PARTNERSHIP OPERATION
PARTNERSHIP OPERATIONS
Accounting for a partnership form of business is basically similar to that of a sole proprietorship. For example,
purchase of supplies is debited either to Supplies or Supplies Expense account and when merchandise are sold on
account, the entry is to debit Accounts Receivable and credit the Sales account which is the same as that of a sole
proprietorship. In fact the Accounting Cycle of a Partnership is similar to that of sole proprietorship.
The computation of the result of business operation of a partnership is essentially the same as that of the sole
proprietorship. But the distribution to individual partners of this profit or loss is the primary objective of the
accounting process.
As a rule profits and losses are to be allocated based on the partnership agreement. Various methods exist for the
division of partnership profits and losses, including the following:
1. Equally
2. Arbitrary Ratio
3. Capital Balance Ratio
a. Original Capital (Initial Investment)
b. Beginning Capital for the Year
c. Average Capital
i. Simple Average
ii. Weighted Average
d. Ending Capital for the Year
4. Interest on Capital and/or Loan Balances and the remainder based on an agreed ratio
5. Salaries to partners and the remainder based on an agreed ratio
6. Bonus to partners and the remainder based on an agreed ratio
7. A combination of salaries, interest and/or bonus and the remainder based on an agreed ratio
The prevailing factor in a given situation regarding division of profits and losses should be the partnership
agreement, since this agreement is binding on the partners. If no profit and loss sharing agreement is specified,
partnership law states that the division of profits will be based on original capital contributions (initial investment).
In the absence of original capital, beginning capital for the year may be used.
If agreement specifies how profits are to be distributed, but is silent as to losses, losses are to be shared in the
same manner as profits. The profit and loss sharing ratio is dependent of the partners’ ownership interest (capital
balances). Any relationship is merely coincidental and is on a case to case basis. Thus, two partners may have
ownership interest of 70:30 but share profits and losses equally.
The following points should be remembered regarding the division of partnership profits and losses:
1. Distribution of salaries, interest and bonus to partners are just a means of profit distribution. They are not to be
treated as an expense. They are part of the profit sharing plan. Salaries, interest and bonus represent a
partner’s return of the following investments/contributions.
a. Service rendered – provide salaries to give recognition to the ability, experience or time devoted by
a partner to the business.
b. Capital investment – provide interest to give recognition to differences in the capital contribution
given in proportion to the period such capital was actually used.
c. Entrepreneurial ability or managerial skills – provide bonus which is an incentive or special
compensation which is usually based on net income.
2. If there is a bonus agreement, determine the basis of computing the bonus which is usually based on net
income after deducting either salaries, interest, bonus or a combination of any of the three. Bonus is not
applicable if the base is negative.
3. The rules and methods in the preceding sections generally apply to capitalist partners. However, they may also
apply to industrial partners bearing in mind the following points:
a. If there is a profit, the industrial partner will share according to the profit sharing agreement. In the
absence of an agreement, the industrial partner will receive what is “just and equitable” under the
circumstances.
b. If the partnership incurs loss, the industrial partner will still share according to their loss sharing
agreement, if any. If there is no agreement with regards to the industrial partner sharing in loss, he
is exempted from sharing in the partnership loss. It does not follow that when the partnership
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sustains a loss, the industrial partner will not share in partnership losses. Their agreement will still
be the prevailing factor.
Note:
Partnership Operations:
1. Arbitrary ratio – agreement.
2. Capital ratio – original capital, beginning capital, ending capital, weighted average capital.
3. Salary allowances – specific partner’s only. Given whether there is income or loss.
4. Interest allowances – all capitalist partners. Given whether there is income or loss.
5. Bonus – specific partner’s only. Given only if there’s income. May be computed on net income before
bonus or after the bonus, salary and interest. If they are treated as expenses, it means basis is after the
three were deducted.
PROBLEMS
Problem 1:
The capital accounts of Castro and Diaz show the following facts for the fiscal year ended December 31, 2016:
Castro Diaz
Jan. 1 Balance 26,000 Jan. 1 Balance 16,500
Mar. 30 Investment 3,000 May 18 Investment 5,000
May 10 Investment 7,000 Aug. 24 Withdrawal 2,000
July 25 Withdrawal 4,000
Dec. 31 Balance 32,000 Dec. 31 Balance 32,000
The profit and loss account shows a credit balance of P23,800 on December 31.
Required: Prepare a schedule of profit distribution under the following independent agreements on the division of
profits:
1. In the ratio of investments at the beginning or the fiscal period.
2. In the ratio of average capitals, investments and withdrawals are to be considered as made at the beginning of
the month if made before the middle of the month, and are to be considered as made at the beginning of the
following month if made after the middle of the month.
3. Interest of24% on average capitals, salaries to Castro and Diaz of P36,000 and P24,000, respectively, and any
balance equally. Investments and withdrawals are to be considered as in (2).
4. Allowance to Castro of a bonus of 25% of the net profit after bonus; interest of 10% to be allowed on the
excess of the average investment (simple average) of one partner over that of the other, and any balance in
the ratio of 3:2 to Castro and Diaz, respectively.
5. Salaries of P3,000 and P2,000 a month to Castro and Diaz, respectively provided annual earnings are sufficient
to cover the allowance; if earnings are insufficient, the profit shall be distributed in the salary ratio; if
operations result in a loss, it shall be distributed equally.
1. Castro : (P26,000/P42,500) x P23,800 = P14,560
Diaz : (P16,500/P42,500) x P23,800 = __9,240
P23,800
2. Castro : (P31,250/P50,000) x P23,800 = P14,875
Diaz : (P18,750/P50,000) x P23,800 = __8,925
P23,800
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Computation of Average Capitals:
Castro: Capital Months Peso
Date Balances Unchanged Months
1/1 ..................................... P26,000 3 P 78,000
4/10 ................................... 29,000 1 29,000
5/1 ..................................... 36,000 3 108,000
8/1 ..................................... 32,000 5 _160,000
12 P375,000
Average capital = P375,000 12 months = P31,250
Diaz: Capital Months Peso
Date Balances Unchanged Months
1/1 ..................................... P16,500 5 P 82,500
6/1 ..................................... 21,500 3 64,500
9/1 ..................................... 19,500 4 __78,000
12 P225,000
Average capital = P225,000 – 12 months = P18,750
3. Castro Diaz Total
Interest ........................................................ P 7,500 P4,500 P12,000
Salaries ........................................................ 36,000 24,000 60,000
Balance, equally .......................................... ( 24,100) (24,100) ( 48,200)
Total............................................................. P19,400 P 4,400 P23,800
4. Castro Diaz Total
Bonus (a) ..................................................... P 4,760 P – P 4,760
Interest (b) ................................................... 1,100 – 1,100
Balance, 3:2 ................................................. _10,764 _7,176 _17,940
Total............................................................. P16,624 P7,176 P23,800
Computations:
a. Net profit before bonus ................................................ P23,800
Net profit after bonus (P23,800 125%)...................... _19,040
Bonus ............................................................................ P 4,760
b. Average capital of Castro [(P26,000 + P32,000) 2] .............................. P29,000
Average of Diaz [(P16,500 + P18,500) 2] .......... .................................. _18,000
Castro's excess ..................................................... .................................. P11,000
Multiply by ........................................................... .................................. ___10%
Interest ................................................................. .................................. P 1,100
5. Castro : (P3,000/P5,000) x P23,800 = P14,280
Diaz : (P2,000/P5,000) x P23,800 = __9,520
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P23,800
Problem 2:
Dino, Nelson and Oscar are partners in a retail appliance store. The partnership was formed on January 2, 2014
with each partner investing P45,000. They agreed that profits and losses are to be shared as follows:
1. Divided in the ratio of 40:30:30 if net income is not sufficient to cover salaries bonus and interest.
2. Net loss is to be divided equally
3. Net income is to be allocated as follows if net income is in excess of salaries, bonus, and interest.
a. Monthly salary allowances are: Dino, P4,000; Nelson P2,000; and Oscar P1,000.
b. Nelson is to receive a bonus of 1 0% of net income before subtracting salaries and interest, but after
subtracting the bonus.
c. Interest of 8% is allocated based on the beginning of-year capital balances.
d. Any remainder is to be divided equally
Operating performance and other capital transactions were as follows:
Capital Transactions
Year-end Net Income Dino Nelson Oscar
Dec. 31 (Loss) Investment Withdrawals Investment Withdrawals Investment Withdrawals
2014 P(5400) P15,000 P17,000 P15,000 P7,000 P6,000 P3,200
2015 27,000 -0- 17,000 -0- 7,000 6,000 3,200
2016 120,000 -0- 19,000 -0- 9,000 6,000 3,200
Required: Prepare a statement of changes in Partners' Equity Accounts for each of the years. Support your
statement with a Schedule of Profit Distribution for each year.
Dino Nelson Oscar Total
Capital balances, 1/2/014 ........................... P45,000 P45,000 P45,000 P135,000
Additional investment, 2014....................... _15,000 _15,000 __6,000 __36,000
Balances .. ................................................... 60,000 60,000 51,000 171,000
Net income (Loss) - 2014, equally ............... (1,800) ( 1,800) ( 1,800) ( 5,400)
Withdrawals, 2014 ...................................... (17,000) ( 7,000) ( 3,200) ( 27,200)
Capital balances, 12/31/14 ......................... 41,200 51,200 46,000 138,400
Additional investment, 2015....................... _____– _____– __6,000 ___6,000
Balances .. ................................................... 41,200 51,200 52,000 144,400
Net income – 2015, 40: 30: 30 .................... 10,800 8,100 8,100 27,000
Withdrawals, 2015 ...................................... (17,000) ( 7,000) ( 3,200) ( 27,200)
Capital Balances, 12/31/015 ....................... 35,000 52,300 56,900 144,200
Additional investment, 2016....................... ______– ______– ___6,000 ___6,000
Balances .. ................................................... 35,000 52,300 62,900 150,200
Net income, 2016 (schedule 1) ................... 56,365 42,272 20,363 120,000
Withdrawals, 2016 ...................................... (19,000) ( 9,000) ( 3,200) ( 31,200)
Capital balances, 12/31/016 ....................... P72,365 P86,572 P80,063 P239,000
Schedule 1:
Dino Nelson Oscar Total
Annual salaries ................................... P48,000 P24,000 P12,000 P84,000
Bonus (see computations below) ....... – 10,909 – 10,909
Interest ............................................... 3,600 3,600 3,600 10,800
Balance, equally ................................. _* 4,765 __4,763 __4,763 __14,291
Totals .................................................. P56,365 P43,272 P20,363 P120,000
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Bonus computations:
Net income before bonus .......... ................. .................... ..................... P120,000
Net income after bonus (P120,000 110%) .................... ..................... _109,091
Bonus to Nelson......................... ................. .................... ..................... P 10,909
* To Total
Part I: Theory of Accounts
1. Which of the following transactions shall not affect the capital balance of a partner?
A. Share of a partner in the partnership’s net loss.
B. Receipt of bonus by a partner from another partner based on the agreement.
C. Advances made by the partnership to a partner.
D. Additional investment by a partner to the partnership.
2. In the absence of agreement as to distribution of profit, how shall the partnership profit be distributed to the
partners?
A. The industrial partner shall receive s share equivalent to the least share of a capitalist partner while the
capitalist partners shall share based on capital contribution ratio.
B. The industrial partner shall receive a just and equitable share and the remainder shall be distributed to the
capitalist partners on the basis of capital contribution ratio.
C. The profit shall be distributed on the basis of loss contribution ratio which may have been agreed upon by
the partners.
D. The profit shall be distributed equally to all partners including the industrial partner.
3. In the absence of agreement as to distribution of loss, how shall the partnership loss be distributed to the
partners?
A. The loss shall be distributed equally to all partners including the industrial partner.
B. The industrial partner shall be exempted from the partnership loss while the capitalist partners shall share
equally.
C. The industrial partner shall be exempted from partnership loss while the capitalist partners shall be
distributed on the basis on capital contribution ratio.
D. The industrial partner shall be exempted from partnership loss because it shall be distributed to the
capitalist partners only in accordance with profit agreement ratio.
4. Which of the following will decrease the capital balance of a partner?
A. Share in partnership profit.
B. Receipt of share in revaluation surplus from a partnership property, plant and equipment.
C. Drawing made by a partner.
D. Advances made by a partner to the partnership.
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Part II: Problem Solving
Use the following information for the next two (2) questions:
On January 1, 20x20, A, B and C formed ABC Partnership with total agreed capitalization of P1,000,000. The
capital interest ratio of the ABC Partnership is 5:1:4 while the profit or loss ratio is 3:2:5, respectively for A, B and
C.
During 20x20, A and B made additional investments of P200,000 and P500,000, respectively. At the end of 20x20,
B and C made drawings of P300,000 and P100,000, respectively. On December 31, 20x20, the capital balance of B
is reported at P200,000.
1. What is the net income or net loss of ABC Partnership for the year ended December 31, 20x20?
A. P500,000 loss B. P1,000,000 loss C. P800,000 income D. P1,200,000 income
2. What is the capital balance of C on December 31, 20x20?
A. P150,000 B. P50,000 C. P200,000 D. P250,000
A B C TAC
Beginning 500,000 100,000 400,000 1,000,000 C apital ratio
Investment 200,000 500,000
Drawings (300,000) (100,000)
Net loss (100,000) (250,000) PL ratio
Ending 200,000 50,000
(100,000 / 20%) (500,000)
Use the following information for the next three (3) questions:
On January 1, 20x20, A, B and C formed ABC Partnership with original capital contribution of P300,000, P500,000
and P200,000. A is appointed as managing partner.
During 20x20, A, B and C made additional investments of P500,000, P200,000 and P300,000, respectively. At the
end of 20x20, A, B and C made drawings of P200,000, P100,000 and P400,000, respectively. At the end of 20x20,
the capital balance of C is reported at P320,000. The profit or loss agreement of the partners is as follows:
• 10% interest on original capital contribution of the partners.
• Quarterly sales of P40,000 and P10,000 for A and B respectively.
• Bonus to A equivalent to 20% of Net income after interest and salary to all partners.
• Remainder is to be distributed equally among the partners.
3. What is the partnership profit for the year ended December 31, 20x20?
A. P900,000 B. P1,020,000 C. P1,050,000 D. P960,000
4. What is A’s share in partnership profit for 20x20?
A. P190,000 B. P340,000 C. P540,000 D. P200,000
5. What is B’s share in partnership profit for 20x20?
A. P200,000 B. P290,000 C. P50,000 D. P90,000
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Question 3
What is the partnership profit for the year ended December 31, 2020?
Schedule A B C C
Interest 30,000 50,000 20,000 100,000
Salaries 160,000 40,000 - 200,000
Bonus 150,000 - - 150,000
PL 200,000 200,000 200,000 600,000
Adjusted Bal. 540,000 290,000 220,000 1,050,000
Bonus Computation
B= 20% (1,050,000 - 300,000)
B= 20% (750,000)
B= 150,000
Answer: C
1,050,000
Question 4
What is A's share in partnership profit for 2020?
Schedule A B C Total
Interest 30,000 50,000 20,000 100,000
Salaries 160,000 40,000 - 200,000
Bonus 150,000 - - 150,000
PL 200,000 200,000 200,000 600,000
Adjusted Bal. 540,000 290,000 220,000 1,050,000
Answer: C
540,000
Question 5
What is B's share in partnership profit for 2020?
Schedule A B C Total
Interest 30,000 50,000 20,000 100,000
Salaries 160,000 40,000 - 200,000
Bonus 150,000 - - 150,000
PL 200,000 200,000 200,000 600,000
Adjusted Bal. 540,000 290,000 220,000 1,050,000
Answer: B
290,000
6. On January 1, 20x20, K and S formed KS Partnership and the articles of co-partnership provides that profit or
loss shall be distributed accordingly:
• 10% interest on average capital balance.
• P50,000 and P100,000 quarterly salary for K and S, respectively.
• The remainder shall be distributed in the ratio of 3:2 for K and S, respectively.
The following transactions regarding the capital balance of the partners for year 20x20 are provided:
K, Capital S, Capital
January 1, 20x20 investment P1,000,000 P500,000
March 31, 20x20 investment 100,000
July 1, 20x20 withdrawal (200,000)
September 30, 20x20 withdrawal (200,000)
October 1, 20x20 investment 700,000
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The chief account of the partnership reported net income of P1,000,000 for year 20x20.
What is the capital balance of K on December 31, 20x20?
A. P1,951,500 B. P1,451,500 C. P2,151,500 D. P1,251,500
K, Capital Amount Months Total
44,197 1,000,000 12 12,000,000
44,378 (200,000) 6 (1,200,000)
44,470 700,000 3 2,100,000
Total 1,075,000
S, Capital Amount Months Total
44,197 500,000 12 6,000,000
44,287 100,000 9 900,000
44,470 (200,000) 3 (600,000)
Total 525,000
Schedule K S Total
Interest 107,500 52,500 160,000
Salaries 200,000 400,000 600,000
Bonus - - -
PL 144,000 96,000 240,000
Total 451,500 548,500 1,000,000
K, Capital Amount
Unadjusted Bal. 1,500,000
Add: 451,500
Total Cash Payment 1,951,500
Answer: A
1,951,500
7. On July 1, 20x20, D and J formed DJ Partnership with initial investment of P1,000,000 and P2,000,000,
respectively. D is appointed as the managing partner.
The articles of co-partnership provide that profit or loss shall be distributed accordingly:
• 30% interest on original capital contribution ratio.
• Monthly salary of P20,000 and P10,000 respectively for D and J.
• D shall be entitled to bonus equivalent to 20% of net income after interest, salary and bonus.
• The remainder shall be distributed in ratio of 3:2 for D and J respectively.
For the year ended December 31, 20x20, the partnership reported net income of P750,000.
What is the share in net income of D for the year ended December 31, 20x20?
A. P400,000 B. P250,000 C. P350,000 D. P500,000
Schedule D J Total
Interest 150,000 300,000 450,000
Salaries 120,000 60,000 180,000
Bonus 20,000 - 20,000
PL 60,000 40,000 100,000
Adjusted Bal. 350,000 400,000 750,000
Answer: C
350,000
8. Using the same data, what is the share in net income of J assuming the bonus is equivalent to 20% of net
income after interest and salary but before bonus for the year ended December 31, 20x20?
A. P351,600 B. P398,400 C. P350,000 D. P500,000
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Schedule D J Total
Interest 150,000 300,000 450,000
Salaries 120,000 60,000 180,000
Bonus 24,000 - 24,000
PL 57,600 38,400 96,000
Adjusted Bal. 351,600 398,400 750,000
Answer: B
398,400
9. Partners Samson and Delilah have profit and loss agreement with the following provisions: salaries of P90,000
and P135,000 for Samson and Delilah, respectively: a bonus to Samson of 10% of net income after salaries;
and interest of 10% on average capital balances of P60,000 and P105,000 for Samson and Delilah,
respectively. One-third of any remaining profits will be allocated to Samson and the balance to Delilah.
If the partnership had net income of P66,000, how much should be allocated to Partner Samson, assuming
that the provisions of the profit and loss agreement are ranked by order of priority starting with 1) salaries, 2)
interest, 3) bonus and up to the extent of the ranking only?
A. P39,600 B. P37,500 C. P36,000 D. P26,400
Samson Amount
Net Income 66,000
Salary Ratio 0
Total Cash Payment 26,400 due to priority ranking for salaries
Answer: D
26,400
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