Partnership Operations and Financial Reporting

ACCOUNTING FOR PARTNERSHIPS
CHAPTER 2
The basis on which profits or losses are shared is a
matter of agreement amount the partners and may not
necessarily be the same as their capital contribution
ratio. The equity of a partner in the net assets of the
partnership should be distinguished from a partner’s
share in profit or losses
1. Partners having considerable financial resources,
hence, strong credit standing.
2. A partner who is well known in a profession or an
industry may contribute immensely to the success of
the partnership although he may not participate
actively in the operations of the partnership
Based on the legal provisions of the Civil Code of the
Philippines, the following are the rules for the
distribution of profits or losses
1. PROFITS
a. The profits will be divided according to partners’
agreement
b. If there is no agreement:
 As to capitalist partners, the profits shall be divided according to
their capital contributions (according to the ratio of original
capital investments or in its absence, the ratio of capital
balances at the beginning of the year)
 As to industrial partners (if any), such share as may be just and
equitable under the circumstances, provided, that the industrial
partner shall receive such share before the capitalist partners
shall divide the profits
2. LOSSES
a. The losses will be divided according to partners’ agreement
b. If there is no agreement as to distribution of losses but
there is an agreement as to profits, the losses shall be
distributed according to the profit sharing ration
c. In the absence of any agreement:
 As to capitalist partners, the losses shall be divided according
to their capital contributions ( according to the ratio of original
capital investments or in its absence, the ratio of capital
balances at the beginning of the year)
 As to purely industrial partners (if there’s any), shall not be
liable for any losses
Per International Accounting Standards(IAS) No. 8,
Accounting Policies, Changes in Accounting Estimates
and Errors, prior period errors are omissions from and
other misstatements for one or more prior periods that
are discovered in the current period. Errors may occur
as a result of mathematical mistakes in applying
accounting policies, misinterpretation of facts, fraud or
oversights. Examples included errors in the estimation
of depreciation, errors in inventory valuation and
omission of accruals of revenue and expenses
The following series of illustrations are based on the figures
obtained from the Medina and Matero Partnership which had a
profit of P300,000 for the year ended December 31, 2015, the
first year of operations. The partnership contract provided that
each partner may withdraw P5,000 on the last day of each month;
both partners did so during the year. The drawings are recorded
by debits to the partner’s drawing accounts and shall not be
considered in division of profits or loss. It is the intention of the
partners that each partner’s share in the profit or loss be either
credited or debited to the drawing account. Leopoldo Medina
invested P400,000 on January 1, 2015 and an additional
P100,000 on April 1. Challoner Matero invested P800,000 on
January 1 and withdrew P50,000 on July 1. These transactions
and events are summarized in the following capital, drawing and
income summary ledger accounts:
L. Medina, Capital C. Matero Capital
400,000.00 1/1 7/1 50,000.00 800,000.00 1/1
100,000.00 4/1
L. Medina, Drawing C. Matero, Drawing

Jan-Dec.
12/31 60,000.00 Jan-Dec.
7/1 60,000.00
Income Summary
300,000.00 12/31
400,000.00 1/1 7/1 50,000.00 800,000.00 1/1
100,000.00 4/1 90,000.00 12/31
90,000.00 12/31 50,000.00 890,000.00
590,000.00 840,000.00

12/31 60,000.00 150,000.00 12/31 7/1 60,000.00 150,000.00 12/31
12/31 90,000.00 12/31 90,000.00
150,000.00 150,000.00 150,000.00 150,000.00
Income Summary
12/31 300,000.00 300,000.00 12/31
Assume instead that Medina and Matero share profits
and losses in a ratio of 60:40 and profit was P300,000,
the profit would be divided as follows:
Journal Entry:
Income Summary P 300,000.00
L. Medina, Drawings P 180,000.00
C. Matero, Drawings 120,000.00

L. Medina, Capital P 120,000.00
C. Matero, Capital 60,000.00
400,000.00 1/1 7/1 50,000.00 800,000.00 1/1
100,000.00 4/1 60,000.00 12/31
120,000.00 12/31 50,000.00 860,000.00
620,000.00 810,000.00

12/31 60,000.00 180,000.00 12/31 7/1 60,000.00 120,000.00 12/31
12/31 120,000.00 12/31 60,000.00
180,000.00 180,000.00 120,000.00 120,000.00
Income Summary
12/31 300,000.00 300,000.00 12/31
160,000.00 400,000.00 1/1 7/1 50,000.00 800,000.00 1/1
100,000.00 4/1 160,000.00
160,000.00 500,000.00 210,000.00 800,000.00
340,000.00 590,000.00

Jan-Dec 60,000.00 Jan-Dec. 60,000.00 12/31
12/31 100,000.00 12/31 100,000.00
160,000.00 160,000.00 160,000.00 160,000.00
Income Summary
12/31 200,000.00 200,000.00 12/31
Assume that the partnership agreement provides for the
division of profits in the ratio of original investments.
The original investments of Medina and Matero are
P400,000 and P800,000, respectively. The profit of
P300,000 for 2015 is divided as follows
Journal Entry:
To record the division
of profits
Computation:
Medina: P300,000xP400,000/1,200,000 P 100,000.00
Matero: P300,000xP800,000/1,200,000 200,000.00
P 300,000.00
Assume that the partnership agreement provided for the
division of profits in the ratio of capital balances at the
beginning of the year. In this case, the original capital
investments are also the capital balances at the
beginning of the year since the partnership is only on its
first year of operations. The profit of P300,000 for 2015
is divided as follows
Journal Entry:
L. Medina, Drawing P 100,000.00
C. Matero, Drawing 200,000.00
To record the division
of profits
Computation:
Medina: P300,000xP400,000/1,200,000 P 100,000.00
Matero: P300,000xP800,000/1,200,000 200,000.00
P 300,000.00
Assume that the profit is divided in the ratio of capital
balances at the end of the year before drawings and the
distribution of profit. The ending balances are P500,000
for Medina and P750,000 for Matero; the profit of
P300,000 for 2015 is divided as follows
400,000.00 1/1 7/1 50,000.00 800,000.00 1/1
100,000.00 4/1
- 500,000.00 50,000.00 800,000.00
500,000.00 750,000.00

Jan-Dec 60,000.00 Jan-Dec. 60,000.00
60,000.00 60,000.00
Income Summary
300,000.00 12/31
Journal Entry:
To record division of profits
Computation:
Medina: P300,000xP500,000/1,250,000 P 120,000.00
Matero: P300,000xP750,000/1,250,000 180,000.00
P 300,000.00
Division of profits or losses on the basis of the three
preceding capital concepts-original capital investments;
capital balances at the beginning of the year; or capital
balances at the end of the year- may prove inequitable if
there are material changes in the capital accounts during
the year.
When beginning capital balances are used in allocating

profits, additional investments during the year are
discouraged because the partners making such
investments are not compensated in the division of
profits until the next year
If ending capital balances are used, year-end investments are
encouraged, but there is no incentive for a partner to make any
investments before year-end.
Using average balances as a basis for distributing profits or losses is

preferable because it reflects the capital actually available for use
by the partnership during the year
The agreement should also state the amount of drawings each

partner may make. These drawings are considered temporary and
are recorded as debits to the partner’s drawing account. Drawings
within the allowable amount will not affect the computation of the
average capital balance. On the contrary, drawings in excess of the
allowable amount are considered permanent reductions in capital;
hence, the computation of the average capital balance is affected
In the continuing illustration for the Medina and Matero
Partnership, the partners are entitled to withdraw
P5,000 monthly or a total of P60,000 per annum. Any
additional withdrawals are directly debited to the
partner’s capital accounts and therefore will affect the
computation of the average capital ratio
400,000.00 1/1 7/1 50,000.00 800,000.00 1/1
100,000.00 4/1
- 500,000.00 50,000.00 800,000.00
500,000.00 750,000.00

Jan-Dec 60,000.00 Jan-Dec. 60,000.00
60,000.00 60,000.00
Income Summary
300,000.00 12/31
Medina and Matero
Computation of the Average Capital Balances
For the Year Ended December 31, 2o15
Average Capital Balance of Medina P475,000
Average Capital Balance of Matero 775,000
-------------
Total Average Capital Balances P1,250,000
===========
Journal Entry:
Computation:
Medina: P300,000xP475,000/1,250,000 P 114,000.00
Matero: P300,000xP775,000/1,250,000 186,000.00
P 300,000.00
Distribution of profits or losses based on partners’
agreement
Ables and Galang divide partnership profits and
losses solely on the basis on their average capital
balances. Ables had P275,000 invested during all of
2015; Galang had P200,000 invested from January 1 to
August 31, and he invested another P75,000 on
September 1. If profit was P800,000 during 2015, how
much should each partner receive? Journalize the
division of profits
 Partnerships may choose to allocate a portion of the total
profits in the capital ratio and the balance equally or in
other agreed ratio after due consideration of the partners’
other contribution.
 If the partners agree to allow interest on capital as a first
step in the division of profit, they should specify the
interest rate to be used. It should also state whether
interest is to be computed on capital balances on specific
dates or on average capital balances during the year
 Considered as mere techniques to share partnership profits
or losses equitably and not as expenses of the partnership
Continuing the illustration of Medina and Matero
Partnership with profit of P300,000 for 2015 and capital
balances as already shown, assume that the partnership
agreement allowed 15% interest on average capital
account balances, with the balance to be divided equally.
Journal Entry:
In a related case, assume that the Medina and Matero
Partnership had a loss of P10,000 for the year ended
December 31, 2015.
If the partnership agreement provided for interest
on capital accounts, this provision must be honored
regardless of whether operations yielded profits or not
The loss will be shared by the partners in the same

manner as the P300,000 profit. The total interest
allowance of P187,500 would still be given to the
partners. The division of profits or losses after the
interest allowances would involve a larger negative
amount P197,500 which will be divided equally between
partners
Medina Matero Total
15% Interest on Average Capital
Medina: P475,000 x 15% P 71,250
Matero P775,000 x 15% P 116,250
Subtotal P 187,500
Balance to be divided equally
[(P10,000)-187,500 = P(197,500)]
Medina: P(197,500) x 50% (98,750)
Matero P(197,500) x 50% (98,750)
Subtotal (197,500)
Share of Partners in Profits(Losses) P (27,500) P 17,500 P (10,000)
Journal Entry:
 To acknowledge the harder working or more valuable
partner, the profit-sharing plan may provide for salary
allowances
 The partnership agreement should be clear on the
treatment of salary allowances when losses are incurred.
 In the absence of an agreement, salary allowances will be
provided even when operation yielded losses.
 Partners are the partnership’s owners- they are not
employees of the business. If partners devote their time
and services to the affairs of the partnership, they are
understood to do so for profit, not for salary
 When the partners calculate the profit of the partnership, salaries to
the partners are not deducted as expenses in the statement of
recognized income and expenses.
 Continuing the illustration for the Medina and Matero
Partnership, assume that the partnership agreement
provided for an annual salary of P100,000 to Medina
and P60,000 to Matero, and the balance to be divided
equally. The profit for 2015 is divided as follows:
Medina Matero Total
Salary Allowances P 100,000 P 60,000 P 160,000
[P300,000-160,000 = P140,000
Medina: P140,000 x 50% 70,000
Matero P140,000 x 50% 70,000
Subtotal 140,000
Share of Partners in Profits(Losses) P 170,000 P 130,000 P 300,000
Journal Entry:
 A partnership contract may provide for a special
compensation in the form of bonus to the managing
partner when the results of operations of the
partnership are favorable.
 Encourage the partner to maximize the profit
potentials of the partnership
 A mere technique to distribute profit
Assume that the Medina and Matero Partnership
agreement provided for a bonus of 25% profit before
bonus to Partner Medina and the balance to be divided
equally. The profit is P300,000
Medina Matero Total
Bonus (25% of P300,000) P 75,000 P P 75,000
[P300,000-75,000 = P225,000
Medina: P225,000 x 50% 112,500
Matero P225,000 x 50% 112,500
Subtotal 225,000
Journal Entry:
Assume instead that the Medina and Matero Partnership
agreement provided for a bonus of 25% of profit after
bonus to partner Medina and the balance to be divided
equally
BONUS = 25% (PROFIT-BONUS)

= 25%(p300,000-BONUS)
=p75,000-25%BONUS
BONUS + 25% BONUS= P75,000
BONUS = p75,000/125% = P60,000
Medina Matero Total
Bonus P 60,000 P P 60,000
[P300,000-60,000 = P240,000
Medina: P240,000 x 50% 120,000
Matero P240,000 x 50% 120,000
Subtotal 240,000
Journal Entry:
The service contribution and capital contribution of the partners
are often not equal. If the service contributions are not equal,
salary allowances can compensate for the differences. Or, when
capital contributions are not equal, interest, allowances can make
up for the unequal investments. When both service and capital
contribution are unequal, the allocation of profits or losses may
include salary allowances, interest on their capital balances,
bonus to the managing partner, and the balance in an agreed ratio
- MERELY MEANS OF ALLOCATING PROFITS TO
PARTNERS
Assume that the profit for the year is P400,000 and the
partnership agreement for the Medina and Matero
Partnership provided for the following:
1. Bonus to Medina of 25% profit after salaries and
interest but before bonus.
2. Annual salaries of P100,000 to Medina and P60,000
to Matero
3. Interest on average capital balances of P71,250 and
P116,250 to Medina and Matero, respectively
4. Balance to be divided in a ratio 40:60
Medina Matero Total
Interest on average capital balances 71,250 116,250 187,500
Bonus (25(400,000-160,000-187,500) 13,125 13,125
Balance to be divided 40:60
[P400,000-160,000-187,500 -
13,125= 39,375)
Medina: P39,375 x 40% 15,750
Matero P39,375 x 60% 23,625
Subtotal 39,375
Journal Entry:
Assume instead that the bonus to Medina is 25% of
profit after salaries, interest and after bonus
Medina Matero Total
Interest on average capital balances 71,250 116,250 187,500
Bonus (25(400,000-160,000-187,500-B) 10,500 10,500
Balance to be divided 40:60
[P400,000-160,000-187,500 -
10,500= 42,000)
Medina: P42,000 x 40% 16,800
Matero P42,000 x 60% 25,200
Subtotal 42,000
Journal Entry:
Let B = Bonus
B=25%(400,000-160,000-187,500-B)
B=25%(52,500-B)
B=13,125-.25B
B+.25B=13,125
1.25B=13,125
B=13,125/1.25
B=10,500
Financial Statements are a structured representation
with the objective of providing information about the
financial positions, financial performance and cash
flows of an entity that is useful to a wide range of users
in making economic decisions.
 Show the results of the management’s stewardship of
the resources entrusted to it
Fair Presentation and Compliance with International
Financial Reporting Standards (IFRS)
 requires the faithful representation of the effects
of transactions, other events and conditions in
accordance with definitions and recognition criteria
for assets, liabilities, income and expenses set out in
the IASB’s framework
 Going Concern
 Accrual Basis of Accounting
 Materiality and Aggregation
 Offsetting
 Frequency of Reporting and Comparative Information
 Consistency of Presentation
 Identification of the Financial Statements
An entity shall clearly identify each financial statement
and the notes.
 Name of the reporting entity
 Whether the financial statements are of the individual
entity or group of entities
 The date of the end of the reporting period or the
period covered by the set of financial statements or
notes;
 The presentation currency;
 And the level of rounding used in presenting amounts
in the financial statements
a. A statement of financial position as at the end of the
period;
b. A statement of comprehensive income for the period;
c. A statement of changes in equity for the period
d. A statement of cash flows for the period
e. Notes, comprising a summary of significant accounting
policies and other explanatory information; and
f. A statement of financial position as at the beginning of
the earliest comparative period when an entity applies an
accounting policy retrospectively or makes retrospective
restatement of items in its financial statements, or when
it reclassifies items in its financial statement
Resembles those of the sole proprietorship with the
exception of the presentation of the division of profits
or losses at the lower portion of the statement
Medina and Detoya
Partial Income Statement
For the Year Ended Dec. 31, 2016
Profit P 300,000.00
Division of Profit (equally)

Partner Medina P 150,000.00
Partner Detoya 150,000.00
Total P 300,000.00
a. Revenue
b. Finance cost
c. Share profit or loss of associates and joint ventures
accounted for using the equity method;
d. Tax expense;
e. A single amount comprising the total of:
I. The post-tax profit or loss of discontinued operations; and
II. The post-tax gain or loss recognized on the measurement
to fair value less costs to sell on the disposal of the assets or
disposal group(s) constituting the discontinued
operations;
f. Profit or Loss;
g. Each component of other comprehensive income
classified by nature ( excluding amounts in (h) below)
h. Share of the comprehensive income of associates and
joint ventures accounted for using the equity method;
and
I Total comprehensive income.
Medina and Detoya
Statement of Changes in Partner's Equity
For the Year Ended Dec. 31, 2016
Medina Detoya Total

Original Investments P 400,000 P 800,000 P 1,200,000
Add: Additional Investment 100,000 100,000
Total P 500,000 P 800,000 P 1,300,000
Less: Permanent Withdrawals 50,000 50,000
Balances P 500,000 P 750,000 P 1,250,000
Add: Profit 150,000 150,000 300,000
Total P 650,000 P 900,000 P 1,550,000
Less: Temporary Withdrawals 60,000 60,000 120,000
Partners' Equity, Dec. 31 P 590,000 P 840,000 P 1,430,000
Current and noncurrent assets and liabilities should be
separately classified on the face of the statement of
financial position.
 An entity shall classify an asset as current asset when it

satisfies any of the following criteria:
 It expects to realize the assets, intends to sell or consume it,
in its normal operating cycle; or
 It holds the assets primarily for the purpose of trading or
 It expects to realize the asset within 12 months after the end
of the reporting period; or
 the asset is cash or a cash equivalent as defined in IAS No. 7
 A liability should be classified as current liability when
it:
 Is expected to be settled in the normal operating cycle; or
 Is held primarily for the purpose of trading; or
 Is due to be settled within 12 months after the end of the
reporting period; or
 Does not have an unconditional right to defer settlement of
the liability for at least 12 months after the reporting period.
 Serves as a basis for evaluating the entity’s ability to
generate cash and cash equivalents and the needs to
utilize these cash flows
 Provides information about the cash receipts and cash
payments of an entity during a period.
 It is a formal statement that classifies cash
receipts(inflows) and cash payments (outflows) into
OPERATING ACTIVITIES
INVESTING ACTIVITIES
FINANCING ACTIVITIES
Cash effects of transactions and other events that enter
into the determination of profit or loss
 Major classes of operating cash flows
 Cash Inflows
 Receipts from sale of goods and performance of services
 Receipts from royalties, fees, commissions and other
revenues
 Cash Outflows
 Payments to suppliers of goods and services
 Payments to employees
 Payments for taxes
 Payments for interest expense
 Payments for other operating expenses
 Cash Inflows
 Receipts from sale of property and equipment
 Receipts from sale of investments in debt or equity securities
 Receipts from collections on notes receivable
 Cash Outflows
 Payments to acquire property and equipment
 Payments to acquire debt or equity securities
 Payments to make loans to others generally in the form of
notes receivableser
 Cash Inflows
 Receipts from investments by owners
 Receipts from issuance of notes payable
 Cash Outflows
 Payment to owners in the form of withdrawals
 Payments to settle notes payable
A&B Company
Statement of Cash Flows
For the Month Ended May 31, 2016
Cash Flows from Operating Activities

Cash received from clients P 604,000
Payments to suppliers (100,000)
payments to employees (138,000)
payments for office rent (80,000)
payments for insurance (140,000)
payments for utilities (30,000)
Net cash provided by (used in) operating activities P 116,000
Cash Flows from Investing Activities
Payments to acquire service vehicle P (4,200,000)
Payments to acquire office equipment (150,000)
Net cash provided by (used in) investing activities (4,350,000)
Cash Flows from Financing Activities
Cash received as investment by owners P 2,500,000
Cash received from borrowings 2,100,000
Payments for withdrawals by owners (140,000)
Net cash provided by (used in) financing activities 4,460,000
Net Increase(Decrease) in Cash and Cash Equivalents P 226,000
Cash and cash equivalents at the beginning of the period 125,000
Cash and cash equivalents at the end of the period P 351,000

Partnership Operations and Financial Reporting

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Partnership Operations and Financial Reporting

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ACCOUNTING FOR PARTNERSHIPS

L. Medina, Drawing C. Matero, Drawing

L. Medina, Drawing C. Matero, Drawing

L. Medina, Drawings P 120,000.00

L. Medina, Drawing C. Matero, Drawing

L. Medina, Drawing C. Matero, Drawing

L. Medina, Drawing C. Matero, Drawing

When beginning capital balances are used in allocating

Using average balances as a basis for distributing profits or losses is

The agreement should also state the amount of drawings each

L. Medina, Drawing C. Matero, Drawing

The loss will be shared by the partners in the same

BONUS = 25% (PROFIT-BONUS)

Division of Profit (equally)

Medina Detoya Total

 An entity shall classify an asset as current asset when it

Cash Flows from Operating Activities

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