§In a contract of partnership, two or more

persons bind themselves to contribute money,

property, or industry to a common fund, with
the intention of dividing the profit among
themselves.
§Two or more persons may also form a
partnership for the exercise of a profession
(Civil Code of the Philippines, Article 1767).
1. Mutual Contribution
2. Division of Profits and Losses
3. Co-ownership of Contributed Assets
4. Mutual Agency
5. Limited Life
6. Unlimited Liability
7. Income Taxes
8. Partners’ Equity Accounts
§Owner’s Equity Accounts
§ Capital Accounts

§ Drawing Accounts
§Loans Receivable from Partners
§Payable to Partners
1. Valuation of Investments by Partners
2. Adjustment of Accounts Prior to Formation
3. Closing of Books (Sole Proprietorship)s
4. Opening of Partnership Books
Reyes and Santos drafted a partnership agreement that lists the following assets
contributed at the partnership formation:
Reyes Santos
Cash 200,000 300,000
Inventory - 150,000
Building - 400,000
Equipment 150,000 -

The building is subject to a mortgage of P100,000, which the partnership has

assumed. The partnership agreement also specifies the profits and losses are to be
distributed evenly. What amounts should be recorded as capital for Reyes and Santos
at the formation of the partnership?
Reyes _______________
Santos _______________
 ANSWER
Reyes Santos Cash 500,000
Cash 200,000 300,000 Inventory 150,000
Building 400,000
Inventory 150,000
Equipment 150,000
Building 400,000 Mortgage 100,000
Equipment 150,000 Reyes, Capital 350,000
Santos, Capital 750,000
Mortgage (100,000)
Total 350,000 750,000
Loren and Jamby decide to combine their businesses and form a partnership on July
1, 2020. The following are their assets and liabilities on July 1, 2020 before formation:
Loren Jamby
Assets P210,750 P103,000
Liabilities 91,500 36,000
The following agreements are to be made to adjust assets and liabilities:
a. Both partners will provide P5,000 allowance for doubtful accounts.
b. Loren’s fixed assets were over-depreciated by P1,000 and Jamby’s fixed assets
were under-depreciated by P500.
c. Accrued expenses are to be recognized in the books of Loren and Jamby in the
amount of P1,200 and P1,000, respectively.
d. Obsolete inventory to be written off by Loren amounts to P3,500.
e. Loren and Jamby also agreed to share profits and losses equally.
What is the total asset of the partnership after the formation? _____________________
The following agreements are to be made to adjust assets and liabilities:
a. Both partners will provide P5,000 allowance for doubtful accounts.
b. Loren’s fixed assets were over-depreciated by P1,000 and Jamby’s fixed assets were under-
depreciated by P500.
c. Accrued expenses are to be recognized in the books of Loren and Jamby in the amount of
P1,200 and P1,000, respectively.
d. Obsolete inventory to be written off by Loren amounts to P3,500.
e. Loren and Jamby also agreed to share profits and losses equally.
A. Loren, Capital 5,000 Jamby, Capital 5,000
Allow. For Doubtful Accounts 5,000 Allow. For Doubtful Accounts 5,000

B. Accumulated Depreciation 1,000 Jamby, Capital 500

Loren, Capital 1,000 Accum. Depreciation 500

C. Loren, Capital 1,200 Jamby, Capital 1,000

Accrued expenses 1,200 Accrued expenses 1,000

D. Loren, Capital 3,500

Inventory 3,500
 ANSWER
Loren Jamby
Assets P210,750 P103,000
Allowance for doubtful accounts (5,000) (5,000)
Loren’s fixed assets were over-depreciated by 1,000 (500)
P1,000 and Jamby’s fixed assets were under-
depreciated by P500.
Accrued expenses are to be recognized in the - -
books of Loren and Jamby in the amount of P1,200
and P1,000, respectively.
Obsolete inventory to be written off by Loren (3,500) -
amounts to P3,500.
Total Assets 203,250 97,500 300,750
Garnett and Bryant decided to combine their businesses and form a partnership. Below are their
statements of financial position before the formation:
The partners agreed that the property and
Garnett Bryant equipment of Garnett is under-depreciated by
Cash 2,048,400 1,098,360 P80,000 and that of Bryant is over-depreciated
by P200,000. Accounts Receivable of P108,000
Accounts Receivable 1,031,960 2,498,716 in Garnett’s book and P140,000 in Bryant’s
Inventories 528,160 1,144,448 book are uncollectible. The partnership
Property and Equipment - net 613,380 852,224
decided to assume the mortgage liability of
Bryant. The partnership’s agreement provides
Other assets 8,800 15,840 for a profit and loss ratio and capital interest of
Total assets 4,230,700 5,609,588 60% to Garnett and 40% to Bryant. Bryant is
willing to invest or withdraw cash from the
partnership to comply with the agreement.
Accounts Payable 787,336 1,072,060
Notes Payable 1,000,000 -
Mortgage Payable - 1,440,000 What are the capital balances of Garnett and
Bryant after the formation?
Garnett, Capital 2,443,364
Bryant, Capital 3,097,528
Garnett __________________
Total Liabilities and Equity 4,230,700 5,609,588 Bryant __________________
 Garnett Bryant
property and equipment of Garnett is under- Garnett, Capital. 80,000 Prop. & Equip. 200,000
depreciated by P80,000 and that of Bryant is over- Prop. & Equip. 80,000 Bryant, Capital. 200,000
depreciated by P200,000
Accounts Receivable of P108,000 in Garnett’s book Garnett, Capital. 108,000 Bryant, Capital. 140,000
and P140,000 in Bryant’s book are uncollectible. Accounts Receivable. 108,000 Accounts Receivable. 140,000
The partnership decided to assume the mortgage
liability of Bryant.

Garnett, Capital (60%) Bryant, Capital

The partnership’s agreement provides for a
2,443,364 3,097,528 profit and loss ratio and capital interest of 60%
80,000 200,000 to Garnett and 40% to Bryant. Bryant is willing
108,000 140,000 to invest or withdraw cash from the
partnership to comply with the agreement.
2,255,364 3,157,528

Garnett, Capital (60%): 2,255,364 / 60% = 3,758,940 Garnett, Capital (60%): 2,255,364
Bryant, Capital (40%): 3,758,940 x 40% = 1,503,576 Bryant, Capital (40%): 1,503,576
§ Profit Distribution § Loss Distribution
1. Profit Agreements 1. Loss Agreements
2. Capital Contribution 2. Profit Agreements
§ Average capital 3. Capital Contribution
§ Original investment § Average capital
§ Beg capital § Original investment
§ End capital § Beg capital
§ End capital
§ A stipulation which excludes one or more partners from any share in the profits or
losses is void (Article 1799). The partnership must exist for the common benefit or
interest of the partners.

§ CORRECTION OF PRIOR PERIOD ERRORS

§ If an error resulted in an understatement of profit in previous periods, a correcting

entry would be needed to increase Capital. If an error overstated profit in prior
periods, then Capital would have to be decreased. The effect of the error
correction will be divided based on the applicable profit and loss ratio.
§ Salaries
§ Interest
§ Bonus
§ Bonus before Salaries, § Bonus after Bonus but before
Interest and Bonus Salaries and Interest
§ Formula § Formula
§ B = %(Profit) § B = %(Profit – Bonus)

§ Bonus after Salaries and Interest § Bonus after Salaries, Interest and
but before Bonus Bonus
§ Formula § Formula
§ B = %(Profit – Salaries – Interest) § B = %(Profit – Salaries – Interest - Bonus)
Labasan, Gabayan, and Villanueva are manufacturers’ representative in the
architectural business. Their capital accounts were as follows:
Labasan, Capital Gabayan, Capital Villanueva, Capital
9/1 80,000 1/1 300,000 3/1 90,000 1/1 400,000 8/1 120,000 1/1 500,000
5/1 60,000 7/1 50,000 4/1 70,000
9/1 40,000 6/1 30,000

Interest is 10% of average capital balances. Salaries are P240,000 to Labasan,

P210,000 to Gabayan, and P250,000 to Villanueva. Gabayan receives a bonus of 10% of
profit after bonus and salary. Any remainder is divided equally. Profit was P810,000.

Compute the share of profit of:

Labasan _______________
Gabayan _______________
Villanueva _______________
 ANSWER

Date Capital Fraction Average Capital Balances

Jan. 1 300,000 X 12/12 = 300,000
May 1 60,000 X 8/12 = 40,000
Sept. 1 (80,000) X 4/12 = (26,667)
Average Capital of Labasan 313,333

Date Capital Fraction Average Capital Balances

Jan. 1 400,000 X 12/12 = 400,000
Mar. 1 (90,000) X 10/12 = (75,000)
July 1 50,000 X 6/12 = 25,000
Sept. 1 40,000 X 4/12 = 13,333
Average Capital of Gabayan 363,333

Date Capital Fraction Average Capital Balances

Jan. 1 500,000 X 12/12 = 500,000
Apr. 1 70,000 X 9/12 = 52,500
June 1 30,000 X 7/12 = 17,500
Aug. 1 (120,000) X 5/12 = (50,000)
Average Capital of Villanueva 520,000
 ANSWER Interest is 10% of average capital balances. Salaries are P240,000 to
Labasan, P210,000 to Gabayan, and P250,000 to Villanueva. Gabayan
receives a bonus of 10% of profit after bonus and salary. Any
remainder is divided equally. Profit was P810,000.
Labasan Gabayan Villanueva Total
Salaries 240,000 210,000 250,000 700,000
Interest – 10% of ave. capital balances 31,333 36,333 52,000 119,666
Bonus – 10% after bonus and salary - 10,000 - 10,000
Subtotal 829,666
Remainder to be Divided Equally: (6,555) (6,555) (6,555) (19,666)

Share of Partners in Profits (Losses) 264,778 249,778 295,445 810,000

Bonus
Formula: B = % (Profit – Salaries – Bonus)
B = 10% (810,000 – 700,000 – B)
B = 10% (110,000 – B)
B = 11,000 – 0.10B
B + 0.10B = 11,000
1.10B = 11,000
B = 10,000
AJ, BJ and CJ are partners in an accounting firm. Their capital account balances at
December 31, 2020 were: AJ, P90,000; BJ, P110,000; CJ, P50,000. They share profits
and losses in a 4:4:2 ratio, after the following special terms:
1. Partner CJ is to receive a bonus of 10% of the net income after bonus.
2. Interest of 10% shall be paid on that portion of the partners’ capital in excess of
P100,000.
3. Salaries of P10,000 and P12,000 shall be paid to partners AJ and CJ, respectively.

The income summary account for the year 2020 shows a credit balance of P44,000.
What is the profit share of partner CJ?
 ANSWER
AJ (4) BJ (4) CJ (2) Total
Bonus - - 4,000 4,000
Interest - 1,000 - 1,000
Salary 10,000 - 12,000 22,000
Remainder to be Divided 4:4:2: 3,400 17,000
Share of Partners in Profits (Losses) 19,400 44,000

Bonus
Formula: B = % (Profit – Bonus)
B = 10% (44,000 – B)
B = 4,400 – 0.10B Profit share of CJ = 19,400
1.10B = 4,400
B = 4,000
Jose and Pedro are partners who share profits and losses in the ratio of
6:4, respectively. Jose’s salary is P100,000 and Pedro is P50,000. The
partners also are paid interest on their average capital balances. In
2020, Jose received P50,000 of interest and Pedro, P20,000. The profit
and loss allocation is determined after deductions for the salary and
interest payments. If Pedro’s total share of partnership income was
P200,000 in 2020, what was the total partnership income?
_____________
 ANSWER

Jose (60%) Pedro (40%) Total

Salary 100,000 50,000 150,000
Interest 50,000 20,000 70,000
Subtotal 220,000
Remainder to be Divided 6:4: 130,000 325,000

Share of Partners in Profits (Losses) 200,000 545,000

Partnership Income = ________

 ANSWER

Jose Pedro Total

Salary 100,000 50,000 150,000
Interest 50,000 20,000 70,000
Subtotal 220,000
Remainder to be Divided 6:4:
130,000
Share of Partners in Profits (Losses) 200,000

Partnership Income = ________

 ANSWER

Jose Pedro Total

Salary 100,000 50,000 150,000
Interest 50,000 20,000 70,000
Subtotal 220,000
Remainder to be Divided 6:4:
130,000 325,000
Share of Partners in Profits (Losses) 200,000 545,000

130,000 ÷ 4/10 = 325,000

Partnership Income = 545,000