PARTNERSHIP OPERATIONS

ACCOUNTING FOR SPECIAL TRANSACTIONS

LEARNING OBJECTIVES

 Recognize and measure partnership income and expenses

 Record distribution of partnership profit or loss among
partners using the various profit and loss distribution
methods
 Identify prior period transactions needed to be corrected to
reflect on net income
PARTNERSHIP OPERATIONS

• DIVISION OF PROFITS AND LOSSES

• FINANCIAL STATEMENTS FOR A
PARTNERSHIP
• CHANGES IN THE PROFIT AND LOSS RATIO
• CORRECTION OF PARTNERSHIP NET
INCOME OF PRIOR PERIOD
DIVISION OF PROFITS AND LOSSES
 Profit and loss division of the partners may be expressed in
terms of:
1. Percentage
2. Fraction
3. Decimal
4. Ratio
DIVISION OF PROFITS AND LOSSES
 Example. Cornelio and Dimalanta are partners sharing
profits and losses based on their capital contributions of
P400,000 and P600,000 respectively. Their profit and loss
sharing can be expressed as follows.
1. By percentage Cornelio 40% (400k/1M)
Dimalanta 60% (600k/1M)
2. By fraction Cornelio 4/10 (400k/1M)
Dimalanta 6/10 (600k/1M)
DIVISION OF PROFITS AND LOSSES
 Example. Cornelio and Dimalanta are partners sharing
profits and losses based on their capital contributions of
P400,000 and P600,000 respectively. Their profit and loss
sharing can be expressed as follows.
3. By decimal Cornelio .40 (400k/1M)
Dimalanta .60 (600k/1M)
4. By ratio Cornelio 4:6 or 2:3 (400k:600k)
Dimalanta
DIVISION OF PROFITS AND LOSSES

FACTORS TO BE CONSIDERED FOR FAIR P/L SHARING

 Services rendered by the partners to the partnership. Salaries are
given to partners proportionate to time devoted to the organization.
Those who devote more time should have greater salary share.
 Amount of capital contributed by the partners. Interest on capital
contribution is allowed to each partner to give recognition to the
differences in capital contributed to the partnership. Thus a partner
with highest capital contribution gets the highest interest share.
 Entrepreneurial ability or managerial skills of the partners. Bonus
is allowed to partners when the partnership realizes profits in order
to give recognition to managerial skills.
DIVISION OF PROFITS AND LOSSES
 Rules for Dividing Profits and Losses
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 contribution
B. Division of losses
1. In accordance with agreement
2. If only the division of profits is agreed upon, then the division of losses
will follow the same proportion
3. In the absence of an agreement, division of losses is in accordance with
capital contribution
DIVISION OF PROFITS AND LOSSES
 Rules for Dividing Profits and Losses
1. As to Industrial Partner
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 in accordance
with the capital contribution
B. Division of losses
1. In accordance with agreement
2. In the absence of an agreement, the capitalist-industrial partner shall have
no share in his/her character as an industrial partner; but will share in
proportion to his/her capital contribution in his/her capacity as a capitalist
partner
DIVISION OF PROFITS AND LOSSES
Method Characteristic
Equally Simple to apply but does not recognize disparity of capital
Arbitrary Ratio contribution and time and effort
Capital Ratio Recognizes differences in capital contribution but not the
Interest on Capital time and effort

Salary Allowance Recognizes time and effort but not differences in capital
contribution. Salary is applied in proportion of the period
rendered and provided whether there is profit, and in case of
profit, whether sufficient or not, unless otherwise agreed
Bonus to Managing Bonus serve as incentive. Usually based on net profit, thus
Partner only allowed when there is profit. Bonus may be computed
using any one of the following:
a. Bonus is based on profit before deducting bonus
b. Bonus is based on profit after deducting bonus
DIVISION OF PROFITS AND LOSSES
 Example. The EF Enterprises realized a profit of P240,000 for the
year. Changes in capital accounts of the partners during the year
are as follows
Estrada, Capital Jan 1 Balance P500,000
Apr 1 Additional 50,000
May 1 Withdrawal 20,000
Oct 1 Additional 100,000
Fajardo, Capital Jan 1 Balance P300,000
Jun 1 Withdrawal 30,000
Sep 1 Additional 100,000
Dec 1 Withdrawal 10,000
DIVISION OF PROFITS AND LOSSES
 Assumption 1 – Profit is divided equally
Income Summary240,000
Estrada, Capital 120,000
Fajardo, Capital 120,000 To record share of partners in partnership
profit
P240,000/2 = P120,000
 Assumption 2 – Profit is divided in the ratio of 3:2
Income Summary240,000
Estrada, Capital 144,000
Fajardo, Capital 96,000 To record share of partners in partnership
profit
P240,000 x 3/5 = P144,000; P240,000 x 2/5 = P96,000
DIVISION OF PROFITS AND LOSSES
 Assumption 3 – Profit is divided 45% to Estrada and 55% to Fajardo
Income Summary240,000
Estrada, Capital 108,000
Fajardo, Capital 132,000 To record share of partners in partnership profit
P240,000 x 45% = P108,000; P240,000 x 55% = P132,000
 Assumption 4 – Profit is divided according to beginning capital ratio
Income Summary240,000
Estrada, Capital 150,000
Fajardo, Capital 90,000 To record share of partners in partnership
profit
P240k x 500k/800k = P150,000; P240k x 300k/800k = P90,000
DIVISION OF PROFITS AND LOSSES
 Assumption 5 – Profit is divided according to average capital ratio
Computation of average capital using peso months method:
Estrada Capital
Jan1 – Mar 31 500,000 x 3 P1,500,000
Apr 1 – Apr 30 550,000 x 1 550,000
May 1 – Sep 30 530,000 x 5 2,650,000
Oct 1 – Dec 31 630,000 x 3 1,890,000
P6,590,000
Average Capital – P6,590,000/12 P 549,166.67
DIVISION OF PROFITS AND LOSSES
 Assumption 5 – Profit is divided according to average capital ratio
Computation of average capital using peso months method:
Fajardo Capital
Jan1 – May 31 300,000 x 5 P1,500,000
Jun 1 – Aug 31 270,000 x 3 810,000
Sep 1– Nov 30 370,000 x 3 1,110,000
Dec 1– Dec 31 360,000 x 1 360,000
P3,780,000
Average Capital – P3,780,000/12 P 315,000
DIVISION OF PROFITS AND LOSSES
 Assumption 5 – Profit is divided according to average capital ratio
Income Summary 240,000
Estrada, Capital 152,516.88
Fajardo, Capital 87,483.12
To record share of partners in partnership profit
P240,000 x 549,166.67/864,166.67 = P152,516.88
P240,000 x 315,000.00/864,166.67 = P 87,483.12
DIVISION OF PROFITS AND LOSSES
 Assumption 6 – Each Partner is allowed 10% interest on ending
capital and the remaining profit is divided equally.
 Assumption 7 – Fajardo is allowed salaries of P150,000 and the
remaining profit is divided in the ratio of 4:1
 Assumption 8 – Fajardo, the managing partner is allowed a bonus
of 20% of profit after bonus and the remainder equally
 Assumption 9 – The partnership agreement provides salaries of
P100,000 and P50,000 to Estrada and Fajardo, 10% interest on
ending capital; 20% bonus to managing partner Fajardo if net
profit is sufficient, then the balance equally.
DIVISION OF PROFITS AND LOSSES
 Order of Profit Sharing
 Some partnerships specify a profit distribution to be followed
 Bonus, salary allowance, interest and remainder
 If partners intend for salary and interest allowances to be deducted
in determining base for computing the bonus, no bonus is allowed
as there is insufficient profit after distribution of salaries and
interests
FINANCIAL STATEMENTS FOR A
PARTNERSHIP
 Statement of Comprehensive Income
 Similar to sole proprietor except explanation of the division of net
income among the partners may be included
 Statement of Changes in Partner’s Equity
 Similar to sole proprietor except to the plurality of accounts
 Statement of Financial Position
 Similar to sole proprietor except to the plurality of accounts
 Statement of Cash Flows
 Similar to sole proprietor
CORRECTION OF PARTNERSHIP NET
INCOME OF PRIOR PERIOD
1. Determine the correct net profit of the prior period
2. Compute the proper share of each partner using profit and loss ratio
in the year in which the error occurred
3. Compute the difference between the share in the profit that each
partner actually received and the share each would have received.
4. Adjust the partners’ capital accounts accordingly.
CORRECTION OF PARTNERSHIP NET
INCOME OF PRIOR PERIOD
CORRECTIONS TO PROFIT OF THE CURRENT Prior Current
YEAR FOR ERRORS MADE IN: Year Year
1. Unrecorded prepaid expenses - +
2. Unrecorded accrued expenses + -
3. Unrecorded accrued income - +
4. Unrecorded unearned income + -
5. Overstatement of inventories + -
6. Understatement of inventories - +
7. Overstatement of purchases - +
8. Understatement of purchases + -
9. Overstatement of depreciation NONE +
10. Understatement of depreciation NONE -