PARTNERSHIP

A partnership is defined in Article 1767 of the Civil Code of the Philippines as "a contract
whereby two or more persons bind themselves to contribute money, property, or industry into a
common fund with the intention of dividing profits among themselves."

Is a formal arrangement by two or more parties to manage and operate a business and share its
profit and sustains part of any losses

CHARACTERISTICS OF A PARTNERSHIP

1. Mutual agency
Any partner may act as agent of the partnership in conducting its affairs.
- Any act of a partner binds the partnership

2. Unlimited liability.
The personal assets (assets not contributed to the partnership) of any partner may be used to
satisfy the partnership creditors' claims upon liquidation, if partnership assets are not enough to
settle the liabilities to outsiders.
- Creditors may go over the personal asset and properties of the general/limited partner

3. Limited life.
A partnership may be dissolved at any time by action of the partners or by operation of law.
- Partnership ends when one partner resigned, died, disabled, incapacitated, lost any
time.

4. Mutual participation in profits.

All partner has the right to share in partnership profits.

5. Legal entity.
A partnership has a legal personality separate and distinct from that of each of the partners.
- The partnership can be sued or sue, buy and sell properties and asset as a separate
legal entity

6. Co-ownership of contributed assets.

Property contributed to the partnership are owned by the partnership by virtue of its separate
legal personality.
- Any property contributed to the partnership becomes a part of the partnership

7. Income tax.
Partnerships, except general professional partnerships (i.e., those organized for the exercise of
professions like CPAs, lawyers, engineers, etc.) are subject to the 30% income tax.
ADVANTAGES OF A PARTNERSHIP

1. It is easy and inexpensive to organize, as it is formed by a simple contract between two or

more persons.
- It can be in an oral and written agreement between the persons

2. The unlimited liability of the partners makes it reliable from the point of view of creditors.
- Advantage that can be used to entice creditors as there are two or more person in the
partnership, meaning they have the choice to collect from anyone incase of dissolution
or liquidation

3. The combined personal credit of the partners offers better opportunity for obtaining additional
capital than does a sole proprietorship.

4. The participation in the business by more than one person makes it possible for a closer
supervision of all the partnership activities.

5. The direct gain to the partners is an incentive to give close attention to the business.
- When a business makes profit, the partners are entitled with the share on the profit

6. The personal element in the characters of the partners is retained.

- Partners and partnership are separate and distinct entity

DISADVANTAGES OF A PARTNERSHIP

1. The personal liability of a partner for firm debts deters many from investing capital in a
partnership.
- Personal property may be involved with the loss of partnership

2. A partner may be subject to personal liability for the wrongful acts or omissions of his/her
associates.
- One act of a partner may cause the dissolution of the partnership
- One partner may be liable for the wrongful acts of one partner

3. It is less stable because it can easily be dissolved.

- The partnership can be easily dissolved per the agreement or circumstances of the
partners e.g death or simply withdrawal from the partnership

4. There is divided authority among the partners.

- As there are more than one partners deciding in the flow of the business, there may be
conflicts from the divided authority that on the latter part may cause the dissension and
disagreements of the partners.
5. There is a constant likelihood of dissension and disagreement when each of the partners has
the same authority in the management of the firm.

KINDS OF PARTNERSHIPS

1. As to activity
a.Trading partnership one whose main activity is the manufacture and sale or the purchase and
sale of goods.
b. Non-trading partnership one which is organized for the purpose of rendering services

2. As to object
a. Universal partnership
1. Universal partnership of all present property
- one in which the partners contribute, at the time of the constitution of the partnership, all
the properties which actually belong to each of them into a common fund with the
intention of dividing the same among themselves as well as the profits which they may
acquire therewith.
All assets contributed to the partnership and subsequent acquisitions become common
partnership assets.
All assets and properties are shared and considered as a Partnership Asset

2. Universal partnership of all profit

- one which comprises all that the partners may acquire by their industry or work during
the existence of the partnership and the usufruct of movable or immovable property
which each of the partners may possess at the time of the institution of the contract.

- Partnership assets consist of assets acquired during the life of the partnership and only
the usufruct or use of assets contributed at the time of partnership formation. The
original movable or immovable property contributed do not become common partnership
assets.

All profits earned are shared. The conjugal share between profits only, assets and properties are
not involved.

b. Particular partnership
- one which has for its object determinate things, their use or fruits, or a specific
undertaking or the exercise of a profession or vocation.
Determinate things are shared within the partnership.
Professional partners do not contribute capitalization.

3. As to liability of partners
a. General co-partnership
 - one consisting of general partners who are liable prorata and sometimes solidarily with
their separate property for partnership liabilities.

* General Partnership are composed of ALL GENERAL PARTNERS

* General Partnership may have a LIMITED PARTNERS

b. Limited partnership
- one formed by two or more persons having as members one or more general partners
and one or more limited partners, who as such are not bound by the obligations of the
partnership. The word "LIMITED" or "LTD." is added to the name of the partnership to
inform the public that it is a limited partnership.

In a limited partnership, one must be a GENERAL Partner

The limited partners have their liability only up to the extent of their investment in the partnership
and the creditors cannot go over their personal assets/properties in case of
dissolution/liquidation.

4. As to duration
a. Partnership at will
- one for which no term is specified and is not formed for a particular undertaking or
venture and which may be terminated any time by mutual agreement of the partners or
the will of one partner alone.

b. Partnership with a fixed term

- one in which the term or period for which the partnership is to exist is agreed upon. It
may also refer to a partnership formed for a particular undertaking and upon the
expiration of that term or completion of the particular undertaking the partnership is
dissolved; unless continued by the partners.

5. As to representation to others
a. Ordinary partnership
- one which actually exists among the partners and also as to third persons.
- Actual partners by agreement

b. Partnership by estoppel
- one which in reality is not a partnership but is considered as one only in relation to those
who, by their conduct or omission are precluded to deny or disprove the partnership's
existence.

*just stated that a person is part of the partnership even if it is not true, thus making its as their
own initiative and conduct
*a partner is not an actual partner of the partnership but in his own conduct, presents himself
being a partner of the partnership, thus making him liable to the person who suffered loss with
the assumption that he is a partner of the partnership
6. As to legality of existence
a. De jure partnership
- one which has complied with all the requirements for its establishment.

b. De facto partnership
- one which failed to comply with one or more of the legal requirements for its
establishment.
* lacking some of the requirements to be a legally registered partnership but STILL is
considered as a partnership that legally exists.

7. As to publicity
a. Secret partnership
- one wherein the existence of certain persons as partners is not made known to the
public by any of the partners.

b. Open partnership
- one wherein the existence of certain persons as partners is made known to the public by
the members of the firm.

CLASSES OF PARTNERS

1. As to contribution
a. Capitalist partner - one who contributes capital in cash (money) or property.
b. Industrial partner - one who contributes industry, labor, skill, talent or service.
c.Capitalist-industrial partner - one who contributes cash, property and industry.

2. As to liability
a. General partner - one whose liability to third persons extends to his separate (private)
property.
b. Limited partner - one whose liability to third persons is limited only to the extent of his capital
contribution to the partnership.

3. As to management
a. Managing partner - one who actively manages the business of the partnership.
b. Silent partner - one who does not participate in the management of the partnership affairs.

4. Other classifications
a. Liquidating partner - one who takes charge of the winding up of partnership affairs upon
dissolution
b. Nominal partner - one who is not really a partner, not being a party to the partnership
agreement, but is made liable as a partner for the protection of innocent third persons.
c. Ostensible partner - one who takes active part in the management of the firm and is known to
the public as a partner in the business.
d. Secret partner - one who takes active part in the management of the business but whose
connection with the partnership is concealed or unknown to the public.
e. Dormant partner - one who does not take active part in the management of the business and
is not known to the public as a partner; he is both a silent and a secret partner.

PARTNERSHIP CONTRACT

A partnership is created by an oral or a written agreement. Since partnerships are required to be

registered with the Office of the Securities and Exchange Commissions, it is necessary that the
agreement be in writing. In this case, misunderstandings and disputes among the partners
relative to the nature and terms of the contract may be avoided or minimized. The written
agreement between or among the partners governing the formation, operation and dissolution of
the partnership is referred to as the Articles of Co-Partnership.

The Articles of Co-Partnership contains the following information:

1. The name of the partnership:
2. The names and addresses of the partners, classes of partners, stating whether the partner is
a general or a limited partner;
3. The effective date of the contract;
4. The purpose or purposes and principal office of the business;
5. The capital of the partnership stating the contributions of individual partners, their description
and agreed values;
6. The rights and duties of each partner;
7. The manner of dividing net income or loss among the partners, including salary allowance
and interest on capital;
8. The conditions under which the partners may withdraw money or other assets for personal
use;
9. The manner of keeping the books of accounts;
10. The causes for dissolution; and
11. The provision for arbitration in settling disputes.

Major Concept of Partnership Accounting

1. Formation - accounting for initial investments to the partnership
2. Operations - division of profits and losses
3. Dissolution - admission of a new partner and withdrawal, retirement or death of partner
4. Liquidation - winding-up of affairs
Organizing a Partnership

A partnership can operate legally after the compliance with certain registration of requirements

Place of Registration Requirements for Certificates Issued

Registration

Securities and Exchange 1. Articles of SEC Certificate

Commision (SEC) Co-Partnership
2. Filled SEC
Registration Form

Department of Trade and 1. Articles of Certificate of Registration of

Industry (DTI) Co-Partnership Business Name (renewable
2. SEC Certificate every five years)

City or Municipal Mayor’s 1. Certificate of Mayor’s Permit and License to

Office Registration of Operate (annually renewable)
Business Name

Bureau of Internal Revenue 1. SEC Registration 1. BIR Registration No.

(BIR) 2. Articles of 2. Partnership's Tax
Co-Partnership Identification Number
(TIN)
3. Registration of books,
invoices, and official
receipts

Social Security System (SSS) 1. Filled SSS 1. SSS Certificate of

Application form Membership
2. List of employees 2. SSS Employer ID
Number

Philippine Health Insurance 1. SEC Registration 1. PhilHealth Employer

Corporation (PHIC) 2. Employer Data Number (PEN)
Record or ERI 2. Certificate of
Form Registration PhilHealth
3. Business Permit or Identification Number
License (PIN)
3. Member Data Record
(MDR) for concerned
employees

Home Mutual Development 1. SEC Registration 1. HMDF Certificate of

Fund (PAG-IBIG Fund) 2. Articles of Membership
Co-Partnership 2. HMDF Employer ID
Number
ACCOUNTING FOR PARTNERSHIPS

PLURALITY OF CAPITAL AND DRAWING ACCOUNTS. Accounting for a partnership differs

from other forms of business organizations with regard to capital accounts. In a partnership,
there should be as many capital accounts and as many drawing accounts as there are partners
(that is, one capital account and one drawing account is maintained for each partner).

T ACCOUNT

Capital Account

1. Permanent withdrawal (decrease) of 1. Original Investment by a partner

Capital 2. Additional investment by a partner
2. Share in partnership loss from 3. Share in partnership profits from the
operations operations to be added in the capital
3. Debit balance of drawing account
closed to capital

Drawing Account

1. Personal withdrawal by a partner 1. Share in partnership profits from the

2. Share in partnership loss from operations to be added in the capital
operations (this may be directly
debited to the capital account)

***NOTE***
1. It is advised that the shares in partnership loss/profit must be credited and debited to the
capital account directly
2. If you choose to debit and credit the shares in partnership loss/profit in the drawing
account, ensure that it will not be posted also in the capital account
OPENING ENTRIES

Partners may contribute cash, property, or industry to the partnership.

Appropriate asset accounts are debited for the assets contributed and partners capital accounts
are credited for the total amount of assets contributed.

If the asset contributed is in the form of cash, it is recorded on the partnership books at face
value
If the asset contributed is in the form of property or non-cash asset, it is recorded at agreed
value, or in the absence of an agreement, at fair market value.
When industry is contributed into the partnership, a memorandum journal entry is prepared

PARTNERSHIP FORMATION

FORMATION A:
TWO OR MORE PERSONS FORM A PARTNERSHIP FOR THE FIRST TIME

ALL PARTNERS ARE NEW IN THE BUSINESS .

1. Cash Contributions only (Capitalist Partners)

Abad and Alba agreed to form a partnership by contributing P600,000 cash each.
The entry to record the contributions in the partnership is:

Cash 1,200,000
Abad, Capital 600,000
Alba, Capital 600,000

***simply record the cash contribution in the capital account of each partner***

2. Cash and Non-cash Contributions (Capitalist Partners)

Abdon and Anton made the following contributions in the partnership:

Abdon Anton

Cash 600,000 200,000

Inventories 300,000
Equipment 500,000
The entry to record the contributions of the partners follows:

Cash 800,000
Inventories 300,000
Equipment 500,000
Abdon, Capital 900,000
Anton, Capital 700,000

***simply record the cash and non-cash contribution in the capital account of each partner***
***ensure to use the correct account title based on the contributed assets to the partnership***

3. Contributions in the form of Cash, Non-cash Assets, and Industry (Capitalist and Industrial
Partners)

Alma, Anna, and Adela formed a partnership. Alma contributed P 600,000 cash, Anna
contributed P300,000 cash and equipment valued at P450,000; Adela is an industrial partner to
contribute her special skills and talents to the partnership. Profit or loss is to be shared equally
among the partners.

The entry to record the contributions of partners Alma, Anna and Adela are as follows:

Cash 900,000
Equipment 450,000
Alma, Capital 600,000
Anna, Capital 750,000

Adela is admitted into the partnership as an industrial partner to share

one-third in the partnership profit.

***Adela is an industrialist partner, hence, she is not required to contribute cash or any asset***
*** ⅓ shared is derived from the statement underlined above, there are 3 partners, so each of
them has the rights to ⅓ share of the profit/loss of the partnership from the operation***
***ensure that whenever there is an industrial partner, there must be a memorandum entry to
acknowledge and note her part in the partnership***
FORMATION B: A SOLE PROPRIETOR AND AN INDIVIDUAL FORM A PARTNERSHIP

Usually, one of the prospective partners is already engaged in business prior to the formation of
the partnership.
In such a case, the partner may transfer his/her assets and liabilities (net assets) to the
partnership at agreed values or at fair market values if there are no agreed values.

The partnership may either:

(1) use the books of the sole proprietor 1. Adjustment of old books
2. Investment of new partner

(2) open a new set of books 1. Adjustment of old books (proprietor)

2. Closing of old books (proprietor)
3. Set-up/Opening of new books

However, it is a common practice that a new set of books are opened for any new business
undertaking.

When individual sets of books are kept by each partner or by any one of the partners, entries
are made on the separate books of the partners for adjustments to the recorded values.

These adjustments are made through the capital account.

The capital account is credited for increases in the value of net assets and is debited for
decreases in the value of net assets.

Alternatively, a Capital Adjustment Account may also be used. The balance of this account, after
recording all the necessary adjustments, is transferred to the capital accounts.

The following rules will be helpful in making the necessary adjusting entries:
Debit asset and credit capital for increases in asset values
Debit capital and credit asset for decreases in asset values
Debit capital and credit liabilities for increases in liability balances
Debit liabilities and credit capital for decreases in liability balances

In the case of contra asset accounts, the following rules shall apply:
Debit contra asset account and credit capital for increases in asset values Debit capital and
credit contra asset account for decreases in asset values
Example ( Exercise 2-3, Baysa and Lupisan, p.64)

Amores admits Andarada to a partnership interest in his business. Accounts in the ledger of
Amores on January 1, 2014, before the admission of Andrade, show the following

Debit Credit

Cash 208,000
Accounts Receivable 460,000
Merchandise Inventory 1,440,000
Accounts Payable 496,000
Amores, Capital 1,612,000

It is agreed that for the purpose of establishing the interest of Amores, the following adjustments
shall be made:

1. An allowance for uncollectible accounts of 25,000 is to be established

2. The merchandise is to be valued at 1,600,000
3. Prepaid expenses of 72,000 and unrecorded liability of 102,000 are to be recognized

Andrade is to invest sufficient cash for an equal interest in the partnership.

USE OF OLD BOOKS

Step 1. Prepare the necessary adjustments of the books of the sole proprietor (Amores) to the
agreed values.

a. Amores, Capital 25,000

Allowance for uncollectible 25,000
accounts

b. Merchandise Inventory 160,000

Amores, Capital 160,000

c. Prepaid Expenses 72,000

Unearned Revenue 30,000
Amores, Capital 102,000

Amores Capital
1,612,000
(25,000) Allowance for uncollectible accounts
160,000 Revaluation of Merchandise Inventory
(30,000) Prepaid Expenses and Recognized unrecorded liability

= 1,717,000
1,717,000 is Amores’ new capital balance.
No entry needed as Amores’ books are being used.
***adjust the necessary accounts under the capital account of the proprietor***
***no entry for the new capital of the proprietor as the old books are being used, hence, once
adjustments are made the capital account also adjusts, accordingly***
***be careful when recording the investment of new partner, always depend on the statement
given in the problem***

Step 2. Record the Investment of the New Partner

Cash 1,717,000
Andrade, Capital 1,717,000

NEW BOOKS ARE TO BE ESTABLISHED

Step 1. Adjust the old books of the proprietor based on the agreed values

a. Amores, Capital 25,000

Allowance for uncollectible 25,000
accounts

b. Merchandise Inventory 160,000

Amores, Capital 160,000

c. Prepaid Expenses 72,000

Amores, Capital 30,000
Liability/ A/P 102,000

Step 2. Close the old books of the proprietor

Debit Credit

Allowance for uncollectible accounts 25,000

Liability (any account) 102,000
Accounts Payable 496,000
Amores, Capital 1,717,000
Cash 208,000
Accounts Receivable 460,000
Merchandise Inventory 1,600,000
Prepaid Expenses 72,000

*to close the books of Amores

Step 3. Record the investment of the proprietor
 Debit Credit

Cash 208,000
Accounts Receivable 460,000
Merchandise Inventory 1,600,000
Prepaid Expenses 72,000
Allowance for uncollectible 25,000
accounts 102,000
Liability (any account) 496,000
Accounts Payable 1,717,000
Amores, Capital

*to record the investment of Amores

Step 4. Record the investment of the new partner

Cash 1,717,000
Andrade, Capital 1,717,000

FORMATION C: TWO OR MORE SOLE PROPRIETORS FORM A PARTNERSHIP

When all the prospective partners are already in business

They may decide to transfer their assets and liabilities (net assets) to the partnership at values
agreed upon or at fair market values, in the absence of agreed values.

The partnership may either:

(1) use the books of the sole proprietor 3. Adjustment of old books
4. Investment of new partner

(2) open a new set of books 4. Adjustment of old books (proprietor)

5. Closing of old books (proprietor)
6. Set-up/Opening of new books

However, it is a common practice that a new set of books are opened for any new business
undertaking.
NEW BOOKS

Step 1. Adjust the books of the proprietors

a. Adjust the Book of (A)

b. Close the Book of (A)
c. Adjust the Book of (B)
d. Close the Book of (B)

Step 2. Set up the investments of both proprietors

a. Set-up and record the investment of (A)

b. Set-up and record the investment of (B)

USE THE BOOKS OF PROPRIETOR (A)

a. Adjust the book of (B)

b. Close the book of (B)
c. Adjust the book of (A)
d. Record the investment of (B)

USE THE BOOKS OF PROPRIETOR (B)

a. Adjust the book of (A)

b. Close the book of (A)
c. Adjust the book of (B)
d. Record the investment of (A)

Chapter Key Points.

1. In the opening entry, the plant assets are recorded net of depreciation.
2. The account accumulated depreciation is not carried on the partnership books.
3. The net amount, being the agreed value, represents the cost of the plant assets to the
partnership and such amount becomes the basis for future depreciation by the
partnership.
4. Both accounts receivable and the corresponding allowance for uncollectible accounts
are recorded on the partnership books. The allowance for uncollectible accounts is
carried on the partnership books because of the possibility of collection.
5. If there are specific accounts receivable which are deemed worthless, such must be
written off and removed permanently from the outstanding accounts receivable.
Goodwill Resulting from the Acquisition of a Sole Proprietorship by a Partnership

The acquisition of a sole proprietorship/s by a partnership or formation of a partnership by a sole

proprietorship and an individual or among two or more sole proprietorships may involve the
recognition of goodwill.

The goodwill shall be the result of the acquisition by the new partnership of the net assets of the
sole proprietorship/s. When the capital credit exceeds the agreed value or fair value of the net
assets acquired by the new partnership from the sole proprietorship, the excess is treated as
goodwill.

The adjustment for the goodwill increases the capital of the sole proprietor.

PFRS 3 does not allow the amortization of goodwill acquired in a combination and instead
requires the goodwill to be tested for impairment annually, or more frequently, if events or
changes in circumstances indicate that the asset might be impaired.

CAPITAL SHARE DIFFERENT FROM CAPITAL CONTRIBUTION

Prior to recording partners' initial contributions to the partnership, the individual partners must
first agree not only on the valuation of the net asset contributions but also on their capital share.
The capital share of each partner is the percentage of equity that each of them will have in the
net assets of the newly formed partnership.

Generally, the capital share of a partner is proportionate to his/her capital contribution.

However, in recognition of intangible factors such as partners' special expertise, established
clientele or necessary business connections, partners may agree to a division of capital that is
not proportionate to their capital contributions. This situation will give rise to provision of bonus
on initial investments.

Illustrative Problem C: Alfonso and Afable formed a partnership by contributing P500,000 and
P600,000, respectively. Journal entries to record the investment of the under two approaches
are as follows:

1. Full investment approach

Cash 1,100,000
Alfonso, Capital 500,000
600,000
Afable, Capital
Assuming the partners agreed to have equal capital in the partnership, it is presumed that part
of the contribution of Afable is given as bonus to Alfonso in exchange for the intangible
advantage that Alfonso will be bringing to the partnership.

2. Bonus approach
Cash 1,100,000
Alfonso, Capital 550,000
550,000
Afable, Capital

(P500,000+ P600,000)/2 = P550,000

LOAN RECEIVABLE AND LOAN PAYABLE.

Aside from the contributions, partners may also advance money to the partnership in the form of
loan when the business is in need of additional funds.
Loans made by partners to the partnership, which are payable immediately by the partnership
and are usually with interest, are recorded in the account Loan Payable or Due to Partners.
This account is reported in the statement of financial position as a liability.

On the other hand, the partnership may advance money to partners, other than withdrawals, in
the form of loans. These loans, which are payable immediately by the partners and are usually
with interest, are recorded in the account Loan Receivable or Due from Partners. This account
is reported in the statement of financial position as an asset.
PARTNERSHIP OPERATION

NATURE OF PARTNERSHIP OPERATION

Accounting for partnership operations is essentially the same as accounting for the operations
of a sole proprietorship.

● Sale of merchandise on account is debited to Accounts Receivable and credited to

Sales.
● Collection of accounts is debited to Cash and credited to Accounts Receivable.
● The purchase of merchandise on account is recorded by a debit to Purchases and credit
to Accounts Payable.
● Payment of accounts is debited to Accounts Payable and credited to Cash.
● Payment of expenses is debited to Expenses and credited to Cash.

At the end of the accounting period,

Adjustments are made for
● merchandise inventory
● accruals
● prepayments
● provision for uncollectible accounts
● provision for depreciation.
Profit or loss is determined in the usual manner, that is, by matching periodic income and
expenses.

However, special problems are encountered in accounting for partnership operations. These
problems include:

1. Closing entries of a partnership losses

2. Distribution of profits and losses
3. Preparation of a worksheet
4. Preparation of financial statements
a. Statement of income/statement of comprehensive income
b. Statement of financial position
c. Statement of changes in partners' equity
CLOSING ENTRIES OF A PARTNERSHIP
The procedures for the preparation of closing entries for a partnership are similar to that of a
sole proprietorship.

First, all revenue and other nominal accounts with credit balances (such as Purchases
Discounts and Purchases Returns and Allowances) are debited and Income Summary is
credited.
Second, Income Summary is debited and all expense and other nominal accounts with
debit balances (such as Sales Discounts and Sales Returns and Allowances) are
credited.
Third, the balance of the Income Summary account, which represents profit or loss of the
partnership, is transferred either to the drawing accounts or directly to the capital
accounts of the partners.
Finally, the balance of the drawing account of each partner is transferred to his/her
capital account.

The balance of the Income Summary account is transferred to the drawing accounts of the
partners if the partners' intention is to keep the capital account intact for investments and
permanent withdrawals of capital.

A credit balance in the Income Summary account represents a profit and its balance is
transferred to the drawing accounts of the partners based on their profit and loss sharing ratio.

Cash XXX
A, Capital XXX
B, Capital XXX
C, Capital XXX

Any resulting credit balance in the drawing account of a partner may be withdrawn by the
partner or reinvested into the firm. If the balance in the drawing account is withdrawn in cash,
the entry is as follows:

A, Drawing XXX
Cash XXX

However if the partner decides to reinvest into the firm this balance in his drawing account, the
entry is as follows:

A, Drawing XXX
A, Capital XXX
A debit balance in the Income Summary account represents a loss and its balance is transferred
to the drawing accounts of the partners based on their profit and loss sharing ratio.

A, Drawing XXX
B, Drawing XXX
Income Summary XXX

The resulting debit balance in the drawing account of a partner is charged against his capital
with the following entry:

A, Capital XXX
A, Drawing XXX

On the other hand, the balance of the Income Summary account may be transferred directly to
the capital accounts of the partners if the partners' intention is to make the profit or loss a part of
permanent capital. It should be noted, however, that either treatment will result to the same net
effect on partners' ending capital balances.

All illustrations in this chapter pertaining to distribution of profit or loss are recorded directly to
the capital accounts with the assumption that partners intend to make their respective share on
the profit or loss as a direct part of their permanent capital.

A credit balance in the Income Summary account represents a profit and its balance is
transferred to the capital accounts of the partners based on their profit and loss sharing ratio

Income Summary XXX

A, Capital XXX
B, Capital XXX

A debit balance in the Income Summary account represents a loss and its balance is transferred
to the capital accounts of the partners based on their profit and loss sharing ratio.

A, Capital XXX
B, Capital XXX
Income Summary XXX
DISTRIBUTION OF PROFITS AND LOSSES

To make distribution of partnership profits and losses equitable, the following factors are
considered:

1. Services rendered by the partners to the partnership

2. Amount of capital contributed by the partners to the business
3. Entrepreneurial ability or managerial skill of the partners

The distribution or division of profits and losses may be expressed in several ways as follows:
- by percentage (25%, 75%)
- by fraction (1/4,. 3/4)
- by decimal (0.25, 0.75)
- by ratio (1:3)

RULES FOR DIVIDING PROFITS AND LOSSES

The following is the list of rules in the division of profits and losses of the partnership based on
the provisions of the New Civil Code:

1. As to Capitalist Partners
a. Division of profits
1. in accordance with agreement
2. in the absence of an agreement, division of profits is in accordance with capital
contributions

b. Division of losses
1. in accordance with agreement
2. if only division of profits is agreed upon, the division of losses will be the same as the
agreement on the division of profits
3. in the absence of an agreement, division of losses is in accordance with capital
contributions

2. As to Industrial Partners
a. Division of profits
1. in accordance with agreement
2. in the absence of an agreement, the industrial partner shall receive a just and
equitable share of the profits and the capitalist partners shall receive profits in
accordance with their capital contributions

b. Division of losses
1. in accordance with agreement
 2. in the absence of an agreement, the capitalist-industrial partner in his/her character as
industrial partner shall have no share in the losses, but in his/her character as a capitalist
partner will share in proportion to the capital contribution

Profits and losses in general shall be divided in accordance with the agreement among the
partners. In the absence of an agreement, the partners shall share in the profits in proportion to
their capital contributions after satisfying the share of the industrial partner on such profit.

METHODS OF DISTRIBUTING PROFITS BASED ON PARTNERS' AGREEMENT

1.Equally it is simple to apply but does not give due recognition on the disparity of capital
contribution nor does it recognize the time and effort that a partner may devote in running the
firm's business operations.

2. Arbitrary ratio (Percentage, Decimal, Fraction, Ratio) - it is simple to apply but does not give
recognition on the disparity of capital contributions nor does it recognize the time and effort that
a partner may devote in running the firm's business operations.

3. Capital ratio (Original, Beginning, Ending, Average) - this method recognizes the differences
in the capital contributions but does not take into account the time and effort that a partner may
devote in running the firm's business operations.

4. Interest on capital and the balance on agreed ratio - this method recognizes the
differences in the capital contributions but does not take into account the time and effort that a
partner may devote in running the firm's business operations.

Interest is allowed to partners for the use of invested capital. Interest as agreed by the partners
shall be allowed in proportion over the period such capital was actually used. sufficient or
insufficient or there is a net loss unless otherwise agreed upon by the partners, Moreover, the
interest shall be provided whether the profit is

5. Salary allowances to partners and the balance on agreed ratio - this method recognizes
the time and effort that a partner may devote in running the firm's business operations but does
not take into consideration the differences in capital contributions.

Salaries are allowed to partners as compensation for their time devoted in the business.
Salaries as agreed by the partners shall be allowed in proportion to the time the partners
actually rendered services to the firm. Such salaries shall be provided whether the profit is
sufficient or insufficient or there is net a loss unless otherwise agreed upon by the partners.

6. Bonus to managing partner and the balance on agreed ratio - this method allows a
bonus, as an incentive, to the managing partner. It is usually a percentage of the profit. Bonus,
therefore, is allowed only when there is a profit.
It may be computed using any one of the following as basis:
a. Bonus is based on profit before deducting bonus and income tax
b. Bonus is based on profit after deducting bonus but before deducting income tax
C. Bonus is based on profit after deducting income tax but before deducting bonus
d. Bonus is based on profit after deducting both bonus and income tax.

7. Interest on capital, salaries to partners, bonus to managing partner, and the

balance on agreed ratio.