PARTNERSHIP OPERATIONS

Accounting 2-Partnership and Corporation

LEARNING OBJECTIVES
 Discuss the closing entries in a partnership and differentiate then from
the closing entries in a sole proprietorship.

 Identify and discuss the different methods and rules of dividing

partnership profits and losses among partners.

 Discuss and understand the preparation of financial statements of a

partnership
PREVIEW OF THE CHAPTER
NATURE OF PARTNERSHIP OPERATION
 Accounting for partnership operations is essentially the same as accounting for the
operations of a sole proprietorship. Sale of merchandise on account is debited to
Accounts Receivable and credited to Sales Collection of accounts is debited to
Cash and credited to Accounts Receivable. The purchase of merchandise on
account is recorded by a debit to Purchases and credit to Accounts Payable.
Payments of accounts is debited to accounts payable and credited to Cash. Payment
of expenses is debited to Expenses and credited to Cash.

 At the end of the accounting period, adjustments are made for merchandise
inventory, accruals, prepayments, provision for uncollectible accounts, and
provision for depreciation. Profit or loss is determined in the usual manner, that is,
by matching periodic income and expenses.
NATURE OF PARTNERSHIP OPERATION
 However, special problems are encountered in accounting for
partnership operation. These problems include:

 1.Closing entries of a partnership

 2.Distribution of profits and losses
 3.Preparation of a work sheet
 4.Preparation of financial statements
 a. Statement of income/statement of comprehensive income

 b. Statement of financial position

 c. Statement of changes in partner's equity

CLOSING ENTRIES OF A PARTNERSHIP
 The procedures for the preparation of closing entries for a partnership are
similar to that of a sole proprietorship.
 First,all revenue and other nominal accounts with credit balances (such as Purchase
Discounts and Purchases Returns and Allowances) are debited and Income Summary
is credited.
 Second, Income Summary is debited and all expense and other nominal accounts
with debit balances (such as Sales Discounts and Sales Returns and Allowances) are
credited.
 Third, the balance of the Income Summary account, which represents profit or loss
of the partnership, is transferred either to the drawing accounts or directly to the
capital accounts of the partners.
 Finally, the balance of the drawing account of each partner is transferred to his/her
capital account.
CLOSING ENTRIES OF A PARTNERSHIP
 The balance of the Income Summary account may be transferred directly to
the capital accounts of the partners if the partners' intention is to make the
profit or loss a part if permanent capital.

A credit balance in the Income Summary account represents a profit and its balance
is transferred to the capital accounts of the partners based on their profit and loss
sharing ratio.
The entry is as follows:
Income Summary xxx
A, Capital xxx
B, Capital xxx
CLOSING ENTRIES OF A PARTNERSHIP

 A debit balance in the Income Summary account represents a loss and its balance is
transferred to the capital accounts of the partners based on their profit and loss
sharing ratio.

The entry is as follows:

A, Capital xxx
B, Capital xxx
Income Summary xxx
DISTRIBUTION OF PROFITS AND LOSSES
 To make distribution of partnership profits and losses equitable, the
following factors are considered:

 1.Services rendered by the partners to the partnerships

 2.Amount of capital contributed by the partners to the business

 3.Entrepreneurial ability or managerial skill of the partners

DISTRIBUTION OF PROFITS AND LOSSES
 To distribution or division of profits and losses may be expressed in several
ways as follows:

 1.by percentage

 2.by fraction

 3.by decimal

 4.by ratio
DISTRIBUTION OF PROFITS AND LOSSES
 Sample Illustration:
Abba and Beatles are partners sharing profits and losses based on their capital
contributions of P100,000 and P300,000, respectively. Their profit and loss
sharing can be expressed as follows:
1.By percentage Abba 25% (P100,000/P400,000)
Beatles75% (P300,000/P400,000)
2.By fraction Abba ¼ (P100,000/P400,000)
Beatles¾ (P300,000/P400,000)
3.By decimal Abba .25 (P100,000/P400,000)
Beatles.75 (P300,000/P400,000)
4.By ratio Abba and Beatles 1:3
RULES FOR DIVIDING PROFITS AND LOSSES
 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

contributions

 b. Division of losses
 1.in accordance with agreement
 2.if only division of profits is agreed upon, the division of losses will be the same as the

agreement on the division of profits

 3.in the absence of an agreement, division of losses is in accordance with capital

contributions
RULES FOR DIVIDING PROFITS AND LOSSES
 As to Industrial Partners Note:
Profits and losses in
general shall be
 a. Division of profits divided in accordance
 1.in accordance with agreement with the agreement
 2.in the absence of an agreement, the industrial partner shall receive a just among the partners.
and equitable share of the profits and the capitalist partners shall receive In the absence of an
profits in accordance with their capital contribution. agreement, the
partners shall share in
 b. Division of losses the profits in
 1.in accordance with agreement proportion to their
 2.in the absence of an agreement, the capitalist-industrial partner in his/her
capital contributions
character as industrial partner shall have no share in the losses, but in after satisfying the
his/her character as a capitalist partner will share in proportion to the share of the industrial
capital contribution partner on such profit.
 METHODS OF DISTRIBUTING PROFITS BASED ON
PARTNERS' AGREEMENT
1. Equally-it is simple to apply but does not give due recognition on the
disparity of capital contributions nor does it recognize the time and effort that
a partner may devote in running the firm's business operations.

2. Arbitrary ratio (Percentage, Decimal, Fraction, Ratio)-it is simple to

apply but does not give recognition on the disparity of capital contributions
nor does it recognize the time and effort that a partner may devote in running
the firm's business operations.

3. Capital ratio (Original, Beginning, Ending, Average)-this method

recognizes the differences in the capital contributions but does not take into
account the time and effort that a partner may devote I running the firm's
business operations.
METHODS OF DISTRIBUTING PROFITS BASED ON
PARTNERS' AGREEMENT

4. Interest on capital and the balances on agreed ratio-this method

recognizes the differences in the capital contributions but does not
take into account the time and effort that a partner may devote in
running the firm's business operations.

5. Salary allowances to partners and the balance on agreed ratio-

this method recognizes the time and effort that a partner may
devote in running the firm's business operations but does not take
into consideration the differences in capital contributions.
METHODS OF DISTRIBUTING PROFITS BASED ON
PARTNERS' AGREEMENT

6. Bonus to managing partner and the balance on agreed ratio-

this method allows a bonus, as an incentive, to the managing
partner. It is usually a percentage of the profit. Bonus, therefore, is
allowed only when there is a profit. It may be computed using any
one of the following as basis:
a. Bonus is based on profit before deducting bonus and income tax
b. Bonus is based on profit after deducting bonus but before deducting
income tax
c. Bonus is based on profit after deducting income tax but before deducting
bonus
d. Bonus is based on profit after deducting both bonus and income tax