Partnership

Operations
Accounting for Partnerships and Corporations
RCA 2022
Points to be discussed

01. Getting Started 02. Factors for Allocation 03. Methods of

Dividing Profit/Loss
Profit or Loss. What are the factors being Who are the methods of
considered in dividing profits dividing profit/loss?
and losses.

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Getting Started

After forming the partnership, the business is now

ready to operate for profit or loss. The profit or loss is
the indicator on whether your business is performing
well or your business is a failure.

3
Factors to consider for the P/L allocation

• Invested Capital
• Time or Labor given
• Expertise contributed

4
Methods of dividing profit or loss

• Arbitrary Ratio (Equally, percentages, fractions or ratios)

• Providing Interest on capital balances, balance in agreed ratio.
• Providing Salary to Partner(s), balance in agreed ratio.
• Providing Bonus to Partners, balance in agreed ratio.

Capital Balances may be based on:

• Beginning balances
• Ending balances
• Average balances
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 Illustration
Danny Cabulay invested P400,000 on January, 1, 2020 and an additional P100,000 on April 1. Belinda
Narvaez invested P800,000 on January 1, 2020 and withdrew P50,000 on July 1.

Assume that the profit for the year is P400,000.

a. The partnership agreement is to divide profits equally.

b. The partnership agreement is to divide profits 60% to Cabulay and 40% to Narvaez.
c. The partnership agreement is to divide profits 6/10 to Cabulay and 4/10 to Narvaez.
d. The partnership agreement is to divide profits 6:4, respectively.
e. The partnership agreement is to divide profits based on beginning capital balances.
f. The partnership agreement is to divide profits based on ending capital balances.
g. The partnership agreement is to divide profits based on average capital balances.

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 Illustration
a. The partnership agreement is to divide profits equally.
Cabulay Narvaez Total
Balance to be divided equally:
Cabulay (P400,000/2): P200,000 200,000
Narvauez (P400,000/2): P200,000 200,000 400,000
Share of Partners in Profits 200,000 200,000 400,000

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 Illustration
b. The partnership agreement is to divide profits 60% to Cabulay and 40% to Narvaez.
Cabulay Narvaez Total
Balance to be divided 60%:40%
Cabulay (P400,000x60%): P240,000 240,000
Narvauez (P400,000x40%): P160,000 160,000 400,000
Share of Partners in Profits 240,000 160,000 400,000

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 Illustration
c. The partnership agreement is to divide profits 6/10 to Cabulay and 4/10 to Narvaez.
Cabulay Narvaez Total
Balance to be divided 6/10:4/10
Cabulay (P400,000x6/10): P240,000 240,000
Narvauez (P400,000x4/10): P160,000 160,000 400,000
Share of Partners in Profits 240,000 160,000 400,000

9
 Illustration
d. The partnership agreement is to divide profits 6:4, respectively.
Cabulay Narvaez Total
Balance to be divided 6:4
Cabulay (P400,000x6/10): P240,000 240,000
Narvauez (P400,000x4/10): P160,000 160,000 400,000
Share of Partners in Profits 240,000 160,000 400,000

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 Illustration
e. The partnership agreement is to divide profits based on beginning capital balances.
Cabulay Narvaez Total
Balance to be divided based on beg. cap. bal.
Cabulay (P400,000x400T/1200T): P240,000 133,333
Narvauez (P400,000x800T/1200T): P160,000 266,667 400,000
Share of Partners in Profits 133,333 266,667 400,000

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 Illustration
f. The partnership agreement is to divide profits based on ending capital balances.
Cabulay Narvaez Total
Balance to be divided based on ending cap. bal.
Cabulay (P400,000x500T/1250T): P240,000 160,000
Narvauez (P400,000x750T/1250T): P160,000 240,000 400,000
Share of Partners in Profits 160,000 240,000 400,000

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 Illustration
g. The partnership agreement is to divide profits based on average capital balances.
Cabulay Narvaez Total
Balance to be divided based on ACB:
Cabulay (P400,000x475T/1250T): P240,000 152,000
Narvauez (P400,000x775T/1250T): P160,000 248,000 400,000
Share of Partners in Profits 152,000 248,000 400,000

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 Illustration
Computation of Average Capital Balances
Cabulay – Ave. Cap. Bal. Amount Multiplier Average
Invested P400,000 on January 1 400,000 3/12 100,000
Additional P100,000 investment on April 1 500,000 9/12 375,000

Average Capital Balance - Cabulay 475,000

Narvaez – Ave. Cap. Bal. Amount Multiplier Average

Invested P800,000 on January 1 800,000 6/12 400,000
Withdrawn P50,000 on July 1 750,000 6/12 375,000

Average Capital Balance - Narvaez 775,000

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 Illustration
Danny Cabulay invested P400,000 on January, 1, 2020 and an additional P100,000 on April 1. Belinda
Narvaez invested P800,000 on January 1, 2020 and withdrew P50,000 on July 1.

Assume that the profit for the year is P400,000 and the partnership agreement for the Cabulay and Narvaez
Partnership provided the following:
1. Bonus to Cabulay of 25% of profit before bonus.
2. Bonus to Cabulay of 25% of profit after salaries and interest but after bonus;
3. Annual Salaries of P100,000 to Cabulay and P60,000 to Narvaez;
4. Interest on average capital balances of P71,250 and P116,250 to Cabulay and Narvaez, respectively;
5. Balance to be divided in a ratio of 40:60.

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 Illustration
Illustration on provision of bonus:

Bonus Before Bonus 400,000 125%

Bonus After Bonus (P400,000/125%) 320,000 100%
Bonus 80,000 25%

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Illustration

Cabulay Narvaez Total

Bonus after bonus to Cabulay 25%
[(P400,000/125%)x25%]: P80,000 80,000 80,000
Salaries to Partners 100,000 60,000 160,000
Interest of Average Capital Balances 71,250 116,250 187,500
Balance to be divided 4:6
[400,000-80,000-160,000-187500= (27,500)]
Cabulay [(P27,500)x4/10]: (P11,000) (11,000)
Narvauez [(P27,500)x6/10]: (P16,500) (16,500) (27,500)
Share of Partners in Profits 240,250 159,750 400,000

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End of Lesson
Thank you.

RCA 2022