Partnership Operation

How will partnership divide the profits and losses resulting from the operation of the
partnership?
 Formula used to divide profits and losses is determines through negotiations among the
partners.
 If profit has been agreed upon, the share of each partner in the losses shall be in the
same proportion with the net income allocation.
 In the absence of agreement, the share of each partner in the profits and losses shall be
in proportion to they have contribution. The industrial partner shall receive such as may
be just and equitable under circumstances.
--base on agreement
-if walang napag agreehan sa profit or loss magiging equally divided.
-PH rule(kung walang agreement sa profit or loss, kelangan natin idivide yung kanilang
share sa income/loss using sa kanilang capital contribution/capital balances)
-Capital balance or Capital Ratio at the date of Formation. (Initial Capital Balance)
-What if di na kayang idetermined yung kanilang Initial Capital balance, dito natin pwede
gamitin yung beg. Capital balance.
-Industrial Partner bibigyan sya ng just and equitable compensation
Most profit and loss sharing formula includes one or more of the ff. features or
techniques.
1. Equally
2. Arbitrary Ratio
A:B 2:3 A=2/5 B=3/5
3. Interest on partner’s capital account and dividing the balance on agreed ratio.
4. Salaries to partners and dividing the balance on agreed ratio.
5. Bonus to partners and dividing the balance on agreed ratio.
6. Interest on capital account balance, salaries, and bonus to partners and dividing the
balance on agreed ratio.
Interest on Capital Balances
- To give recognition to difference on capital contributions by partners.
-The use of interest on capital as a means of allocating profits would be appropriate when the
business is capital intensive.
- Interest on capital balances has no effect on the measurement of net income or loss of the
partnership. (Hindi sya irerecord as interest expense, ito ay allocation ng profit, wala effect sa
net income.)
Salary Allowances
- Used to compensate for the differences in the fair value of talents for partners, all of whom
devote their time to the partnership. (Given to the managing partner/ industrial partner para
macompensate sila sa time na dinedevote nilang time para sa partnership) (Withdrawals)
- Salary Allowances given to partners has no effect on the measurement of net income/loss of
the partnership. (NOT EXPENSE)
Bonus
- Uses as a means of providing additional compensation to partners who have provided services
to the partnership. (Binibigyan ng bonus pag maganda ang performance)
- Typically stated as a percentage of profit either before/after the bonus. Concept of bonus is not
applicable to net loss. (Di nag bibigay ng bonus pag net loss yung partnership and not
rerecognize as expense) (Pag si partner ang binigyan ng bonus not expense, pag employee
expense)
Average Capital Balances
- Fairest basic for allocating profit because it reflects the capital actually available for use by the
partnership during the year. (Naka base ang Interest on Capital Balance sa Ave. Capital
Balances)

1. Simple Average – beginning + ending divided by 2

2. Weighted Average – recognize all the changes in their capital as well as in their drawing
accounts in determining the capital ratio to be used in distributing the profits and losses in the
operation of the partnership.(Kinoconsider mo if anong buwan ka ba nag invest or nag
withdraw)
1/1/2021 Investment 100k x 12 months/12 months = 100K
7/1/2021 Investment 50k x 6 months/12 months = + 25k
11/1/2021 Withdrawal 10k x 2 months/ 12 months = (1667)
Weighted Ave. Capital Balance = 123,333
Two Kinds of Withdrawal
Permanent Withdrawal (ang ginagamit sa computation ng weighted ave. capital bal.)
(Winiwithdraw mo yung ininvest mo dati it is called Permanent Withdrawal)
Temporary Withdrawal (Di ginagamit sa computation ng weighted ave. capital bal.)
- Ito yung mga withdrawals na dahil sa salary and allowance natin
- Nag kakaroon ng temporary withdrawal dahil meron tayong share sa net income through
salaries and allowances. (Pag winiwithdraw ang salaries and allowances it is called Temporary
Withdrawal)
-Routine Withdrawals. (Monthly, Twice a Month, Every Period, Every Quarter, etc sila nag
wiwithdraw)
Examples for Computation of Average Capital
James, Keller, and Rivers have the following capital balances; $48,000, $70,000 and $90,000
respectively. Because of a cash shortage, James invests an additional $12,000 on June 1st.
Each partner withdraws $1,000 per month. James, Keller, and Rivers receive a salary of
$13,000, $15,000 and $20,000, respectively, for work done during the year. Each partner
receives interest of 8% on their weighted average capital balance without regard to normal
drawings. Any remaining profits are split 20%, 30%, and 50% respectively. The net income for
the year is $30,000. What are the ending capital balances for each partner? 

Names Salary Interest (8%) 30k (Profit/Net Income)

James 13k 55k x 8% = 4,400 (48k) (Total Salary)
Keller 15k 70k x 8% = 5,600 (17.2k) (Total interest)
Rivers 20k 90k x 8%= 7,200 = 17,200 -35200 (Negative Remainder)
48k
Negative Remainder Journal Entry:
-35200 x 20%= -7,040 Income Summary 30,000
-35200 x 30%= -10,560 J. Capital 10,360
-35200 x 50%= -17,600 K. Capital 10,040
Shares In Net Income R. Capital 9,600
James 13k + 4.4k – 7,040= 10,360
Keller 15k + 5.6k – 10,560= 10,040 Pag Loss: CR. Income Summary DR. Capital
Bal.
Rivers 20k + 7.2k – 17,600= 9,600  30,000

Weighted Ave. Capital Bal.

James 1/1/200x 48k x 12 months/ 12 months = 48k
6/1/200x 12k x 7 months / 12 months = 7k WAC = 55k
Keller 1/1/200x 70k x 12 months/ 12 months = 70k  WAC= 70k
Rivers 1/1/200x 90k x 12 months/ 12 months = 90k  WAC= 90k
TAKE NOTE:
KAPAG KINUKUHA YUNG ENDING CAPITAL BALANCE MAPA PERMANENT/ TEMPORARY
IBABAWAS
Ending Capital Balances

James Keller Rivers Totals

Beg. 48k 70k 90k 208k
Add. Investment 12k - - 12k
Net Income 10,360 10,040 9,600 30,000
Withdrawals (12,000) (12,000) (12,000) (36,000)
Ending 58,360 68,040 87,600 214,000
Balances Total Ending
Balances