PARTNERSHIP AND

CORPORATION
Lesson Title: Chapter 2 - Partnership Operations

Lesson Objective/s:
At the end of the module, the learners will be able to:
• Determine the distribution of profit or loss according to the
partnership agreement.
Lectures and Annotations

PARTNERSHIP OPERATION

Rules for the distribution of Profits and Losses

A. As to Capitalist Partner
Distribution of Profits
1. Profits shall be divided according to the partners’ agreement.
2. If there is no agreement, the profits shall be based in proportion to their
capital contribution (or original capital contribution).

Distribution of Losses
3. Losses shall be distributed according to the partners’ agreement.
4. If there is no agreement as to distribution of losses, but there is an
agreement as to profits, the losses shall be distributed according to the
profit sharing ratio.
5. In the absence of agreement, the losses shall be based in proportion to
their capital contribution.
B. As to Industrial Partner
Distribution of Profits
1. Profits shall be divided according to the partners’ agreement.
2. If there is no agreement, industrial partner receives a just and equitable
under the circumstances. Industrial partner shall receive such share,
which may be satisfied first before the capitalist partners divide the
profits.

Distribution of Losses
3. Losses shall be distributed according to the partners’ agreement.
4. In the absence of agreement, industrial partner is not liable for losses.
Q:
What if only the loss allocation has been agreed upon among the partners, is
the share of each partner in the profits be in the same proportion with
the loss allocation?

A:
No. If only the loss sharing ratio has been agreed upon, that ratio is only
applicable if the partnership incurred loss during the period.

Therefore, if the partnership realized profit during the period and only the loss
sharing ratio has been agreed upon, it is as if there was no agreement as to
the distribution of profit. Hence, the profit is to be distributed between or
among the partners based on their original capital contribution.
For Equity of Distribution of Net Income Allowances are given:
1. Salary allowance – it is given to recognize the time rendered by the
partners to the entity.

2. Interest allowance – it is given to recognize the difference in the

capital contributed to the partnership.

3. Bonus allowance – it is given if the partnership realized a profit to

give recognition to the managerial skills of the partner.
Permanent (capital) withdrawals
• it affects the computation of average capital. It is a withdrawal
against the invested capital.

Temporary (personal) withdrawals

• it does not affects the computation of average capital. It is a
withdrawal in anticipation of profit.
The partners may agree with any of the following schemes of distribution of
profits and losses:
1. Equally
2. Arbitrary ratio
3. Capital ratio
a. Original capital
b. Beginning capital
c. Ending capital
d. Average capital
 Simple average
 Weighted average (peso-month/ peso-day average capital)
4. Salary allowance and the balance on the agreed ratio
5. Interest allowance and the balance on the agreed ratio
6. Bonus to managing partner and the balance on the agreed ratio
7. Order of priority schemes if profits are not sufficient to cover the salary and
interest allowances.
Accounting for Partnership Operations: Methods to Allocate Net
Income or Loss
1. Equally
• This method may be proper when capital or service contribution of
the partners are considered to be the same.
• The entry of the partnership of X and Y to record the allocation of
net income of P288,000 equally would be as follows:
Income Summary 288,000
X, Drawing 144,000
Y, Drawing 144,000

• The resulting balance in the drawing accounts may be closed into

the capital accounts.
Accounting for Partnership Operations: Methods to Allocate Net Income or
Loss
2. Arbitrary ratio
• When the capital and service contribution of the partners are unequal,
an arbitrary profit ratio may be employed to recognize these
differences.
• The entry of the partnership of X and Y to record the allocation of net
income of P288,000 in the ratio of 3:2 would be as follows:
Income Summary 288,000
X, Drawing 172,800
Y, Drawing 115,200

• The resulting balance in the drawing accounts may be closed into the
capital accounts.
Accounting for Partnership Operations: Methods to Allocate Net Income
or Loss
3. Capital Balances
• Original Capital – if the agreement between X & Y is based on
original capital, reference would be made to the amounts
originally invested by the partners.
• Capital balances on Jan 1: X, Capital P300,000; Y, Capital
P420,000.
• The entry of the partnership of X and Y to record the allocation of
net income of P288,000 would be as follows:
Income Summary 288,000
X, Drawing 120,000
Y, Drawing 168,000
Accounting for Partnership Operations: Methods to Allocate Net Income or
Loss
3. Capital Balances
• Ending Capital – if the agreement between X & Y is based on ending
capital,
• Capital balances on Dec 31: X, Capital P360,000; Y, Capital P450,000.
• The entry of the partnership of X and Y to record the allocation of net
income of P288,000 would be as follows:
Income Summary 288,000
X, Drawing 128,000
Y, Drawing 160,000

• The resulting balance in the drawing accounts may be closed into the
capital accounts.
Accounting for Partnership Operations: Methods to Allocate Net
Income or Loss
3. Capital Balances
• Average Capital – if the agreement between X & Y is based on
average capital (simple average and weighted average),
• Average Capital balances: X, Capital P345,000; Y, Capital
P405,000.
• The entry of the partnership of X and Y to record the allocation of
net income of P288,000 would be as follows:
Income Summary 288,000
X, Drawing 132,480
Y, Drawing 155,520

• The resulting balance in the drawing accounts may be closed into

Accounting for Partnership Operations: Methods to Allocate Net Income or
Loss
4. Interest on Excess Capital Balances –
• Assume that X & Y agree to allow interest on the excess of the average capital of
one partner over that of another at 6%; any net income or loss balance is to be
allocated 1:2.
• X, Capital P345,000; Y, Capital P405,000 = Y, Capital excess is P60,000.
• The entry of the partnership of X and Y to record the allocation of net income of
P288,000 would be as follows:
Income Summary 288,000
X, Drawing 94,800
Y, Drawing X 193,200 Y Total

Interest on excess average

3,600 3,600
capital

Balance 1:2 94,800 189,600 284,400

Total 94,800 193,200 288,000

Accounting for Partnership Operations: Methods to Allocate Net Income
or Loss
5. Salary Allowances –
• Assume that X & Y agree to the allowance of monthly salaries of P10,000 and
P9,000, respectively, any net income or loss balance is to be allocated in the
ratio of beginning capital (X, Capital P300K; Y, Capital P420K).
• The entry of the partnership of X and Y to record the allocation of net income of
P288,000 would be as follows:
Income Summary 288,000
X, Drawing 145,000
Y, Drawing 143,000
X Y Total

Salaries 120,000 108,000 228,000

Balance (300:420) 25,000 35,000 60,000

288,00
Total 145,000 143,000
0
Accounting for Partnership Operations: Methods to Allocate Net
Income or Loss
6. Allocation of Net Income with Bonus –
• The net income of A and B Partnership for 20x4 amounted to
P420,000. A, as the managing partner, is allowed as a bonus
based on the following assumptions:

1) A bonus of 20% of net income before the bonus is deducted, the

bonus would be computed as follows:
Let B = Bonus
= 20% of NI
= 20% of P420,000
= P84,000
Accounting for Partnership Operations: Methods to Allocate Net Income
or Loss
6. Allocation of Net Income with Bonus, Salaries, Interest and Income tax
–
• Bonus of 20% to A
• Salaries to A, P40,000 and B, P60,000
• Interest on average capital balances
A – A, P12,000Band B, P8,000Total
• Residual balance in net income be allocated to A and B in the ratio of 2:1 ratio.
Bonus 84,000 84,000
Salaries 40,000 60,000 100,000
Interest 12,000 8,000 20,000
Balance (2:1) 144,000 72,000 216,000
Total 280,000 140,000 420,000
PA-03 Prob 7: (p127)
On Jan 2, 2023, X and Y formed a partnership by investing P100,000 and
P200,000, respectively. They agreed on the allocation of profit as follows:
• Interest at 5% on original capital.
• Salaries of P24,000 and P36,000 to X and Y, respectively.
• Bonus of 20% to X.
• Any undistributed profits or losses will be allocated equally to X and Y.
Assume that the partnership realized profit of P250,000 for 2023.
Requirement: Determine the amount of bonus given to X and profit share
of each partner under each of the following independent cases:

1. Bonus is based on profit before interests, salaries, and bonus.

2. Bonus is based on profit after interests but before salaries and bonus.
3. Bonus is based on profit after salaries but before interests and bonus.
4. Bonus is based on profit after bonus but before interests and salaries.
5. Bonus is based on profit after interests and salaries but before bonus.
6. Bonus is based on profit after interests and bonus but before salaries.
7. Bonus is based on profit after salaries and bonus but before interests.
8. Bonus is based on profit after interests, salaries, and bonus.
1) X Y Total B =.20 (NI)
Interest 5,000 10,000 15,000
Salaries 24,000 36,000 60,000
Bonus 50,000 50,000
Remainder 62,500 62,500 125,000
Share in profit 141,500 108,500 250,000

2) X Y Total B =.20 (NI - I)

Interest 5,000 10,000 15,000
Salaries 24,000 36,000 60,000
Bonus 47,000 47,000
Remainder 64,000 64,000 128,000
Share in profit 140,000 110,000 250,000
3) X Y Total B =.20 (NI - S)
Interest 5,000 10,000 15,000
Salaries 24,000 36,000 60,000
Bonus 38,000 38,000
Remainder 68,500 68,500 137,000
Share in profit 135,500 114,500 250,000

4) X Y Total B =.20 (NI - B)

Interest 5,000 10,000 15,000 =50,000 - .2B
Salaries 24,000 36,000 60,000 =41,667
Bonus 41,667 41,667
Remainder 66,667 66,667 133,334
Share in profit 137,334 112,667 250,001
5) X Y Total B =.20 (NI - I - S)
Interest 5,000 10,000 15,000 =.20 (250 - 15 - 60)
Salaries 24,000 36,000 60,000 =35,000
Bonus 35,000 35,000
Remainder 70,000 70,000 140,000
Share in profit 134,000 116,000 250,000

6) X Y Total B =.20 (NI - I - B)

Interest 5,000 10,000 15,000 =.20 (250 - 15 - B)
Salaries 24,000 36,000 60,000 =47,000 - .2B
Bonus 39,167 39,167 =39,167
Remainder 67,917 67,917 135,834
Share in profit 136,084 113,917 250,001
7) X Y Total B =.20 (NI - S - B)
Interest 5,000 10,000 15,000 = 38,000 - .2B
Salaries 24,000 36,000 60,000
Bonus 31,667 31,667
Remainder 71,667 71,667 143,334
Share in profit 132,334 117,667 250,001

8) X Y Total B =.20 (NI - I - S - B)

Interest 5,000 10,000 15,000 =35,000 - .2B
Salaries 24,000 36,000 60,000 =29,167
Bonus 29,167 29,167
Remainder 72,917 72,917 145,834
Share in profit 131,084 118,917 250,001
References:

Ballada, W., Ballada, S., (2023). Partnership and Corporation. Manila: DomDane
Publishers.

Empleo, P.M., Robles, N.S, German, C.I., (2023). Fundamentals of Accounting Volume
2. Quezon City: PME Publishing Corp.

Reyno, Jr. F.Z., Reyno, DW. M., (2019). Financial Accounting and Reporting Part Two.
Dagupan City: Reyno Publishing House.

Villaluz, B.C. S., (2024). The Ultimate Partnership Accounting Reviewer. Cainta, Rizal:
BCV Accounting Bookshop.