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Partnership Operations: Accounting Cycle of A Partnership
Partnership Operations: Accounting Cycle of A Partnership
c. Statement of Changes in Partners’ Equity – a statement that reports the changes that have
taken place in partners’ equity during the period. Each partner is provided a column heading
which explains details of the changes in their equity account.
III. Closing entries – drawing accounts are not automatically closed to the capital accounts; drawing accounts
are closed to the capital accounts only if agreed upon in the articles of co-partnership.
Closing the books at the end of the accounting period:
1. Merchandise Inventory xx
Income Summary xx
To set up ending inventory
3. Income Summary xx
All Nominal Accounts with Debit Balances xx
To close all nominal accounts with debit balances to income summary.
NET Income
4. Income Summary xx
Partners’ Drawing xx
To distribute profits to partners
NET Loss
4. Partners’ Drawing xx
Income Summary xx
To distribute losses to partners
CAPITAL DRAWING
Decrease Increase Increase Decrease
Permanent Initial investment Temporary Share in Net Income
withdrawal0 withdrawal
Sale of equity Additional Share in Net Loss
Investment
Payment of
partnership liability
from personal funds
Debit balance in Credit balance in
drawing drawing
1. As to Capitalist Partner
a. Division of Profit
1. In accordance with agreement.
2. In the absence of an agreement, division of profits is in accordance with capital
contributions.
b. Division of Loss
1. In accordance with agreement.
2. If only the division of profits is agreed upon, then the division of losses will be the same as
the agreement on division of profits.
3. In the absence of an agreement, division of losses is in accordance with capital contribution.
2. As to Industrial Partner
a. Division of Profit
1. In accordance with agreement.
2. In the absence of an agreement, the industrial partner shall receive a just and equitable
share of the profits.
b. Division of Loss
1. In accordance with agreement.
2. In the absence of an agreement, the industrial partner shall have no share in the losses.
1. Equally
2. Arbitrary Ratio
a. Fractions
b. Percentages
c. Ratio and Proportion
3. Capital Ratio
a. Original/Initial investment
b. Beginning capital balance
c. Ending capital balance
d. Average capital – most equitable method
4. Allowing Salaries, Interest and Bonus – considered as part of the distribution of net income
a. Salaries – to give recognition to the ability, experience or time devoted by a partner to the
business.
b. Interest - to give recognition to differences in the capital contribution given in proportion to the
period such capital was actually used.
c. Bonus – incentive/special compensation given to a partner for superior income realized. It is
usually based on net income.
General Guidelines
1. Partner salary allowances, interest allowances on capital account balances and bonus are not expenses
in the determination of partnership net income.
2. The provision on salaries and interest must be enforced regardless of whether operating results is a
profit or loss.
3. The provision on bonus is enforced only when operating results is a profit.
4. If the partnership agreement specifies that income is to be divided based on partners’ capital balances
but fails to specify how capital balances are to be computed, the average capital balances should be
used if it can be computed. If not, the original capital balances should be used.
Partner, Capital
Debit Credit
Permanent Withdrawals Initial Investment
Additional Investments
Partner, Drawing
Debit Credit
Net Loss Net Income
Temporary Withdrawals
Pro-forma Entries
2. arbitrary ratio
a. percentage 40%:60%
b. fraction 2/5:3/5
3. Capital RATIO
Average Capital:
John P465,000 150,000 x 465000/927,500= P 75,202.16
Martha 462,500 150,000x 462,500/927,500 = P 74,797.84
P927,500
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7. Allowing interest on partners’ capital balances, salaries and bonus, balance equally.
Distribution of Profits
John Martha Total
10% interest on ending capital
John- 500,000 x5% P25,000
Martha- 600,000 x 5% P30,000 P55,000
Salary allowance 30,000 40,000 70,000
10% Bonus to John 15,000 15,000
Balance equally 5,000 5,000 10,000
Share in Net Income P75,000 P75,000 P150,000
Distribution of Profits
John Martha Total
10% interest on ending capital
John- 500,000 x10% P50,000
Martha- 600,000 x 10% P60,000 P110,000
Salary allowance 50,000 60,000 110,000
20% Bonus to John 30,000 30,000
Excess equally (50,000) (50,000) (100,000)
Share in Net Income P80,000 P70,000 P150,000
9. Allowing interest on partners’ capital balances, salaries and bonus, balance 4:6
NMA Company
Income Statement
For the Year Ended, December 31, 2015
Note
Net Sales 1 P627,635
Cost of Sales 2 (456,225)
Gross Profit P171,410
Other Income 3 1,771
Total Income P173,181
Operating expenses
Administrative expense 4 P90,890
Distribution costs 5 19,615
Finance cost 7 5,100 (114.625)
NET INCOME P57,576
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Schedule of Distribution of Profits
Marlon Miranda Total
10% interest on beginning capital
Marlon- 120,000 x10% P12,000
Miranda- 100,000 x 10% P10,000 P22,000
Balance equally 17,788 17,788 35,576
Share in Net Income P29,788 P27,788 P57,576
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Purchases P 366,200
Total P 1,771
Note 4 Administrative Expenses
Salaries & Wages P 54,200
Rent Expense 30,000
Depreciation Expense-Office Equipment 3,830
Doubtful Accounts Expense 2,340
Office Supplies used 520
Total P 90,890
NMA Company
Statement of Changes in Partners’ Equity
For the Year Ended, December 31, 2015
1. Assume ABC Partnership earned a net income of P120,000 for the year. Three partners Ana, Bea and
Carmi will share in the net income. Their capital accounts are as follows:
Ana, Capital
9/1 30,000 1/1 50,000
6/1 10,000
Bea, Capital
3/1 20,000 1/1 70,000
Carmi, Capital
1/1 30,000
4/1 10,000
Prepare the entry to distribute net income among the three partners assuming:
a. Net income is divided equally.
b. Net income is divided as follows: Ana – ½; Bea – ¼; Carmi – ¼.
c. Net income is divided as follows: Ana – 50%; Bea – 30%; Carmi – 20%.
d. Net income is divided as follows: 3:2:1
e. Net income is divided based on original/initial capital contribution which were as follows: Ana
– P20,000; Bea – P30,000; Carmi – P10,000.
f. Net income is divided based on beginning capital balances.
g. Net income is divided based on ending capital balances.
h. Net income is divided based on average capital.
2. Assume the same given information in No. 1. Prepare the entry to divide net income if net income is
to be divided as follows:
a. Interest of 10% on beginning capital balances.
b. Annual salaries of P5,000 to Ana and P4,000 to Bea.
c. Bonus to Carmi amounting to P16,000.
d. Remainder to be divided – 50:30:20.
3. Using the same given information in No. 2, prepare the entry to divide net income if net income is
P35,000 only.
4. Using the same given information in No. 2, prepare the entry to close income summary if the
partnership incurred a net loss of P60,000 for the year.
2016