GUIDE QUESTIONS FOR CHAPTER 2 – Partnership Operations and Financial

Reporting

Differentiate a partner’s equity in assets from share in profits or losses.

Discuss some of the factors to consider in arriving at a plan for dividing profits or losses.

What are some of the performance criteria used to allocate profits to partners?

What are the rules for the distribution of profits or losses?

If there is no partnership agreement as to the division of profits and losses, what will be the basis for the
distribution of profits or losses?
If there is an agreement as to the distribution of profits only, how will losses be divided?

Does an industrial partner share in losses?

What are the common arrangements in distributing profits or losses?

Page 57

How do original, beginning, ending and average capitals differ? Why is the use of average capital as a
basis of distributing profits or losses preferable than the other capital concepts?

Page 60

Why is interest allowed on partner’s capital? Is it allowed even if the operations resulted to a loss?

-Interest on Capital is allowed to compensate a partner for contributing capital to the firm in excess of

the profit-sharing ratio. Interest on capital are provided in full even if the partnership suffered net loss
or the profit is not sufficient to cover such.

-Page 62 italic
Differentiate the accounting treatment of interest on partners’ capital from interest on loans from
partners?

-Page 61

Why do profit agreements provide for salary allowances? Are salary allowances expenses of the
partnership?

-Page 63

- These are not expenses of the business. It is only a mere technique to share partnership profits and
losses.

If a bonus is allowed to a partner, what are the common bases for its computation?

-Net profit

-Agreed percentage of the bonus

If a partner is allowed to make specified periodic drawings, are these drawings treated as profit
distribution? Explain.

Page 60

What are the differences in the financial statements of a partnership and a sole proprietorship?

ole Proprietorship Partnership

Only one Capital Account More than one capital account. The number of capital
 account depends on the number of partners in the
Partnership concern.

Profit & loss is distributed to the partners’ capital account

All the profit belongs to the owner
according to the agreed ratio.

The income statement of the Partnership shows a

None schedule on how the net profit/loss is distributed to the
partners.

Balance Sheet show only one capital account The balance sheet shows the balance of the capital
which belongs to the single owner. amount of each partner classified under owner’s equity.

Besides the income statement and the balance sheet, a

Statement of Partner’s Equity is also prepared to show
None.
the CHANGES in equity of each partner since the
beginning of the year.

What is the objective in the preparation of the statement of changes in partners’ equity?

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What are the differences in the use of partner’s capital and current account in other jurisdictions when
compared to our local practice?

Partner’s Capital

• The capital accounts of each partner will be credited with the partner’s
original and additional capital contributions, and debited with any
payment withdrawals.

• The balances of the partner’s account will not change frequently.

 • Capital accounts prepared in this manner are referred to as fixed capital
accounts.

Current Accounts

• The current accounts will be credited for salaries and interest on capital
( in this case, with a debit to profit and loss appropriation account).

• It will debited for interest on drawings. At the end of the year, it will be
debited with the drawings account balance.

What is the treatment of interest on drawings in other jurisdictions?

Drawing Accounts

• A drawing account is maintained for each partner.

• This will debited for any cash drawings during the year.

• The balance of this account is transferred to the partner’s current account at the end of the
year.

Interest on Drawings

• Some partnership agreements will provide the partners will be charged interest on any
drawings made during the year.

• This is to defer partners from drawing cash from the business.

• The interest on drawings is added to the profit for the year.

• It is debited to the individual partner’s current accounts and credited to the profit and loss
appropriation account.