PARTNERSHIP OPERATIONS

DIVISION OF PROFITS AND LOSSES

• Because the primary objective of forming a partnership is to divide the profits or losses among the partners, the
resulting profit or loss is closed to the partner’s equity accounts.

• Partnership profit or loss may be divided base on factors that they consider to be equitable and fair. These factors include:
a.) Time spent by each partner in overseeing or managing the activities of the partnership
b.) Capital contribution of each of the partners
c.) The managerial or technological skills of one or some of the partners
d.) The level of a partner’s influence in the environment the partnership is operating

• Partners may agree on dividing profit and losses under the following:
ü Equally
ü In arbitrary ratio ( percentage, fraction, decimal)
ü In the ratio of the partner’s capital balances ( beginning capital, ending capital, average capital)
ü Allowance for interest on capital balances and remainder of profit in agreed ratio.
ü Allowance for salary and or bonus and remainder of profit in an agreed ratio
ü Allowance for interest on capital balances, salary and or bonus, and any remainder of profit in an agreed ratio
As a general rule, partnership profits or losses are divided in accordance with the partner’s agreement, however, if there is no
agreement regarding the division of profits and losses, partnership’s profit and losses shall be divided in accordance
with the capital contribution.

à if there is an INDUSTRIAL PARTNER

a.) Does not share in the partnership losses
b.) A just and equitable share is given if the partnership resulted to profits.
c.) If the industrial partner has also a capital contribution, he/she also receives a share in profits in proportion to his
capital contribution.

The entry to record the distribution of profit or loss to the partners:

Profit Loss
Income Summary xx A,Drawing xx
A, Drawing xx B, Drawing xx
B, Drawing xx Income Summary xx

• When partnership profit is not sufficient to provide the interest and/ or salary allowances, or when a partnership incurs a loss,
INTEREST and SALARY allowances are still provided in full and any remainder is taken as a negative amount.

• Bonus is only given if the partnership resulted to a profit.

 ILLUSTRATIVE PROBLEM
After a year of operating as a partnership, the capital and drawing accounts of Jhim and Ces show the following postings
in their respective ledger for the year ended December 31,2019:
Jhim,Capital Ces, Capital
1/15 P 600,000 1/15 P 600,000
6/1 100,000 8/23 50,000

Jhim, Drawing Ces, Drawing

4/10 P 50,000 7/16 P 80,000

The partnership resulted to a profit of P 275,000 during the year.

Under the different profits and losses sharing agreement, prepare the entries to close the income summary account and
determine the capital balances of each partners after distribution of profits and losses.
a. Jhim and Ces share profits and losses equally .
b. Jhim has 25% share while Ces has 75% share in profits and losses.
c. Jhim and Ces share profits and losses in the ratio 2:3, respectively.
d. Jhim and Ces share profits and losses in accordance with the capital balances at the formation of the partnership. Capital
balances of the partners at the time of formation are both P 600,000.
e. Jhim and Ces share profits and losses in accordance with the capital balances at the beginning of the accounting period.
f. Jhim and Ces share profits and losses in accordance with the ending equity balances before division of current year’s
profits and losses.
g. Jhim and Ces share profits and losses according to their average capital balances, considering additional investments and
withdrawals during the period.
h. An allowance of 12% interest is provided on average capital balances and any remainder is divided to Jhim and Ces in the
ratio of 1:2.
i. An allowance of 12% interest is provided on beginning capital balances, bonus of 20% on profit after deducting interest
allowance is provided to Ces, any remainder is divided equally.
j. Annual salaries of P 60,000 and P 100,000 to Jhim and Ces, respectively, balance in the ratio of 1:2.
k. An allowance of 10% interest on partner’s beginning capital balances, monthly salary allowances of P 5,000 and 10,000,
respectively and any remainder is divided equally.
The entries and capital balances of Jhim and Ces under different profits and losses agreement are as follows:
a. Jhim and Ces share profits and losses equally
After distribution of profits and losses and
Income Summary 275,000 closing of drawing accounts to the partner’s
Jhim, Drawing 137,500 capital accounts:
Jhim , Capital – 787,500
Ces, Drawing 137,500 Ces, Capital – 707,500

b. Jhim has 25% share while Ces has 75% share in profits and losses.
Income Summary 275,000
After distribution of profits and losses and
Jhim, Drawing 68,750 closing of drawing accounts to the partner’s
Ces, Drawing 206,250 capital accounts:
Jhim , Capital – 718,750
Ces, Capital – 776,250
c. Jhim and Ces share profits and losses in the ratio 2:3, respectively.
Income Summary 275,000
After distribution of profits and losses and
Jhim, Drawing* 110,000 closing of drawing accounts to the partner’s
Ces, Drawing** 165,000 capital accounts:
Jhim , Capital – 760,000
*(275,000 x 2/5) Ces, Capital – 735,000
** (275,000 x 3/5)

d. Jhim and Ces share profits and losses in accordance with the capital balances at the formation of the
partnership. Capital balances of the partners at the time of formation are both P 600,000.
Income Summary 275,000
After distribution of profits and losses and
Jhim, Drawing* 137,500
closing of drawing accounts to the partner’s
Ces, Drawing** 137,500 capital accounts:
*(275,000 x 600,000/1,200,000) Jhim , Capital – 787,500
Ces, Capital – 707,500
** (275,000 x 600,000/1,200,000)
e. Jhim and Ces share profits and losses in accordance with the capital balances at the beginning of the
accounting period.
Income Summary 275,000 After distribution of profits and losses and
Jhim, Drawing* 137,500 closing of drawing accounts to the partner’s
capital accounts:
Ces, Drawing** 137,500 Jhim , Capital – 787,500
*(275,000 x 650,000/1,220,000) Ces, Capital – 707,500
** (275,000 x 570,000/1,220,000)

f. Jhim and Ces share profits and losses in accordance with the ending equity balances before division of
current year’s profits and losses.
After distribution of profits and losses and
closing of drawing accounts to the partner’s
Income Summary 275,000
capital accounts:
Jhim, Drawing* 146,516.39 Jhim , Capital – 796,516.39
Ces, Drawing** 128,483.61 Ces, Capital – 698,483.61

*(275,000 x 650,000/1,200,000)
** (275,000 x 600,000/1,200,000)
e. Jhim and Ces share profits and losses according to their average capital balances, considering additional investments and
withdrawals during the period.
Computation of average capital balances is computed in 2 two ways:
Method 1:
JHIM CES
Jan. 15,2019 600,000 x 12 = 7,200,000 Jan. 15,2019 600,000 x 12 = 7,200,000
April 10,2019 (50,000) x 9 = (450,000) July 16, 2019 (80,000) x 5 = (400,000)
June 1,2019 100,000 x 7 = 700,000 Aug. 23,2019 50,000 x 4 = 200,000
Average capital balance: 7,450,000/12 = 620,833.33 Average capital balance: 7,000,000/12 = 583,333.33

*Number of months to Dec. 31

Method 2:
JHIM CES
Jan. 15,2019 600,000 x 3 = 1,800,000 Jan. 15,2019 600,000 x 7 = 4,200,000
April 10,2019 550,000 x 2 = 1,100,000 July 16, 2019 520,000 x 1 = 520,000
June 1,2019 650,000 x 7 = 4,550,000 Aug. 23,2019 570,000 x 4 = 2,280,000
Average capital balance: 7,450,000/12 = 620,833.33 Average capital balance: 7,000,000/12 = 583,333.33
*Number of months unchanged
 After distribution of profits and losses and
Income Summary 275,000
closing of drawing accounts to the partner’s
Jhim, Drawing* 141,782.01 capital accounts:
Ces, Drawing** 133,217.99 Jhim , Capital – 791,782.01
*(275,000 x 620,833.33/1,204,166.66) Ces, Capital – 703,217.99
** (275,000 x 583,833.33/1,204,166.66)

h.) An allowance of 12% interest is provided on average capital balances and any remainder is divided to Jhim
and Ces in the ratio of 1:2.
Jhim Ces Total
Interest 74,500 (12%x 620,833.33) 70,000 (12%x 583,833.33) 144,500
Remainder 43,500 87,000 130,500
Total 118,000 157,000 275,000

Income Summary 275,000 After distribution of profits and losses and

Jhim, Drawing 118,000 closing of drawing accounts to the partner’s
capital accounts:
Ces, Drawing 157,000 Jhim , Capital –768,000
Ces, Capital – 727,000
i.) An allowance of 12% interest is provided on beginning capital balances, bonus of 20% on profit after
deducting interest allowance is provided to Ces, any remainder is divided equally.

Jhim Ces Total

Interest 72,000 (12%x 600,000) 72,000 (12%x 600,000) 144,000
Bonus ---- 26,200* 26,200
Remainder 52,400 52,400 104,800
Total 124,400 150,600 275,000
*bonus to Ces:
B = 20% ( Profit – Total interest)
= 20% ( 275,000 – 144,000) After distribution of profits and losses and
= 26,200 closing of drawing accounts to the partner’s
capital accounts:
Jhim , Capital –774,400
Income Summary 275,000 Ces, Capital – 720,600
Jhim, Drawing 124,400
Ces, Drawing 150,600
J.) Annual salaries of P 60,000 and P 100,000 to Jhim and Ces, respectively, balance in the ratio of 1:2.

Jhim Ces Total

Salaries 60,000 100,000 160,000
Remainder 38,333.33 (1/3) 76,666.67 (2/3) 115,000
Total 98,333.33 176,666.67 275,000

After distribution of profits and losses and

Income Summary 275,000 closing of drawing accounts to the partner’s
capital accounts:
Jhim, Drawing 98,333.33 Jhim , Capital –748,333.33
Ces, Drawing 176,666.67 Ces, Capital – 746,666.67
K.) An allowance of 12% interest on partner’s beginning capital balances, monthly salary allowances of
P 5,000 and 10,000, respectively and any remainder is divided equally.

Jhim Ces Total

Interest 72,000 72,000 144,000
Salaries 60,000 ( 5,000 x12) 120,000 (10,000 x 12) 180,000
Remainder (24,500) (24,500) (49,000)
Total 107,500 167,500 275,000

Income Summary 275,000 After distribution of profits and losses and

Jhim, Drawing 107,500 closing of drawing accounts to the partner’s
capital accounts:
Ces, Drawing 167,500 Jhim , Capital –757,500
Ces, Capital – 737,500