Partnership

2 Operations
Considerations such as profit and loss sharing ratio,

provisions of salary, bonuses, allowances and interest to partners

and the distribution of net income of the partnership should be set up

by the partners in order for the operations to run smoothly. Rules and

regulations setup by the Civil Code of the Philippines with respect to

partnerships are present. These laws are laid out and followed.
LEARNING OUTCOMES:

After reading this module, the learner should be able to:

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 profits

TIME:

The time allotted for this module is ______________ hours.

LEARNER DESCRIPTION

The participants in this module are Third Year BSA Students

MODULE CONTENTS:

DIVISION OF PROFITS AND LOSSES

- It should be in accordance with their partnership agreement
- Additional rules according to Art. 1797 of the Civil Code
o If only the share of each partner in the profits has been agreed, the share
of the losses shall be the same in proportion
o In the absence of a stipulation, it shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the losses. As
for the profits, the industrial partner shall received such share as may be
just and equitable under the circumstances.
- The partnership agreement may also stipulate any of the following:
o Salaries
o Bonuses – the managing partner may be entitled to a bonus for excellent
management performance. Unlike for salaries, the partner is entitled to a
bonus only if the partnership earns profit
o Interest on capital contributions – the partnership agreement may stipulate
that capitalist partners are entitled to an annual interest on their capital
contributions.
o The items above are provided first before any of the remaining amount of
the profit or loss be shared among the partners based on their stipulated
profit or loss ratio.

JOURNAL ENTRIES
Journal entries – same as in sole proprietorship except for the following
transactions which are peculiar to a partnership:
a. Partners’ loans – partner lends money to partnership

Cash xxx
Accounts/Loans/ xxx
Notes Payable or Due
to Partner or Loan from
Partner

b. Partners’ borrowings from partnership – partnership lends money to

partners

Accounts/Loans/ xxx
Notes Receivable or Due
from Partner or Loan to
Partner
Cash xxx

FINANCIAL STATEMENTS
Financial statements – the same as in sole proprietorship except:
a. Statement of Financial Position– the owner’s equity section is labeled Partners’
Equity
b. Income Statement – an additional section called Division of Profit and Loss is
included. This profit distribution provides a full analysis of the distribution of
earnings which is presented at the bottom of the partnership income statement.

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.

RULES IN DIVIDING PROFIT OR LOSS

As to Capitalist Partner
1. Division of Profit
a. In accordance with agreement.
b. In the absence of an agreement, division of profits is in accordance
with capital contributions.
 2. Division of Loss
a. In accordance with agreement.
b. 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.
c. In the absence of an agreement, division of losses is in accordance
with capital contribution.

As to Industrial Partner
1. Division of Profit
a. In accordance with agreement.
b. In the absence of an agreement, the industrial partner shall
receive a just and equitable share of the profits.

2. Division of Loss
a. In accordance with agreement.
b. In the absence of an agreement, the industrial partner shall have no
share in the losses.\

Net income is viewed as a return for

1. services rendered (salaries)
2. capital investment (interest)
3. entrepreneurial ability or managerial skills (bonus)

RULES IN DIVIDING NET INCOME

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.
THINGS TO REMEMBER
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.

ONLINE READING MATERIALS:

• Read the complete details on the Title IX: Partnership, the general provisions and
obligations of the partner at
https://www.officialgazette.gov.ph/1949/06/18/republic-act-no-386/
• Read Chapter 2 and of Advanced Accounting for Special Transactions by Zeus
Vernon Millan

ONLINE VIDEO LINKS AND MATERIALS:

• Watch the online video lecture of the course instructor uploaded at NEO LMS
and to the class shared Google drive (if applicable).
• For supplemental lessons, watch the online video of Filipino Accounting Tutorial
at https://www.youtube.com/watch?v=8FZpNqfMrsw

TEST YOUR KNOWLEDGE:

Refer to Ubian LMS for the activities and quiz

LESSON REFERENCES:
Dayag, Antonio J.(2020), Advanced Financial Accounting (A Comprehensive: Conceptual
& Procedural Approach) Good Dreams Publishing. Sampaloc, Manila

Filipino Accounting Tutorial (2019, July 7) Partnership Operations: Division of Profits and
Losses. Retrieved from: https://www.youtube.com/watch?v=8FZpNqfMrsw
Millan, Zeus Vernon B. (2020). Accounting for Special Transactions. CHAPTER 8:
Separate Financial Statements. Bandolin Enterprise. #21 Paramount Vill., Sto.
Tomas, Baguio City
Republic Act. No. 386 An Act to Ordain and Institute the Civil Code of the Philippines.
Title IX Partnership.
Retrieved from https://www.officialgazette.gov.ph/1949/06/18/republic-act-no-
386/