PARTNERSHIP OPERATION

- Accounting Cycle is still same. Business is

formed to earn a profit.
- A business in the form of partnership is
governed by the Articles of Co-partnership
under Article No. 1767 - 1867 of the Civil Code
of the Philippines.
- The problem will be on how to divide the
profits and losses at the end of the period. The
contract of partnership should state on how the
profit and losses shall be divided among the
partners. If no agreement, Article 1797 of the
Phil. Law on Partnership provides that the share
of each partner in the profits and losses shall be
in proportion of their capital contribution and
the industrial partner shall not share in the
losses.
Ways in which the profit and losses can be
divided, as follows:
1. Equally;
2. Arbitrary ratio; (Percentage, Decimal,
Fraction, Ratio)
3. Capital Ratio
 a. Original capital;
b. Beginning or Ending capital balance
of the period;
c. Average Capital
4. By allowing interest on capital balances and
dividing the balance on agreed ratio.
5. By allowing salaries to partners and
dividing the balance on agreed ratio.
6. By allowing bonus to partners and dividing
the balance on agreed ratio
7. By allowing interest on capital balances,
salaries and bonuses to partners. And
dividing the balance on agreed ratio.
Most common method are equally or
arbitrary ratio. The amount of net income
divided among the partners shall be the net
income after tax.
How to record the distribution of profits and
losses as agreed upon by the pertners
- The journal entry to record the sharing of
profits and losses among the partners is part of
the procedures in the preparation of closing
entries.
- After all the revenue and expense accounts are
closed to the income summary, the balance of
the income summary will represent either the
profit or loss of the business.
- “Thus, the third step in the closing entries is to
transfer the balance of the Income summary to
the capital account.
- A credit balance in the Income Summary
represents profit while a debit balance
represents net loss.
- The closing entry to close the income
summary to Capital:
R more than E=Profits; R less than E =Net Loss
If Income Summary showed a credit bal (profit)
+C(credit)= 1.Investment 2.Profit
Income Summary xxx
Capital xxx
If Income Summary showed a debit bal (Net loss)
+C(debit)= 1.Drawings 2.Net Loss
Capital xxx
Income Summary xxx
Factors to be considered in the distribution of profits
and losses:
 - Services rendered by the partners to the
partnership (mas Malaki ang profit ng mas
nagbigay ng service)
- Amount of capital contributed by the partners to
the business (mas Malaki ang contribution mas
Malaki profit)
- Entrepreneurial ability or managerial skill of the
partners (may nadagdag na profit ang
managerial partner-bonus)
Average Capital is a method of dividing profits
based on the amount of capital 7invested and the time
during which such capital is actually used in the
business.
ILLUSTRATION: (tax is ignored for
simplicity)
Case 1 - Equally
Philip Santos and Ruel Cruz are partners and
have capital balance at the end of 2020 as follows:
Philip Santos - P60,000.00; Ruel Cruz - P30,000.00.
The results of its 2020 operations is a net income after
tax of P120,000. Prepare the entry to record the
allocation of the net income between the two partners
- Equally.
Entry to close the credit balance of the Income
Summary Account to the partners’ capital accounts:
 After this closing entry, the balance of Philip
Santos Capital is P120,000 and Ruel Cruz, Capital is
P90,000.00.
Case 2 - Arbitrary Ratio
Philip Santos and Ruel Cruz are partners and
have capital balance at the end of 2020 as follows:
Philip Santos - P60,000.00; Ruel Cruz - P30,000.00.
The results of its 2020 operations is a net income after
tax of P120,000. Prepare the entry to record the
allocation of the net income between the two
partners’ assuming that they agreed that the net
income be divided by 1:3
Entry to close the credit balance of the Income
Summary Account to the partners’ capital accounts:

Case 3 - In the Ratio of Partners’ Capital

Balances
Philip Santos and Ruel Cruz are partners and
invested cash to their partnership in January 2020 as
follows: Philip Santos - P60,000.00; Ruel Cruz -
P30,000.00. Withdrawals are made by the partners in
the amount of P10,000 on October 1, 2020. The
partners made additional investment on June 1, 2020
of P30,000 and P20,000 respectively. The results of
its 2020 operations is a net income after tax of
P120,000. Prepare the entry to record the allocation of
the net income between the two partners’ assuming:
A. Based on the ratio of the partners’ original
capital balances
B. Based on the ratio of the partners’ capital
balances
Entry to close the credit balance of the Income
Summary Account to the partners’ capital accounts
on December 31, 2020
A. Based on the ratio of partners’ original capital
balances:
Original Capital- is the amount of capital invested
by the partners at the start of their partnership.

B. Based on the ratio of the partners’ ending capital

balances

C. Based on the average capital balances

Compute the average capital balances of each
partner, as follows: (nearest peso)
Using Peso Months (nearest peso)
Philip Santos share in profits: 900/1370 x 120,000 =
78,832
Ruel Cruz share in profits: 470/1370 x 120,000 =
41,168
Using Average Capital
Philip Santos share in profits: 75000/114,167 x
120,000 = 78,832
Ruel Cruz share in profits: 39,167/114,167 x 120,000
= 41,168

In using the average capital ratio in distributing

profits, the method provides the recognition of the
changes in capital during the period.
Philip Santos and Ruel Cruz are partners and
invested cash to their partnership in January 2020 as
follows: Philip Santos - P60,000.00; Ruel Cruz -
P30,000.00. Withdrawals are made by the partners in
the amount of P10,000 on October 1, 2020. The
partners made additional investment on June 1, 2020
of P30,000 and P20,000 respectively. The results of
its 2020 operations is a net income after tax of
P120,000. Prepare the entry to record the allocation of
the net income between the two partners’ assuming:
Case 4 - By allowing 8% interest on average
capital balances and the remainder based on
3:1 (Use the amount of average capital on Case
no. 3.C)
The partners may agree to provide interest on
capital balances and the interest to be applied should
be agreed by them and the balance in arbitrary ratio.
It should also be stated that the computation of
interest in terms of capital balances as of a certain
period or for their average capital balances for the
period.
Computation of Interest of 8% on average
capital balance (amount of interest rounded to nearest
peso)
1. Entry to allow interest on average capital
balances

2. Entry to divide the balance of net profit according

to arbitrary ratio 3:1 (120,000-9133)
 Or (compound entry)

Computation:

Case 4.a By allowing 8% interest on average

capital balances and the remainder based on
3:1 (Use the amount of average capital on
Case no. 3.C)
Assuming that the net income for the year is only
5,000.00.
The entries to record the division of profits to partner
capital accounts, follows:
1. Entry to allow interest on average capital balances

2. Entry to divide the balance of the insufficient

profit according to arbitrary ratio 3:1 *5000-
9133= (4133)

Or (compound entry)

Computation:
 Remainder is computed Net Income P5,000 -
allotted for allowance P9,133 = negative remainder of
P4,133. This represents insufficient profit.
Case 5. By allowing salaries to partners and
dividing the balance on agreed ratio.
Problem data is from
A. Assuming that salaries is allowed to each
partner in the amount of P40,000 annually and
the balance in agreed ratio of 3:1.
5.a Net Income is P90,000.00 for the year
2020.
5.b. Net Income is P50,000.00 for the year
2020.
The entry to close the Income Summary Account to
partners’ capital accounts follows:
5.a Net Income is P90,000.00 for the year 2020.
Remainder 3:1
1. Entry to allow salaries to partners

2. Entry to divide the P10,000 balance of net profit

according to arbitrary ratio 3:1 (90000- 80000)
 Or (compound entry)

Computation:

5.b. Net Income is P50,000.00 for the year 2020.

Remainder 3:1
1. Entry to allow salaries to partners

2. Entry to divide the balance of insufficient profit

according to arbitrary ratio 3:1 *50000-80000=
(30000)

Or (compound entry)

Computation:

Case 6. 10% bonus is allowed to each

partner based on net income after tax of
P120,000 and dividing the balance on agreed
ratio of 3:1.
Philip Santos and Ruel Cruz are partners and
have capital balance at the end of 2020 as follows:
Philip Santos - P60,000.00; Ruel Cruz - P30,000.00.
The results of its 2020 operations is a net income after
tax of P120,000. Prepare the entry to record the
allocation of the net income between the two partners
as follows:
1. Entry to record the bonus to partners.

2. Entry to record the remainder of profit based on

agreed ratio of 3:1 (120000-24000)

OR (compound entry)

Case 7 .Lani, Emma and Selya are partners.

The initial investment of the three partners
are P40,000 each. They withdrew cash every
June 30 and Dec. 31, 2020 of P30,000 each.
They have additional investment of P50,000
each in March 31 and in Sept. 30, 2020. .
After a year of operation, the company
earned a net profit of P90,000 after tax. The
profit and loss agreement follows:
1. By allowing P5,000 monthly salary to the
managing partner Selya;
2. By allowing 10% interest on their original
capital investment to all the partners;
3. By allowing bonus to managing partner of
P3,000
4. Remainder is divided equally.
Prepare the entries to record the division of profits
based on the above agreement:
1. Entry to record the salary allowance to Selya;
P5,000 x 12=P60,000

2. Entry to record the 10% interest on their original

capital. 10% x P40,000

3. Entry to record the bonus to managing partner of

P3,000
 4. Entry to record the remainder profit to partners
equally.
90000-60000-12000-3000 = 15000/3 = 5000
each

OR (compound entry)

Same data in Case 7 except that the results of

operation in 2020 is a net loss of P90,000.00.
Prepare the entries to record the division of
profits and losses: Entries for Nos. 1 to 2 are the
same. Bonus is not allowed for insufficient income
or Net Loss. The remainder will be divided as
follows, -90000-60000-12000 = (162000)/3 =
(54000)
OR (compound entry)