Partnership

Operation
Advanced Accounting 1
Division of Profits and Losses
The partners shall share in the profits or losses of a partnership in accordance with
the partnership agreement.

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.

In the absence of stipulation, the share of each partner in the profits and losses
shall be in proportion to what he may have contributed, but the industrial partner
shall not be liable for the losses. (Art. 1797 of the Philippine Civil Code)

The designation of losses and profits cannot be entrusted to one of the partners
(Art. 1798).

A stipulation which excludes one or more partners from any share in the profits or
losses is void (Art. 1799).
Other Stipulations that Affect Division of
P/LSalaries
1. – normally, an industrial partner shall receive salary, in addition to his
share in the partnership’s profits, as compensation for his services to the
partnership.
2. Bonuses – the partnership agreement may stipulate a bonus to be given to a
managing partner to encourage excellent management performance. Unlike for
salaries though, a partner is entitled to a bonus only if the partnership earns
profit.
3. Interest on capital contributions – the partnership agreement may stipulate
that each partner may be entitled to a per annum interest computed on his
capital contributions.

The above-mentioned items are normally provided first to the respective partners
and any remaining amount of the profit or loss is shared based on the stipulated
profit or loss ratio.
Summary
P/L Sharing Procedures
Profits 1st – partnership agreement
2nd – contributed capital
1. original capital balance (at the year of commencement)
2. current year balance (weighted average or opening balance)
Losses 1st – partnership agreement
2nd – how profit is divided

Stipulation Accounting Procedures

Salaries Always provided in allocation even if operations resulted in a loss
Interest Always provided in allocation even if operations resulted in a loss
Bonus Provided only if bonus base is positive
Computation of Division of Profit or Loss
Partner A Partner B Profit/Loss
Profit (Loss) xx
Salaries (Agreement) xx xx (xx)
Interest (Usually based on average xx xx (xx)
capital balance)
Bonus xx xx (xx)
Total xx xx xx
Share in the remainder of P/L xx xx (xx)
Total P/L Allocated xx xx -