Partnership Formation

• The initial investment of a partner is recorded by:

  Dr. Asset

  Cr. Liab Assumed

  Partner's capital
• Subsequent to the initial investment, capital account of the partner increases for any additional investment of cash or non-cash assets and by the share in the partnership profits.
• Partners' capital account decreases for any cash withdrawals or non-cash assets and by the share in partnership losses
• Drawing or personal accounts (temporary) are initially recorded in the drawing account because it arises from salaries or regular advances made by the partners in anticipation of their share in profits
• Capital withdrawals (permanent) directly affects the capital account balance because it arises from withdrawals of investments
• A withdrawal by a partner of a substantial amount of cash or non-cash with the intention of its repayment to the firm may be debited to Loan to (Receivable from) partner
• A partner may lend money to the firm which is considered as a loan rather than an increase in capital account balance. This is credited to Loan from (Payable to) partner
• Cash is valued at its face value
• Non-cash assets are valued at their agreed value. If there is no agreement, at their fair value.
• For services or industry contributed, only memorandum entry is made
• If the problem will be silent regarding the capital interest of the partners, use the net investment method.
• Under the Net Investment Method, partners' capital investment is equal to their capital interest.
• If partners' capital investment is not equal to their capital interest, the bonus or revaluation method may be applied to meet the condition or agreement.
• Under bonus method, the TAC = TCC. In this method, there is a transfer of capital interest from one partner/s to another partner/s.
• If TAC > TCC , then it is a positive (under) revaluation
• If TAC < TCC, then it is a negative (over) revaluation