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Partnership Operations

Review of the accounting cycle


1. 2. 3. 4. 5. Collection and analysis of data Journalizing Posting Preparation of unadjusted trial balance Adjusting entries

6.
7. 8. 9.

Preparation of adjusted trial balance


Preparation of financial statements Closing of books Preparation of post-closing trial balance

10. Reversing entries

Partnership Operations
Review of partnership accounting
Plurality of capital and drawing accounts Partners loans and borrowings Division of profits and losses

Partners Accounts
Capital account records the partners equity investment at any point in time
Drawings account records the allowable withdrawal by the partner Loans account records amounts borrowed from or loaned to the partner *A loan is not part of the partners equity. It is treated in the same way as a loan to or from a third party.

Partnership Operations
Peculiarities of a partnerships financial statements
1. The owners equity is labeled as partners equity. 2. An additional section in the profit or loss statement that shows the division of profits among the partners is included. 3. The statement of changes in partners equity is included in the set of financial statements presented by the partnership.

Partnership Operations
Division of profits and losses
Civil Code of the Philippines, Art. 1797 and 1799 1. In accordance with the agreement. 2. If only the division of profits is agreed upon, the division of losses will be the same as the division of profits. 3. In the absence of an agreement, the division of the profits or losses is in accordance

with the capital contribution of capitalist partners.


4. In the absence of an agreement, the industrial partner receives a just and equitable share in the profits, but is not liable for the losses. 5. A stipulation that excludes one or more partners from any share in the profits is void.

Partnership Operations
General guidelines in the division of profits and losses
1. Partner salary allowances, interest allowances on capital account balances and bonuses are not considered expenses by the partnership. 2. Salary and interest allowances must be provided whether the partnership realized a profit or not. 3. Bonuses are given only when there is a profit.

4. Drawings, generally, are not closed to the capital account immediately.

Partnership Operations
Assume Johnson, Froderman and Moore earned an income of P1.2M for the year. Their capital accounts are summarized as follows: Johnson Jan. 1 Mar. 31 Oct. 1 300 000 60 000 (80 000) Froderman 300 000 (50 000) 20 000 Moore 200 000 50 000 (30 000)

Divide the net income among the partners given the following independent situations:
1. Net income is divided equally. 2. Net income is divided as follows: J 1/5; F 2/5; M 2/5 3. Net income is divided as follows: J 30%; F 40%; M 30% 4. Net income is divided as follows: 5: 3: 2. 5. Net income is divided based on beginning capital balance.

Partnership Operations
6. Net income is divided based on ending capital balance. 7. Net income is divided based on average capital balance. 8. The following have been agreed upon by the partners: a. 10% interest on beginning capital b. Assumed salaries of P90 000 are given to Johnson and Froderman. c. 20% bonus on income before bonus is given to Moore.

d. Remainder is to be divided as follows: 4: 4: 2.


9. Same information as #8, but bonus is computed as a percentage of net income after bonus. 10. Same information as #8, but net income is P50 000. 11. Same information as #8, but net loss is P50 000.

Partnership Operations
Danny Tidwell, Steven Boss, Jakob Karr and Sasha Mallorys agreement with regard to the division of the partnership income is as follows: 10% interest on the partners original contribution.

Total bonus amounting to P51 200 will be given to Boss, Karr and Mallory. Boss will
receive 50% of the bonus, while Karr and Mallory will equally share in the other half of the bonus. Tidwell and Mallory will receive salaries of P300 000 each annually, while Boss will receive P350 000 and Karr will have P250 000. Remainder will be divided as follows: Tidwell 1/6, Boss 1/3, Karr 1/3 and Mallory 1/6.

The initial partnership was P1 000 000. Tidwell and Mallory contributed P250 000 each,
Boss invested P100 000 in the partnership, while the remainder was invested by Karr. If Jakob Karrs share in the partnership income was P182 800, and he received a bonus of P12 800, compute for the partnerships total income and each partners share in it.