SELF-PACED LEARNING MODULE

COLLEGE DEPARTMENT

MODULE 5
Subject:

FUNDAMENTALS OF ACCOUNTING 2

AISAT COLLEGE – DASMARIÑAS, INC.

This material has been developed in support to the Senior High School Program implementation.
Materials included in this module are owned by the respective copyright holders. AISAT College –
Dasmariñas, the publisher and author do not represent nor claim ownership over them.
This material will be reproduced for educational purposes and can be modified for the purpose of
translation into another language provided that the source must be clearly acknowledged. Derivatives of
the work including creating an edited version, enhancement or a supplementary work are permitted
provided all original works are acknowledged and the copyright is attributed. No work may be derived
from this material for commercial purposes and profit.

INFORMATION SHEET PR-5.1.1

 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |2

“ACCOUNTING FOR PARTNERSHIP OPERATIONS AND FINANCIAL STATEMENT”

RULES FOR THE DISTRIBUTION OF PROFITS AND LOSSES

The profit or losses shall be distributed in conformity with the 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.
1. Profits
a. According to partner’s agreement
b. If there’s no agreement:
i. As to capitalist partners, according to capital contributions.
ii. As to industrial partner, share must be just and equitable under the
circumstances, provided, that the industrial partner shall receive such share
before the capital partners shall divide the profits.
2. Losses
a. According to partner’s agreement
b. If there is no agreement as to contribution of losses but there is an agreement as to
profits, the losses shall be distributed according to profit sharing ratio.
c. If there’s no agreement:
i. As to capitalist partners, according to capital contribution.
ii. As to Purely industrial partner, shall not be liable for any losses.
The ratio in which the profits and losses from partnership operations are distributed is recognized
as the profit and loss ratio. The partners may agree on any of the following scheme in distributing profits
or losses.
1. Based on partner’s capital contribution
a. Ratio of original capital investments
b. Ratio of capital balances at the beginning of the year
c. Ratio of capital balances at the end of the year
d. Ratio of average capital balances
2. Equally or in other agreed ratio
3. By allowing interest on partner’s capital and the balance in an agreed ratio.
4. By allowing salaries to partners and the balance in an agreed ratio.
5. By allowing bonus to the managing partner based on profit and the balance in an agreed ratio.
6. By allowing salaries, interest on partners’ capital, bonus to the managing partner and the
balance in an agreed ratio.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |3

ILLUSTRATION: Chi Ta E invested P400,000 on Jan. 1 2014 and an additional P100,000 on April 1. Ganda
Ba Bae invested P800,000 on Jan. 1 and withdrew P50,000 on July 1. The partnership had a profit of
P300,000 for the year ended Dec. 31, 2014, the first year of operations.

EQUALLY OR IN OTHER AGREED RATIO

• The partners agreed the share the profit or loss equally.
Income Summary 300,000
Chi Ta E, Capital 150,000
Ganda Ba Bae, Capital 150,000
To record the division of profits
• In case the partnership incurred a loss instead of profit worth P200,000.
Chi Ta E, Capital 100,000
Ganda Ba Bae, Capital 100,000
Income Summary 200,000
To record the division of losses
• Assume partners decided to have a P/L ratio of 60:40 in their profit of P300,000.
Income Summary 300,000
Chi Ta E, Capital 180,000
Ganda Ba Bae, Capital 120,000
To record the division of profits Computation:
Chi Ta E, Capital (60% x 300,000) 180,000
Ganda Ba Bae, Capital (40% X 300,000) 120,000
300,000

BASED ON PARTNERS’ CAPITAL CONTRIBUTION

• Ratio of Original capital investment
Just a recap, the original investment of Chi Ta E and Ganda Ba Bae is 400,000 and 800,000
respectively. Thus, based on this, the ratio will be 33.33% (400k/1,200k) and 66.67% (800k /
1,200k).
Income Summary 300,000
Chi Ta E, Capital 100,000
Ganda Ba Bae, Capital 200,000
To record the division of profits

• Ratio of Capital Balances at the Beginning of the Year

In this case, the capital balances at the beginning of the year is also the original capital investment
since the partnership is only on its first year of operations. But on the succeeding years of operations, the
capital beginning will be change prospectively apart from the original investment.
Income Summary 300,000
Chi Ta E, Capital 100,000
Ganda Ba Bae, Capital 200,000
To record the division of profits

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |4

• Ratio of Capital Balances at the End of the Year

The Ending balances at the end of the year before the distribution of profit. Thus,
Date Chi Ta E, Capital Ganda Ba Bae, Capital Total
Jan. 1 400,000 800,000 1,200,000
Apr. 1 100,000 100,000
July 1 (50,000) (50,000)
Total 500,000 750,000 1,250,000
The ratio on this will be 40% for Chi Ta E (500k/1,250k) and 60% for Ganda Ba Bae (750k/1,250k).
Income Summary 300,000
Chi Ta E, Capital 120,000
Ganda Ba Bae, Capital 180,000
To record the division of profits

• Ratio on Average Capital Balances

Chi Ta E and Ganda Ba Bae
Computation of the Average Capita Balances
For the year ended Dec. 31, 2014

* The fractions for each partner should add up to 12/12 or 1. This conversion will help minimize counting
of errors as to the number of months the capital balance went unchanged. To state the obvious, there are
only 12 months in a year. For e.g. for partner Chi Ta E, the fraction will total 12/12 (3/12 + 9/12) or in
simple terms, 1.

The ratio on this would be 38% (475k/1,250k) and 62% (775k/1,250k) respectively. Thus, the entry would
be,
Income Summary 300,000
Chi Ta E, Capital 114,000
Ganda Ba Bae, Capital 186,000
SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:
MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |5

To record the division of profits

• By Allowing Interest on Capital and Balance in an Agreed Ratio

To allow interest on partner’s capital account balances is almost similar to dividing part of profits
in the ratio of partner’s capital balances. If the partners agree to allow interest on capital as a first step in
the division of profit, they should specify the interest rate to be used. It should also state whether interest
is to be computed on capital balances on specific dates or on average capital balances during the year.
To illustrate, Chi Ta E and Ganda Ba Bae Partnership with a profit of 300,000 assumed an
agreement for a 15% interest on average capital account balances, with the balance to be divided equally.

• By Allowing Salaries to Partners and the Balance in an Agreed Ratio

To acknowledge the harder working or more suitable valuable partner, the profit-sharing plan
may provide for salary allowances. The partnership agreement should be clear on the treatment of salary
allowances when losses are incurred. In the absence of an agreement to govern this situation, salary
allowances will be provided even when operations resulted losses.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |6

To illustrate, assume that the agreement provided for an annual salary of P100,000 to Chi Ta E
and P60,000 to Ganda Ba Bae, and the balance to be divided equally.

Salaries to partners and interest on partners’ capital are not expenses of the
partnership. Therefore, these items do not enter into the matching of expenses with
revenues and the determination of net income or net loss. For a partnership, as for
other entities, salaries expense pertains to the cost of services performed by
employees. Likewise, interest expense relates to the cost of borrowing from
creditors. But partners, as owners, are not considered either employees or creditors.
Note that the provisions for salaries and interest in the partnership agreement are
called allowances. These allowances are not reported in the statement of
recognized income and expense as salaries and interest expense, they are merely
means of allocating profit to the partners.

• By Allowing Bonus to the Salaries of Managing Partner Based on Profit and the Balance in an Agreed
Ratio.
A partnership contract may provide for a special compensation in the form of BONUS to the
managing partner when the results of operations are favorable. The bonus is computed based on
agreement whether before or after bonus. To illustrate:
Assume the partnership agreement provided for a bonus of 25% of profit before bonus.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |7

Assume the partnership agreement provided for a bonus of 25% of profit after bonus. Here the
P300,000 profit still includes the bonus. The difference between this profit and bonus shall be the basis
for the 25% bonus rate. Hence, profit after bonus represents 100% while the profit of P300,000 before
bonus represents 125%.

The journal entry would be:

Income Summary 300,000
Chi Ta E, Capital 180,000
Ganda Ba Bae, Capital 120,000
To record the division of profits
• By Allowing Salaries, Interest on Capital, Bonus to the Managing Partner and the Balance in an Agreed
Ratio
Assume that the profit for the year is P400,000 and the partnership agreement for he Chi Ta E and
Ganda Ba Bae Partnership provided the following:
1. Bonus to Chi Ta E of 25% of profit after salaries and interest but before bonus;
2. Annual salaries of P100,000 to Chi Ta E and P60,000 to Ganda Ba Bae;
3. Interest on average capital balances of P71,250 and P116,250 to Chi Ta E and Ganda Ba Bae,
respectively;
4. Balance to be divided in a ratio of 40:60.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |8

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 Page |9

PARTNERSHIP FINANCIAL STATEMENTS

The financial statements of a partnership are much like those of a proprietorship. However,
partnership statement of comprehensive income includes a section showing the division of net income to
the partners and the statement of financial position has a capital account for each partner.
The complete set of financial statements as per revised international accounting standards (IAS)
No. 1, Presentation of Financial Statements, a complete set of financial statements comprises:
a. A statement of financial position as at the end of the period;
b. A statement of comprehensive income for the period;
c. A statement of changes in equity for the period;
d. A statement of cash flows for the period;
e. Notes, comprising a summary significant accounting policies and other explanatory
information.

Note: When preparing financial statements by hand the Income Statement would usually be prepared
first because the net income or loss becomes part of the Statement of Partners’ Capital. The Statement
of Partners’ Capital is usually prepared second because the ending partners’ capital balances become part
of the Balance Sheet.

Note: Owner’s equity statements of corporations are called Statement of Retained Earnings, those of sole
proprietorships are called Statement of Capital and those of partnerships are called Statement of Partners’
Capital.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 P a g e | 10

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 P a g e | 11

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 P a g e | 12

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 P a g e | 13

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 P a g e | 14

STUDENT NAME: __________________________________ SECTION: __________________

PERFORMANCE TASK PR-5.2.1

PERFORMANCE TASK TITLE: ACCOUNTING FOR PARTNERSHIP OPERATIONS AND DIVISION OF PROFIT OR
LOSS.
PERFORMANCE OBJECTIVE: After completing this performance task, you were being knowledgeable about
accounting in partnership formation and division of profit or loss.
TOOLS AND MATERIALS: Modules, newspapers, magazines, internet resources.

EQUIPMENT: none

ESTIMATED COST: none

PROCESS / PROCEDURE

Rules for Distribution of Profit or Losses Luka Toh and Care Moh form a partnership, investing
P40,000 and P70,000, respectively. Determine their shares of net income or net loss for each
of the following situations.

a. Net loss is P44,000, and the partners have no written partnership agreement.

b. Net income is P66,000 and the partnership agreement states that the partners share profits
and losses on the basis of their capital contributions.

c. Net loss is P77,000, and the partnership agreement states that the partners share profits
on the basis of their capital contributions.

d. Net income is P125,000. The first P60,000 is shared on the basis of partner capital
contributions. The next P 45,000 is based on partner service, with Luka Toh receiving 30%
and Care moh receiving 70%. The remainder is shared equally.
PRECAUTIONS: •Avoid copy and paste performance task of other

ASSESSMENT METHOD: PERFORMANCE TASK CRITERIA CHECKLIST

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Accounting
Module ACCOUNTING FOR PARTNERSHIP OPERATIONS AND F. S
PREC11-ACTG2 Fundamentals of Accounting 2 Units: 6 P a g e | 15

STUDENT NAME: _____________________________________ SECTION: ___________

PERFORMANCE TASK CRITERIA CHECKLIST PR-5-2.1

Did I … CRITERIA SCORING
1 2 3 4 5
1. Logic and key points. All corresponding ideas about the topic are
logically presented.
2. Content. Content of the essay flows and is passionate.
3. Cleanliness. Very clean and well presented.
4. Spelling and Grammar. No error in spelling and grammar.
5. Word usage. Word choice and usage are professionals.

GRADES

Teacher’s Remarks □ Quiz □ Recitation □ Project

5 - Excellently Performed
4 - Very Satisfactory Performed
3 - Satisfactory Performed
2 - Fairly Performed
1 - Poorly Performed

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 8th
PRELIM
5 Meeting MS. MARY JOY F. LABAJO MR. WILBERT A. MAÑUSCA
Subject Teacher School Director