At the time of formation of partnership, each partner contributes his capital either in the form of cash or non-cash. Separate accounts of capital are opened to record the investment of each partner. The partner can invest in the business in any of the following ways.
- By contributing cash.
- By contributing non-cash assets.
- By combining individual business.
By contributing cash
If contribution is made in cash, CASH ACCOUNT will be debited and respective partner’s capital account will be credited with one’s respective contribution. For example:
A, B, form a partnership contributing $100,000 and $50,000 respectively in the form of cash. The journal entry will be
John and Harry agreed to form a partnership on 1st January 2018. For this purpose, John contributed $4,50,000 and Harry $1,50,000.
- Journal entry.
- Opening Balance Sheet of the firm.
By contributing non-cash assets
If non-cash is invested, debit will be given to asset invested at the amount agreed by all the partners and credit to partner’s respective capital. For example, A and B form partnership. A .invested $1,00,000 in the form of cash, B provides building to the partnership, the agreed value of which is $80,000 the journal entry will be as such:
John and Harry formed a partnership on 1st January 2018. John contributed Cash $3,00,000 and building $4,00,000 for the business. Harry contributed cash $4,00,000 and furniture $50,000.
- Journal Entry
- Opening Balance Sheet of the firm
By combining individual business
Sometimes partnership is formed by combination of two or more business. For this purpose the journal entry will be:
John and Harry carrying on separate business agreed to form a partnership on 1st January 2018, by combining their individual business. On this date, their balance sheets were as under:
- Pass the Journal entry to form the partnership.
- Prepare opening Balance Sheet of the firm.