PARTNERSHIP OPERATIONS

Primary accounting issues include:

1. Profit or loss allocation
2. Periodic adjustment of capital after operation

Profit division:
1. Profit sharing agreement
2. Original capital

Loss division:
1. Loss sharing agreement
2. How profit is divided

Arbitrary allocation:
The partners may provide for the following methods of profit or loss distribution:
1. Salary – compensation for services; provided for regardless of the existence of profit because
the provision for services by a partner is independent from earning a profit.
2. Interest – compensation for use of partner’s capital; provided for regardless of the existence
of profit because the of the partner’s capital is independent from earning a profit.
3. Bonus – compensation for good performance; provided only when the partnership has profit
because the use of the partner’s capital is independent from earning a profit.
Bonus computation:
Assume the following:
Tax rate (T) = 30%
Bonus rate (B) = 10%
Tax on bonus (tb) = 3% (30% x 10%)

Case 1: After bonus and after tax

Bonus = Income - 30%T X 10%

1 + 10%B – 3% tb

Case 2: After bonus but before tax

Bonus = Income X 10%

1 + 10%B

Case 3: Before bonus but after tax

Bonus = Income - 30%T X 10%

1 – 3% tb

Case 4: Before bonus and before tax

Bonus = Income X 10%

Special allocation
1. Distribution of profit in order of priority
2. Minimum profit sharing
3. Bonus, interest or salaries are regarded as expense

Statement of Partner’s Capital

Beginning/Original Capital XXX
Additional investment XXX
Withdrawals (XXX)
Drawings (XXX)
Share in net income XXX
Share in net loss (XXX)
Ending capital XXX

SOURCE:
Prof. Mark Alyson B. Ngina, CPA, CMA

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