ACTG112 – MODULE 2
LECTURE VID 1
FACTORS TO CONSIDER IN DIVIDING PROFITS OR
LOSSES
1) Ital contribution of each partner
2) Service to partnership
3) Expertise of the partner/s
RULES FOR THE DISTRIBUTION OF PROFITS
 According to partners’ agreement
 If no agreement:
 If Capitalist Partner
 Ratio of original capital investment.
Or in its absence, based on:
 Ration of capital balances at the
beginning of the year
 If Industrialist Partner
 In the form of salary allowances
that is just and equitable before the
capitalist partners shall divide the
profits
RULES FOR THE DISTRIBUTION OF LOSSES
 According to partner’s agreement
 If no agreement as to distribution of losses but
there is agreement for distribution of profits,
the losses shall be distributed based on profit
sharing ratio
 In the absence of agreement:
 If Capitalist Partner
 Ratio of original Capital Investment
Or in its absence, based on:
 Ratio of capital balances at the
beginning of the year
 If Industrial Partner
 Shall not be liable for any losses
thus will not share on the losses
AGREEMENTS IN THE DISTRIBUTION OF PROFIT
1) EQUALLY AGREED RATIO OR ANY AGREED
RATIO
2) BASED ON PARTNERS’ CAPITAL
a) Original Capital Contribution
 May prove inequitable is there are
material changes in the capital
accounts during the year
1
b) Capital Balances, Beginning of the Year
 When beginning capital balances
are used in allocating profits,
additional investments are
discouraged because additional
investments will not be considered
in the division of profits in the year
it was invested
c) Capital Balances, End of Year
 If ending capital balances are used,
additional investments are
encouraged only at the end of the
year
d) Average Capital
 The use of average capital balances
as a basis for distributing profits or
losses is preferable because it
reflects the capital actually available
for use by the partnership during
the year
3) PROVIDING INTEREST ON CAPITAL BALANCES
» If the agreement provides interest on
capital, it must be honored regardless
the operations yielded a profit or loss
» Interest on capital must be honored
regardless the operations yielded a loss
4) PROVIDING SALARY
» Salaries to partners are not deducted as
expenses. Partners devote their time
and services is understood to do so for
profit, not for salary. Salaries are
recorded as Drawings
» Similarly with interests on capital,
salaries to partners must be honored
regardless the operations yielded a
profit or loss
5) PROVIDING BONUS
» Normally Provided to Managing
Partners
» Operations should yield a good profit
» Bonus is provided if operations are
favorable
» To encourage partners to maximize the
profit potentials of the partnership
6) PROVIDING COMBINATION OF INTERESTS,
SALARY, AND BONUS
» The partnership can provide
distribution of profit on the
combination of interests, salaries and
bonus, and the remainder based on the
agreed distribution
 ACTG112 – MODULE 2
1) Investment by Partner

Cash 300,000
Partner, Capital 300,000

DIFFERENT WAYS IN PRESENTING PROFIT & LOSS

2) Drawings by Partner
RATIO
Partner, Drawing 5,000
The ratio can be expressed as:
Cash 5,000
Proportion Fraction Percentage 3) Salaries by Partner
1:1 11 50% , 50%
Partner, Drawing 15,000
22 Cash 15,000
Illustrations:

Partners Richard, Piolo, Jericho agreed to distribute the 4) Distribution of Profits

profit 1:3:2.
Income & Expense Sum. 80,000
Proportion Fraction Percentage Partner, Drawing 80,000
1:3:2 132 16.67%, 50%,
666 33.33%
5) Additional Investment by Partner
111
Cash 100,000
623
Partner, Capital 100,000

RECALL CLOSING ENTRIES

6) Increase in Capital from Asset Revaluation
 Close balance of Income and Expense Summary
Land 70,000
account to Capital.
Partner, Capital 70,000
 Close Inventory, Beginning 7) Permanent Withdrawal of Investment
 Record Inventory, End
 Close Credit Balances of Nominal Partner, Capital 50,000
Accounts Cash 50,000
 Close Debit Balances of Nominal
Accounts 8) Distribution of Loss
INCOME & EXPENSE SUMMARY Partner, Drawing 40,000
DR CR Income &
30,000 40,000
Expense Sum
55,000
321,000
281,000 PARTNER, CAPITAL
3111,000 376,000 DR CR
65,000 (6) 50,000 (1) 300,000
(5) 100,000
 Net Profit = 65,000 (6) 70,000
50,000 470,000
DR CR 420,000
Income & Expense
65,000
Summary
A, Drawing PARTNER, DRAWING
Agreements
DR CR
on
B, Drawing (2) 5,000 (4) 80,000
distribution
(3) 15,000
(8) 40,000
60,000 80,000
(9.2) 20,000 (9.1) 20,000
TRANSACTIONS ON PARTNERSHIP’S EQUITY

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 ACTG112 – MODULE 2
TO CLOSE DRAWING ACCOUNT, 4 6
 ,
10 10
9.1) Pay the Credit Balance of Drawing
 40%, 60%
Partner, Drawing 20,000
JE to record share on profit:
Cash 20,000
Income & Expense Sum 300,000
OR Medina, Drawing 120,000
Detoya, Drawing 180,000
9.2)Transfer Credit Balance of Drawing to Capital

Partner, Drawing 20,000

Partner, Capital 20,000

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LECTURE VID 2
2) Based on Partners’ Capital
AGREEMENTS IN THE DISTRIBUTION OF PROFIT (1-2)
Given:
1) Equally Agreed Ratio or Any Agreed Ratio
2) Based on Partners Capital Medina and Detoya partnership started on Aug. 14,
a. Original Capital Contribution 2018. Medina and Detoya investes ₱300,000 and
b. Capital Balances, Beginning of the Year ₱700,000, respectively as initial capital contributions.
c. Capital Balances, End of Year
On October 2018, Medina and Detoya invested
d. Average Capital
additional capital of ₱100,000 each.

On 2019, the following transactions occurred:

ILLUSTRATION IN THE DISTRIBUTION OF PROFT
1) Equally Agreed Ratio or Any Agreed Ratio
Given:
The partnership of Medina and Detoya generated a
profit of ₱300,000.
AGREEMENT:
1a. Based on Equally Agreed Ratio
 Medina invested ₱100,000 on April 1.
 Detoya made a permanent capital withdrawal of
₱50,000 on July 1.
Partnership contracts provides that effective Jan 01,
2019, each partner may withdraw ₱5,000 each month
and both partners did so.
 The partnership generated a profit of ₱300,000 for
the year 2019.

Ratio: Required:

 1:1 Distribute the profit of ₱300,000 for 2019.

1 1 Analysis:
 ,
2 2
 50%, 50% Transactions for Partnership’s Equity for 2019

JE to record share on profit: MEDINA, CAPITAL

DR CR
Income & Expense Sum 300,000 400,000 (Jan 1)
Medina, Drawing 150,000
100,000 (April 1)
Detoya, Drawing 150,000
500,000 (Dec 31)

AGREEMENT:
MEDINA, DRAWING
1b. Based on Agreed Ratio DR CR
Ratio: (Jan-Dec) 60,000

 4:6
DETOYA, CAPITAL

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 ACTG112 – MODULE 2
DR CR DETOYA, CAPITAL
(July 1) 50,000 800,000 (Jan 1) DR CR
750,000 (Dec 31) 800,000 (Jan
(July 1) 50,000
1)
750,000 (Dec
DETOYA, DRAWING 31)
DR CR
(Jan-Dec) 60,000
MEDINA DETOYA TOTAL
Balance of
INCOME & EXPENSE SUMMARY
Beg. Capital 400,000 800,000 1,200,000
DR CR
2019
300,000 (Dec
31) 1 2
Distribution 1
3 3
Share on
100,000 200,000 300,000
Profit

AGREEMENT:
Income & Expense Sum. 300,000
2a. Original Capital Contributions Medina, Drawing 100,000
Medina, Drawing 200,000
MEDINA, CAPITAL
AGREEMENT:
DR CR
300,000 (Aug 2c. Capital Contributions, End of Year 2019
14)
MEDINA, CAPITAL
DR CR
DETOYA, CAPITAL 400,000 (Jan
DR CR 1)
700,000 (Aug 100,000 (April
14) 1)
500,000 (Dec
31)
MEDINA DETOYA TOTAL
Orig.
300,000 700,000 1,000,000
Capital DETOYA, CAPITAL
Distributio DR CR
30% 70% 100%
n (July 1) 50,000 800,000 (Jan 1)
Share on 750,000 (Dec 31)
90,000 210,000 300,000
Profit

MEDINA DETOYA TOTAL

Income & Expense Sum 300,000 Balance of
Medina, Drawing 90,000 End Capital 500,000 750,000 1,250,000
Detoya, Drawing 210,000 2019
Distributio
40% 60% 100%
n
Share on
AGREEMENT: 120,000 180,000 300,000
Profit
2b. Capital Contributions, Beginning of year
2019
Income & Expense Sum 300,000
MEDINA, CAPITAL Medina, Drawing 120,000
DR CR Detoya, Drawing 180,000
400,000 (Jan 1)
100,000 (April 1)
500,000 (Dec 31)
AGREEMENT:
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 ACTG112 – MODULE 2
2d. Average Capital Balance 2019

MEDINA, CAPITAL ↶*ೃ✧˚. ❃ ↷ ˊ-↶*ೃ✧˚. ❃ ↷ ˊ-↶*ೃ✧˚. ❃ ↷ ˊ-

DR CR
400,000 (Jan 1) LECTURE VID 3
100,000 (April 1)
500,000 (Dec 31) 3.1) Providing Interest on Capital Balances

GIVEN:
DETOYA, CAPITAL Amount of Profit to be Distributed = 300,000
DR CR
(July 1) 50,000 800,000 (Jan 1) AGREEMENT:
750,000 (Dec 31) a. Provide 15% interest on average capital balance
MEDINA DETOYA TOTAL
Computing the Average Capital Balances for Ave. Cap. Bal. 475,000 775,000 1,250,000
2019: 15% Interest 71,250 116,250 187,250
b. Remaining balance to be divided equally
 Jan 1 – March 31 = 3 mos.
(300,000-
 400,000(3)/12 = 100,000 187,500= 56,250 56,250 112,500
 April 1 – Dec 31 = 9 mos. 112,500)/2
 500,000(9)/12 = 375,000 Distribution of
127,500 175,500 300,000
Profit

MEDINA, CAPITAL
Income & Expense Sum 300,000
Ave. Cap.
Cap. Bal. *nMos/12 Total Medina, Drawing 127,500
Bal.
Detoya, Drawing 172,500
400,000
*3/12 100,000
(1/01)
500,000
*9/12 375,000 475,000
(4/01)
3.2) Providing Interest on Capital Balances w/ Net
Loss
 Jan 1 – June 31 = 6 mos.
 800,000(6)/12 = 400,000 GIVEN:
 July 1 – Dec 31 = 6 mos.
Net Loss = (10,000)
 750,000(6)/12 = 375,000
AGREEMENT:
DETOYA, CAPITAL
Ave. Cap. a. Provide 15% interest on average capital balances
Cap. Bal *nMos/12 Total
Bal MEDINA DETOYA TOTAL
800,000 Ave. Cap. Bal 475,000 775,000 1,250,000
*6/12 400,000
(1/01)
15% Interest 71,250 116,250 187,500
750,000
*6/12 375,000 775,000 b. Remaining balance to be divided equally
(7/01)
(10,000)- 187,500=
(98,750) (98,750) (197,500)
(197,500)/2
MEDINA DETOYA TOTAL Distribution of
Ave. Cap. (27,000) 17,500 (10,000)
475,000 775,000 1,250,000 Loss
Bal.
Distributio
38% 62% 100% Medina, Drawing 27,000
n
Share on Detoya, Drawing 17,500
114,000 186,000 300,000
Profit Income & Expense
10,000
Sum
Income and Expense Sum. 300,000
Medina, Drawing 114,000
Detoya, Drawing 186,000

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 ACTG112 – MODULE 2
4) Providing Salary with Profit Not Sufficient to Cover a) Provide salaries to Medina of ₱100,000, and to
the Salaries Detoya of ₱60,000

GIVEN:

Net Profit = 50,000

AGREEMENT:

a) Provide salaries to Medina of ₱100,000 and to

Detoya of ₱60,000
MEDINA DETOYA TOTAL
Salary allowances 100,000 60,000 160,000
b) Balance to be divided equally
50,000- 160,000=
(55,000) (55,000) (110,000)
(110,000)/2
Distribution of
45,000 5,000 50,000
Profit

Income & Expense Sum 50,000

Medina, Drawing 45,000
Detoya, Drawing 5,000

5) Providing Bonus

GIVEN:

Net Profit = 300,000

AGREEMENT:

a) Provide 25% bonus to partner Medina

MEDIN
DETOYA TOTAL
A
Bonus
75,000 - 75,000
(300,000*25%)
b) Balance to be divided equally
300,000- 75,000=
112,000 112,000 225,000
225,000
Distribution of
187,500 112,000 300,000
Profits

Income & Expense Sum 300,000

Medina, Drawing 187,000
Detoya, Drawing 112,000

6) Providing Combination of Interests, Salary, and

Bonus

GIVEN:

Net Profit = 400,000

AGREEMENT:

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 ACTG112 – MODULE 2
MEDINA DETOYA TOTAL Remaining Bal. at
15,750 23,625 39,375
Salaries 100,000 60,000 160,000 40% & 60%
b) Provide 15% Interest on Average Capital Balances Distribution of Profit 200,125 199,875 400,000
Ave. Cap. Bal. 475,000 775,000 1,250,000
Interest on Ave. Medina and Detoya Partnership
71,250 116,250 187,500
Cap. Bal. (*.15) Statement of Changes in Partners’ Equity
c) Provide 25% bonus to profit after salaries and For the Year Ended December 31, 2019
interest to partner Medina MEDINA DETOYA TOTAL
Remaining Bal. for Balances, Jan 1 400,000 800,000 1,200,000
- - 52,500
Bonus Add: Additional
52,500*.25 13,125 - 13,125 100,000 - 100,000
Cap.
Bal. after Bonus - - 39,375 Less: Cap.
d) Balance to be Divided 40:60 - (50,000) (50,000)
Drawing
2/5 & 3/5 of Balances, Dec 31
15,750 23,625 39,375 500,000 750,000 1,250,000
39,375 Before Profit
Distribution of Add: Share on
200,125 199,875 400,000 200,125 199,875 400,000
Profit Profit
Less: Regular
(60,000) (60,0000 (120,000)
Drawings
Income and Expense Sum. 400,000
Balances, Dec 31
Medina, Drawing 200,125 640,000 889,975 1,530,000
After Profit
Detoya, Drawing 199,875

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PREPARATION OF STATEMENT OF CHANGES IN

PARTNERS’ EQUITY

MEDINA, CAPITAL
DR CR
400,000 (Jan 1)
100,000 (April 1)
500,000 (Dec 31)

MEDINA, DRAWING
DR CR
(Jan-Dec) 60,000

DETOYA, CAPITAL
DR CR
(July 1) 50,000 800,000 (Jan 1)
750,000 (Dec 31)

DETOYA, DRAWING
DR CR
(Jan-Dec) 60,000

MEDINA DETOYA TOTAL

Salaries 100,000 60,000 160,000
Interests on Ave.
71,250 116,250 187,500
Cap
Bonus 13,125 - 13,125