Profit distribution

to partners
illustrations
Julie Anna R. Santos
outline
➢ CASE 1: Division of Profit or Losses Equally.
➢ CASE 2: Division of Profit or Losses in an Arbitrary (Unequal) Ratio
2.1. Percentage
2.2. Ratio
2.2.a. Based on Agreement
2.2.b. No Agreement
2.2.c. Based on Beginning Capital Balances
2.2.d. Based on Ending Capital Balances
2.2.e. Based on Average Capital Balances
➢ CASE 3: Provision of Salaries
3.1. The remainder of Net Income after Deducting Salaries is Positive:
3.2. The remainder of Net Income after Deducting Salaries is Negative:
3.3. Provision for salaries and the result of Partnership Operations is Net Loss
➢ CASE 4: Provision of Interest on Capital
4.1. The remainder of Net Income after Deducting Interest on Capital is Positive:
4.2. The remainder of Net Income after Deducting Interest on Capital is Negative:
4.3. Provision for interest on capital and the result of Partnership Operations is Net
Loss
TABLE OF CONTENTS

01 02
Division of Profit or Provision of
Losses Equally. salaries

03 04
Division of Profit or Provision of
Losses In Arbitrary Interest capital
ILLUSTRATION
JJ and KK agreed to form JK Partnership on January 1, 2018. JJ invested P60,000
while KK invested P40,000 cash. On December 31, 2020, after closing all income and
expense accounts, the Income Summary account shows a credit balance of
P50,000, representing the profit for the year 2020. Changes in the Capital accounts
during 2020 are as follows:
JJ KK
Capital balances, January 1, 2020 P80,000 P60,000
Additional investment – Apr 1 10,000 20,000
Additional investment – June 1 10,000 5,000
Withdrawal – July 1 - (10,000)
Withdrawal – Sep 1 (15,000) (5,000)
Additional investment – Nov 1 5,000 10,000
Capital Balances, December 31, 2020 P90,000 P80,000
01 Division of Profit or Losses Equally
Profit is divided equally among the partners if the partners
have agreed to do so.

JOURNAL ENTRY:

Income Summary 50,000

JJ, Capital (50,000/2) 25,000
KK, Capital (50,000/2) 25,000
 Division of Profit or Losses in an Arbitrary
02 (Unequal) Ratio
2.1. PERCENTAGE

Assume that JJ and KK agreed to share 70% and 30% in the profit or loss
respectively.

Journal Entry:

Income Summary 50,000

JJ, Capital (50,000*70%) 35,000
KK, Capital (50,000*30%) 15,000
2.2. RATIO
A. Based on Agreement
Assume that JJ and KK agreed to share in a ratio of 3:1,
respectively.

JOURNAL ENTRY:

Income Summary 50,000

JJ, Capital (50,000*3/4) 37,500
KK, Capital (50,000*1/4) 12,500
2.2. RATIO
B. No Agreement
- If no agreement is made between the partners, use the ratio of
Original Capital Contributions

Partner Original Capital Contribution Ratio

JJ 60,000 60/100 or 60%
KK 40,000 40/100 or 40%
TOTAL 100,000

JOURNAL ENTRY:
Income Summary 50,000
JJ, Capital (50,000*60%) 30,000
KK, Capital (50,000*40%) 20,000
2.2. RATIO
C. Based on Beginning Capital Balances
- Determine the profit share of the partners using their beginning
capital balances on January 1, 2020.

Partner Beginning Capital Balances Ratio

JJ 80,000 80/140 or 57%
KK 60,000 60/140 or 43%
TOTAL 140,000

JOURNAL ENTRY:
Income Summary 50,000
JJ, Capital (50,000*57%) 28,500
KK, Capital (50,000*43%) 21,500
2.2. RATIO
D. Based on Ending Capital Balances
- Determine the profit share of the partners using their ending
capital balances on December 31, 2020.

Partner Ending Capital Balances Ratio

JJ 90,000 90/170 or 53%
KK 80,000 80/170 or 47%
TOTAL 170,000

JOURNAL ENTRY:
Income Summary 50,000
JJ, Capital (50,000*53%) 26,500
KK, Capital (50,000*47%) 23,500
2.2. RATIO
E. Based on Average Capital Balances
SIMPLE AVERAGE METHOD

Partner Beginning Ending Simple Average Ratio

Capital Capital Average Capital
Balance Balances Method Balances

JJ 80,000 90,000 (80k+90k)/2 85,000 55%

KK 60,000 80,000 (60k+80k)/2 70,000 45%

Total 140,000 170,000 155,000

JOURNAL ENTRY:

Income Summary 50,000

JJ, Capital (50,000*55%) 27,500
KK, Capital (50,000*45%) 22,500
Peso Month/ Peso Day METHOD
Computing the division of net income for 2020:
Computation of Average Capital Account Balances - JJ

JJ Capital Fraction of Average

Account Year Capital
Balance Unchanged Balances

Capital Balances, 1/1 P80,000 P80,000 3/12 P20,000

Additional Investment- 4/1 10,000 90,000 2/12 15,000

Additional Investment- 6/1 10,000 100,000 3/12 25,000

Withdrawal- 9/1 (15,000) 85,000 2/12 14,167

Additional Investment- 11/1 5,000 90,000 2/12 15,000

TOTAL P90,000 P89,167

Computation of Average Capital Account Balances - KK

KK Capital Fraction of Average

Account Year Capital
Balance Unchanged Balances

Capital Balances, 1/1 P60,000 P60,000 3/12 P15,000

Additional Investment- 4/1 20,000 80,000 2/12 13,333

Additional Investment- 6/1 5,000 85,000 1/12 7,083

Withdrawal- 7/1 (10,000) 75,000 2/12 12,500

Withdrawal- 9/1 (5,000) 70,000 2/12 11,667

Additional Investment- 11/1 10,000 80,000 2/12 13,333

TOTAL P80,000 P72,916

Partner Average Capital Balances Ratio
JJ 89,167 55%
KK 72,916 45%
TOTAL 162,083

JOURNAL ENTRY

Income Summary 50,000

JJ, Capital (50,000*55%) 27,500
KK, Capital (50,000*45%) 22,500
03 PROVISION OF SALARIES
Partners may agree to distribute profit by providing salaries to each of
the partners or to selected partners only.
In this case, the following have to be observed:

a. The salaries have to be given first to respective partner/s.

b. The salaries are to be deducted from the profit.

c. The remainder balance of the profit after deducting the salaries is

to be distributed according to agreement and if there is no
agreement stipulated, the capital ratio is to be used.
 3.1. The remainder of Net Income after
Deducting Salaries is Positive
Assume that the partners stipulate the following:
a. JJ will receive monthly salary of P1,000.
b. KK will receive semi-annual salary of P5,000.
c. The remainder is to be divided equally
Profit Distribution Table:

JJ KK TOTAL

Salaries- JJ (1,000*12) P12,000 P12,000

Salaries- KK (5000*2) P10,000 10,000

Remainder: (28,000/2) 14,000 14,000 28,000

TOTAL 26,000 24,000 50,000

***Remainder:
Net Income P50,000
Salaries-JJ (12,000)
Salaries- KK (10,000)
Balance P28,000

Monthly Journal Entry for the Salary of JJ:

JJ, Drawings 1,000
Cash 1,000
To Record salary allowances of JJ

Semi-annual Journal Entry for the Salary of KK:

KK, Drawings 5,000
Cash 5,000
To Record salary allowances of KK
Journal entry for the distribution of profit and to close the Income
Summary:

Income Summary 50,000

JJ, Capital 26,000
KK, Capital 24,000

Journal entry close partners’ drawing accounts for 2020:

JJ, Capital 12,000

KK, Capital 10,000
JJ, Drawings 12,000
KK, Drawings 10,000
 3.2. The remainder of Net Income after
Deducting Salaries is NEGAtive
Assume that the partners stipulate the following:
a. JJ will receive monthly salary of P2,000.
b. KK will receive semi-annual salary of P15,000.
c. The remainder is to be divided equally
Profit Distribution Table:
JJ KK TOTAL

Salaries- JJ (2,000*12) P24,000 P24,000

Salaries- KK (15000*2) P30,000 30,000

Remainder: (-4,000/2) (2,000) (2,000) (4,000)

TOTAL 22,000 28,000 50,000

***Remainder:
Net Income P50,000
Salaries-JJ (24,000)
Salaries- KK (30,000)
Balance (P4,000)

Monthly Journal Entry for the Salary of JJ:

JJ, Drawings 2,000
Cash 2,000
To Record salary allowances of JJ

Semi-annual Journal Entry for the Salary of KK:

KK, Drawings 15,000
Cash 15,000
To Record salary allowances of KK
Journal entry for the distribution of profit and to close the Income
Summary:

Income Summary 50,000

JJ, Capital 22,000
KK, Capital 28,000

Journal entry close partners’ drawing accounts for 2020:

JJ, Capital 24,000

KK, Capital 30,000
JJ, Drawings 24,000
KK, Drawings 30,000
 3.3. Provision for salaries and the result
of Partnership Operations is Net Loss
Assume that instead of a net profit, JK Partnership incurred a net loss of
P50,000. Also, the partners stipulate the following:
a. JJ will receive monthly salary of P1,000.
b. KK will receive semi-annual salary of P5,000.
c. The remainder is to be divided equally

JJ KK TOTAL

Salaries- JJ (1000*12) P12,000 P12,000

Salaries- KK (5000*2) P10,000 10,000

Remainder: (-72,000/2) (36,000) (36,000) (72,000)

TOTAL (24,000) (26,000) (50,000)

***Remainder:
Net Income (P50,000)
Salaries-JJ (12,000)
Salaries- KK (10,000)
Balance (P72,000)

Monthly Journal Entry for the Salary of JJ:

JJ, Drawings 1,000
Cash 1,000
To Record salary allowances of JJ

Semi-annual Journal Entry for the Salary of KK:

KK, Drawings 5,000
Cash 5,000
To Record salary allowances of KK
Journal entry for the distribution of profit and to close the Income
Summary:

JJ, Capital 24,000

KK, Capital 26,000
Income Summary 50,000

Journal entry close partners’ drawing accounts for 2020:

JJ, Capital 12,000

KK, Capital 10,000
JJ, Drawings 12,000
KK, Drawings 10,000
04 Provision of Interest on Capital
4.1. The remainder of Net Income after
Deducting Interest on Capital is Positive:
Assume that the partners stipulate the following:

a. JJ will receive quarterly interest of 2% on his beginning

capital balance.

b. KK will receive semi-annual interest of 6% on his average

capital balance.

c. The remainder is to be divided based on their ending

capital balances.
Profit Distribution Table:

JJ KK Total

Interest- JJ (80K*2%*4) P6,400 P6,400

Interest- KK (72,916*6%*2) P8,750 8750

Remainder: JJ 18,450

Remainder: KK 16,400

Balance 34,850

TOTAL P24,850 P25,150 P50,000

***Net Income P50,000 ***Remainder
Interest- JJ (6,400) JJ=34,850*90/170=18,450
Interest- KK (8,750)
Balance P 34,850 KK= 34,850*80/170= 16,400

Quarterly journal entry for the interest in beginning capital balance of JJ:

JJ, Drawings 1,600

Cash 1,600
To Record interest allowances of JJ

Semi-annual journal entry for interest in average capital balance of KK:

KK, Drawings 4,375

Cash 4,375
To Record interest allowances of KK
Journal entry for the distribution of profit and to close the Income Summary:

Income Summary 50,000

JJ, Capital 24, 850
KK, Capital 25, 150

Journal entry close partners’ drawing accounts for 2020:

JJ, Capital 6,400

KK, Capital 8,750
JJ, Drawings 6,400
KK, Drawings 8,750
 4.2. The remainder of Net Income after
Deducting Interest on Capital is Negative
Assume that the partners stipulate the following:

a. JJ will receive quarterly interest of 10% on his beginning capital balance.

b. KK will receive semi-annual interest of 20% on his average capital balance.
c. The remainder is to be divided based on their ending capital balances
 Profit Distribution Table

JJ KK TOTAL

Interest- JJ (80K*10%*4) P32,000 P32,000

Interest- KK I(72,916*20%*2) P29,166 29,166

Remainder: JJ (11,166*90/170) (5,911)

Remainder: KK (11,166*80/170) (5,255)

Balance (11,166)

TOTAL P26,089 P23,911 P50,000

***Net Income P50,000 ***Remainder
Interest- JJ (32,000) JJ=(11,166)*90/170= (5,911)
Interest- KK (29,166)
Balance (P 11,166) KK= (11,166)*80/170= (5,255)

Quarterly Journal Entry for the interest on beginning capital balance of JJ:

JJ, Drawings 8,000

Cash 8,000
To Record interest allowances of JJ

Semi-annual Journal Entry for the average capital balance of KK:

KK, Drawings 14,583

Cash 14,583
To Record interest allowances of KK
Journal entry for the distribution of profit and to close the Income
Summary:

Income Summary 50,000

JJ, Capital 26,089
KK, Capital 23,911

Journal entry close partners’ drawing accounts for 2020:

JJ, Capital 32,000

KK, Capital 29,166
JJ, Drawings 32,000
KK, Drawings 29,166
 4..3. Provision for interest on capital and the
result of Partnership Operations is Net Loss
Assume that instead of a net profit, JK Partnership incurred a net loss of
P50,000. Also, the partners stipulate the following:

a. JJ will receive quarterly interest of 2% on his beginning capital balance.

b. KK will receive semi-annual interest of 6% on his average capital balance.

c. The remainder is to be divided based on their ending capital balances.

 Profit Distribution Table

JJ KK TOTAL

Interest- JJ (80K*2%*4) P6,400 P6,400

Interest- KK I(72,916*6%*2) P8,750 8,750

Remainder: JJ (65,150*90/170) (34,491)

Remainder: KK (65,150*80/170) (30,659)

Balance (65,150)

TOTAL (P28,091) (P21,909) (P50,000)

***Net Income (P50,000) ***Remainder
Interest- JJ (6,400) JJ=(65,150)*90/170= (34,491)
Interest- KK (8,750)
Balance (P 65,150) KK= (65,150)*80/170= (30,659)

Quarterly Journal Entry for the interest on beginning capital balance of JJ:

JJ, Drawings 1,600

Cash 1,600
To Record interest allowances of JJ

Semi-annual Journal Entry for the average capital balance of KK:

KK, Drawings 4,375

Cash 4,375
To Record interest allowances of KK
Journal entry for the distribution of profit and to close the Income Summary:

JJ, Capital 28,091

KK, Capital 21,909
Income Summary 50,000

Journal entry close partners’ drawing accounts for 2020:

JJ, Capital 6,400

KK, Capital 8,750
JJ, Drawings 6,400
KK, Drawings 8,750
THANK
YOU!