The formation of the partnership presents relatively few difficult accounting problems. Accounting entries to record the formation will depend upon how the partnership is formed. A partnership may be formed in several ways, namely:

1. Formation of a partnership for the first time.
2. Conversion of a sole proprietorship to a partnership
   1. a sole proprietor allows another individual, who has no business of his own to join his business
   2. Two or more sole proprietors form a partnership
3. Admission of a new partner

An existing partnership may admit a new partner with the consent of all the partners. When a new partner is admitted, the partnership is dissolved and a new partnership is formed. Upon the admission of a new partner, a new agreement covering partners' interests, profit and loss sharing and other consideration should be drawn because the dissolution of the original partnership cancels the old agreement.

If there are no implicit intangibles contributed by the individuals forming a partnership and only cash is contributed to the partnership, the entries to record the cash contributions are relatively simple. To illustrate, Partners Pedro and Pedra form a partnership with a capital of P100,000 and the cash contributions are 40 percent and 60 percent, respectively. The entry would be:

			
Cash 		100,000 
		Pedro, Capital		40,000
		Pedra, Capital  		60,000
	To record the investments of Partners Pedro and Pedra.
			

Normally, a partner's contribution to the partnership consists of property and/or intangible assets in addition to cash or in place of cash. Hence, valuation problems arise. Theoretically, independent appraisals of the property should be obtained since to record property at an amount other than its fair market value can affect the interest of individual partners.

Despite the theoretical soundness of the independent appraisal procedure, partners often disregard the procedure and agree to use instead arbitrary valuations for property contributions.

An individual who has no business of his own may join another individual who is already operating his own business. Under this type of formation, both the assets and liabilities of the sole proprietor are transferred to the newly formed partnership. Normally, the partners agree on the revaluation of some of the assets before the transfer. The journal entries to record this type of formation will depend on whether the books of the sole proprietorship are to be used for the newly formed partnership or new books are to be opened.

Case 1. Sole Proprietorship's Books are Retained for the Partnership. If the books of the sole proprietorship are to be retained for the partnership, the following accounting procedures may be used in recording the formation of the partnership:

1. Adjust the assets of the sole proprietor in accordance with the agreement. Adjustments are to be made to his capital account.
2. Record the investment of the other partner.

Case 2. New Books are Opened for the Partnership. If new books are to be opened for the partnership, the following procedures may be used in recording the formation of the partnership:

Books of the Sole Proprietor:

1. Adjust the assets of the sole proprietor according to the agreement. Adjustments are to be made to his capital account.
2. Close the books.

Books of the Partnership:

1. Record the investment of the sole proprietor (i.e., his assets and liabilities).
2. Record the investment of the other partner.

The accounting procedures described in the preceding section are also applicable when two or more businesses join together to form a partnership. There should be an agreement on the determination of the partners' interest in the partnership. It is also important that the partners agree on the values of the assets to be assigned and the liabilities to be assumed by the partnership. Books of one of the sole proprietorship may be used for the newly formed partnership or a new set of books may be opened.