Partnership Operations

(Accounting For Special Transactions)

2nd Trimester, AY 2023-2024
 Partnership Operations

Learning Objectives:

1. State the items that affect the division of a

partnership’s profits or losses among the partners.

2. Compute for the share of a partner in the partnership’s

profit or loss.
 Divisions of Profits and Losses
The partners shall share in the profits or losses of a
partnership in accordance with the partnership
agreement.
Art.1797 of the Phil. Civil Code provides additional rules I
profit or loss sharing of partners:
• If only the share of each partners in the profits has been
agreed, the share in the losses shall be in the same
proportion.
• In the absence of stipulation, share of each partner in profits
and losses shall be in proportion to their capital contribution,
but the industrial partner shall not be liable for the losses. As
for profits, the industrial partner shall receive share equitable
under the circumstances.
 Divisions of Profits and Losses
Ø An industrial partner is one who contributes services
to the partnership rather than cash or other non-cash
assets.
Ø A capitalist partner is one who contributes cash or
other non-cash assets to the partnership.
Ø A partner who contributes both services and cash or
other non-cash asset is both an industrial and a
capitalist partner.

• 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 Profit or Loss
1. Salaries – 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.
Illustration 1: Salaries
A and B’s partnership agreement provides for annual salary
allowances of P50,000 for A and P30,000 for B. The salary
allowances are to be withdrawn throughout the period and are to be
debited to the partner’s respective drawings accounts.
Case 1: With remaining profit – different P/L ratios
The partners share profits equally and losses on a 60:40 ratio. The
partnership earned profit of P100,000 before salary allowances.
Requirements:
a. Compute for the respective shares of the partners in profit
b. Provide the journal entries
Illustration 1: Salaries
a. Compute for the respective shares of the partners in profit
Illustration 1: Salaries
b. Provide the journal entries
Illustration 1: Salaries
A and B’s partnership agreement provides for annual salary
allowances of P50,000 for A and P30,000 for B. The salary
allowances are to be withdrawn throughout the period and are to be
debited to the partner’s respective drawings accounts.
Case 2: No remaining profit – different P/L ratios
The partners share profits equally and losses on a 60:40 ratio. The
partnership earned profit of P70,000 before salary allowances.
Requirement: Compute for the respective shares of the partners
in profit
Illustration 1: Salaries
A and B’s partnership agreement provides for annual salary
allowances of P50,000 for A and P30,000 for B. The salary
allowances are to be withdrawn throughout the period and are to be
debited to the partner’s respective drawings accounts.
Case 3: No P/L ratio
The partnership agreement does not state how profits and losses are
to be divided. A contributed P10,000, while B contributed P20,000.
The partnership earned profit of P95,000 before salary allowances.
Requirement: Compute for the respective shares of the partners
in the profit
Illustration 2: Bonus
A and B’s partnership agreement stipulates the following:
• Annual salary allowances of P30,000 for A and P10,000 for B
• Bonus to A of 10% of the profit after partner’s salaries and bonus
• The profit and loss sharing ratio is 60:40
Case 1: With profit
The partnership earned profit of P106,000 before deductions for
salaries and bonus
Requirement: Compute for the respective shares of the partners
in the profit
The bonus is computed as follows:
Case 2: With loss
The partnership incurred loss of P5,000 before deductions for
salaries and bonus
Requirement:
a. Compute for the respective shares of the partners in the profit
Case 2: With loss
The partnership incurred loss of P5,000 before deductions for
salaries and bonus
Requirement:
b. By what amount did A’s capital account change?
A’s capital increased by P3,000. Notice that a partner’s capital can
increase despite of partnership loss. The entry to record the
allocation of loss is as follows:
Illustration 2.1: Bonus – with limit
A and B’s partnership agreement stipulates the following:
• First, A shall receive 10% of profit up to P100,000 and 20% over
P100,000
• Second, B shall receive 5% of the remaining profit over P150,000
• Any remainder shall be shared equally
The partnership earned profit of P280,000
Requirement: Compute for the respective shares of the partners
in the profit.
Illustration 2.2: Bonus – choice of profit sharing scheme
Mr. A, a partner in ABC Co., is deciding on whether to accept a salary
of P8,000 or a salary of P5,000 plus a bonus of 10% of profit after
deducting salaries and bonus. The salaries of other partners amounts
to P20,000.
Requirement: At what amount of profit would Mr. A be indifferent
between the choices?
If the partnership profit is P58,000, it does not matter whether Mr. A
chooses to receive a salary of P8,000 or a salary of P5,000 plus a
10% bonus because he will receive the same amount.
Illustration 2.3: Bonus – comparison of profit sharing scheme
A and B’s partnership agreement stipulates the following:
• Bonus to A of 10% of the profit before bonus
• Profits are shared equally, while losses in the ratio of 2:3
Requirement: Which partner has a greater advantage when the
partnership earns profits or when it incurs loss?
Illustration 3: Interest on Capital
A and B’s partnership agreement stipulates the following:
• Annual salary allowance of P50,000 for A
• Interest of 10% on the weighted average capital balance of B
• The partners share profits and losses on a 60:40 ratio
Ø The partnership earned profit of P100,000
Ø The movement in B’s capital account are as follows:

Requirement: Compute for the respective shares of the partners

in profit.
Solution: The weighted average balance of B’s capital account is
computed as follows:
Illustration 3.1: Interest on Capital and Bonus
A and B’s partnership agreement stipulates the following:
• Annual salary allowance of P5,000 for A
• 20% bonus to A, based on profit before deductions for salary,
interest and bonus
• 10% interest on the weighted average capital of B
Ø The partnership earned profit of P30,000
Ø B’s weighted average capital balance is P100,000
Requirement: How much is the bonus of A?
Illustration 3.2: Interest on Capital – Partial year
A and B formed a partnership on March 1, 20x1. The partnership
agreement stipulates a 10% interest on B’s weighted average capital
balance. The movements in B’s capital account are as follows:

Requirement: Compute for the interest on the weighted average

balance of B’s capital
Solution:
Illustration 3.3: Interest on Capital – With limit
A and B’s partnership agreement stipulates the following:
• A and B shall maintain average investments of P100,000 and
P150,000 respectively. Any excess (deficiency) will earn (incur)
10% annual interest.
• The P/L ratio is 60:40
Ø The partnership incurred loss of P60,000 in the first six months of
operations
Ø A and B’s average capital balances were P120,000 and P110,000
respectively.
Requirement: Compute for the respective shares of the partners
in the loss.
Solution:
The interest on the excess (deficiency) in capital contribution is
computed as follows:
Illustration 4.1: Partner’s Capital account
A and B’s partnership began operations on March 1, 20x1. A invested
P100,000 cash, while B invested equipment with book value of
P300,000 and fair value of P180,000. A invested additional cash of
P20,000 on Aug 31, 20x1. The partnership agreement stipulates the
following:
• Monthly salaries of P2,000 and P10,000 to A and B, respectively,
recognized a expenses
• 20% bonus to B, based on profit before deducting salaries and
interest but after deducting the bonus.
• 12% annual interest on the beginning of capital A
• Balance equally
Ø The partners received their monthly salaries at each month-end
Ø The partnership earned profit of P210,000 before deductions for
bonus and interest.
Requirement: Compute for the ending balances of the capital
accounts of the partners.
Solution:
The profit given in the problem is net of the monthly salaries that were
recognized as expenses. We need the gross amount which is the one
subject to allocation. This is computed as follows:

The bonus and interest on capital are not yet deducted from the profit
figure given in the problem. Unlike for monthly salaries which are
withdrawn periodically (i.e., monthly basis), interest, and bonuses are
normally computed only at year end. The profit before salaries,
interest and bonus is allocated as follows:
Solution:
(a) The bonus after bonus is computed as follows:
B = P – (P/1 + Br)
B = 330,000 – [330,000/ (1+20%)] = 55,000

The ending balances of the partners’ capital accounts are computed

as follows:
Illustration 4.2: Reconstruction of Information
Partner A has a 25% participation in profits of a partnership. During
the year, A’s capital account had a net increase of P10,000. Partner
A made contributions of P40,000 and capital withdrawals of P60,000
during the year.
Requirement: How much profit did the partnership earn during
the year?
Illustration 4.3: Reconstruction of Information – Required profit
A, B, C and D’s partnership agreement stipulates the following:
• A and B shall receive salaries of P20,000 and P10,000,
respectively, and 10% interest on their capital contributions of
P100,000 and P60,000, respectively.
• Balance is divided on a 4:4:1:1 basis. However, C and D are
guaranteed minimum shares of P5,000 each.
Partner A is contemplating on obtaining a housing loan which he
intends to repay through his share from the partnership profit. The
loan requires annual payment of P42,000. Partner A wants to know
the minimum level of partnership profit that could secure him a share
of P42,000, inclusive of salaries, interest and share in remaining profit.
Requirement: Help Partner A
OPEN FORUM

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