Procedure to Open Books of Partnership

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on April 20, 2023

When a partnership is formed, each partner contributes capital in the form of either cash or a non-cash asset.

Separate capital accounts are opened to record each partner's investment. The partners can invest in the business in any of the following ways:

  • By contributing cash
  • By combining individual business

By Contributing Cash

If a contribution is made in cash, the cash account is debited and the respective partner's capital account is credited with the contribution.

For example, suppose that A and B form a partnership contributing $100,000 and $50,000, respectively, in the form of cash. The journal entry will be as follows:

A and B Partnership Journal Entry

Example

John and Harry formed a partnership on 1 January 2018. John contributed $450,000 and Harry $150,000.

Required:

  • Pass the journal entry to form the partnership

Solution

John and Harry Journal Entry Contributing Cash
John and Harry Balance Sheet Contributing Cash

By Contributing Non-Cash Assets

If non-cash assets are invested, debit is given to assets invested at the amount agreed by all the partners, and credit is made to the partner's capital.

For example, suppose that A and B form a partnership. A invests $100,000 in the form of cash, whereas B adds buildings to the partnership, the agreed value of which is $80,000. In this case, the journal entry will be:

A and B Journal Entry Non-cash Assets

Example

John and Harry formed a partnership on 1 January 2018. John contributed cash amounting to $300,000 and buildings totaling $400,000. Harry contributed cash of $400,000 and furniture amounting to $50,000.

Required:

  • Journal entry
  • Opening balance sheet

Solution

John and Harry Journal Entry Contributing Non-cash Assets
John and Harry Balance Sheet Contributing Non-cash Assets

By Combining Individual Business

A partnership may also be formed by combining two or more existing businesses. For this purpose, the journal entry will be as follows:

Journal Entry for Combining Existing Businesses

Example

John and Harry both have their own businesses. They agree to form a partnership on 1 January 2018 by combining their businesses. On this date, their balance sheets were as follows:

John's Balance Sheet
Harry's Balance Sheet

All assets and liabilities of the two companies will be taken over by the firm at book value.

Required:

  • Pass the journal entry to form the partnership
  • Prepare the firm's opening balance sheet

Solution

Journal Entry For Contributing Individual Businesses
Balance Sheet For New Firm

Procedure to Open Books of Partnership FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.