PARTNERSHIP

OPERATION
“How will the partners divide the profits or
losses resulting from the operation of the
partnership?”
RULES FOR DISTRIBUTION OF
PROFIT AND LOSS
 Profits and losses shall be distributed in conformity with the
agreement.
 In the absence of agreement, share of each partner shall be in
proportion to what he have contributed**
 Industrial Partner shall receive just and equitable share in profit.
 In case of loss, Industrial Partner shall not be liable.
 A stipulation which excludes one or more partners from any share
in the profits or losses is VOID.
CAPITALIST PARTNER
Distribution of Profit (order of priority)
1. Profits shall be divided according to the partners’ agreement.
2. Based in proportion to their capital contribution.

Distribution of Losses (order of priority)

3. Losses shall be distributed according to partners’ agreement.
4. If there is no agreement as to distribution of losses, but there is an agreement as to profits, then
losses shall be distributed in accordance to profit sharing ratio.
5. Based in proportion to their capital contribution.
INDUSTRIAL PARTNER
Distribution of Profit (order of priority)
1. Profits shall be divided according to the partners’ agreement.
2. Industrial partner receives a just and equitable share under the circumstances.

Distribution of Losses (order of priority)

3. Losses shall be distributed according to partners’ agreement.
4. Industrial partner is not liable for losses.
P/L AGREEMENT
 Most profit and loss sharing formula includes one or more of the following features or
techniques :
1. Equally ;
2. Arbitrary ratio ;
3. In the ratio of partner’s capital amount balances and the dividing the balance on agreed ratio
:
a. Original capital – the initial investment / capital at the time of formation.
b. Beginning capital of the period
c. Average capital
P/L AGREEMENT
4. Interest on partners’ capital accounts and dividing the balanced on agreed ratio;
5. Salaries partners and dividing the balance on agreed ratio;
6. Bonus to partners and dividing the balance on agreed ratio; and
7. Interest on capital account balance, salaries and bonus to partners and dividing the balance
on agreed ratio.
8. Order of priority distribution schemes if profits are not sufficient to cover the salary and
interest allowances
 INTEREST ON CAPITAL
BALANCES
The purpose of allowing interest on capital is to give recognition
differences on capital contributions by partners. It also recognizes
the capital contribution of the partners’ capital contribution to the
partnership’s profit-generating capacity.
 INTEREST ON CAPITAL AS A
DISTRIBUTION/ALLOCATION OF NET
INCOME
Using interest allowances on partners’ capital accounts as a
technique for sharing partnership profit equitably has no effect on
the measurement of net income or loss of the partnership.
INTEREST ON CAPITAL ACCOUNTS
WITH RESULTANT NET LOSS
If the partnership contract provides for allowing interest on capital
accounts, this provision must be enforced regardless of whether
operations are profitable or unprofitable.
 SALARY ALLOWANCES
A person who devotes time to the partnership business while the
other partners work elsewhere may receive a salary allowance.
Salary allowances are also used to compensate for differences in the
fair value of the talents for partners, all of whom devote their time to
the partnership.
 SALARY ALLOWANCES WITH
RESULTANT NET LOSS
When an agreement provides for salaries with out qualification,
salary allocations must be made even though profit is inadequate to
cover salaries or there is a loss. After salaries are recorded the
income summary account shows a debit balance that is transferred to
the partners’ accounts as agreed.
 BONUSES
Bonuses are sometimes used as a means of providing additional compensation to partners who have
provided services to the partnership.
BONUS TO MANAGING PARTNERS
1. NET INCOME BEFORE ALLOWANCES
B = X ( N1 )
2. NET INCOME BEFORE ALLOWANCES BUT AFTER BONUS

B = X ( N1 – B )
3. NET INCOME AFTER ALLOWANCES BEFORE BONUS

B = X ( N1 - S – I )
4. NET INCOME AFTER ALLOWANCES FOR SALARIES, INTEREST, AND BONUS
B = X ( N1 – S – I – B )
BONUS WITH RESULTANT NET
LOSS
The concept of bonus is not applicable to a net loss.
When a partnership operates at a loss, the bonus provision is
disregarded because it defeats the purpose of giving bonus.
 INSUFFICIENT INCOME TO
COVER ALLOCATION
If the partners fail to provide such an occurrence in the profit and
loss formula, the established practice is to allocate the interest, salary
and/or bonus as if sufficient income had been earned. The amount by
which the interest, salary and/or bonus exceeds the net income is
allocated to the individual partners in their agreed ratio for allocating
residual income.
CORRECTION OF PARTNERSHIP
NET INCOME OF PRIOR PERIOD
1. Errors are discovered that occurred in specific prior years,
2. and the partners have altered the profit and loss agreement since the period
in which the error occurred.

In a partnership the correction is allocated to the individual partners’ capital

accounts. The allocation should be based on the profit and loss agreement in
effect during the period of the error.
SUMMARY
DISTRIBUTION PARTNERS
CAPITALIST INDUSTRIAL
PROFIT : 1. AGREEMENT 1. AGREEMENT
2. CAPITAL CONTRIBUTION - 2. JUST AND EQUITABLE SHARE
ORIGINAL

LOSSES : 1. AGREEMENT 1. AGREEMENT

2. PROFIT AGREEMENT 2. NO SHARE
3. CAPITAL CONTRIBUTION -
ORIGINAL
TYPES OF ALLOWANCES :
PROFIT
LOSS
SUFFICIENT INSUFFICIENT

1. SALARY   

2. INTEREST   

3. BONUS  × ×
ILLUSTRATION PROBLEM:
 The net income of A and B partnership for the year amounted to P420,000. Assume that the
partners agreed on the allocation of net income:

 Bonus of 20% to A
 Salaries to A, P40,000 and B, P60,000
 Interest on average capital balances – A, P12,000 and B,P8,000
 Residual balance in net income be allocated in the ratio of 2:1
SOLUTION:
A B TOTAL

 BONUS (20% x P420,000) 84,000 - 84,000

 SALARIES 40,000 60,000 100,000
 INTEREST 12,000 8,000 20,000
 BALANCE (420,000-84,000
-100,000-20,000) = 216,000
216,000 x 2/3 144,000 144,000
216,000 x 1/3 72,000 72,000
TOTAL 280,000 140,000 420,000