formed above?

Overview This module covers the nature, characteristics and

9 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

a. An immovable property or real rights are contributed thereto

b. The partnership capital exceeds P3,000

10 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

Advantages and Disadvantages

1. Easy formation – formed by a mere agreement or mutual understanding by the

Disadvantages of forming partnership

11 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

Exercise 1: Discussion Questions

Exercise 2: Modified True or False

13 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

What have I learned from this module?

What areas or topics I am having difficulties to understand or comprehend?

What are the answers to my questions formed above?

Overview Learning Outcomes

14 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

Place of Registration Requirements for Registration Certificates Issued

15 AC_FAR -FINANCIAL ACCOUNTING AND REPORTING

To record the contribution of each partner

b. Without agreement on individual partner’s contribution