FINANCIAL ACCOUNTING & REPORTING 1 • Some of the services being offered include

preparation, review and audit of the company’s

REVIEWER - MIDTERMS
financial statements, tax services, and
consultation involving accounting systems,
mergers and acquisitions.
MODULE 1 - Review of Accounting Process
• licensed professionals known as Certified Public
Accountants

ACCOUNTING
PRIVATE ACCOUNTING
• a service activity
• function is to provide quantitative information,
primarily financial in nature, about economic
entities, that is intended to be useful in making
economic decisions, in making reasoned choices
among alternative courses of action.
• provides services and furnishes quantitative
information expressed in terms of money that is
useful to the users of the accounting information
• information are outlined into reports called
financial statements and served as a basis for
making important economic decisions.
• offers accounting services for a specific
company and is an important part to the
success of any organization
• offer a higher level of services through
familiarity with the full workings of the
company’s business interests
• concerned with the collection and analysis of
financial data within a specific company
• involved with strategic planning and developing
new products and services

Internal Users
-decision makers of an
entity and they need the
accounting information for
the continued operation of
their business.
-directly involved
Ex.
-Business owners
-Board of directors
-Managers
GOVERNMENT ACCOUNTING
External Users
-decision makers who
have no direct access to
the information provided
by the operations of the
company.
-not directly involved
Ex.
-Investor
-Lender/creditor/supplier
-Government agencies
-Costumers/public
• one that encompasses the process of analyzing,
classifying, summarizing and communicating all
transactions that are involved in the receipt and
disbursement of all government funds and
properties, and interpreting the results thereof
• objectives were set to include several areas in
government operations
• The accounting data should show how
government funds were used and should
indicate the outflow and inflow of funds and the
need for a study of fund management and
control, if necessary.

BRANCHES OF ACCOUNTING
ACCOUNTING EDUCATION
FINANCIAL ACCOUNTING
• an area of accounting that covers the
• designed in providing accounting information
upgrading, researching and teaching accounting
for all parties external to the operating
knowledge to students, aspiring accountants or
responsibility of the company.
accounting professionals seeking continuous
• process of preparing accounting reports known education and updates.
as financial statements that show the
• composed of accountants (Certified Public
company’s financial performance and position
Accountants) who are into teaching, training
to people outside the company like creditors
and development, including research.
and customers.
Accountants in education pursue a career as a
MANAGEMENT OR MANAGERIAL ACCOUNTING faculty member in a school, an author of an
accounting book, a researcher, a trainer, or a
• designed in providing accounting information reviewer.
and operational needs for use by the internal
users, the management.
• involves financial analysis, budgeting and FORMS OF BUSINESS ORGANIZATION
forecasting, cost analysis, and evaluation of
business decisions. SOLE PROPRIETORSHIP

• organized and owned by only one person

• easy to form and offers complete control to the
AREAS OF ACCOUNTING
owner.
PUBLIC ACCOUNTING • Owner is personally liable for all financial
obligations and debts of his business.
• offers accounting and related services to its
clients on a fee basis.
PARTNERSHIP management decided to liquidate or to
cease its operations.
• formed by two or more individuals who agreed
to carry on a trade or business.
3. TIME PERIOD ASSUMPTION
• each individual contributes money, property, - a business’s financial position be
labor or skill, and expects to share in the profits reported over a series of shorter time
of the business. periods like annually, semi-annually,
quarterly or monthly

CORPORATION 4. UNIT-OF-MEASURE ASSUMPTION/MONETARY

• more complex form of business organization
• a separate legal entity whose ownership is
divided into shares of stocks
• owners are known as shareholders
• subject to more legal
• requirements and government regulations
UNIT
- use of a standard monetary unit
throughout all financial statements;
accounting should measure and report
the results of a business’s economic
activities in terms of a monetary unit
such as the Philippine peso.

ACCRUAL BASIS OF CASH BASIS OF

TYPES OF BUSINESS ACTIVITIES ACCOUNTING ACCOUNTING
- revenues are -revenues are recognized
SERVICE BUSINESS recognized and recorded and recorded when cash
when earned regardless is received or collected
• provides services rather than products to
of when cash is received and expenses when cash
customers or clients for a fee
or collected is paid.
• Examples are salons, repair shops, hotels and -expenses incurred are - No adjusting entries are
restaurants, and professional firms like law and recorded whether or not needed in this method of
accounting cash is paid accounting.
- adjusting entries are
needed under this
MERCHANDISING BUSINESS method to update the
account balances at the
• also called a trading business end of the accounting
• buy goods in salable form and sell them to their period
customers at a higher cost to make a profit
• Examples are department stores, bookstores,
THE ACCOUNTING CYCLE
appliance stores and other resellers.
1. Documentation
2. Journalizing
MANUFACTURING BUSINESS 3. Posting
4. Preparation of the trial balance
• buys raw materials with the intention of using
5. Compilation of data needed for adjustments
them in making a new product
6. Preparation of the worksheet
• Manufacturing companies converts these raw 7. Preparation of the Financial Statements
materials into finished products before selling 8. Adjusting entries are journalized and posted to
them to their customers. the ledger
9. Closing entries are journalized and posted to
the ledger
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 10. Preparation of the post-closing trial balance
(GAAP) 11. Reversing entries are journalized and posted to
1. BUSINESS ENTITY CONCEPT the ledger
- activities of a business are recorded REAL ACCOUNTS NOMINAL ACCOUNTS
separately from the activities of the -assets -revenue
owner or owners; business is treated as -liabilities -expenses
having a separate personality from the -capital -drawings
owner/s or other entities -income summary

2. GOING CONCERN OR CONTINUITY

RECORDING Debit Credit
ASSUMPTION
Assets + -
- To prepare financial statements for an
Liabilities - +
accounting period, the accountant must
make an assumption about the ability of Capital - +
the business to continue Drawings + -
- business entity will continue its Revenue - +
operation indefinitely unless Expenses + -
ADJUSTING ENTRIES CLOSING ENTRIES

1. PREPAID EXPENSES - To reduce the nominal accounts to zero

a. ASSET METHOD
1. debit all revenue & credit income summary
Expense Acc
Revenue
Asset Acc
Income Summary
b. EXPENSE METHOD 2. debit income summary & credit all expense
Asset Acc Income Summary
Expense Acc Expense
3. debit income summary & credit capital
a. Income summary w/ credit balance
2. UNEARNED REVENUES
Income Summary
a. LIABILITY METHOD Capital
Liability Acc b. Income summary w/ debit balance
Revenue Acc Capital
Income Summary
b. REVENUE METHOD 4. debit capital & credit drawing
Revenue Acc Capital
Liability Acc Drawings

3. ACCRUED EXPENSES
POST-CLOSING TRIAL BALANCE
Expense Acc
Liability Acc - balances of real accounts

4. ACCRUED REVENUES
REVERSING ENTRIES
Asset Acc
Revenue Acc 1. PREPAID EXPENSES
Expense
Prepaid Expense
5. DEPRECIATION
2. UNEARNED REVENUE
Depreciation Expense
Unearned Revenue
Accumulated Depreciation
Revenue
3. ACCRUES EXPENSE
ANNUAL DEPRECIATION
Payable
= Cost – Residual Value
Estimated Life Expense
or 4. ACCRUED REVENUE
= (Cost – Residual Value) x Depreciation Rate Revenue
Receivable

6. UNCOLLECTIBLE ACCOUNTS
Doubtful Accounts Expense FINANCIAL STATEMENTS
Allowance for Doubtful Accounts
SERVICE BUSINESS
Required Ending Bal for Bad Debts xxx
(10% x Accounts Receivable)
Allowance for Bad Debts before adjustments xxx STATEMENT OF CHANGES IN EQUITY
(*add if debit/minus if credit)
Doubtful Accounts Expense for the period xxx • summary of changes (increases or decreases)
affecting the equity of the owner/s during an
accounting period.
7. MERCHANDISE INVENTORY

a. To close the beg BUSINESS NAME

Income Summary STATEMENT IN CHANGES IN OWNER’S EQUITY
Merchandise Inventory, beg DATE

b. To record the end Beginning (DATE), Capital xxx

Merchandise Inventory, end Add: Additional Investment xxx
Income Summary Net Income xxx
Total xxx
Less: Drawing xxx
Ending (DATE), Capital xxx
STATEMENT OF FINANCIAL POSITION *The Notes to the Financial Statements are an integral
part of an entity’s financial statements. They are for
• also known as the Balance Sheet
complying with the full disclosure principle.
• shows the financial condition of the business as
of a specific date

BUSINESS NAME MERCHANDISING BUSINESS

STATEMENT OF FINANCIAL POSITION INVENTORY SYSTEMS
DATE
• PERIODIC INVENTORY SYSTEM
ASSETS o Companies that sell goods of low unit
Cash xxx value or inexpensive items use the
Accounts Receivable xxx periodic inventory system
Prepaid Insurance xxx o relies upon the physical count of the
Prepaid Rent xxx inventory to determine the ending
Supplies xxx inventory balance
Equipment xxx o Merchandise bought intended for sale
Accum. Depre – Equipment xxx xxx are recorded in the Purchases account
Total Assets xxx o The balance in the Purchases account is
then added to the beginning balance of
LIABILITIES AND CAPITAL the inventory account to arrive at the
cost of merchandise available for sale
Accounts Payable xxx o When a physical inventory count is
Salaries Payable xxx done, the amount of the ending
Interest Payable xxx inventory balance will then be deducted
Notes Payable xxx from the cost of merchandise available
Total Liabilities xxx for sale to arrive at the cost of
merchandise sold
Owner’s Capital xxx o Sale of merchandise is recorded in a
Total Liabilities & Capital xxx revenue account, Sales. However, the
cost is not recorded
• PERPETUAL INVENTORY SYSTEM
STATEMENT OF COMPREHENSIVE INCOME o purchases and sale of merchandise is
• also known as the Profit and Loss Statement recorded in the Merchandise Inventory
• presents the income, expenses and the account and the Cost of the
operating result (profit or loss) during an Merchandise Sold account
accounting period. o used by companies that sell goods of
high unit value like automobiles,
jewelry, and other large home
BUSINESS NAME appliances
STATEMENT OF COMPREHENSIVE INCOME o The business keeps track of its cost of
DATE merchandise sold on a continuous basis,
thus, at any given time, there is an
Service Revenue xxx estimate of the company’s inventory
level
Less: Operating Expense o At the end of the accounting period, an
Salaries Expense xxx actual count is taken on the number of
Supplies Expense xxx units still on hand and is compared with
Insurance Expense xxx the records showing the ending
Rent Expense xxx inventory balance
Utilities Expense xxx
Depre Expense xxx
VALUE ADDED TAX (VAT)
Miscellaneous Expense xxx
Total Operating Expense xxx • 12% value added tax rate is levied on goods and
is recorded as a separate account in recording
Net Income xxx the sale and purchase transactions.
• It is an indirect tax that is passed on to the
buyer and is added to the selling price. The
CASH FLOW STATEMENT amount paid by the customer, known as the
invoice price.
• presents the movement of cash (input and
• Output Vat refers to the value added tax the
output) over a period
seller passed on to the buyer and is classified as
• classified as either under operating, financing or
a liability account will include the selling price
investing activities.
and the 12% value added tax.
 • Input Vat refers to the value added tax the SCHEDULE OF ACCOUNTS RECEIVABLE
buyer paid on the purchase.
• prepared to ensure that the total of the
balances in the subsidiary ledger account agrees
SPECIAL JOURNALS with the control account.
• This schedule is merely a listing of open account
• Sales Journal - used to record all sales of
balances.
merchandise on account (on credit).
• Cash Receipts Journal - used to record all
inflows or receipts of cash into the business.
• Purchases Journal - used to record all purchases
of merchandise and other items on account (on
credit).
• Cash Payments Journal - used to record all
payments (or outflows) of cash by the business.
• If a transaction is recorded in the journal, it is
posted to the ledger and made part of the
accounting records. Therefore, if a transaction is
recorded in a special journal, it should not be
recorded in the general journal because this
would record the transaction twice.

CONTROL ACCOUNT

• an account in the general ledger that shows the

total balance of all the subsidiary accounts
related to it.
• example of a control account is the general
ledger Accounts Receivable account, which
summarizes all of the amounts owed to the
company.

SUBSIDIARY LEDGER ACCOUNTS

• show the details supporting the related general

ledger control account balance.
• The company may use subsidiary accounts for
receivables to send out customer statements.
They may use the subsidiary accounts for
payables to determine the amount payable to
each supplier.
• These accounts are normally arranged
alphabetically by the
• name of the customer or supplier. The sum of
the subsidiary accounts in a subsidiary ledger
should agree with the balance in the related
general ledger control account when the
company prepares the financial statements.
• a group of related accounts showing the details
of the balance of a general ledger control
account.
• separated from the general ledger in order to
relieve the general ledger of a mass of details
and thereby shorten the general ledger trial
balance. Also, having separate ledger promotes
a division of labor.

SCHEDULE OF ACCOUNTS PAYABLE

• prepared to make certain that the total of the

balances in the subsidiary ledger accounts
agrees with the control account.
FINANCIAL STATEMENT

MERCHANDISE BUSINESS
STATEMENT OF COMPREHENSIVE INCOME
DATE

Sales xxx
Sales Return & Allowances xxx
Sales Discount xxx xxx
Net Sales xxx

Less: Cost of Goods Sold

Merchandise Inventory, beg xxx
Add: Purchases xxx
Add: Freight-in xxx xxx
Total
Less: Purchase Return & Allowances xxx
Purchase Discount xxx xxx
Net Purchases xxx
Merchandise (Goods) Available for Sale xxx
Less: Merchandise Inventory, end xxx
Cost of Goods Sold xxx
Gross Profit xxx
Less: Operating Expense
Store Supplies Expense xxx
Store Salaries Expense xxx
Rent Expense – Store xxx
Depre Expense – Store Equip xxx xxx
Administrative (General) Expense
Office Supplies Expense xxx
Office Salaries Expense xxx
Depre Expense – Office Equip xxx
Utilities Expense – Office xxx
Bad Debts Expense xxx
Insurance Expense xxx xxx
Other Expenses
Interest Expense xxx
Total Expense xxx
NET INCOME / LOSS xxx
 MODULE 2 - Nature and Formation of A Partnership
PARTNERSHIP - “a contract whereby two or more
persons bind themselves to contribute money, property
or industry into a common fund with the intention of
dividing profits among themselves.” (Article 1767 of the
Civil Code of the Philippines)
CHARACTERICTICS AND ELEMENTS OF A PARTNERSHIP
1. MUTUAL CONTRIBUTION – partners must contribute
money, property and/or industry to the common fund.
2. MUTUAL AGENCY – any partner may act as agent of
the partnership in conducting its affairs within the
express or implied authority.
KINDS OF PARTNERSHIP
3. UNLIMITED LIABILITY - personal assets of any partner
may be used to satisfy the partnership creditors’ claims
upon liquidation, if partnership assets are not enough to
settle the liabilities to outsiders.
4. LIMITED LIFE - partnership may be dissolved at any
time by admission, death, incapacity, or withdrawal of
any partner or by expiration of the term specified in the
partnership agreement.
5. DIVISION OF PROFITS AND LOSSES - the reason why
a partnership was formed; The element that
distinguishes the partnership contract from a voluntary
religious or social organization; A stipulation which
excludes one or more partners from any share in the
profits or losses is void.
6. LEGAL ENTITY - a partnership has legal personality
separate and distinct from that of each the partners.
7. CO-OWNERSHIP OF CONTRIBUTED ASSETS - property
contributed to the partnerships are owned by the
partnership by virtue of its separate legal personality;
assets contributed by each partner are joint assets of all
partners.
8. INCOME TAX - Partnerships, other than general
professional partnerships (GPP) are subject to the same
tax of a corporation, 30% income tax. GPP are those
organized for the exercise of professions like CPA’s
lawyers, engineers, etc. are exempt from income tax.
ADVANTAGES OF A PARTNERSHIP
• easy to organize and less expensive than a
corporation, as it is formed by a mere
agreement between two or more persons.
• unlimited liability of the partners makes it
attractive to creditors.
• with two or more partners will be a better
opportunity to obtain additional funds than
does a single proprietorship.
• more partners of different skills and expertise
makes it possible to manage all the partnership
activities.
DISADVANTAGES OF A PARTNERSHIP
• less stable because it can easily be dissolved
(limited life)
• Business partners are jointly and individually
liable for the actions of the other partners
(Mutual agency)
• liability of the partnership will extend to the
personal property of the partners (unlimited
liability)
• Since decisions are shared, disagreement
among partners may lead to dissolution
• A partner has to consult the other partners
before a decision can be arrived at
1. As to liability of partners
a. General partnership - one consisting of
general partners who are liable to the
extent of their separate properties for
partnership debts.
b. Limited partnership - one formed by
two or more persons having as
members one or more general partners
and one or more limited partners. The
limited partners are not personally
liable for the obligations of the
partnership. The word “LIMITED” or
“LTD.” Is added to the name of the
partnership to inform the public that it
is a limited partnership. There should be
at least one general partner in a limited
partnership.
2. As to duration
a. Partnership at will - one for which no
term is specified and is not formed for a
particular undertaking and which may
be terminated any time by mutual
agreement of the partners or at the will
of any one partner.
b. Partnership with fixed term - one in
which the term for the existence of the
partnership is fixed or is agreed upon or
one formed for a particular
undertaking.
3. As to legality of existence
a. De jure partnership - one that has
complied with all the requirements for
its establishments.
b. De facto partnership - one which has
failed to comply with one or more of
the legal requirements for its
establishment.
4. As to purpose or activity
a. Commercial or trading partnership -
one whose main activity is the
manufacture and sale or the purchase
and sale of goods.
b. Professional or Non-trading
partnership - one formed for the
exercise of profession or for the
purpose of rendering services.
 5. As to object
a. Universal partnership
i. Universal partnership of all
present property - one in
which each partners
contribute to the partnership
at the time of its
constitution; properties were
contributed to a common
fund with the intention of
dividing the same among
themselves including it’s
profits which they may
acquire therewith; all assets
contributed to the
partnership and subsequent
acquisitions become
partnership assets.
ii. Universal partnership of all
profit - one which the
usufruct or use of assets only
was contributed to the
partnership, either at the
time of it’s formation and/or
during the life of the
partnership by which the
partner may acquire thru
industry or work; the original
movable or immovable
property contributed do not
become the common
partnership assets.
b. Particular partnership - one which has
for its object a determinate thing, their
use or fruits, or a specific undertaking
or the exercise of a profession or
vocation.
6. As to representation to others
a. Ordinary partnership - one which
actually exists among the partners and
to the third parties.
b. Partnership by estoppel - one which on
reality is not a partnership but is
considered as one only in relation to
those who, by their conduct or
omissions are precluded to deny or
disprove it’s partnership existence.
7. As to publicity
a. Secret partnership - one wherein the
existence of certain person as partners
is not made known to the public by any
of the partners.
b. Open partnership - one wherein the
existence of certain persons as partners
is made known to the public by the
members of the firm.
CLASS OF PARTNERS
1. As to contribution
a. Capitalist partner - one who
contributes capital in cash (money) or
property.
b. Industrial partner - one who
contributes industry, labor, skill, talent
or service.
c. Capitalist-industrial partner - one who
contributes cash, property, and
industry.
2. As to liability
a. General partner - one whose liability to
third persons extends to his separate
(private) property.
b. Limited partner - one whose liability to
third persons is limited only to the
extent of his capital contribution to the
partnership.
3. As to management
a. Managing partner - one who manages
actively the business of the partnership.
b. Silent partner - one who does not
participate in the management of the
partnership affairs.
4. Other classifications
a. Liquidating partner - one who takes
charge of the winding up of partnership
affairs upon dissolution.
b. Nominal partner - one who is not really
a partner, not being a party to the
partnership agreement, but is made
liable as a partner for the protection of
innocent persons.
c. Ostensible partner - one who takes
active part int the management of the
firm and is known to the public as a
partner in the business.
d. Secret partner - one who takes active
part in the management of the business
but whose connection with the
partnership is concealed or unknown to
the public.
e. Dormant partner - one who does not
take active part in the management of
the business and is not known to the
public as a partner; he is both a silent a
secret partner.
PARTNERSHIP CONTRACT
• A partnership is created by an oral or a written
agreement.
• Since partnerships are required to be registered
with the Securities and Exchange Commissions,
it is necessary that the agreement be in writing.
• The written agreement between or among the
partners governing the formation, operation
and dissolution of the partnership is referred to
as the Articles of Co-Partnership.
The Articles of Co-Partnership contains the following
information:
1. The name of the partnership;
2. The names and address of the partners, classes
of partners, stating whether the partner is a
general or a limited partner;
 3. The effective date of contract; PARTNERSHIP FORMATION
4. The purpose or purposes and principal office of
A. TWO OR MORE PERSONS WITH NO EXISTING
the business;
BUSINESS FORM A PARTNESHIP
5. The capital of the partnership stating the
• New set of books
contributions of individual partners, their
B. A SOLE PROPRIETOR AND AN INDIVIDUAL
description and agreed values;
FORM A PARTNERSHIP
6. The rights and duties of each partner;
7. The manner of dividing net income or loss • Use the book of the proprietorship
among the partners, including salary allowance • Open new set of books
and interest on capital; i. Adjust the books
8. The conditions under which the partners may ii. Close the books
withdraw money or other assets for personal iii. Transfer the accounts to the
use; new set of books
9. The manner of keeping the books of accounts; iv. Record the investment of other
10. The causes for dissolution; and partner
11. The provision for arbitration in settling disputes. C. TWO OR MORE SOLE PROPRIETORS FORM A
PARTNERSHIP
• Accounts Receivable & Allowance for
Bad Debts is still included in new books
ACCOUNTING FOR PARTNERSHIPS
• Equipment & Accumulated
• There should be as many any capital accounts Depreciation- only Equipment is
and as many drawing accounts as there are included in new books
partners. (meaning, one capital account and
one drawing account is maintained for each
partner). The following rules will be helpful in making the
necessary adjusting entries:

PARTNER’S CAPITAL ACCOUNT • Debit asset and credit capital for increase in
1. Permanent withdrawal 1. Original investment by asset values
(decrease) of Capital a partner • Debit capital and credit asset for decreases in
asset values
2. Share in partnership 2. Additional investment • Debit capital and credit liabilities for increases
loss from partner by a partner in liability balances
• Debit liabilities and credit capital for decreases
3. Closing entry of 3. Share in partnership in liability balances
drawing account profits from operations
In the case of contra asset accounts, the following rules
shall apply:
PARTNER’S DRAWING ACCOUNT
1. Personal withdrawal 1. Share in partnership • Debit contra asset account and credit capital for
by a partner profits from operations increases in asset values
(this may be credited • Debit capital and credit contra asset account for
2. Share in partnership directly to the partner’s decreases in asset values
loss form operations (this capital account
may be deducted directly
to the partner’s capital
account) MODULE 3 - Partnership Operations

OPENING ENTRIES NATURE OF PARTNERSHIP OPERATION

• Partners may contribute cash, property, or
industry to the partnership.
• Appropriate asset accounts are debited for the
assets contributed and partner’s capital
accounts are credited for the total amount of
assets contributed.
1. Closing entries of a partnership
2. Distribution of profits and losses
3. Preparation of a work sheet
4. Preparation of financial statements

FACE VALUE If the assets contributed is in the a. Statement of income / statement of

form of cash comprehensive income
If the asset contributed is in the
b. Statement of financial position
AGREED VALUE form of property or non-cash
asset c. Statement of changes in partners’ equity
FAIR MARKET when there is an absence of an
VALUE agreement
MEMORANDUM When industry is contributed into
ENRTY the partnership
CLOSING ENTRIES OF A PARTNERSHIP A credit balance in the Income Summary account
represent a profit and its balance is transferred to the
• all revenue and other nominal accounts with
capital accounts of the partners based on their profit
credit balances (such as Purchases Discounts
and loss sharing ratio. The entry is as follows:
and Purchases Returns and Allowances) are
debited and Income Summary is credited. Income Summary xxx
• income Summary is debited and all expense and X, Capital xxx
other nominal accounts with debit balances Y, Capital xxx
(such as Sales Discounts and Sales Returns and
Allowances) are credited.
A debit balance in the Income Summary account
• the balance of the Income Summary account,
represents a loss and its balance is transferred to the
which represents profit or loss of the partners.
capital accounts of the partners based on their profit
• the balance of the drawing account of each
and loss sharing ratio. The entry is as follows:
partner is transferred to his/her capital account.
X, Capital xxx
Y, Capital xxx
A credit balance in the Income Summary account Income Summary xxx
represents a profit and its balance is transferred to the
drawing accounts of the partners based on their profit
DISTRIBUTION OF PROFIT AND LOSSES
and loss sharing ratio. The entry is as follows:
To make distribution of partnership profits and losses
Income Summary xxx
equitable, the following factors are considered:
X, Drawing xxx
Y, Drawing xxx 1. Services rendered by the partners to the
partnership
2. Amount of capital contributed by the partners
If the balance in the drawing accounts is withdrawn in
to the business
cash, the entry is as follows:
3. Entrepreneurial ability or managerial skill of the
X, Drawing xxx partners
X, Cash xxx

RULES FOR DIVIDING PROFITS AND LOSSES

if the partner decides to reinvest into the firm this
balance in his drawing account, the entry is as follows: Rules in the division of profits and losses of the
partnership based on the provision of the New Civil
X, Drawing xxx
Code:
X, Capital xxx
1. As to Capital Partners
a. Division of profits
A debit balance in the Income Summary account
i. in accordance with agreement
represents a loss and its balance is transferred to the
ii. in the absence of an
drawing accounts of the partners based on their profit
agreement, division of profits is
and loss sharing ratio. The entry is as follows:
in accordance with capital
X, Drawing xxx contributions
Y, Drawing xxx b. Division of losses
Income Summary xxx i. In accordance with agreement
ii. If only division of profits is
agreed upon, the division of
The resulting debit balance in the drawing account of a losses will be the same as the
partner is charged against his capital with the following agreement on the division of
entry: profits
X, Capital xxx iii. In the absence of an
agreement, division of losses is
X, Drawing xxx in accordance with capital
contributions
2. As to Industrial Partners
• the balance of the Income Summary account a. Division of profits
may be transferred directly to the capital i. In accordance with agreement
accounts of the partners if the partners’ ii. In the absence of an
intention is to make the profit or loss a part of agreement, the industrial
permanent capital. partner shall receive a just and
equitable share of the profits
and the capitalist partners shall
receive profits in accordance
with their capital contributions
b. Division of losses
 i. In accordance with agreement
ii. In the absence of an
agreement, the capitalist-
industrial partner in his/her
character as industrial partner
shall have no share in the
losses, but in his/her character
as a capitalist partner will share
in proportion to the capital
contribution
METHODS OF DISTRIBUTING PROFITS BASED ON
PARTNERS’ AGREEMENT
Arbitrary ratio (Percentage, Decimal, Fraction, Ratio)
• it is simple to apply but does not give
recognition on the disparity of capital
contributions nor does it recognize the time and
effort that a partner may devote in running the
firm’s business operations.
Capital ratio (Original, Beginning, Ending, Average)
• this method recognizes the differences in the
capital contributions but does not take into
account the time and effort that a partner may
devote in running the firm’s business
operations.
Interest on capital and the balance on agreed ratio
• this method recognizes the differences in the
capital contributions but does not take into
account the time and effort that partner may
devote in running the firm’s business
operations.
• Interest is allowed to partners for the use of
invested capital.
• Interest as agreed by the partners shall be
allowed in proportion over the period such
capital was actually used.
• interest shall be provided whether profit is
sufficient or insufficient or there is a net loss
unless otherwise agreed upon by the partners.
Salary allowances to partners and the balance on
agreed ratio
• this method recognizes the time and effort that
a partner may devote in running the firm’s
business operations but does not take into
consideration the differences in capital
contributions.
• Salaries are allowed to partners as a
compensation for their time devoted in the
business.
• Salaries as agreed by the partners shall be
allowed in proportion to the time the partners
actually rendered services to the firm.
• Such salaries shall be provided whether the
profit is sufficient or insufficient or there is net a
loss unless otherwise agreed upon by the
partners.
Bonus to managing partner and the balance on agreed
ratio
• this method allows a bonus, as an incentive, to
the managing partner.
• usually a percentage of the profit
• allowed only when there is a profit.
• It may be computed using any one of the
following as basis:
a. Bonus is based on profit before deducting
bonus and income tax
b. Bonus is based on profit after deducting bonus
but before deducting income tax
c. Bonus is based on profit after deducting income
tax but before deducting bonus
d. Bonus is based on profit after deducting both
bonus and income tax.
Interest on capital, salaries to partners, bonus to
managing partner, and the balance on agreed ratio.
CORRECTION IN PROFIT FOR ERRORS AND OMISSIONS
PRIOR TO DISTRIBUTION
• The partnership books may show an incorrect
profit because of errors and omissions.
• Such include failure to record prepaid expenses,
accrued expenses, accrued income, unearned
income and also overstatement or
understatement in purchases, inventories, and
depreciation.
• The reported profit should be corrected before
it is distributed to the partners.
• The required corrections may be summarized as
follows:
Correction profit
of current year for
errors made in
Prior Current
Year Year
Unrecorded prepaid expenses - +
Unrecorded accrued expenses + -
Unrecorded accrued income - +
Unrecorded unearned income + -
Overstatement of inventories + -
Understatement of inventories - +
Overstatement of purchases - +
Understatement of purchases + -
Overstatement of depreciation none +
Understatement of depreciation none -