AFAR 1 – Accounting for Special Transactions
Chapter 2 – Partnerships Operations
The usual types of accounting problems for partnership operations are classified as
follows:
1. Determination of the proper distribution of partnership profits and losses among
the partners.
2. Preparation of financial statements for the partnership, such as balance sheet,
income statement, statement of partners’ capitals, and cash flows
3. Changes in the profit and loss ratios.
4. Correction of net income (loss) of prior years.
Division of Profit and Loss
• Profits and losses of the partnership are to be divided in accordance with the
partnership agreement
• If no agreement is made – according to their original capital contributions • If the
partners agree to divide profits only – any losses are to be divided in the same
manner of dividing the profits
• If the partners agree to divide losses only – profits shall be divided according to
their original capital contribution
Profit and Loss Ratio – the ratio in which the partnership divides the profits and losses.
Some are as follows:
1. Equally
2. In an unequal or arbitrary ratio
3. In the ratio of partners’ capital account balances on a particular date •
Original capital – the initial investment / capital at time of formation •
Beginning capital of the period
• Average Capital
- Simple average
- Weighted average
▪ Peso-day average
▪ Peso-month average
4. Allowing interest on partners’ capital account balances and dividing the
remaining net income or loss in a specified ratio
5. Allowing salaries to partners and dividing the remaining net income or loss in
specified ratio
6. Bonus to managing partner based on net income
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Illustration of Profit and Loss Distribution
On January 1, 2016, Siy and Tiu formed a partnership with an investment of Php30,000
and Php60,000 respectively. Assume that the net income of ST Partnership for the year
2016 is Php60,000. Changes in capital accounts are as follows:
Siy Tiu
Capital Bal. January 1, 2016 Php 40,000 Php 60,000
Add’l Investments, March 1 20,000 50,000
Add’l Investments, August 1 20,000 40,000
Withdrawal, October 1 (20,000) -
Withdrawal, November 1 __________ (50,000)
Capital Bal., December 31, 2016 Php 60,000 Php 100,000
I. Equally
Closing Entry:
Income Summary 60,000
Siy Capital 30,000
Tiu Capital 30,000
To record division of net income for 2016
If the partnership incurred loss of Php10,000, the closing entry is as follows:
Siy Capital 5,000
Tiu Capital 5,000
Income Summary 10,000
To record division of net loss for 2016
II. Arbitrary (Unequal) ratio
Assume that Siy and Tiu divided profits and losses in the ratio of 60:40. Closing
entry to divide the net income is as follows:
Siy 60% x Php60,000 = Php36,000
Tiu 40% x Php60,000 = Php24,000
Php60,000
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Income Summary Php60,000
Siy Capital Php36,000
Tiu Capital Php24,000
To record division of net income for 2016
III. Capital Balances
A. Original Capital – This is used if no agreement is made between the partners.
The allocation is as follows:
Siy Php60,000 x Php30,000 / Php90,000 = Php20,000
Tiu Php60,000 x Php60,000 / Php90,000 = Php40,000
Income Summary Php60,000
Siy Capital Php20,000
Tiu Capital Php40,000
To record division of net income for 2016
B. Beginning Capital
The allocation is as follows:
Siy Php60,000 x Php40,000 / Php100,000 = Php24,000
Tiu Php60,000 x Php60,000 / Php100,000 = Php36,000
Income Summary Php60,000
Siy Capital Php24,000
Tiu Capital Php36,000
To record division of net income for 2016
C. Ending Capital
The allocation is as follows:
Siy Php60,000 x Php60,000 / Php160,000 = Php22,500
Tiu Php60,000 x Php100,000 / Php160,000= Php37,500
Income Summary Php60,000
Siy Capital Php22,500
Tiu Capital Php37,500
To record division of net income for 2016
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D. Average Capital
1. Simple Average
The allocation is as follows:
Siy (Php40,000 + Php60,000) / 2 = Php50,000
Tiu (Php60,000 + Php100,000) / 2 = Php80,000
Siy Php60,000 x Php50,000 / Php130,000 = Php23,077
Tiu Php60,000 x Php80,000 / Php130,000 = Php36,923
2. Weighted Average (Peso-Month / Peso-Day)
Partner Date Investments Capital Fraction of Average
(Withdrawals) Account Unchanged Year Capital
Balance Account
Balance
Siy January 1 Php 40,000 Php 40,000 2/12 Php 6,667
March 1 20,000 60,000 5/12 25,000
August 1 20,000 80,000 2/12 13,333
October 1 (20,000) 60,000 3/12 15,000
Php60,000
Tiu January 1 Php60,000 Php 60,000 2/12 Php 10,000
March 1 50,000 110,000 5/12 45,833
August 1 40,000 150,000 3/12 37,500
October 1 (50,000) 100,000 2/12 16,667
Php110,000
Total Average Capital Balances Php170,000
The net income of Php60,000 shall be divided as follows:
Siy Php60,000 x Php60,000 / Php170,000 = Php21,177
Tiu Php60,000 x Php110,000 / Php170,000= Php38,823
If the partnership agreement specifies that income is to be divided based on partners’
capital balances, but it is not specified how capital balances are to be computed, the
average capital balances should be used if it can be computed. If not, the original
capital balances should be used.
IV. Interest on Capital Balances
1. Allocating Net Profit. Assume that the partnership agreement allows interest on
partners’ average capital account balances at 12%, with any remaining net
income or loss to be divided equally.
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Siy Tiu Total
Interest on Average Php7,200 Php13,200 Php7,200
Capital Siy: Php60,000 x Php13,200
12% Php19,800
Tiu: Php110,000 x 12% Php19,800 Php33,000 Php39,600
Php27,000 Php60,000
Remainder (divided
equally) TOTALS
Note: Using interest allowances on partners’ capital account in order to achieve a
reasonable profit distribution has no effect on the computation of the net income or loss
of the partnership. Interest on partners’ capital accounts is not an expense of the
partnership.
2. Allocating Net Loss. Assume that the partnership operation results at a loss of
Php10,000. If the agreement provides to allow interest on capital account
balances, the provision must be enforced regardless of whether operating
results is a profit or loss.
Siy Tiu Total
Interest on Average Php7,200 Php13,200 Php20,400
Capital Remainder (15,200) (15,200) 30,400
(divided equally) TOTALS (Php8,000) (Php2,000) (Php10,000)
Journal Entry:
Siy Capital 8,000
Tiu Capital 2,000
Income Summary 10,000
To record division of net loss of 2016
V. Salary
1. Allocating Net Profit. Assume that the partnership agreement provides for an
annual salary of Php30,000 to Siy and Php20,000 to Tiu, net income or loss to
be divided equally. The salaries are paid monthly during the year.
Siy Tiu Total
Salaries Php30, Php20, Php50,000
Remainder (Php60,000-Php50,000), 00 00 10,000
equally TOTALS 0 0 Php60,000
5,0 5,0
00 00
Php35,00 Php25,00
0 0
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Monthly JE:
Siy Drawing (Php30,000/12) 2,500
Tiu Drawing (Php20,000/12) 1,667
Cash 4,167
To record salary allowances to partners
Year-end Closing JE:
(1) Income Summary 60,000
Siy Capital 35,000
Tiu Capital 25,000
To record division of net income of 2016
(2) Siy Capital 35,000
Tiu Capital 25,000
Siy Drawing 30,000
Tiu Drawing 20,000
To close partners’ drawing accounts
Note: In the absence of an agreement, salaries are automatically allowed even
when losses are incurred.
2. Allocating Net Loss. Assume that the partnership has net loss of Php20,000
before salary allowances to partners.
Siy Tiu Total
Salaries Php30, Php20,000 Php50,000
Remainder (Php50,000+Php20,000), 000 (35,000) (70,000)
equally TOTALS (35,0 (Php15,000) (Php20,000)
00)
(Php5,000)
JE:
Siy Capital 5,000
Tiu Capital 15,000
Income Summary 20,000
To record division of net loss for 2016.
VI. Bonus
Assume that the ST Partnership has net income of Php190,200 before salaries,
interest, and bonus to partners. The partnership agreement includes the following:
a. Salaries to Siy and Tiu, Php30,000 each
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b. Interest on capital balances on Siy Php7,000, Tiu Php3,200
c. Bonus to Siy, 20% of net income
d. Remaining profit or loss after salaries, interest, and bonus, equally
1. Net income before allowances for salaries, interest, and bonus
Computation of bonus:
Net income before salaries, interest, and bonus Php190,200
Bonus percentage 20% Bonus Php38,040
Schedule of Profit Distribution:
Siy Tiu Total
Salary allowances Php30,000 Php30,000 Php60,000
Interest allowances 7,000 3,200 10,200
Bonus to Siy 38,040 38,040
Remainder, equally 40,980 40,980 81,960
TOTALS Php116,020 Php74,180 Php190,200
Under this method, bonus is not treated as an expense of the partnership.
2. Net income before allowances for salaries and interest, but after deduction of the
bonus
Bonus + income after the bonus = Php190,200
Net income before salary, interest, and bonus Php190,200 = 120% Net
income after bonus (Php190,200 /120%) Php158,500 = 100% Bonus Php
31,700 = 20%
Under this method, for purposes of bonus computation, it is treated as an
expense. Schedule of Profit Distribution:
Siy Tiu Total
Salary allowances Php30,000 Php30,000 Php60,000
Interest allowances 7,000 3,200 10,200
Bonus to Siy 31,700 31,700
Remainder, equally 44,150 44,150 88,300
TOTALS Php112,850 Php77,350 Php190,200
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3. Net Income After allowances for Salaries and Interest but Before Bonus
Computation of Bonus
Net Income Before salaries, interests, and bonus Php190,200 Less: Salaries Php60,000
Interests 10,200 70,200 Net Income Before Bonus Php 120,000 % Bonus 20% Bonus
Php 24,000
Schedule of Profit Distribution:
Siy Tiu Total
Salary allowances Php30,000 Php30,000 Php60,000
Interest allowances 7,000 3,200 10,200
Bonus to Siy 24,000 24,000
Remainder, equally 48,000 48,000 96,000
TOTALS Php109,200 Php81,200 Php190,200
4. Net Income After allowances for Salaries, Interests, and Bonus
Computation of Bonus
Net Income Before salaries, interests, and bonus Php190,200 Less:
Salaries Php60,000
Interests 10,200 70,200 Net Income Before Bonus Php 120,000 = 120% Net
Income After Bonus (Php120,000 / 120%) Php100,000 = 100% Bonus Php
20,000 = 20%
Schedule of Profit Distribution:
Siy Tiu Total
Salary allowances Php30,000 Php30,000 Php60,000
Interest allowances 7,000 3,200 10,200
Bonus to Siy 20,000 20,000
Remainder, equally 50,000 50,000 100,000
TOTALS Php107,000 Php83,200 Php190,200
Note: When the partnership incur net loss, the bonus provision is disregarded.
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