DISTRIBUTION OF PROFIT/ LOSS

Allocation Methods:
1. Equally
2. Arbitrary Ratio
3. Based on Capital Contributions:
a. Ratio of original capital investments
b. Ratio of capital balances at the beginning of the year
c. Ratio of capital balances at the end of the year
d. Ratio of average capital balances
4. By allowing salaries/ interest on partners’s capital/ bonus to managing
partner and the balance in agreed ratio.
DISTRIBUTION OF PROFIT/ LOSS
In the absence of agreement, use the ratio of original capital balances
to distribute profit/loss.

If original capital balances is not given, use the beginning capital.

DISTRIBUTION OF PROFIT/ LOSS
Guidelines in computing the Average Capital:
1. An agreement should indicate clearly what withdrawals or drawings
accounts are to be recognized.
2. A partnership agreement may state that only withdrawals above a
certain limit are to be viewed as offsets (reduction) against capital
balances.
3. Typically, temorary withdrawals are not recognized in the
computation of average capital.
DISTRIBUTION OF PROFIT/ LOSS
Note:
1. The concept of bonus is not applicable to a net loss.
2. If errors were found during prior period, the correction is allocated
to the individual partners’ capital accounts based on the profit and
loss ratio in effect during the period of error.
DISTRIBUTION OF PROFIT/ LOSS-
Illustrations
1. AA, BB, and CC Partnership was formed on Jannuary 2, 2014. The
original cash investment were as follows:
AA................................... P 96, 000
BB.................................... 144, 000
CC.................................... 216, 000
According to the general partnership contract, the partners were to be
renumerated as follows:
- Salaries of P14, 400 for AA, P12, 000 for BB, and P13, 600 for CC
- Interest of 12% on the average capital account balances during the year.
DISTRIBUTION OF PROFIT/ LOSS-
Illustrations
- Remainder divided 40% to AA, 30% to BB, and 30% for CC.
Income before partners’ salaries for the year ended Dec. 31, 2014,
was P92080. AA invested additional P24, 000, in the partnership on
July 1; CC withdrew P36000 on Oct. 1; and, as authorized by the
partnership contract, AA, BB, and Cceach withdrew P750 monthly
against their share of net income for the year.

Required: determine the income allocated to each partner.

DISTRIBUTION OF PROFIT/ LOSS-
Illustrations
3. Computation for Bonus
Given:
- Net Income of A & B Partnership for 2014 amounted to P420,000
- Bonus of 20% to A
- Salaries to A, P40000 and B, P60000
- Interest on average capital balances- A, P12000 and B, P8000
- Residual balance in net income be allocated to A and B in the ratio of
2:1.
DISTRIBUTION OF PROFIT/ LOSS-
Illustrations
3. Computation for Bonus
Required: Compute the bonus with the following independent
assumptions:
a. Bonus is based on net income before bonus, salaries, and interest
b. Bonus is based on net income after bonus
c. Bonus is based on net income after bonus and salaries
d. Bonus is based on net income after interest
e. Bonus is based on net income after income tax
f. Bonus is based on net income after bonus and income tax