PARTNERSHIP OPERATION - DISTRIBUTION OF PROFIT OR LOSS

Assume that on January 1,2016, Jolina and Karla formed a partnership with an investment of P40,000.00 by Jolina a
December 31,2016 after closing all income and expenses accounts, the Income Summary account shows a credit ba
the profit for the year 2016. Changes in the capital accounts during 2016 are summarized as follows:

Jolina Karla
Account balances, Jsn. 1, 2016 ₱ 40,000.00 ₱ 60,000.00
Additional investment, March 1 20,000.00 50,000.00
Additional investment, August 1 20,000.00 40,000.00
Withdrawal, Oct. 1 -20,000.00
Withdrawal, Nov. 1 -50,000.00
Capital balances, Dec. 31,2016 ₱ 60,000.00 ₱ 100,000.00

1. Division of profit or loss equally.

Journal entry:
Income Summary ₱ 60,000.00
Jolina, Capital ₱ 30,000.00
Karla, Capital 30,000.00
#
On the other hand, if the business operations resulted to a loss of P10,000.00 during the year, the Income Summary
of P10,000.00. The loss is transferred to partners' capital accounts by the following closing entry.
Journal entry:
Jolina, Capital ₱ 5,000.00
Karla, Capital 5,000.00
Income Summary ₱ 10,000.00
#

2.Division of profit or loss in an arbitrary (unequal) ratio.

Assume that Jolina and Karla agreed to divide profit or loss in the ratio of 60% to Jolina and 40% to Karla. Closing en
to individual partners' capital accounts for 2016.
Journal entry:
Income Summary ₱ 60,000.00
Jolina, Capital ₱ 36,000.00
Karla, Capital 24,000.00
#
Computation:
Jolina - 60% x P60,000.00 = P36,000.00
Karla - 40% x P60,000.00 = P24,000.00

3. Division of profit or loss in the ratio of capital account balances

A. Ratio of original capital contributions-this ratio is used if no agreement is made between partners.
Journal entry:
Income Summary ₱ 60,000.00
Jolina, Capital ₱ 24,000.00
 Karla, Capital 36,000.00
#
Computation:
Jolina - P60,000.00 x P40,000.00/P100,000.00 = P24,000.00
Karla - P60,000.00 x P60,000.00/P100,000.00 = P36,000.00

B. Ratio of beginning capital balances

Journal entry:
Income Summary ₱ 60,000.00
Jolina, Capital ₱ 24,000.00
Karla, Capital 36,000.00
#
Computation:
Jolina - P60,000.00 x P40,000.00/P100,000.00 = P24,000.00
Karla - P60,000.00 x P60,000.00/P100,000.00 = P36,000.00

C. Ratio of ending capital balances

Journal entry:
Income Summary ₱ 60,000.00
Jolina, Capital ₱ 22,500.00
Karla, Capital 37,500.00
#
Computation:
Jolina - P60,000.00 x P60,000.00/P160,000.00 = P22,500.00
Karla - P60,000.00 x P100,000.00/P160,000.00 = P37,500.00

D.1 Ratio of Average Capital balances (Simple average)

Journal entry:
Income Summary ₱ 60,000.00
Jolina, Capital ₱ 23,077.00
Karla, Capital 36,923.00
#
Computation : Average Capital (simple average)
Jolina = P40,000.00 + P60,000.00
2
= P100,000.00
= 2
= P50,000.00
Karla = P60,000.00 + P100,000.00
2
= P160,000.00
2
= P80,000.00
 Division of profit:
Jolina - P60,000.00 x P50,000.00/P130,000.00 = P23,077.00
Karla - P60,000.00 x P80,000.00/P130,000.00 = P36,923.00

D.2 Ratio of Weighted Average Capital balances (Peso-month/Peso-day method)

Under this method, partners' drawing account balances up to the amounts specified in the agreement would not be
partners' average or year-end capital balances. For the purposes of dividing partnership income, drawings in excess
from the partners' capital accounts in computing average capital balances. The partnership contract should also sta
are to be computed to the nearest month or to the nearest day.. A common practice is to treat withdrawals and inv
of the month as if they were made on the first day of the month,and to treat withdrawals and investments during th
were made on the first day of the following month.

Computation of Average Capital Balances (weighted average - Peso-month method)

Partner Date Investment Capital Account Fraction of Year
(Withdrawal) Balances Unchanged
Jolina Jan. 1 ₱ 40,000.00 ₱ 40,000.00 1/6
Mar. 1 20,000.00 60,000.00 3/7
Aug. 1 20,000.00 80,000.00 1/6
Oct. 1 -20,000.00 60,000.00 1/4

Karla Jan. 1 ₱ 60,000.00 ₱ 60,000.00 1/6

Mar. 1 50,000.00 110,000.00 3/7
Aug. 1 40,000.00 150,000.00 1/4
Nov. 1 -50,000.00 100,000.00 1/6

Total Average Capital account balances

Division of profit:
Jolina - P60,000.00 x P60,000.00/P170,000.00 = P21,176.00
Karla - P60,000.00 x P110,000.00/P170,000.00 = P38,824.00
Journal Entry:
Income Summary ₱ 60,000.00
Jolina, Capital ₱ 21,176.00
Karla, Capital 38,824.00
#
Note: If the partnership agreement specifies that income is to be divided based on partners'capital balances,
but fails to specify how capital balances are to be computed, the average capital balances should be used if
If not, the original capital balances should be used.

4. Salary allowance to partners with remaining net profit or loss divided in an agreed ratio.
Using the same data for Jolina and Karla partnership, assume that the partnership agreement provides for an annual salary
and P20,000.00 for Karla, with resultant net profit or loss to be divided equally.
Note: In partnership accounting, partners' salary allowances, like interest allowances on capital account balances are not ex
of partnership income.
 Schedule of Profit Distribution
Jolina Karla Total
Salaries ₱ 30,000.00 ₱ 20,000.00 ₱ 50,000.00
Remainder:equally
(P60,000.00 - P50,000.00) 5,000.00 5,000.00 10,000.00
Total ₱ 35,000.00 ₱ 25,000.00 ₱ 60,000.00

Required Journal entries:

1. to record monthly salary allowances to partners.
Jolina, drawing (P30,000.00/12) ₱ 2,500.00
Karla, drawing (P20,000.00/12) 1,667.00
Cash ₱ 4,167.00
#
2. year-end closing journal entries.
Income Summary ₱ 60,000.00
Jolina, Capital ₱ 35,000.00
Karla, Capital 25,000.00
#
Jolina, Capital ₱ 30,000.00
Karla, Capital 20,000.00
Jolina, Drawing ₱ 30,000.00
Karla, Drawing 20,000.00
#
* Partnership agreement should provide not only for partners salary allowances and the sharing of profit but also for the tre
when losses are incurred. In the absence of an agreement, salaries are automatically allowed even when losses are incurre
Using the same illustration, assume that on December 31,2016, Jolina and Karla Partnership has a net loss of P20,000.00 be
allowances to partners.
Schedule of Distribution of Loss
Jolina Karla Total
Salaries ₱ 30,000.00 ₱ 20,000.00 ₱ 50,000.00
Remainder:equally
(P50,000.00 + P20,000.00) -35,000.00 -35,000.00 -70,000.00
Total -₱ 5,000.00 -₱ 15,000.00 -₱ 20,000.00
Closing Journal entry:
Jolina, Capital ₱ 5,000.00
Karla, Capital 15,000.00
Income Summary ₱ 20,000.00
#
* But if partnership agrement provides that salaries are allowed to the extent of earnings only, then no salaries are allowed
Partners may also agree to allow salaries on a pro-rata basis if earnings are lower than the total salaries.
Assume that Jolina and Karla Partnership earned an income of P30,000.00, lower than their salaries allowed.
Computation of profit distribution - pro-rata salaries.
 Jolina - P30,000.00 x P30,000.00/P50,000.00 = P18,000.00
Karla - P30,000.00 x P20,000.00/P50,000.00 = P12,000.00

Required Journal entries:

1. to record montly salary allowances to partners.
Jolina, Drawing ₱ 1,500.00
Karla, Drawing 1,000.00
Cash ₱ 2,500.00
#
2. year-end closing journal entries.
Income Summary ₱ 30,000.00
Jolina, Drawing ₱ 18,000.00
Karla, Drawing 12,000.00
#

5. Interest allowed on Partners' capital with remaining profit or loss divided in an agreed ratio.
Note: Interest on partners' capital accounts are not treated as expense of the partnership.
*Assume that in the Jolina and Karla Partnership with net income of P60,000.00 privides for interest on partners' averag
balances at 12%, with any remaining net income or loss to be divided equally.
Schedule of Profit Distribution
Jolina Karla Total
Interes on average capital:
Jolina- P60,000.00 x 12% ₱ 7,200.00 ₱ 7,200.00
Karla- P110,000.00 x 12% ₱ 13,200.00 13,200.00
Remainder: equally
(60,000.00 - P20,400.00) 19,800.00 19,800.00 39,600.00
Toal ₱ 27,000.00 ₱ 33,000.00 ₱ 60,000.00
Closing Journal entry:
Income Summary ₱ 60,000.00
Jolina, Capital ₱ 27,000.00
Karla, Capital 33,000.00
#

* Allocating net loss: As a separate case, assume that the partnership operation results at a net loss of P10,000.00. If the agree
allow interest on capital account balances, the provision must be enforced regardless of whether operati
Schedule of Distribution of Loss
Jolina Karla Total
Interest on average capital ₱ 7,200.00 ₱ 13,200.00 ₱ 20,400.00
Remainder: equally
(P20,400.00 + P10,000.00) -15,200.00 -15,200.00 -30,400.00
Total -₱ 8,000.00 -₱ 2,000.00 -₱ 10,000.00
Closing Journal entry
Jolina, Capital ₱ 8,000.00
 Karla, Capital 2,000.00
Income Summary ₱ 10,000.00
#
* In some cases, agreement allowing interest on partners' capital account balances may result to a net increase in one's par
operations for the year resulted to a net loss.
Assume the same conditions as in the preceding example except that the net loss for the year was P1,000.00.
Scehdule of Distribution of Loss
Jolina Karla Total
Interest on average capital 7,200.00 13,200.00 20,400.00
Remainder: equally
(P20,400.00 + P1,000.00) -10,700.00 -10,700.00 -21,400.00
Toal -₱ 3,500.00 ₱ 2,500.00 -₱ 1,000.00
Closing Journal Entry
Jolina, Capital ₱ 3,500.00
Karla, Capital 2,500.00
Income summary 1,000.00
#
6. Bonus to Managing Partner based on Profit and the balance in an agreed ratio.
a. Bonus on net income before bonus
Assume that the partnership of Jolina and Karla has a net income of P190,200.00 before bonus. Bonus to Jolina, the
of net income before the bonus, balance, equally.
Schedule of Profit Distribution
Jolina Karla Total
Bonus: to Jolina
P190,200.00 x 20% ₱ 38,040.00 ₱ 38,040.00
Balance: equally
(P190,200.00 - P38,040.00) 76,080.00 76,080.00 152,160.00
Total ₱ 114,120.00 ₱ 76,080.00 ₱ 190,200.00
Note: Bonus is not treated as an expense of the partnership but as a tool of computing the profit share
Closing Journal Entry
Income Summary ₱ 190,200.00
Jolina, Capital ₱ 114,120.00
Karla, Capital 76,080.00
#
b. Bonus on net income after bonus.
Assume the same illustration, except that the bonus of 20% to Jolina is based on net income after the bonus.
Computation of Bonus
1. Using algebraic equation.
Bonus + Net Income after Bonus = P190,200.00
let X = Net Income after Bonus
X = P190,200.00 - Bonus
X = P190,200.00 - 20% (X)
X = P190,200.00 - .20 X
 1.20X= P190,200.00
X= P190,200.00/1.20
X =P158,,500.00
Bonus = P158,500.00 x 20%
= P31,700.00
2. Alternative computation of bonus.
Net income before Bonus ₱ 190,200.00 120%
Net income after Bonus 158,500.00 100%
Bonus ₱ 31,700.00 20%
Note: Under this method for purposes of bonus computation, the bonus to Jolina is treated as an expense.
Schedule of Profit Distribution
Jolina Karla Total
Bonus: to Jolina
(P190,200.00/1.20) .20 ₱ 31,700.00 ₱ 31,700.00
Balance: equally
(P190,200.00- P31,700.00) 79,250.00 79,250.00 158,500.00
Total ₱ 110,950.00 ₱ 79,250.00 ₱ 190,200.00
Closing Journal entry
Income summary ₱ 190,200.00
Jolina, Capital ₱ 110,950.00
Karla, Capital 79,250.00
#
c. Bonus on net income after allowing salaries, interest on capital balances but before bonus.
Assume that the partnership of Jolina and Karla has a net income of P190,200.00 before salaries, interest and bonus
The partnership contract provides for the following:
a. Salaries to Jolina and Karla, P30,000.00
b. Interest on capital balances:
Jolina = P7,000.00
Karla = P3,200.00
c. Bonus to Jolina, 20%
d. Remaining profit or loss, equally
Computation of Bonus:
Net Income before salaries, interest and bonus
Less: Salaries ₱ 60,000.00
Interest 10,200.00
Net income before bonus
Bonus percentage
Bonus
Schedule of Profit distribution
Jolina Karla Total
Salary allowances ₱ 30,000.00 ₱ 30,000.00 ₱ 60,000.00
Interest allowances 7,000.00 3,200.00 10,200.00
Bonus: to Jolina 24,000.00 24,000.00
 Balance: equally
(P190,200 - P94,200.00) 48,000.00 48,000 96,000.00
Total ₱ 109,000.00 ₱ 81,200.00 ₱ 190,200.00
Closing Journal Entry
Income Summary ₱ 190,200.00
Jolina, Capital ₱ 109,000.00
Karla, Capital 81,200.00
#
d. Bonus on net income after salaries, interest and bonus.
Computation of Bonus
1. Using algebraic equation
Bonus = Net Income - Salaries - Interest - Bonus
Let X = Bonus
X = 20% ( P190,200.00 - P60,000.00 - P10,200.00 - X)
X = P38,040.00 - P12,000.00 - P2,040.00 - .20X
1.20X = P24,000.00
X = P24,000.00/1.20
X = P20,000.00
2. Alternative computation
Net Income before salaries, interest and bonus ₱ 190,200.00
Less: Salaries ₱ 60,000.00
Interest 10,200.00 70,200.00
Net Income before bonus 120,000.00
Net Income after bonus 100,000.00
Bonus ₱ 20,000.00
Schedule of Profit Distribution
Jolina Karla Total
Salary allowances ₱ 30,000.00 ₱ 30,000.00 ₱ 60,000.00
Interest allowances 7,000.00 3,200.00 10,200.00
Bonus: to Jolina 20,000.00 20,000.00
Balance: equally
(P190,200.00 - P90,200.00) 50,000.00 50,000.00 100,000.00
Total ₱ 107,000.00 ₱ 83,200.00 ₱ 190,200.00
Closing Journal entry
Income Summary ₱ 190,200.00
Jolina, Capital ₱ 107,000.00
Karla, Capital 83,200.00
#
Note: The bonus agreement is not applicable if the operation of the partnership result to a net loss. In o
the bonus provision is disregarded.
nvestment of P40,000.00 by Jolina and P60,000.00 by Karla. On
Summary account shows a credit balance of P60,000.00 representing
mmarized as follows:

uring the year, the Income Summary account would show a debit balance
ing closing entry.

o Jolina and 40% to Karla. Closing entry to divide the net income of P60,000.00

ween partners.
cified in the agreement would not be duducted in determining the
tnership income, drawings in excess of allowable amount are deducted
partnership contract should also state whether capital account balances
actice is to treat withdrawals and investments made during the first half
thdrawals and investments during the latter half of the month as if they

Average Capital
Account balances
₱ 6,667.00
25,000.00
13,333.00
15,000.00
₱ 60,000.00
₱ 10,000.00
45,833.00
37,500.00
16,667.00
₱ 110,000.00
₱ 170,000.00

d on partners'capital balances,
ge capital balances should be used if it can be computed.

ement provides for an annual salary of P30,000.00 for Jolina

capital account balances are not expenses in the determination

 sharing of profit but also for the treatment of salaries
lowed even when losses are incurred.
rship has a net loss of P20,000.00 before salary

gs only, then no salaries are allowed when a loss occurs.

the total salaries.
an their salaries allowed.
vides for interest on partners' average capital account

a net loss of P10,000.00. If the agreement provides to

orced regardless of whether operating results is a profit or loss.
result to a net increase in one's partner's capital account even though

r the year was P1,000.00.

0 before bonus. Bonus to Jolina, the Managing Partner, 20%

a tool of computing the profit share of the partners.

n net income after the bonus.

ina is treated as an expense.

0 before salaries, interest and bonus to partners.

₱ 190,200.00

70,200.00
120,000.00
x 20%
₱ 24,000.00
 120%
100%
20%

partnership result to a net loss. In other words, when there is net loss