Partnership Operations

Lesson 2
Profit or Loss Allocation

► Under the partnership law,

► Profits are allocated through
► Profit ratio
► Capital contribution

► Losses are allocated through

► Loss ratio
► If no loss ratio, profit ratio = loss ratio
► Capital contribution
Allocation Techniques

► Equally
► Arbitrary ratio
► In the ratio of partner’s capital account balances and dividing the balance on
agreed ratio
► Interest on partners’ capital account and dividing the balance on agreed ratio
► Salaries to partners and dividing the balance on agreed ratio
► Interest on capital account balance, salaries and bonus to partners and
dividing the balance on agreed ratio
Allocation of Net Income/Loss

► SALARIES
Priority ► INTEREST ON CAPITAL BALANCES

Special ► BONUS

► EQUALLY
Ordinary ► ARBITRARY RATIO
► RATIO OF PARTNERS CAPITAL BALANCES
Scenario 1
Assume that a net income of P288,000 is determined for X and Y Partnership
at the end of 20x4. Regular withdrawals by partners in anticipation of net income
have been summarized in the drawing accounts; permanent capital changes have
been summarized in the capital accounts. Drawing and capital accounts at the
end of 20x4 appear as follows:

X, Capital Y, Capital
1/1 300,000 3/1 30,000 1/1 420,000
4/1 60,000 11/1 60,000
12/31 360,000 12/31 450,000
X, Drawing Y, Drawing
1/1 36,000 1/1 114,000
-12/31 -12/31
36,000 114,000

The partners agreed that they will receive an equal amount of profit or loss.
Scenario 2
Assume that a net income of P288,000 is determined for X and Y Partnership
at the end of 20x4. Regular withdrawals by partners in anticipation of net income
have been summarized in the drawing accounts; permanent capital changes have
been summarized in the capital accounts. Drawing and capital accounts at the
end of 20x4 appear as follows:

X, Capital Y, Capital
1/1 300,000 3/1 30,000 1/1 420,000
4/1 60,000 11/1 60,000
12/31 360,000 12/31 450,000
X, Drawing Y, Drawing
1/1 36,000 1/1 114,000
-12/31 -12/31
36,000 114,000
Since the expertise, ability and reputation of X are factors of special significance
to the success of the partnership, X and Y agree to allocate the net income into
the ratio of 3:2
Scenario 3
Assume that a net income of P288,000 is determined for X and Y Partnership
at the end of 20x4. Regular withdrawals by partners in anticipation of net income
have been summarized in the drawing accounts; permanent capital changes have
been summarized in the capital accounts. Drawing and capital accounts at the
end of 20x4 appear as follows:

X, Capital Y, Capital
1/1 300,000 3/1 30,000 1/1 420,000
4/1 60,000 11/1 60,000
12/31 360,000 12/31 450,000
X, Drawing Y, Drawing
1/1 36,000 1/1 114,000
-12/31 -12/31
36,000 114,000
The partners agreed to allocate the net income in proportion to their original
capital
Scenario 4
Assume that a net income of P288,000 is determined for X and Y Partnership
at the end of 20x4. Regular withdrawals by partners in anticipation of net income
have been summarized in the drawing accounts; permanent capital changes have
been summarized in the capital accounts. Drawing and capital accounts at the
end of 20x4 appear as follows:

X, Capital Y, Capital
1/1 300,000 3/1 30,000 1/1 420,000
4/1 60,000 11/1 60,000
12/31 360,000 12/31 450,000
X, Drawing Y, Drawing
1/1 36,000 1/1 114,000
-12/31 -12/31
36,000 114,000
The partners agreed to allocate the net income in proportion to their beginning
capital
Scenario 5
Assume that a net income of P288,000 is determined for X and Y Partnership
at the end of 20x4. Regular withdrawals by partners in anticipation of net income
have been summarized in the drawing accounts; permanent capital changes have
been summarized in the capital accounts. Drawing and capital accounts at the
end of 20x4 appear as follows:

X, Capital Y, Capital
1/1 300,000 3/1 30,000 1/1 420,000
4/1 60,000 11/1 60,000
12/31 360,000 12/31 450,000
X, Drawing Y, Drawing
1/1 36,000 1/1 114,000
-12/31 -12/31
36,000 114,000
The partners agreed to allocate the net income in proportion to their ending
capital
Scenario 6
Assume that a net income of P288,000 is determined for X and Y Partnership
at the end of 20x4. Regular withdrawals by partners in anticipation of net income
have been summarized in the drawing accounts; permanent capital changes have
been summarized in the capital accounts. Drawing and capital accounts at the
end of 20x4 appear as follows:

X, Capital Y, Capital
1/1 300,000 3/1 30,000 1/1 420,000
4/1 60,000 11/1 60,000
12/31 360,000 12/31 450,000
X, Drawing Y, Drawing
1/1 36,000 1/1 114,000
-12/31 -12/31
36,000 114,000
The partners agreed to allocate the net income in proportion to their average
capital
Scenario 7
Assume that a net income of P288,000 is determined for X and Y Partnership
at the end of 20x4. Regular withdrawals by partners in anticipation of net income
have been summarized in the drawing accounts; permanent capital changes have
been summarized in the capital accounts. Drawing and capital accounts at the
end of 20x4 appear as follows:

X, Capital Y, Capital
1/1 300,000 3/1 30,000 1/1 420,000
4/1 60,000 11/1 60,000
12/31 360,000 12/31 450,000
X, Drawing Y, Drawing
1/1 36,000 1/1 114,000
-12/31 -12/31
36,000 114,000
Assume that X and Y agree to allow interest on average capital at 6%; any net
income or loss balance is to be allocated 3:7.
Scenario 8
Assume that a net income of P288,000 is determined for X and Y Partnership
at the end of 20x4. Regular withdrawals by partners in anticipation of net income
have been summarized in the drawing accounts; permanent capital changes have
been summarized in the capital accounts. Drawing and capital accounts at the
end of 20x4 appear as follows:

X, Capital Y, Capital
1/1 300,000 3/1 30,000 1/1 420,000
4/1 60,000 11/1 60,000
12/31 360,000 12/31 450,000
X, Drawing Y, Drawing
1/1 36,000 1/1 114,000
-12/31 -12/31
36,000 114,000
Assume that the operations for X and Y prior to the recognition of interest had
resulted in a net loss of P80,000 and any balance will be allocated into 1:4 ratio.
Scenario 9
Assume that a net income of P288,000 is determined for X and Y Partnership
at the end of 20x4. Regular withdrawals by partners in anticipation of net income
have been summarized in the drawing accounts; permanent capital changes have
been summarized in the capital accounts. Drawing and capital accounts at the
end of 20x4 appear as follows:

X, Capital Y, Capital
1/1 300,000 3/1 30,000 1/1 420,000
4/1 60,000 11/1 60,000
12/31 360,000 12/31 450,000
X, Drawing Y, Drawing
1/1 36,000 1/1 114,000
-12/31 -12/31
36,000 114,000
Assume that the partners agreed to allow interest on the excess of the average
capital of one of the partner over the other. And the remaining 1:2
Scenario 10

The net income of A and B partnership for 20x4 amounted to P420,000. A, as

the managing partner, is allowed a bonus based on the following assumptions:
a. A bonus of 20% of net income before the bonus is deducted.
b. A bonus of 20% of net income after deduction of the bonus
Scenario 11
The net income of A and B partnership for 20x4 amounted to P420,000.
Assume that the partners agreed on the allocation of net income:
• Bonus of 20% to A
• Salaries to A, P40,000 and B, P60,000
• Interest on average capital balance – A, P12,000 and B, P8,000
• Residual balance in net income be allocated to A and B in the ratio of 2:1