PARTNERSHIP OPERATION

Allocation of Partnership Income (Loss)

The partners should have a written agreement, called articles of co-partnership, specifying the
manner in which partnership income (loss) is to be distributed. Note that in the absence of a
predetermined agreement, the profit and loss (P&L) is divided according to original capital
contributed by partners.

A number of issues arise which complicate the allocation of partnership income (loss).
1. Partners may receive interest on their capital balances. If so, it must be determined what
constitute the capital balance (e.g., the year-end amount of some type of weighted-
average).
2. Some of the partners may receive a salary.
3. Some of the partners may receive a bonus on distributable net income. If so, you need to
determine if the bonus should be computed before or after salary, interest and bonus
allocations.
4. A formula needs to be determined for allocating the remaining income. The formula agreed
upon is usually termed the residual, remainder, or profit (loss) sharing ratio.

Finally, the partners should decide upon how income is to be allocated if net income is
insufficient to cover partner’s salaries, bonuses, and interest allocations. These allocations are
usually made even if the effect is to create a negative remainder. This is important to note that
partners may choose the allocate losses (or a negative remainder) in a different manner than
income.

Example 1:

The following are the capital balances and net income of ABC Partnership:

A, Capital – 300,000
B, Capital – 200,000
C, Capital – 100,000
Net Income – 150,000

Give the entry for the division of profit under each of the independent assumptions:
(example 1 answers will be given during discussion)

1. Profit is divided equally.

2. Profit is divided in the ratio 3:4:5 for A, B and C respectively.
3. Profit is divided in the following percentages: A – 50%; B – 30%; C – 20%
4. Profit is divided in the following fractions: A – 1/2; B – 1/3; C – 1/6
5. Interest of 10% on the capital and the balance in the ratio of 3:1:1 for A, B and C
respectively.
6. Salaries of 45,000 to A and 30,000 to B and the balance equally.
7. 20% bonus on income to C and the balance in the ratio of 4:3:3 for A, B and C
respectively.
8. Interest of 30% on capital and the balance equally.
9. Interest of 10% on capital, salaries of 30,000 each to A and B, 20% bonus to C on income
after interest and salaries, and the balance in the ratio of 3:1:1 for A, B and C respectively.
10. Interest of 10% on capital to A, salaries of 30,000 each to A and B, 20% bonus to C on
income after interest and salaries, and the balance in the ratio of capital balances.
11. 20% bonus after bonus to A, allowances of 80,000 each for A and B, and the balance
equally.
12.
Example 2:

JR and his very close friend AJ formed a partnership on January 1, 2008 with JR contributing
equipment with a book value of P6,400 and a fair value P4,800 and inventory items with a book
value of P2,400 and fair value of P3,200. During 2008, JR made additional investment of P1,600 on
April 1 and P1,600 on June 1 and on September 1 he withdraw P4,000. AJ had no Additional
investment nor withdrawals during year. The Average capital balance at the end of 2008 for JR is:

Date Balance Unchanged Months

January 1 P16,000 3 P 48,000
April 1 17,600 2 35,200
June 1 19,200 3 57,600
September 1 15,200 4 __60,800
12 P201,600

Average Capital(P201,600/12) = P16,800

Example 3:

Sam, a partner in the ST Partnership, is entitled to 40% of the profits and losses. During 2008, Sam
contributed land with a fair value of P60,000. Also during 2008, Sam had drawings of P80,000. The
balance of Sam's capital account was P120,000 at the beginning of 2008 and P150,000 at the end of
the year.

Sam capital, beginning P120,000

Additional investment (Land) 60,000
Drawings ( 80,000 )
Capital balance before net profit (loss) 100,000
Capital balance, end 150,000
Profit share (40%) 50,000
Net profit (P50,000 ÷ 40%) P125,000