Partnership formation: capital credits, opening entries and the bonus method
Forming a partnership comes down to one question per partner: how much capital credit do they get? Answer it with the valuation rules below, and the opening journal entries write themselves.
01Who contributes what
| Partner type | Contributes | Capital credit? | Shares profits? | Liable to outsiders? |
|---|---|---|---|---|
| Capitalist | Money or property | Yes: the net fair value of the contribution | Yes, as agreed | Yes |
| Industrial | Industry: skill, labor, expertise | No capital credit at formation | Yes, as agreed | Yes, still liable to third persons |
| Capitalist-industrial | Both | Yes, for the money or property portion | Yes, as agreed | Yes |
An industrial partner gets no peso capital credit because industry has no measurable fair value on the day the partnership is formed. Their contribution is recorded with a memo entry only.
02How much capital credit? The valuation rules
- Cash: at face amount. ₱100,000 cash = ₱100,000 credit.
- Property: at the agreed value; if there is no agreement, at fair value on the date of contribution. Never the partner's old cost or book value.
- Property with a loan the partnership assumes: capital credit = fair value − liability assumed.
- Industry: memo entry only, no peso credit.
Trap: problems often tell you what the partner originally paid for an asset. That figure is a distractor. The partnership records the asset at its agreed or fair value on the day it is contributed.
03Worked example: forming a three-partner bakeshop
An original illustration. Dino, Ellen and Fely form D&E Bakeshop.
- Dino contributes ₱150,000 cash and baking equipment. He paid ₱300,000 for the equipment years ago; the partners agree it is worth ₱220,000 today.
- Ellen contributes a delivery van with a fair value of ₱400,000, subject to a ₱100,000 loan that the partnership assumes, plus flour and supplies inventory worth ₱30,000.
- Fely contributes her skill as a pastry chef: she is an industrial partner.
Step 1 · Work out each capital credit
| Partner | Calculation | Capital credit |
|---|---|---|
| Dino | ₱150,000 cash + ₱220,000 equipment (the ₱300,000 old cost is ignored) | 370,000 |
| Ellen | ₱400,000 van + ₱30,000 inventory − ₱100,000 loan assumed | 330,000 |
| Fely | Industry: memo entry only | 0 |
| Total capital | 700,000 |
Step 2 · The opening entries
Dino's investment
Ellen's investment
Fely's investment
Check: assets ₱800,000 (150,000 + 220,000 + 400,000 + 30,000) = liabilities ₱100,000 + capital ₱700,000.
04The bonus method: when agreed capitals differ
Sometimes partners agree that their capital balances will be in a ratio that differs from what each actually contributed. Under the bonus method, the difference is simply transferred between capital accounts. Total capital never changes, because no asset is created.
Suppose Dino and Ellen agree their capitals should be equal. Total capital is ₱700,000, so each should have ₱350,000. Dino has ₱370,000, so he gives a ₱20,000 bonus to Ellen, who has ₱330,000.
Quick test: if a "bonus" entry changes total capital, it is wrong. A bonus only moves amounts from one partner's capital to another's.
05Self-check (with answers)
1. A partner contributes land that cost ₱1,000,000, now worth ₱1,500,000, with a ₱400,000 mortgage the partnership assumes. What is the capital credit?
₱1,500,000 − ₱400,000 = ₱1,100,000. The ₱1,000,000 cost is irrelevant.
2. How much capital credit does an industrial partner receive at formation? Can they share in profits?
None: only a memo entry is made. Yes, they share in profits as agreed, and they are still liable to third persons.
3. A contributes ₱240,000 and B contributes ₱160,000. They agree on equal capitals, using the bonus method. What is the entry?
Total ₱400,000 → ₱200,000 each. A transfers ₱40,000 to B: Dr A, Capital 40,000 · Cr B, Capital 40,000.
Practise formation until it's automatic
Chapter 8 of the book covers partnership formation in full. The companion portal adds a capital-credit calculator, a formation-entry drill, and board-exam-style CPALE questions with rationales. Start with the free sample questions from every chapter, no sign-up needed.