Partnership

Operation
Patriani Wahyu Dewanti, M.Acc.
Partnership Operation

Expenses Should Be Scrutinized
Partnership general-purpose
financial statements include an
income statement, a balance sheet, a
statement of partnership capital, and
a statement of cash

Accrual method, cash basis or mix

Partnership Operation
• Ilustration : Assume that Rat and Yan are partners sharing profits in a 60:40 ratio, respectively.
Data relevant to the partnership’s equity accounts for 2016 are:

Partnership net income 2016 $34,500

Rat capital January 1, 2016 40,000
Rat Additional invesment 2016 5,000
Rat drawing 2016 6,000
Yan capital January 1, 2016 35,000
Yan drawing 2016 9,000
Yan withdrawal 2016 3,000
Partnership Operation
Partnership Operation
• Recorded as follows :

Closing entries for the Rat and Yan partnership at December 31, 2016, are as follows:
December 31, 2016
Income summary (-OE) 34,500
Rat capital (+OE) 20,700
Yan capital (+OE) 13,800
To divide net Income 60% to Rat and 40% to Yan
December 31, 2016
Rat capital (-OE) 6,000
Yan Capital (-OE) 9,000
Rat Drawing (+OE) 6,000
Yan Drawing (+OE) 9,000
To close partner drawing accounts to capital accounts
Partnership Operation
Differences Withdrawal vs Drawings :
• Withdrawal : large and irregular amounts are ordinarily recorded directly in the withdrawing
partner’s capital account

Sam capital (-OE) 20,000

Cash (-A) 20,000
To record the withdrawal of cash
Partnership Operation
• Drawings : partner activity to withdraw regularly amounts of money in anticipation of their
partnership profits (bonus, salary allowances, etc)
Ilustration : Tow and Lee withdraw $1,000 from the partnership each month, they would record
the monthly withdrawals as follows :

Tow drawing (-OE) 1,000

Cash (-A) 1,000
To record Tow’s drawing allowance for January
Lee drawing (-OE) 1,000
Cash (-A) 1,000
To record Lee’s drawing allowance for January
Partnership Operation
• Recorded at the end of the year each partner withdraw each month $1,000

Tow capital (-OE) 12,000

Tow drawing (+OE) 12,000
To close Tow’s drawing account
Partnership Operation
(Loan Accounts)
• Any loans between a partner and the partnership should always be accompanied by proper
loan documentation such as a promissory note.
• Loan from a partner is shown as a payable on the partnership’s books, the same as for any
other loan
• Ilustration : record a $4,000, 10 percent, one-year loan from Alt to the partnership on July 1,
20X1:

July 1, 20x1
Cash 4,000
Loan Payable to Alt 4,000
Record load agreement with partner Alt
Profit- AND LOSS-SHARING
AGREEMENTS
• Profit distributions are similar to a corporation’s dividends
• These distributions should not be included
• on the partnership’s income statement regardless of how the profit is distributed.
• Profit distributions are recorded directly into the partner’s capital accounts, not treated as
expense items.
• Partners generally agree to share profits in a specified ratio, such as the 60:40
• A wide range of profit distribution plans is found in the business world.
Profit- AND LOSS-SHARING
AGREEMENTS
• Ilustration :
• During 20X1, the AB Partnership earned $45,000 of revenue and incurred $35,000 in expenses,
leaving a profit of $10,000 for the year. Alt maintains a capital balance of $20,000 during the year,
but Blue’s capital investment varies during the year as follows:
• Debit $3,000 and $1,000 are recorded as drawing account, while $500 credited as additional
investment. Assume that both partners agree to share profit and loss in the ratio 60% : 40%
(Alt : Blue)
• Recorded as end of the years as follows :

December 31, 20X1

Blue, Capital 4,000
Blue, Drawing 4,000
Close Blue’s drawing account
Revenue 45,000
Expenses 35,000
Income Summary 10,000
Close revenue and expenses
Income Summary 10,000
Alt, Capital 6,000
Blue, Capital 4,000
Distribute profit in accordance with partnership agreement
 Salaries Allocation
• salaries to partners are simply fixed amounts allocated to partners as part of the regular allocation
of profits.
• They are generally included as part of the profit distribution plan to recognize and compensate
partners for differing amounts of personal services provided to the business.
• In partnership accounting, partner salary allowances are not expenses in the determination of
partnership net income. They are a means of achieving a fair division of income among the
partners based on the time and talents devoted to partnership business.
Salaries Allocation
• Ilustration 1 :
• the partnership agreement provides for fixed allocations of $2,000 to Alt and $5,000 to Blue.
Any remainder is to be distributed in the profit and loss–sharing ratio of 60:40 percent. The
profit distribution is calculated as follows:
Salaries Allocation
• Ilustration 2 :
• Assume that Ann, Gar, and Kat’s partnership agreement provides that Ann and Gar receive salary
allowances of $12,000 each, with the remaining income allocated equally among the three
partners. If partnership net income is $60,000 for 2016 and $12,000 for 2017, the income
allocations are as shown in below. The total 2016 allocation is $24,000 each to Ann and Gar and
$12,000 toKat. The 2017 allocation is $8,000 income to Ann and Gar and a $4,000 loss to Kat.
Note that the partnership agreement was followed in 2017 even though the salary allowances of
$24,000 exceeded partnership net income of $12,000. The income allocation schedule follows the
order of the profitsharing agreement even when the partnership has a loss. Salary allowances
increase the loss to be divided equally.
Recorded as follows :

December 31, 2016

Income Summary (-OE) 60,000
Ann capital (+OE) 24,000
Gar capital (+OE) 24,000
Kat capital (+OE) 12,000
partnership income allocation for 2016
December 31, 2017
Income Summary (-OE) 12,000
Kat capital (-OE) 4,000
Ann Capital (+OE) 8,000
Gar Capital (+OE) 8,000
Partnership income allocation for 2017
 Bonuses
• Bonuses are sometimes used to provide additional compensation to partners who have provided
services to the partnership, and are typically stated as a percentage of income either before or after
subtracting the bonus.
• Ilustration
• Assume that a bonus of 10 percent of income in excess of $5,000 is to be credited to Blue’s
capital account before distributing the remaining profit. In Case 1, the bonus is computed as a
percentage of income before subtracting the bonus amount. In Case 2, the bonus is computed as
a percentage of income after subtracting it.
• Case 1:
Bonus = X % (NI – MIN)
where: X = The bonus percentage
NI = Net income before bonus
MIN = Minimum amount of income before bonus
Bonus = 0.10 ($10,000 – $5,000)= $500
• Case 2:
Bonus = X % (NI – MIN – Bonus) = 0.10 ($10,000 – $5,000 – Bonus )= 0.10 ($5,000 – Bonus)
= $500 – 0.10 Bonus
1.10 Bonus = $500
Bonus = $454.55≈ $455
• Ilustration 2 :
• Assume that the partnership agreement of Ann, Gar, and Kat provides that Ann receive a
bonus of 10 percent of partnership net income for managing the business; that Ann and Gar
receive salary allowances of $10,000 and $8,000, respectively, for services rendered; and that
the remaining partnership income be divided equally among the three partners. If partnership
net income is $60,000 in 2016 and $12,000 in 2017, the partnership income is allocated as
shown below.
• Partners may, however, require salary allowances to be deducted in determining the base for
computing the bonus. If this had been the case here, the bonus illustrated for 2016 as follows :
• Bonus Ann : $4,200  [($60,000 - $18,000) * 10%]
• The final net income allocation would have been
= ($60,000-$10,000-$8,000-$4,200):3 = $12.600
• Ann Income allocation:$ 12,600 + $10,000+$4,200 = $26,800
• Gra Income Allocation : $ 12,600+$8,000 = $ 20,600
• Kat Income Allocation : $ 12,600
 Bonuses
• Sometimes the partners may want the bonus, as well as salary allowances, to be deducted in
determining the base for the bonus computation.
• Let B = Bonus
B = 0.1($60,000 - $18,000 - B)
B = $6,000 - $1,800 - 0.1B
1.1B = $4,200
B = $3,818 (rounded)
• Check: $60,000 - $18,000 - $3,818 = $38,182 bonus base
• $38,182 * 10% = $3,818 bonus
• Bonus and Salary Allowances in profit- Sharing Agreements
Capital as a Factor In Profit-sharing Agreements

Capital Capital
Capital
Income
Balance

Profit
Ending
sharing
Balance
agreement
• Ilustration :
INCOME ALLOCATED IN RELATION TO PARTNERSHIP CAPITAL
• The partnership of Ace and Soy was formed on January 1, 2016, with each partner investing
$20,000 cash. Changes in the capital accounts during 2016 are summarized as follows:
• Let’s extend the Ace and Soy example by assuming that partnership net income is allocated on
the basis of capital balances and that net income for 2016 is $100,000.
• Net Income Allocation
INTEREST ALLOWANCES ON
PARTNERSHIP CAPITAL
• The purpose of interest allowance is to encurage the capital investment
• As well as salary allowances, which recognized for time devoted to business
• Interest allowance and salary allowances than deducted to net income, remaining profit are
then divided equally or in other ratio specified in the agreement.
• Ilustration :
The following information for Rus and Nag partnership in 2016 as follows :
• The average capital balances for Rus and Nag are computed as follows (amounts in
thousands):
• The partnership agreement provides that the partnership income is divided equally after salary
allowances of $12,000 per year for each partner and after interest allowances at a 10 percent
annual rate on average capital balances. Exhibit 16-5 shows the income allocations for 2016
under this agreement. Part A assumes that partnership net income for 2016 is $91,000, and
Part B assumes a partnership loss for 2016 of $3,000.
Multiple Profit Allocation Bases
• A partnership agreement may provide a formula describing several allocation procedures to be
used to distribute profit. For example, assume the AB Partnership profit and loss agreement of
specifies the following allocation process:
1. Interest of 15 percent on weighted-average capital balances.
2. Salaries of $2,000 for Alt and $5,000 for Blue.
3. A bonus of 10 percent of profits to be paid to Blue on partnership income exceeding $5,000 before
subtracting the bonus, partners’ salaries, and interest on capital balances.
4. Any residual to be allocated in the ratio of 60 percent to Alt and 40 percent to Blue.
• During 20X1, the AB Partnership earned $45,000 of revenue and incurred $35,000 in
expenses, leaving a profit of $10,000 for the year. Alt maintains a capital balance of $20,000
during the year, but Blue’s capital investment varies during the year as follows:
References
Beams, Floyd.A.,&Anthony, Joseph H.(2018). Advanced Accounting, 13th Ed, Pearson Education
Limited
Christensen, E. Theodore., Cotrell M. David., Baker, Richard E. (2010). Advanced Financial
Accounting , 10th Edition, Mc Graw Hill
Pernyataan Standar Akuntansi Keuangan (PSAK). (2015), IAI.