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Partnership Operations

Partnership operations involve accounting for the partnership similar to other business organizations but with special considerations like closing entries, profit/loss distribution, and financial statements. Profits and losses are generally divided according to partnership agreement or if none, according to capital contributions. Various methods for dividing profits and losses are allowed if agreed upon by partners like equally, capital ratios, salaries, interest, bonuses, etc. Sample problems demonstrate applying different distribution methods to a partnership's net profit.

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Lyca Mae Cubangbang
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2K views

Partnership Operations

Partnership operations involve accounting for the partnership similar to other business organizations but with special considerations like closing entries, profit/loss distribution, and financial statements. Profits and losses are generally divided according to partnership agreement or if none, according to capital contributions. Various methods for dividing profits and losses are allowed if agreed upon by partners like equally, capital ratios, salaries, interest, bonuses, etc. Sample problems demonstrate applying different distribution methods to a partnership's net profit.

Uploaded by

Lyca Mae Cubangbang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Partnership Operations

- Accounting for partnership operations is essentially the same as accounting for the operations of
any other form of business organization. However, special problems are encountered in
accounting for partnership operations. These are as follows:
 Closing entries of a partnership
 Distribution of profits and losses
 Preparation of financial statements

Rules for Dividing Profits and Losses

Generally, profits and losses shall be divided in accordance with the partnership agreement. In the
absence of agreement, the partners shall share in the profits in proportion to their capital contribution
after satisfying the share of the industrial partner on such income.

1. Division of Profits
a. Agreed profit ratio
b. In the absence of agreement:
- Profits shall be divided in accordance to the partners’ capital contribution
- The industrial partner shall receive a just and equitable share of the profits before the
capitalist partners divide the profits

2. Division of Losses
a. Agreed loss ratio
b. If no agreed ratio, then the agreed profit ratio shall be followed
c. In the absence of any agreement:
- Losses shall be divided by the capitalist partners in accordance to their capital
contribution
- Industrial partners shall not be liable for any losses

Profit and Loss Distribution Based on Partners’ Agreement

Below are methods of distributing profits and losses that the partners may agree into:

1. Equally or in any other arbitrary ratio


2. Based on partners’ capital contribution
a. Original capital investments ratio
b. Beginning capital balance ratio
c. Ending capital balance ratio
d. Average capital balance ratio
- Simple average
- Weighted average
3. Interest on capital
- Shall be provided whether the profit is sufficient or insufficient or there is net loss unless
otherwise agreed upon by the partners
4. Salaries to partners
- Shall be provided whether the profit is sufficient or insufficient or there is net loss unless
otherwise agreed upon by the partners
5. Bonus to managing partner
- Allowed only when there is profit
a. Bonus based on profit before deducting bonus and income tax
b. Bonus based on profit after deducting bonus but before deducting income tax
c. Bonus based on profit before deducting bonus but after deducting income tax
d. Bonus based on profit after deducting bonus and income tax
6. Salaries, interest on capital, bonus to managing partner and the balance to agreed ratio

Methods of Profit Distribution

1. Order of Profit Sharing Provision


Most commonly used method where the allocation of partnership profit follows the order of the
profit sharing agreement in allocating the interest, salaries, bonus and the remainder to the
partners.

2. Order of Priority Provision


The profit is being distributed to the partners in so far as it is possible. The partners must agree
on the priority of the various features.

Note: The order of profit-sharing provision generally applies unless the partners agree on the
order of priority provision relative to profit distribution.

Sample Problems:
Cardo and Mara entered into a partnership agreement to put up Agila Company on January 1,
2020. Agila Company realized a net profit of ₱240,000 for the year. During the year, the capital accounts
of the partners change as follows:

Cardo, Capital
Jan 1 Balance 500,000
Apr 1 Additional Investment 50,000
May 1 Withdrawal (20,000)
Oct 1 Additional Investment 100,000

Mara, Capital
Jan 1 Balance 300,000
Jun 1 Withdrawal (30,000)
Sep 1 Additional Investment 100,000
Dec 1 Withdrawal (10,000)

A. Profit is divided equally

Income Summary 240,000


Cardo, Capital 120,000
Mara, Capital 120,000
₱240,000 / 2 = ₱120,000

B. Profit is divided in the ratio of 2:3

Income Summary 240,000


Cardo, Capital 96,000
Mara, Capital 144,000
₱240,000 x 2/5 = ₱96,000
₱240,000 x 3/5 = ₱144,000

C. Profit is divided 55% to Cardo and 45% to Mara

Income Summary 240,000


Cardo, Capital 132,000
Mara, Capital 108,000
₱240,000 x 55% = ₱132,000
₱240,000 x 45% = ₱108,000

D. Profit is divided according to beginning capital ratio

Income Summary 240,000


Cardo, Capital 150,000
Mara, Capital 90,000
₱240,000 x 500,000/800,000 = ₱150,000
₱240,000 x 300,000/800,000 = ₱90,000

E. Profit is divided according to average capital ratio

Income Summary 240,000


Cardo, Capital 152,517
Mara, Capital 87,483
₱240,000 x 549,167/864,167 = ₱152,520
₱240,000 x 315,000/864,167 = ₱87,480

Computation of average capital using the peso-month method:

Cardo, Capital
Jan 1 – Mar 31 ₱ 500,000 x 3 ₱ 1,500,000
Apr 1 – Apr 30 550,000 x 1 550,000
May 1 – Sep 30 530,000 x 5 2,650,000
Oct 1 – Dec 31 630,000 x 3 1,890,000
₱ 6,590,000

Average capital ₱6,590,000/12 ₱ 549,167

Mara, Capital
Jan 1 – May 31 ₱ 300,000 x 5 ₱ 1,500,000
Jun 1 – Aug 31 270,000 x 3 810,000
Sep 1 – Nov 30 370,000 x 3 1,110,000
Dec 1 – Dec 31 360,000 x 1 360,000
₱ 3,780,000

Average capital ₱3,780,000/12 ₱ 315,000

F. Each partner is allowed 10% interest on ending capital and the remaining profit is divided equally.

Income Summary 240,000


Cardo, Capital 133,500
Mara, Capital 106,500

Cardo Mara Total


Interest on ending capital:
₱630,000 x 10% ₱ 63,000
₱360,000 x 10% ₱ 36,000 ₱ 99,000
Remainder – equally
₱141,000/2 70,500 70,500 141,000
Net Profit ₱ 133,500 ₱ 106,500 ₱ 240,000

G. Mara is allowed salaries of ₱150,000 and the remaining profit is divided in the ratio of 4:1.

Income Summary 240,000


Cardo, Capital 72,000
Mara, Capital 168,000
Cardo Mara Total
Salaries to Mara ₱ 150,000 ₱ 150,000
Remainder – 4:1
₱90,000 x 4/5 ₱ 72,000
₱90,000 x 1/5 18,000 90,000
Net Profit ₱ 72,000 ₱ 168,000 ₱ 240,000

H. Mara, the managing partner, is allowed a bonus of 20% of profit before bonus and income tax and
the remainder divided equally.

Income Summary 240,000


Cardo, Capital 85,714
Mara, Capital 154,286

Income before income tax is ₱342,857 (₱240,000/70%)

Cardo Mara Total


Bonus (₱342,857 x 20%) ₱ 68,571 ₱ 68,571
Remainder – equally ₱ 85,714.50 85,714.50 171,429
Net Profit ₱ 85,714.50 ₱ 154,285.50 ₱ 240,000

 If bonus is based on profit after deduction for bonus but before deduction for income tax:

Bonus = Bonus rate x (Income before income tax – Bonus)


Bonus = .20 x (₱342,857 – Bonus)
B = ₱68,571.40 - .20B
B + .20B = ₱68,571.40
1.2B = ₱68,571.40
1.2B/1.2 = ₱68,571.40/1.2
Bonus = ₱57,142.83

 If bonus is based on profit before deduction for bonus but after deduction for income tax:

Bonus = Bonus rate x (Income before income tax – Tax)


Tax = Income before income tax x Tax rate
Tax = ₱342,857 x 30%
Tax = ₱102,857.10
Bonus = Bonus rate x (Income before income tax – Tax)
Bonus = .20 x (₱342,857 – ₱102,857.10)
B = .20 x ₱239,999.90
Bonus = ₱47,999.98
 If bonus is based on profit after deduction for bonus and income tax:

Bonus = Bonus rate x (Income before income tax – Bonus - Tax)


Bonus = .20 x (₱342,857 – Bonus - ₱102,857.10)
B = .20 x (₱239,999.90 – Bonus)
B = ₱47,999.98 - .20B
B + .20B = ₱47,999.98
1.2B = ₱47,999.98
1.2B/1.2 = ₱47,999.98/1.2
Bonus = ₱39,999.98

I. The partnership agreement provides salaries of ₱100,000 and ₱50,000 to Cardo and Mara,
respectively; 10% interest on ending capital; 20% bonus to managing partner Mara if the net profit is
sufficient; and the balance will be divided equally.

Income Summary 240,000


Cardo, Capital 158,500
Mara, Capital 81,500
Cardo Mara Total
Salaries ₱ 100,000 ₱ 50,000 ₱ 150,000
Interest on ending capital 63,000 36,000 99,000
Balance – equally (4,500) (4,500) (9,000)
Net Profit ₱ 158,500 ₱ 81,500 ₱ 240,000

J. The partnership agreement provides salaries of ₱100,000 and ₱50,000 to Cardo and Mara,
respectively; 10% interest on ending capital; and the balance will be divided equally. Profit is to be
allocated by first giving priority to interest on ending capital and then on salary allowance.

Income Summary 240,000


Cardo, Capital 157,000
Mara, Capital 83,000
Cardo Mara Total
Interest on ending capital ₱ 63,000 ₱ 36,000 ₱ 99,000
Salaries (100:50 ratio) 94,000 47,000 141,000
Net Profit ₱ 157,000 ₱ 83,000 ₱ 240,000

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