Partnership Operation

Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY

Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021
College: Business Education

Campus : Bayombong Campus
DEGREE BSBA COURSE BRG6

PROGRAM NO.
SPECIALIZATION FM/MM/HRM/BE COURSE Partnership and Corporation
TITLE Accounting
YEAR LEVEL First Year TIME FRAME WK NO. 4-6 IM NO. 03
I. UNIT TITLE/CHAPTER TITLE: PARTNERSHIP OPERATION
II. LESSON TITLE:

Lesson 1: Factors to consider in arriving at a plan for dividing profits or losses
Lesson 2: Rules for the Distribution of Profit or Losses
Lesson 3: Distribution of Profits or Losses based on Partners’ Agreement
Lesson 4: Distribution of Profits/Losses Based on Partners' Capital Contributions
III. LESSON OVERVIEW
The basis on which profits and losses are shared is a matter of agreement among the
partners and may not necessarily be the same as their capital contribution ratio. The
equity of a partner in the net assets of the partnership should be distinguished from a
partners share in profits or losses.
This chapter explains the rationale behind each method in dividing the results of
operation and the factors which were the basis of the partners in choosing a method in
dividing profits. It also shows some computation applying some of the methods use in
profit distribution.
IV. DESIRED LEARNING OUTCOME
1. Enumerate and explain the different methods of dividing partnership net income and loss
and discuss the rationale behind each method
2. Identify the factors that guide the partners in choosing which method should be adopted
in dividing net income or loss.
3. Discuss the treatment of interest on capital, partners’ salaries and bonus in the
distribution of profits or losses.
4. Prepare a distribution schedule of profit or loss for partners.
V. LESSON CONTENT
Lesson 1: Factors to consider in arriving at a plan for dividing profits or losses
Money, Property or Industry
Partnership profits are realized as a result of putting together the contribution money, property
or industry of the partners. The amount of Capital invested to each partner and time devotes to
the business and other contributions are the factors being considered in profit and loss ratio.
Some agreements consider the importance of both the amount and quality of managerial
services rendered, and the amount of capital invested by the partners for the success or failure
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of the partnership. In this case, allowances may be provided for salaries to partners and interest
on their respective capital balances, the balance may be divided in specified ratio. Among the
other factors which may considered as follows:
A. A partner has considerable personal financial resources. In general, partners have

unlimited liability. A very solvent partner will make the person attractive to creditors.
B. A partner who is well known in a profession or an industry may contribute immensely to

the success of the partnership although he may not participate actively in the operations
of the partnership.
These two factors may be incorporated in the plan to arrive at a ratio by which any remaining
profits or losses to be divided.
Performance Method
Many partnerships use profits and loss sharing arrangements that give some weight to the
specific performance of each partner to provide incentives to perform well. This allocation of
profits to a partner on the basis of performance is frequently referred to a bonus.
Examples of use of criteria are:
A. Chargeable hours. These are the total number of hours that a partner incurred on client
–related assignments. Weight may be given to hours in excess of standard.
B. Total billings. The total amount billed clients for work performed and supervised by
partner constitutes total billings. Weight may be given to billings in excess of norm.
C. Write –offs. Consist of uncollectible billings. Weight may be given to a write off
percentage below a norm.
D. Promotional and civic activities. Time devoted in enhancing the partnership name in
community is considered civic activity.
E. Profits in excess of specified levels. Designated partners commonly receive a certain
percentage of profits in excess of a level of earnings.
Lesson 2: Rules for the Distribution of Profit or Losses
The Profit and losses shall be distributed in conformity with agreement. It is generally written
in the Articles of Co-Partnership. If only the share of each partner in the profits has been agreed
upon, the share of each in the loss shall be in the same proportion.
In the absence of stipulation, the share of each partner in profits or losses shall be in proportion
to what he may have contributed (according to the ratio of original capital investments or in its
absence, the ratio of capital balances at the beginning of the year), but the industrial partner
may not liable for the losses.
A summary of the above legal provisions is prepared as follows:

1. Profits
A. The profits will be divided according to partners agreement
B. If there is no agreement:
 As to capitalist partner, the profits shall be divided according to their capital

contributions ( according to the ratio of the original capital investments or in its
absence, the ratio of capital balances at the beginning of the year).
 As to industrial partner (if any), such share as may be just and equitable under the
circumstances, provided, that the industrial partner shall receive before the
capitalist partner shall be divide the profits.
2. Losses
A. The losses will be divided according to partners’ agreement.

B. If there is no agreement as to distribution of losses but there is an agreement as to
profits, the losses shall be distributed according to the profit sharing ratio.
C. In the absence of any agreement:
1. As to capitalist partner, the loss shall be divided according to their capital

contributions (according to the ratio of the original capital investments or in its
absence, the ratio of capital balances at the beginning of the year).
2. As to purely industrial (if any), shall not liable for any losses.
Lesson 3: Distribution of Profits or Losses based on Partners’ Agreement
In general, profits or losses shall be divided in accordance with the agreement of the partners.
The ratio in which profits or losses from partnership operations are distributed is recognized as
the profit and loss ratio.
The partners agree on any of the following scheme in distributing profits or losses:
1. Equally or in other agreed ratio
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 interest on partners’ capital and the balance in an agreed ratio

4. By allowing bonus to the managing partner based on profit and the balance in an agreed
ratio
5. By allowing salaries, interest on partners’ capital, bonus to the managing partner and the
balance in an agreed ratio.
Note that the partners can agree on not using a residual sharing ratio (“the balance in an agreed
ratio”) if profits do not exceed the total salary and interest allowances. In such a case, the
partners must agree on the priority of the various profit or loss distribution schemes.
Illustration.
The following series of illustrations are based on the figures obtained from the SUN and MOON
Partnership which had a profit of P300,000 for the year ended Dec. 31, 2016, the first year of
operations. The partnership contract provided that each partner may withdraw P5,000 on the
last day of each month; both partners did so during the year. The drawings are recorded by
debits to the partners' drawing accounts and shall not be considered in the division of profit or
loss. It is the intention of the partners that each partner's share in the profit or loss be either
credited or debited to the drawing account.
Leah SUN invested P400,000 on Jan. 1, 2016 and an additional P100,000 on April 1. Zeah
MOON invested P800,000 on Jan. 1 and withdrew P50,000 on July 1.
Equally or in an Agreed Ratio
Partnership contracts may provide that profit or loss be divided equally. The profit of P300,000
for the SUN and MOON Partnership is transferred by a closing entry on Dec. 31, 2016, from the
income summary ledger account to the partners' drawing accounts:
Income Summary 300,000

Sun, Drawing 150,000
Moon, Drawing 150,000
To record the division of profits.
If the partnership had a loss of P200,000 for the year ended Dec. 31, 2016, the income
summary ledger account would have a debit balance of P200,000. This loss would be
transferred to the partners' drawing accounts by a debit to each drawing account for P100,000
and a credit to the income summary account for P200,000.
SUN, Drawing 100,000

MOON, Drawing 100,000
To record the division of losses.
Assume instead that SUN and MOON share profits and losses in a ratio of 60:40 and profit was
P300,000, the profit would be divided as follows:

Computation:
SUN: 60% x P300,000
MOON: 40% x P300,000
Lesson 4: Distribution of Profits/Losses Based on Partners' Capital Contributions
Division of partnership profits in proportion to the capital invested by each partner is most likely
to be found in partnerships in which substantial investments is the principal ingredient for
success. It is essential that the partnership contract be specific with respect to the concept of
capital. Capital may refer to either of the following:
Ratio of Original Capital Investments. Assume that the partnership agreement provides for
the division of profits in the ratio of original capital investments. The original investments of SUN
and MOON are P400,000 and P800,000, respectively. The profit of P300,000 for 2016 is divided
as follows:
Computation:
SUN: P300,000 x P400,000/P1,200,000 P100,000
MOON: P300,000 x P800,000/P1,200,000 200,000
P300,000
After the entry allocating the profits of P300,000 to SUN and MOON, are the partners
supposed to receive cash for their respective share in the profits? No, the partners' share in the
profits cannot be attributed to any particular asset, including cash. The entry increased the
equity of SUN and MOON in all the assets of the partnership.
Ratio of Capital Balances at the Beginning of the Year. Assume that the partnership
agreement provided for the division of profits in the ratio of capital balances at the beginning of
the year. In this case, the original capital investments are also the capital balances at the
beginning of the year since the partnership is only on its first year of operations. The profit of
P300,000 for 2016 is divided as follows:

Computation:
SUN: P300,000 x P400,000/P1,200,000
MOON: P300,000 x P800,000/P1,200,000
Ratio of Capital Balances at the End of the Year. Assume that the profit is divided in the ratio
of capital balances at the end of the year before drawings and the distribution of profit. The
ending balances are P500,000 for SUN and P750,000 for MOON; the profit of P300,000 for
2016 is divided as follows:

Computation:
SUN: P300,000 x P500,000/P1,250,000 = P120,000
MOON: P300.000 x P750,000/P1,250,000 = 180,000
P300,000
Ratio of Average Capital Balances. Division of profits or losses on the basis of the three
preceding capital concepts—original capital investments; capital balances at the beginning of
the year; or capital balances at the end of the year—may prove inequitable there are material
changes in the capital accounts during the year.
When beginning capital balances are used in allocating profits, additional investments during
the year are discouraged because the partners making such investments are not compensated
in the division of profits until the next year.
If ending capital balances are used, year-end investments are encouraged, but there is no
incentive for a partner to make any investments before year-end. In addition, amounts earlier
withdrawn may be reinvested before year-end. These considerations suggest that using
average balances as a basis for distributing profits or losses is preferable because it reflects the
capital actually available for use by the partnership during the year.
The agreement should also state the amount of drawings each partner may make. These
drawings are considered temporary and are recorded as debits to the partner's drawing
account. Drawings within the allowable amount will not affect the computation of the average
capital balance. On the contrary, drawings in excess of the allowable amount are considered
permanent reductions in capital; hence, the computation of the average capital balance is
affected.
In Continuing the illustration for the SUN and MOON Partnership, the partners are entitles to
withdraw P5,000 or 60,000 per annum. Any additional withdrawals are directly debited to the
partners’ capital accounts and therefore will affect the computation of the average capital ratio.
SUN, CAPITAL
Average Capital
Date Capital Balances Month Balance
Unchanged
Jan 1 P400,000 X 3/12 P 100,000
April 1 500,000 X 9/12 375,000
Average Capital P475,000
MOON, CAPITAL
Average Capital
Date Capital Balances Month Balance
Unchanged
Jan 1 P400,000 X 6/12 P 400,000
July 1 7,500,000 X 6/12 375,000
Average Capital P775,000
TOTAL AVERAGE CAPITAL BALANCES (475,000+775,000) P 1, 250,000
The entry to record the division of P300,000 profit is as follows:

Computation:
SUN: P300,000 x P475,000/1,250,000
MOON: P300,000 x P775,000/P1,250,000
Comparison of distribution based solely on capital ratios as against distribution with

interest on capital balances. Under the capital ratio plan, the partner who invested more
capital will ultimately should a bigger share of the loss. This may result inequitable because the
investment of capital presumably is not the cause of the loss. The interest plan, the partner who
invested more capital is credited (increased) for an interest on his capital and is ultimately
debited (decreased) with a lesser share of the loss; in some cases, the result may even be net
credit (increase).
By Allowing Interest on Partners’ capital and the balance in an agreed Ratio
To give recognition to the difference in partners’ capital contribution, the partners may agree that
an interest be allowed in their capital balances which may either be the beginning, ending or
average capital balances. No matter what capital balance should be used as the basis, such
agreement including the rate of interest must be stipulated in the contract. It is important to
note that interest given to partners is not an expense of the partnership but as a part of the
distribution of profits or losses.
For illustration purposes, we will use the beginning balance as the basis. At any rate, the
mechanics will just be the same,
To illustrate:
Katrina and Sang are partners with beginning capital balances of P 80,000 and P60,000
respectively. They agreed to allow 10% interest its based on their respective beginning capital
balances and the remainder is equally divided.
Case 1- The profit for distribution is 30,000.
Solution:
A Schedule of Profit Distribution is Shown Below:
Partners
Total Katrina Sang
Interest allowed to partners
P P
Katrina 8,000 8,000
P
Sang 6,000 6,000
P
Total 14,000
Remainder:
Equally divided 16,000 8,000 8,000
P P P
As Distributed 30,000 16,000 14,000
Of the P30,000 Profit, P14,000 was first distributed to partners based on interest Allowed on
their Beginning Capital Balance and the remainder of P16,000 was distributed equally as per
agreement.
Based on the above schedule of Profit Distribution ,a journal entry is prepared as follows:
Journal Entry:
Income and Expense Summary 30,000
Katrina, Drawing P16,000
Sang, Drawing 14,000
To distribute profit to partners.
Case 2- The profit for distribution is P10,000.
This is a case where in the profit is not sufficient to pay the interest allowed to partners. While
the interest allowed to partnership P14,000, the profit for distribution is only P10,000.
As a rule, the partners’ agreement should prevail. Therefore, the interest allowed on capital will
be distributed to partners despite of the insufficiency to conform of what has been agreed upon.
Then later, make some sort of adjustment on the distribution of the difference to conform also to
what has been agreed upon.
Solution: A schedule of Profit Distribution is prepare below:
TOTAL Katrina Sang

Interest allowed to partners
P
Katrina 8,000 P 8,000
Sang 6,000 P 6,000
Total 14,000
Remainder: (10,000-14,000)
Loss
Equally Divided (4,000) (2,000) (2,000)
P
TOTAL 10,000 P 6,000 P 4,000
The above Schedule shows that interest allowed to partners of P14,000 was provided first
despite of its smaller profit. To conform with the distribution of actual profit of P10,000, the
difference of P4,000 was being deducted from the P14,000.
The journal entry to record the division of profit is prepared below:
Income Summary P10,000

Katrina, Drawing P6,000
Sang, Drawing 4,000
To distribute profit to partners.
By Allowing Salaries to partners and the Balance in an agreed Ratio
The sharing agreement may provide for variations in compensating the personal services
contributed by partners. Ever among partners who devote equal service time, one partners’
superior experience and knowledge may command a greater share of the profit. To
acknowledge the harder working or more valuable partner, the profit sharing plan may provide
foe salary allowances
Partners are partnership partnerships’ owners; they are not employees of the business. If
partners devote their time and services to the affairs of the partnership, they are understood to
do so for profit, not for salary. Therefore, when the partners calculate the profit of the
partnership, salaries to the partners are not deducted as expense in the statement of
recognized income and expense.
Continuing the illustration for the SUN and MOON Partnership, assume that the partnership
agreement provided for an annual salary of P100,000 to SUN and P60,000 to MOON, and the
balance to be divided equally. The profit of P300,000 for 2016 is divided as follows:
SUN MOON TOTAL

P
Salary Allowances 100,000 P 60,000 P 160,000
Balance to be divided equally
(300,000-160,000=140,000)
SUN (140,000x50%) 70,000
MOON (140,000x50%) 70,000 140,000
P
Share of Partners in Profits 170,000 P 130,000 P 300,000
The journal entry to close the income summary is as follows:

By allowing Bonus to the Managing Partner based on Profit and the Balance in an Agree
Ratio
A partnership contract may provide for a special compensation in the form of bonus to the
managing partner when the results of operations of the partnership are favourable. This
allowance is given in order to encourage the partner to maximize the profit potentials of the
partnership. Bonus is not being considered in the computation of profit, rather it is a mere
technique to distribute profits.
Assume that the SUN and MOON partnership agreement provided for a bonus of 25% of the
profit before bonus to partner SUN and the balance to be divided equally. The profit is
P300,000.
SUN MOON TOTAL

Bonus(25%xP300,000) P 75,000 P 75,000
Balance to be divided
equally
(300,000-75,000=225,000)
SUN (225,000x50%) 112,500
MOON (225,000x50%) 112,500 225,000
Share of Partners in
Profits P 185,000 P 112,000 P 300,000
The journal entry to close the income summary ledger is as follows:

Assume instead that the SUN and MOON Partnership agreement provided for a bonus of 25%
of profit after bonus to Partner SUN and the balance to be divided equally. It is understood in
the wording of the agreement that the 25% bonus will be based on the difference after
deducting bonus from certain amount. This certain amount is the profit after considering
expenses but before this bonus.
Here, the P300,000 profit still includes the bonus. The difference between this profit and bonus
shall be the basis for the 25% bonus rate. Hence, profit after bonus represents 100% while the
profit of P300,000 before bonus represents 125%.
Profit before bonus P300,000 125%

Profit after Bonus(P300,000/125%) 240,000 100%
Bonus P60,000 25%
SUN MOON TOTAL

Bonus P 60,000 P 60,000
Balance to be divided equally
(300,000-60,000=240,000)
SUN (240,000x50%) 120,000
MOON (240,000x50%) 120,000 240,000
P
Share of Partners in Profits 180,000 P 120,000 P 300,000
The journal entry to close to income summary ledger is as follows:
Income summary 300,000

By allowing Salaries, Interest on Capital, Bonus to the Managing Partner and the Balance
in an Agreed Ratio
The service contributions and capital contributions of the partners are often not equal. If the
service contribution are not equal, salary and allowances can compensate for the differences.
When both service and capital contribution are unequal the allocation of profits or losses may
include salary allowances, interest on their capital balances, bonus to the managing partner,
and the balance to be divided in an agreed ratio.
Note the provision for salaries and interest in the partnership agreement are called allowances.
These allowance are not reported in the statement of recognized income and expense as
salaries expense; they are merely means of allocating profit to the partners.
VI. LEARNING ACTIVITIES
Activity 2. Profit Distribution
Elisa Diaz and Ma. Conception Manalo formed a partnership, investing P330,000 and
P110,000, respectively. Determine the partners’ participation in the 2019 profit of P420,000
under each of the following independent assumptions:
a. No agreement concerning division of profit.

b. Divided in the ratio of original capital investment.
c. Interest at the rate of 8% allowed on original investments and the remainder divided in
the ratio of 2:3.
d. Salary allowances of P50,000 and P70,000, respectively, and the balance to be divided
equally.
e. Allowance of interest at the rate of 8% on original investments, salary allowances of
P50,000 and P70,000, respectively, and the remainder to be divided equally.
Ables and Galang divide partnership profit and losses solely on the basis of their average
capital balances. Ables had P275,000 invested during all of 2019; Galang had P200,000
invested from January 1 to August 31, and he invested another P75,000 on September 1. If
profit was P800,000 during 2019, how much should each partner receive?
Activity 4. PROFIT Distribution
In January 2019, Nick Marasigan and Dems Asacta agreed to produce and sell chocolate
candies. Marasigan contribute P2,400,000 in cash to the business. Asacta contributed the
building and equipment, valued at P2,200,000 and P1,400,000, respectively. The partnership
had profits of P840,000 during 2019 but was less successful during 2020, when profit was only
P400,000.
Required:
1. Prepare the journal entry to record the investment of both partners in the partnership.
2. Determine the share of profit for each partner in 2019 and 2020 under each of the
following conditions:
a. The partners agreed to share profit equally
b. The partners failed to agree on a profit-sharing arrangement
c. The partners agreed to share profit according to the ratio of their original
investments.
d. The partners agreed to share profit by allowing interest of 10% on their original
investments and dividing the remainder equally.
e. The partners agreed to share profit by allowing salaries of P400,000 for Marasigan
and P280,000 for Asacta, and dividing the remainder equally.
f. The partners agreed to share profits by paying salaries of P400,000 to Marasigan
and P280,000 to Asacta, allowing interest of 9% on their original investments, and
dividing the remainder equally.
Stephanie Calamba and Allan Brillantes decided to form a partnership. They agreed that
Calamba will invest P200,000 and Brillantes, P300,000. Calamba will devote full time to the
business, and Brillantes on part-time only. The following plans for the division of profits are
being considered:
a.Equal division.
b.In the ratio of original investments.
c.In the ratio of time devoted to the business.
d.Interest of 10% on original investments and the remainder in the ratio of 3:2.
e.Interest of 10% on original investments, salary allowances of P340,000 to Calamba and
P170,000 to Brillantes, and the remainder equally.
f. Plan (e), except that Calamba is also to be allowed a bonus equal to 20% of the amount
by which profit exceeds the salary allowances.
Required:
Determine the partners’ share in the profit or loss for each of the situations above assuming (1)
profit of P1,500,000 and (2) profit of P600,000.
VII. References:
Ballada, Win. Ballada Susan, (2016). Partnership and Corporation Accounting (Made
Easy). Sampaloc, Manila: Domadane Publishers
Domingo, A. 2nd Edition. Partnership, Revised Corporation, Cooperative Law. #02

Ampucao, Itogon, Benguet: Coaching for Results Publishing
Lopez, JR., R., (2015). Learning the Basic of ACCOUNTING. Davao City, Philippines:
MS LOPEZ Printing & Publishing
Millan, Z., (2020). Financial Accounting and Reportin (Fundamentals), 2019 Edition.
Baguio City: Bandolin Exterprise

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Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

College: Business Education

DEGREE BSBA COURSE BRG6

I. UNIT TITLE/CHAPTER TITLE: PARTNERSHIP OPERATION

II. LESSON TITLE:

III. LESSON OVERVIEW

IV. DESIRED LEARNING OUTCOME

Lesson 1: Factors to consider in arriving at a plan for dividing profits or losses

Money, Property or Industry

A. A partner has considerable personal financial resources. In general, partners have

B. A partner who is well known in a profession or an industry may contribute immensely to

Examples of use of criteria are:

Lesson 2: Rules for the Distribution of Profit or Losses

A summary of the above legal provisions is prepared as follows:

A. The profits will be divided according to partners agreement

 As to capitalist partner, the profits shall be divided according to their capital

A. The losses will be divided according to partners’ agreement.

1. As to capitalist partner, the loss shall be divided according to their capital

Lesson 3: Distribution of Profits or Losses based on Partners’ Agreement

1. Equally or in other agreed ratio

2. Based on partners’ capital contributions:

3. By allowing interest on partners’ capital and the balance in an agreed ratio

Equally or in an Agreed Ratio

Income Summary 300,000

SUN, Drawing 100,000

Income Summary 300,000

Lesson 4: Distribution of Profits/Losses Based on Partners' Capital Contributions

Income Summary 300,000

Income Summary 300,000

TOTAL AVERAGE CAPITAL BALANCES (475,000+775,000) P 1, 250,000

The entry to record the division of P300,000 profit is as follows:

Income Summary 300,000

Comparison of distribution based solely on capital ratios as against distribution with

By Allowing Interest on Partners’ capital and the balance in an agreed Ratio

Case 1- The profit for distribution is 30,000.

Case 2- The profit for distribution is P10,000.

Solution: A schedule of Profit Distribution is prepare below:

TOTAL Katrina Sang

The journal entry to record the division of profit is prepared below:

Income Summary P10,000

By Allowing Salaries to partners and the Balance in an agreed Ratio

SUN MOON TOTAL

The journal entry to close the income summary is as follows:

Income Summary 300,000

SUN MOON TOTAL

The journal entry to close the income summary ledger is as follows:

Income Summary 300,000

Profit before bonus P300,000 125%

SUN MOON TOTAL

The journal entry to close to income summary ledger is as follows:

Income summary 300,000

VI. LEARNING ACTIVITIES

Activity 2. Profit Distribution

a. No agreement concerning division of profit.

Activity 3. Profit Distribution

Activity 4. PROFIT Distribution

Activity 5. Profit Distribution

Domingo, A. 2nd Edition. Partnership, Revised Corporation, Cooperative Law. #02

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