Partnerships Operations

The usual types of accounting problems for partnership operations are classified as
follows:
1. Determination of the proper distribution of partnership profits and losses among
the partners.
2. Preparation of financial statements for the partnership, such as balance sheet,
income statement, statement of partners’ capitals, and cash flows
3. Changes in the profit and loss ratios.
4. Correction of net income (loss) of prior years.

Division of Profit and Loss

• Profits and losses of the partnership are to be divided in accordance with the
partnership agreement
• If no agreement is made – according to their original capital contributions
• If the partners agree to divide profits only – any losses are to be divided in the same
manner of dividing the profits
• If the partners agree to divide losses only – profits shall be divided according to
their original capital contribution

Profit and Loss Ratio – the ratio in which the partnership divides the profits and losses.
Some are as follows:
1. Equally
2. In an unequal or arbitrary ratio
3. In the ratio of partners’ capital account balances on a particular date •
Original capital – the initial investment / capital at time of formation •
Beginning capital of the period
• Average Capital
- Simple average
- Weighted average
▪ Peso-day average
▪ Peso-month average
4. Allowing interest on partners’ capital account balances and dividing the
remaining net income or loss in a specified ratio
5. Allowing salaries to partners and dividing the remaining net income or loss in
specified ratio
6. Bonus to managing partner based on net income
On January 1, 2015, Siy and Tiu formed a partnership with an investment of Php30,000 and
Php60,000 respectively. Assume that the net income of ST Partnership for the year 2016 is Php60,000.
Changes in capital accounts are as follows:

Siy Tiu

Capital Bal. January 1, 2016 Php 40,000 Php 60,000

Add’l Investments, March 1 20,000 50,000
Add’l Investments, August 1 20,000 40,000
Withdrawal, October 1 (20,000) -
Withdrawal, November 1 (50,000)

Capital Bal., December 31, 2016 Php 60,000 Php 100,000

I. Equally

Closing Entry:

Income Summary 60,000

Siy Capital 30,000
Tiu Capital 30,000

To record division of net income for 2016

If the partnership incurred loss of Php10,000, the closing entry is as follows:

Siy Capital 5,000

Tiu Capital 5,000
Income Summary 10,000

To record division of net loss for 2016

II. Arbitrary (Unequal) ratio

Assume that Siy and Tiu divided profits and losses in the ratio of 60:40. Closing
entry to divide the net income is as follows:

Siy 60% x Php60,000 = Php36,000

Tiu 40% x Php60,000 = Php24,000

Php60,000

Income Summary Php60,000

Siy Capital Php36,000
Tiu Capital Php24,000
 To record division of net income for 2016

III. Capital Balances

A. Original Capital – This is used if no agreement is made between the partners. The
allocation is as follows:
Siy Php60,000 x Php30,000 / Php90,000 =Php20,000
Tiu Php60,000 x Php60,000 / Php90,000= Php40,000

Income Summary Php60,000

Siy Capital Php20,000
Tiu CapitalPhp40,000
To record division of net income for 2016
B. Beginning Capital

The allocation is as follows:

Siy Php60,000 xPhp40,000 / Php100,000 =Php24,000
Tiu Php60,000 xPhp60,000 / Php100,000 =Php36,000

Income Summary Php60,000

Siy Capital Php24,000
Tiu CapitalPhp36,000

To record division of net income for 2016

C. Ending Capital
The allocation is as follows:

Siy: 60,000 x 60,000 / Php160,000 = Php22,500

Tiu : 60,000 x100,000 / Php160,000= Php37,500

Income Summary Php60,000

Siy Capital 22,500
Tiu Capital 37,500
To record division of net income for 2016

D. Average Capital
1. Simple Average
The allocation is as follows:

Siy (Php40,000 + Php60,000) / 2 = Php50,000

Tiu (Php60,000 + Php100,000) / 2 = Php80,000
 Siy Php60,000 x Php50,000 / Php130,000 = Php23,077
Tiu Php60,000 x Php80,000 / Php130,000 = Php36,923

2. Weighted Average (Peso-Month / Peso-Day)

Partner Date Investments Capital Fraction of Average

(Withdrawals) Account Unchanged Year Capital
Balance Account
Balance

Siy January 1 Php 40,000 Php 40,000 2/12 Php 6,667

March 1 20,000 60,000 5/12 25,000
August 1 20,000 80,000 2/12 13,333
October 1 (20,000) 60,000 3/12 15,000
Php60,000

Tiu January 1 Php60,000 Php 60,000 2/12 Php 10,000

March 1 50,000 110,000 5/12 45,833
August 1 40,000 150,000 3/12 37,500
Novem 1 (50,000) 100,000 2/12 16,667
Php110,000

Total Average Capital Balances Php170,000

The net income of Php60,000 shall be divided as follows:

Siy Php60,000 x Php60,000 / Php170,000 = Php21,177
Tiu Php60,000 x Php110,000 / Php170,000= Php38,823

If the partnership agreement specifies that income is to be divided based on partners’ capital balances,
but it is not specified how capital balances are to be computed, the average capital balances should
be used if it can be computed. If not, the original capital balances should be used.

IV. Interest on Capital Balances

1. Allocating Net Profit. Assume that the partnership agreement allows interest on partners’
average capital account balances at 12%, with any remaining net income or loss to be
divided equally.
Siy Tiu Total

Interest on Average Php7,200 Php13,200 Php7,200

Capital Siy: Php60,000 x Php13,200
12%
Tiu: Php110,000 x 12% Php19,800 Php19,800 Php39,600
Php27,000 Php33,000 Php60,000

Remainder (divided equally)

TOTALS
 Note: Using interest allowances on partners’ capital account in order
to achieve a reasonable profit distribution has no effect on the
computation of the net income or loss of the partnership. Interest on
partners’ capital accounts is not an expense of the partnership
2. Allocating Net Loss. Assume that the partnership operation results at a loss of Php10,000. If
the agreement provides to allow interest on capital account balances, the provision must be
enforced regardless of whether operating results is a profit or loss.
Siy Tiu Total

Interest on Average Php7,200 Php13,200 Php20,400

Capital Remainder (15,200) (15,200) 30,400
TOTALS (Php8,000) (Php2,000) (Php10,000)

Journal Entry:
Siy Capital 8,000
Tiu Capital 2,000
Income Summary 10,000
To record division of net loss of 2016

V. Salary
1. Allocating Net Profit. Assume that the partnership agreement provides for an annual salary of
Php30,000 to Siy and Php20,000 to Tiu, net income or loss to be divided equally. The
salaries are paid monthly during the year.

Siy Tiu Total

Salaries 30,000 20,000 50,000

5,000 5,000 10,000
Capital Remainder
Php35,000 Php25,000 Php60,000
TOTALS

Monthly JE:
Siy Drawing (Php30,000/12) 2,500
Tiu Drawing (Php20,000/12) 1,667
Cash 4,167
To record salary allowances to partners

Year-end Closing JE:

(1) Income Summary 60,000
Siy Capital 35,000
Tiu Capital 25,000
To record division of net income of 2016
(2) Siy Capital 35,000
 Tiu Capital 25,000
Siy Drawing 30,000
Tiu Drawing 20,000
To close partners’ drawing accounts
Note: In the absence of an agreement, salaries are automatically allowed even when losses
are incurred.
2. Allocating Net Loss. Assume that the partnership has net loss of Php20,000 before salary
allowances to partners.

Siy Tiu Tot

al
Salaries 30,000 20,000 50,000
(35,000) (35,000) (70,000)
Capital Remainder
(20,000)
TOTALS (5,000) (15,000)

Journal entries:

Siy Capital 5,000

Tiu Capital 15,000
Income Summary 20,000
To record division of net loss for 2016.
VI. Bonus
Assume that the ST Partnership has net income of Php190,200 before salaries, interest, and
bonus to partners. The partnership agreement includes the following:

a. Salaries to Siy and Tiu, Php30,000 each

b. Interest on capital balances on Siy Php7,000, Tiu Php3,200
c. Bonus to Siy, 20% of net income
d. Remaining profit or loss after salaries, interest, and bonus, equally

1. Net income before allowances for salaries, interest, and bonus

Net income before salaries, interest, and bonus Php190,200
Bonus percentage 20%
Bonus Php38,040

Schedule of Profit Distribution:

Siy Tiu Total

Salary allowances Php30,000 Php30,000 Php60,000

Interest allowances 7,000 3,200 10,200
Bonus to Siy 38,040 38,040
Remainder, equally 40,980 40,980 81,960
TOTALS Php116,020 Php74,180 Php190,200
 2. Net income before allowances for salaries and interest, but after deduction of the bonus
Bonus + income after the bonus = Php190,200

Net income before salary, interest, and bonus Php190,200 = 120%

Net income after bonus (Php190,200 /120%) Php158,500 = 100%
Bonus Php31,700 = 20%

Schedule of Profit Distribution:

Siy Tiu Total

Salary allowances Php30,000 Php30,000 Php60,000

Interest allowances 7,000 3,200 10,200
Bonus to Siy 31,700 31,700
Remainder, equally 44,150 44,150 88,300
TOTALS Php112,850 Php77,350 Php190,200

3. Net Income After allowances for Salaries and Interest but Before Bonus
Computation of Bonus

Net Income Before salaries, interests, and bonus Php190,200

Less: Salaries Php60,000
Interests 10,200 70,200
Net Income Before Bonus Php 120,000
% Bonus 20%
Bonus Php 24,000

Schedule of Profit Distribution:

Siy Tiu Total

Salary allowances Php30,000 Php30,000 Php60,000

Interest allowances 7,000 3,200 10,200
Bonus to Siy 24,000 24,000
Remainder, equally 48,000 48,000 96,000
TOTALS Php109,200 Php81,200 Php190,200

4. Net Income After allowances for Salaries, Interests, and Bonus

Computation of Bonus
Net Income Before salaries, interests, and bonus Php190,200
Less: Salaries Php60,000
Interests 10,200 70,200
Net Income Before Bonus Php 120,000 = 120%
Net Income After Bonus (Php120,000 / 120%) Php100,000 = 100%
Bonus Php 20,000 = 20%
 Schedule of Profit Distribution:

Siy Tiu Total

Salary allowances Php30,000 Php30,000 Php60,000

Interest allowances 7,000 3,200 10,200
Bonus to Siy 20,000 20,000
Remainder, equally 50,000 50,000 100,000
TOTALS Php107,000 Php83,200 Php190,200

Note: When the partnership incur net loss, the bonus provision is disregarded.

Practice Problems

Use the following information for the next 4 questions

DD and EE was organized and began operations of March 1, 2019. On that date, DD invested P75,000 and EE invested land and building with current
fair value of P40,000 and P50,000, respectively. EE also invested P30,000 in the partnership on November 1, 2019 because of its shortage of cash. The
partnership contract includes the following remuneration plan:
DD EE
Annual Salary P9,000 P12,000
Annual interest on average capital account balances 10% 10%
Remainder 60% 40%
The annual salary was to be withdrawn by each partner in 12 monthly installments. During the fiscal year ended, February 28, 2020, DD and EE had
net sales of P250,000, cost of goods sold of P140,000 and total operating expenses of P50,000 (excluding partners’ salaries and interest on
average capital account balances). Each partner made monthly cash drawings in accordance with partnership contract.

1. The share of partner DD in the net income is?_____________

2. The capital balance of each partner on March 1, 2020 should be:
3. Assuming that the annual salary are to recognized as operating expenses and the total operating expenses of P50,000 includes the
partners’ salaries expenses but excluding interest on partners’ average capital account balances. The share of partner DD in the net
income in 2020?
4. Using the same information in No. 3, the capital balance of each partner on March 1, 2020 is ?_
5. NN and OO created a partnership to own and operate a health-food store. The partnership agreement provided that NN receive a salary of
P100,000 and OO a salary of P50,000 to recognize their relative time spent in operating the store. Remaining profits and losses were divided
60:40 to NN and OO, respectively. Income for 20x4, the first year of operations, P130,000 was allocated P88,000 to NN and P42,000 to OO.
On January 1, 20x5, the partnership agreement was changed to reflect the fact that OO could no longer devote any time to the store’s
operations. The new agreement allows NN a salary of P180,000, and the remaining profits and losses are allocated equally. In 20x5, an error was
discovered such that the 20x4 reported income was understated by P40,000. The partnership income of P250,000 for 20x5 including the
P40,000 related to 20x4. Of the P250,000 how much should be allocated between NN and OO ?

Use the following information for the next 4 questions:

The AA, BB, and CC Partnership was formed on January 2, 2019. The original cash investments were as follows:
AA P 48,000
BB 72,000
CC 108,000
According to the general partnership contract, the partners were to be remunerated as follows:
a. Salaries of P7,200 for AA, P6,000 for BB, and P6,800 for CC.
b. Interest at 12% on the average capital account balances during the year.
 c. Remainder divided 40% to AA, 30% to BB, and 30% for CC.
Income before partners’ salaries for the year ended December 31, 2019, was P46,040. AA invested an additional P12,000, in the partnership on
July 1; CC withdrew P18,000 from the partnership on October 1, and, as authorized by the partnership contract, AA, BB, and CC each withdrew P375
monthly against their shares of net income for the year.
6. The share of partners AA, BB and CC in the net income is ?____________________
7. The capital balance of partners AA, BB and CC on December 31, 2019:
8. If the salaries to partners’ are to be recognized as operating expenses by the partnership, the share of partner BB in the net income?
9. Using the same information in No. 8, the capital balance of partner CC on December 31, 2019?
10. A partnership begins first year with the following capital balances:
Arthur, capital P 60,000
Baxter, capital 80,000
Cartwright, capital 100,000

The articles of partnership stipulate that profits and losses be assigned in the following manner:
1. Each partner is allocated interest equal to 10 percent of the beginning capital balance.
2. Baxter is allocated compensation of P20,000 per year.
3. Any remaining profits and losses are allocated on a 3:3:4 basis respectively.
4. Each partner is allowed to withdraw up to P5,000 cash per year.

Assuming that the net income is P50,000 and that each partner withdraws the maximum amount allowed, what is the balance in
Cartwright’s capital account at the end of the year?

11. The Trading Company, a partnership, was formed on January 1, 2019, with four partners, DD, EE, FF, and GG. Capital contributi ons
were as follows: DD, P25,000; EE, P12,500; FF, P12,500; GG, P10,000. The partnership agreement provides that partners shall receive
5% interest in the amounts of their capital contributions. In addition, DD is to receive a salary of P2,500 and EE a salary of P1,500. The
agreement further provides that FF shall receive a minimum of P1,250 per annum from the partnership and GG a minimum of P3,000
per annum, both including amounts allowed as interest on capital and their respective shares of profits. The balance of the profits is to
be shared in the following proportions: DD, 30%; EE, 30%; FF, 20%; and GG, 20%. Calculate the amount that must be earned by the
partnership during 2019, before any charges for interest on capital or partners’ salaries, in order that DD may receive an aggregate of
P6,250 including interest, salaries and share of profits

Use the following information for the next 4 questions

David and Ruby organized the DR Partnership on January 1, 2018. the following entries were made in their capital accounts during 2018:

Debit Credit
David, capital:
January 1 180,000.00
April 1 50,000.00
October 1 10,000.00

Ruby, capital
January 1 60,000.00
March 1 10,000.00
September 20,000.00
November 1 10,000.00

Required:
If the partnership net income, computed before salaries, interest and bonus is P56,000 for 2018, indicate its division between the partners under each
of the following independent profit-sharing agreements:
12. Interest at 4% is allowed on average capital investments, and the balance is divided equally.
13. A salary of P24,000 is to be credited to Ruby, 4% interest is allowed on each partner on their ending capital balance, an d the balance in the
ratio of beginning capital balances.
14. Salaries allowed to David and Ruby in the amounts of P34,000 and P38,000. respectively, and remaining profits ad losses are divided in the
ratio of average capital balances.
15. A bonus of 10% of partnership net income is credited to David, a salary of P16,000 is allowed to Ruby, and remaining profits and losses are
shared equally. (The bonus is regarded as an expense for purposes of calculating the bonus amount).