Module 2 Part 1

PARTNERSHIP OPERATIONS &

FINANCIAL REPORTING
Partner’s Equity& Share in Profits & Losses; Rules in the
Distribution of Profits & Losses; Financial Reporting
Introduction
After partnership formation, the main concern now of the partners is to operate the
business profitably and to formulate profits or losses sharing scheme. Like any other
forms of business, it is profit-oriented. Some of the many questions that will arise are as
follows:
1. What are the factors to consider in arriving at a plan for dividing profits or losses?
2. What rules to apply if there is no agreement as to division of profits or losses?
3. If there is an agreement, what are the common arrangements to govern the
distribution of profits or losses?
4. Should capital contribution given more weight?
Learning Objectives

After studying this module, the students should be able to:

1. summarize the various rules to be followed in the distribution of profit and loss;
contrast a partner’s equity in assets from share in profits and losses;
2. identify, describe and account for the different methods of dividing partnership
profits or losses based on agreement;
3. ascertain the effects of using original, beginning, ending and average capital balances
on the partner’s share in profits and losses;
4. understand and appreciate the usefulness of financial statements and develop skills in
its preparation;
5. differentiate between capital account and the current account of a partner used in
other jurisdictions.
 PERTINENT LAWS ON THE DISTRIBUTION OF THE
PARTNERSHIP PROFIT & LOSS

All partners put in their money, property or industry to a common fund such factors may
be the bases to determine the equitable profit –sharing scheme as:
1. Money, property or Industry.
The amount of capital invested by each partner, means the amount of time each partner
devotes to the business and other contributions.
2. Performance Methods. Some partnerships give some weight to the specific
performance of each partner to provide incentives to perform well. This is frequently
referred to as Bonus.
Example of performance criteria:
1. Chargeable hours- total number of hours that a partner incurred on a client-related
assignments. Weight may be given to hours in excess of a standard.
2. Total billings-total amount billed to clients for work performed and supervised.
3. Write-offs – uncollected billings , weight may be given to billings in excess of norm.
4. Promotional activities-enhancing partnership’s name in the community
5. Profits in excess of specified levels.
 RULES FOR THE DISTRIBUTION OF
PROFITS OR LOSSES
1. The profits and losses shall be distributed in conformity with the agreement.
2. If only the share of each partner in the profits has been agreed upon, the share of
each in the losses shall be in the same proportion.
3. In the absence of stipulation, the share of each partner in profits or losses shall be in
proportion to what they have contributed (according to ratio of original capital
investments or in its absence, the ratio of capital balances at the beginning of the
year).
4. The industrial partner shall receive such share as may be just and equitable under
the circumstances but he may not be liable for losses incurred by the business.
5. As “ industrial – capitalist partner”, he shall also receive his share in the profits in
proportion to his capital.”
Tan and Sy are partners in coco water
business.Tan contributed most of the assets but
spends less time for its daily operations. Sy
contributed less of the assets but devotes his full
knowledge and attention to the partnership.
How will profits be divided ?
Partner’s Equity vs. Share in profits
and losses
The basis by which profits or losses are
shared is a matter of agreement between
partners and not the same as their capital
contribution ratio.

EX: If Ging is a 1/3 equity partner in a

partnership, it does not mean that he has also
1/3 share in the profits or losses of the
partnership. It could be MORE or LESS.
 RULES FOR DISTRIBUTION OF
PROFITS OR LOSSES
1. PROFITS
a. According to partner’s agreement
❑ equally or in an agreed ratio
❑ capital contributions of partners
b. If NO agreement:
❑ As to capitalist partners
according to capital contributions-ratio of original
investments or ratio of capital balances at the beginning
of the year
❑ As to industrial partners (if any)
such share as may be just & equitable provided that , the
industrial partner shall receive it before capitalist partners
shall divide the profits.
Rules continued...
2. LOSSES
a. According to partner’s agreement
b. If no agreement as to losses but has agreement
as to profits, same agreed upon profit ratio shall
apply to losses.
c. If NO agreement:
as to capitalist partners-losses shall be divided
according to capital contribution-ratio of original capital
investments, in absence, ratio of capital balances at the
beginning of the year.
as to industrial partner- they are not liable for any
losses
Rationale for Industrial Partner
For obvious reasons, Industrial Partners are not liable for losses of the
partnership:

An industrial partner cannot anymore withdraw the work or labor already done
by him , unlike the capitalist partners who can withdraw their capital
If the partnership failed to realize profits, the industrial partner has already
contributed to the loss, he in fact, has labored in vain.
Summary of Rules & Illustrations:

DISTRIBUTION OF PROFITS BASED ON PARTNERSHIP AGREEMENT To

illustrate the different methods or scheme of profit and loss distribution, we will use the
partnership of King and Kong as a basis for illustration in the succeeding discussions:
Illustration:
Assume King and Kong formed a partnership with original capital contribution of
P600,000 and P500,000 respectively. Partners allowed withdrawals of P5,000 every
month which will be recorded using their respective Withdrawal account. It will not be
considered in the division of profits and losses. During the year, the partnership made a
profit of P220,000.
Illustration
As of December 31, 2019, the general ledger showed the following balances for equity
accounts:
I. a. Equally or at any agreed ratio
b. Using same data, assume that profit sharing
agreement is 2/3 for King and 1/3 for Kong.
c. Assume King-Kong Partnership, incurred a loss of (P220,000)
instead of profit.

The profit-sharing ratio is 60:40 respectively but no loss sharing agreement. Therefore,
loss will be distributed to partners in the same proportion as in profit sharing.
II. Based on Partner’s Capital Contribution which
may refer to either of the following:
Based on capital contribution …
Based on capital contribution…
Based on capital contribution…
Based on capital contribution…
Seatwork #2 Distribution of Profits
Seo and Joon are partners in a travel and tours business. Joon is the managing partner in-charge in the day to
day operations of the business. Their respective capital accounts as of fiscal year May 31, 2019 are as follows:

Seo, Capital Joon, Capital

12/1/18 15,000 6/1/18 P100,000 9/1/18 P130,000 6/1/18 P250,000
5/1/19 10,000 9/1/18 10,000 5/1/19 135,000 11/1/18 150,000
4/1/19 35,000 3/1/19 165,000
25,000 145,000 265,000 565,000

Income Summary
5/31/19 P250,000

REQUIRED: Prepare a profit distribution schedule and journalize the distribution of profits based on the
following agreements:
Case 1 – Equally
Case 2 – 1/3 & 2/3 for Seo and Joon respectively.
Case 3 – 60%:40% for Seo and Joon respectively.
Case 4 – 1:5 ratio for Seo and Joon respectively.
Case 5 – Based on original capital contribution.
Case 6 – Based on ending capital balances.
Case 7 – Based on average capital balances.

Thank you Next Part 2