PARTNERSHIP: OPERATION

Kinds of Partners
 As to Liability:
1. General Partner – liable up to personal asset
2. Limited Partner – not liable up to personal asset
 As to Contribution:
3. Capitalist Partner – contributed Capital (money or property)
4. Industrial Partner – contributed industry (efforts, skills, expertise)
 As to Responsibility:
5. Managing Partner – manages the operations; given with bonus
6. Liquidating Partner – assure that all the remaining transactions will be finished; liquidates partnership
 Others:
7. Dormant Partner – not active/ not known
8. Silent Partner – not active/ may be known or not
9. Secret Partner – not known/ may be active or not
10. Nominal Partner/ Partner by estoppel – partner by name only, but in reality, it’s not

Basis of Profit/ Loss Sharing

1. STIPULATION or AGREEMENT
Stipulations may be:
1. Equally
2. Based on partners’ capital contributions:
a. Ratio of ORIGINAL capital investments
b. Ratio of capital balances at the BEGINNING of the year
c. Ratio of capital balances at the END of the year
d. Ratio of AVERAGE capital Balances
3. By allowing salaries to partners and the balance in agreed ratio
4. By allowing interests on partners’ capital and the balance in agreed ratio
5. By allowing Bonus to the managing partner based on profit and the balance in an agreed ratio
6. By allowing salaries, interest on partners’ capital, bonus to the managing partner and the balance in
an agreed ratio (combination of 3 to 5)

PROBLEMS:
Problem 1
A and B are partners of AB partnership. The original investment of the partners are P39,000 and P91,000, respectively.
During the year, the partnership had an income of P150,000. The following are the changes in equity of the partners for
the current year:

A B
Beginning Balance 200,000 250,000
30-Jun Additional Investment 50,000
31-Jul Withdrawal (20,000)
31-Aug Additional Investment 10,000
31-Oct Additional Investment 10,000 25,000
30-Nov Withdrawal (30,000)
Balance before Profit 230,000 265,000
Required:

Find the share in profit and ending capital balance of A and B under the following methods:

1. Share in Profits Equally

A B Total
Share in Profit 75,000 75,000 150,000
Add: Balance before Profit 230,000 265,000 495,000
Ending Capital Balance 305,000 340,000 645,000

2. Share in Profits according to capital balances:

a. Ratio of ORIGINAL capital investments

% Share in Profit: Investment of Partner/Total

A B Total Investment
150,00
Share in Profit 45,000 105,000 0 Partner A: 39,000/130,000 =30%
Add: Balance before 230,00 495,00
Profit 0 265,000 0 Partner B: 91,000/130,000 =70%
275,00 645,00
Ending Capital Balance 0 370,000 0 Share in Profit: Net Income * % Share in Profit

% Share in Profit: Beginning Balance of

A B Total Partner/Total Beginning Balance
Share in Profit 66,000 84,000 150,000 Partner A: 200,000/450,000 =44%
Add: Balance before Profit 230,000 265,000 495,000 Partner B: 250,000/450,000 =56%
Ending Capital Balance 296,000 349,000 645,000 Share in Profit: Net Income * % Share in Profit
b. Ratio of capital balances at the BEGINNING of the year

c. Ratio of capital balances at the END of the year

% Share in Profit: Balance before

Profit of Partner/Total Balance
A B Total before Profit
150,00
Share in Profit 69,000 81,000 0 Partner A: 230,000/495,000 =46%
Add: Balance before 230,00 265,00 495,00
Profit 0 0 0 Partner B: 265,000/495,000 =54%
299,00 346,00 645,00 Share in Profit: Net Income * % Share
Ending Capital Balance 0 0 0 in Profit
 d. Ratio of AVERAGE capital Balances

A
Amount Weight Weighted Average
Beginning Balance 200,000 12 2,400,000
6/30 Additional Investment 50,000 6 300,000
10/31 Additional Investment 10,000 2 20,000
11/30 Withdrawal (30,000) 1 (30,000)
Capital before profits 230,000   2,690,000
  Divided by: 12
Weighted Average of Capital before Profit 224,167

B
Amount Weight Weighted Average
Beginning Balance 250,000 12 3,000,000
7/31 Winthdrawal (20,000) 5 (100,000)
8/31 Additional Investment 10,000 4 40,000
10/30 Additional Investment 25000 2 50,000
Capital before profits 265,000   2,990,000
  Divided by: 12
Weighted Average of Capital before Profit 249,167

Weighted Average = ∑(Amount * Weight) / 12

% Share in Profit: Ave. Capital of
A B Total Partner/Total Ave. Capital
Share in Profit 70,500 79,500 150,000 Partner A: 224,167/473,334 =47%
Add: Balance before Profit 230,000 265,000 495,000 Partner B: 249,167/473,335 =53%
Share in Profit: Net Income * % Share in
Ending Capital Balance 300,500 344,500 645,000 Profit

3. By allowing salaries of P50,000 to partner A and the balance is shared equally.

A B Total
Salaries 50,000 50,000
Balance 50,000 50,000 100,000 (150,000-50,000)
Total Share in Profit 100,000 50,000 150,000
Add: Balance before Profit 230,000 265,000 495,000
Ending Capital Balance 330,000 315,000 645,000

4. By allowing 15% interests on partners’ capital and the balance to be divided in a ratio of 40:60
a. The interest is based on partners’ beginning capital

A B Total
(Beginning Balance *
Interest 30,000 37,500 67,500 15%)
Balance 33,000 49,500 82,500 (150,000-67,500)
Total Share in Profit 63,000 87,000 150,000
Add: Balance before Profit 230,000 265,000 495,000
Ending Capital Balance 293,000 352,000 645,000

b. The interest is based on partners’ average capital

A B Total
(Average Capital*
Interest 33,625 37,375 71,000 15%)
Balance 31,600 47,400 79,000 (150,000-71,000)
Total Share in Profit 65,225 84,775 150,000
Add: Balance before Profit 230,000 265,000 495,000
Ending Capital Balance 295,225 349,775 645,000

BONUS NET INCOME AFTER vs NET INCOME BEFORE

- Normally given to
Managing Partners -After deducting -Before deducting
- Only when base is
POSITIVE -MINUS -IGNORE
- NEVER NEGATIVE
bonus
- NOT GIVEN when
Examples: Base of Bonus
the operations
1. Net Income after Salaries = NI – S
results to LOSS
- Bonus = Base2.x rate
Net Income after Interests = NI – I
of bonus 3. Net Income after Bonus = NI – B
4. Net Income after salaries before interests = NI – S
5. Net Income after salaries and interests, but before bonus = NI – S – I
6. Net Income after salaries, interest and bonus = NI – S – I – B
7. Net Income before interest, salaries and bonus = NI

5. By allowing Bonus to the managing partner (Assumed to be A) and the balance in an agreed ratio of 40:60
a. 20% Bonus based on Net Income before Bonus

A B Total B = NI x r
Bonus 30,000 30,000 B = 150,000 x 20%
Balance 48,000 72,000 120,000 B = 30,000
Total Share in Profit 78,000 72,000 150,000
Add: Balance before Profit 230,000 265,000 495,000
 Ending Capital Balance 308,000 337,000 645,000

b. 20% Bonus based on Net Income after Bonus

A B Total B = (NI-B) x r
Bonus 25,000 25,000 B = (150,000 - B) x 20%
Balance 50,000 75,000 125,000 B = 30,000 - (0.2B)
Total Share in Profit 75,000 75,000 150,000 1.2 B = 30,000
Add: Balance before Profit 230,000 265,000 495,000 B = 25,000
Ending Capital Balance 305,000 340,000 645,000
SHORTCUT FOR BONUS

Before Bonus After Bonus

BASE x rate BASE Excluding bonus/ (1+r) x r

Problem 2:
Partners A, B, and C are partners of ABC Partnership. Partner A is the managing partner. The partners agreed to give the
managing partner a bonus. The original investments of the partners are P300,000, P350,000, and P350,000, respectively.
At the end of the year, the capital balances before profit of the partners is P350,000, P400,000, and P450,000,
respectively. The current year’s Income summary is P785,000.

Required: Compute for the Share in profit of Partners’ A, B, and C.

1. 15% bonus to the managing partner is based on Net Income before bonus. The remaining balance is divided in
4:3:3 between the partners

A B C Total B = NI x r
Bonus to A 117,750 117,750 B = 785,000 x 15%
Balance 266,900 200,175 200,175 667,250 B = 117,500
Total Share in Profit 384,650 200,175 785,000
Add: Balance before Profit 350,000 400,000 450,000 1,200,000
Ending Capital Balance 734,650 600,175 650,175 1,985,000

2. 15% bonus to the managing partner is based on Net Income after bonus. The remaining balance is divided in
proportion to the original capitals

B = Base excl. bonus/

A B C Total (1+r) x r
Bonus to A 102,391 102,391 B = NI/ (1+r) x r
Balance 204,783 238,913 238,913 682,609 B = 785,000/ (1.15) x 0.15
Total Share in Profit 307,174 238,913 238,913 785,000 B = 102,391
Add: Balance before Profit 350,000 400,000 450,000 1,200,000
Ending Capital Balance 657,174 638,913 688,913 1,985,000

Problem 3:
Partners A and B are partners of AB Partnership. For the current period, the partnership had a loss of P500,000. The
partners’ original investments are P100,000 and P300,000, respectively.
Required: Compute for the Share in Net Profit and the ending capital balances of the partners with the following
assumption.

a. Partner A is the managing partner, he is allowed the bonus based on Net Income.
b. The remaining balance is divided in the Ratio of AVERAGE Capital Balances

A B
Weighted Weighted
Amount Weight Average Amount Weight Average
Beginning Beginning
Balance 500,000 12 6,000,000 Balance 400,000 12 4,800,000
6/1 Additional 8/1
Investment 100,000 7 700,000 Withdrawal (100,000) 5 (500,000)
10/31 (150,000 9/1 Additional
Withdrawal ) 2 (300,000) Investment 150,000 4 600,000
Balance before Balance before
profit/(loss) 450000   6,400,000 profit/(loss) 450,000   4,900,000
Divided Divided
  by: 12   by: 12
Weighted Average of Capital before Weighted Average of Capital
Profit 533,333.33 before Profit 408,333.33

Capital A B Total
Balance before Profit/ Loss 450,000 450,000 900,000
Average Capital 533,333 408,333 941,666
Ratio of Average Capital 57% 43%  

A B Total
Bonus No bonus because of LOSS
Balance (285,000) (215,000) (500,000)
Total Share in Profit (285,000) (215,000) (500,000)
Add: Balance before Profit 450,000 450,000 900,000
Ending Capital Balance 165,000 235,000 400,000

Problem 4:
Partners A and B are partners of AB Partnership. For the current year, the partnership had a profit of P500,000. The
partners decided to distribute the profit/loss as follows:
a. Bonus to A of 30% of profit after Salaries, Interest, and Bonus
b. Annual Salaries of P100,000 to A and P50,000 to B
 c. 10% Interest on average capital balances
d. Balance is divided 40:60 The partner’s capital balances are as follows:
The partner’s capital balances are as follows:

  A B
Balance before Profit/ Loss 400,000 500,000
Average Capital 350,000 400,000

Required: Compute for the Share in Profit and the Ending Balance of the Capitals of the partners.

A B Total
Salaries 100,000 50,000 150,000
Interest on Average Capital 35,000 40,000 75,000 Ave. Capital x 10%
Bonus 63,462   63,462 275,000/ 1.3 / 0.3
Total 198,462 90,000 288,462
Balance 84,615 126,923 211,538 500,000-288,462
Share in Profit 283,077 216,923 500,000
Balance before P/L 400,000 500,000 900,000
Ending Capital Balance 683,077 716,923 1,400,000

Problem 5:
Partners A and B are partners of AB Partnership. For the current year, the partnership had a loss of P100,000. The
partners decided to distribute the profit/loss as follows:
a. Bonus to A of 30% of profit after bonus
b. Annual Salaries of P50,000 to A and P30,000 to B
c. 10% Interest on average capital balances.
d. Balance is divided 40:60

The partner’s capital balances are as follows:

  A B
Balance before Profit/ Loss 100,000 200,000
Average Capital 150,000 250,000

A B Total
Salaries 50,000 30,000 80,000
Interest on Average Capital 15,000 25,000 40,000 Ave. Capital x 10%
Bonus       No Bonus: LOSS
Total 65000 55000 120000
Balance (88,000) (132,000) (220,000) -100,000 - 120,000
Share in Profit (23,000) (77,000) (100,000)
Balance before P/L 100,000 200,000 300,000
Ending Capital Balance 77,000 123,000 200,000

SUMMARY
Interests Journal Entries in Share of Profit/ Loss

Share in Profit
(1) Allowed even with loss
(2) May be based on average capital or any balance at a certain time

Salaries
(1) Allowed even without a loss
(2) A certain amount in peso

Bonus
(1) Only given when the base for bonus is POSITIVE
(2) No Negative Bonus
(3) Only given when the business is operating at a profit
(4) Normally given to Managing Partners