PARTNERSHIP OPERATIONS

Accounting Cycle of a Partnership same as in sole proprietorship

1. Prepare journal entries
2. Post to ledgers
3. Prepare a trial balance
4. Prepare adjusting entries
5. Prepare financial statements
6. Prepare closing entries
7. Prepare a post-closing trial balance
8. Prepare reversing entries

Special Concerns

I. Journal entries same as in sole proprietorship except for the following transactions which are
peculiar to a partnership:

a. Partners loans partner lends money to partnership

Cash xxx
Accounts/Loans/ xxx
Notes Payable or Due
to Partner or Loan from
Partner

b. Partners borrowings from partnership partnership lends money to partners

Accounts/Loans/ xxx
Notes Receivable or Due
from Partner or Loan to
Partner
Cash xxx

II. Financial statements the same as in sole proprietorship except:

a. Statement of Financial Position the owners equity section is labeled Partners Equity

b. Income Statement an additional section called Division of Profit and Loss is included.
This profit distribution provides a full analysis of the distribution of earnings which is presented
at the bottom of the partnership income statement.

c. Statement of Changes in Partners Equity a statement that reports the changes that
have taken place in partners equity during the period. Each partner is provided a column
heading which explains details of the changes in their equity account.

III. Closing entries drawing accounts are not automatically closed to the capital accounts; drawing
accounts are closed to the capital accounts only if agreed upon in the articles of co-partnership.
 Closing the books at the end of the accounting period:

1. Merchandise Inventory xx
Income Summary xx
To set up ending inventory

2. All Nominal Accounts with Credit Balancesxx

Income Summary xx
To close all nominal accounts with credit balances to income summary.

3. Income Summary xx
All Nominal Accounts with Debit Balances xx
To close all nominal accounts with debit balances to income summary.

NET Income
4. Income Summary xx
Partners Drawing xx
To distribute profits to partners

NET Loss
4. Partners Drawing xx
Income Summary xx
To distribute losses to partners

INCREASES/DECREASES IN CAPITAL &

DRAWING ACCOUNTS

CAPITAL DRAWING
Decrease Increase Increase Decrease
Permanent Initial investment Temporary Share in Net Income
withdrawal0 withdrawal
Sale of equity Additional Share in Net Loss
Investment
Payment of
partnership liability
from personal funds
Debit balance in Credit balance in
drawing drawing

Rules for Dividing Profit and Loss

 1. As to Capitalist Partner
a. Division of Profit
1. In accordance with agreement.
2. In the absence of an agreement, division of profits is in accordance with capital
contributions.

b. Division of Loss
1. In accordance with agreement.
2. If only the division of profits is agreed upon, then the division of losses will be the same as
the agreement on division of profits.
3. In the absence of an agreement, division of losses is in accordance with capital contribution.

2. As to Industrial Partner
a. Division of Profit
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.

b. Division of Loss
1. In accordance with agreement.
2. In the absence of an agreement, the industrial partner shall have no share in the losses.

Net income is viewed as a return for

1. services rendered (salaries)

2. capital investment (interest)
3. entrepreneurial ability or managerial skills (bonus)

Methods of Dividing Net Income

1. Equally

2. Arbitrary Ratio
a. Fractions
b. Percentages
c. Ratio and Proportion

3. Capital Ratio
a. Original/Initial investment
b. Beginning capital balance
c. Ending capital balance
d. Average capital most equitable method

4. Allowing Salaries, Interest and Bonus considered as part of the distribution of net income

a. Salaries to give recognition to the ability, experience or time devoted by a partner to

the business.
 b. Interest - to give recognition to differences in the capital contribution given in
proportion to the period such capital was actually used.

c. Bonus incentive/special compensation given to a partner for superior income realized.

It is usually based on net income.

General Guidelines

1. Partner salary allowances, interest allowances on capital account balances and bonus are not
expenses in the determination of partnership net income.

2. The provision on salaries and interest must be enforced regardless of whether operating results
is a profit or loss.

3. The provision on bonus is enforced only when operating results is a profit.

4. If the partnership agreement specifies that income is to be divided based on partners capital
balances but fails to specify 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.

EXAMPLE

JOHN CAPITAL MARTHA CAPITAL

5/1 10,000 1/1 400,000 7/1 50,000 1/1 300,000
10/31 50,000 7/1 160,000 4/1 200,000
9/30 150,000
NET INCOME FOR THE PERIOD P 150,000

DIVISION OF PROFITS & LOSSES

1. equally
Income Summary 150,000
John, Drawing 75,000
Martha, Drawing 75,000
To distribute profits to partners

2. arbitrary ratio
a. percentage 40%:60%
b. fraction 2/5:3/5

Income Summary 150,000

John, Drawing 60,000
Martha, Drawing 90,000
To distribute profits to partners

3. Capital RATIO
 a. Beginning Capital Ratio : 400:300 or 4/7:3/7

Income Summary 150,000

John, Drawing 85,714.29
Martha, Drawing 64,285.71
To distribute profits to partners

b. Ending Capital Ratio 500: 600 or 5/11:6/11

Inc 1
om
e
Su
m
ma
ry
J 6
o
h
n
,
D
r
a
w
i
n
g
M 8
a
rt
h
a
,
D
r
a
w
i
n
g
To
distribu
te
profits
to
partner
s

c. Average Capital Ratio

 Income Summary 150,000
John, Drawing 75,202.16
Martha, Drawing 74,797.84
To distribute profits to partners

Computation of Average Capital

Date Capital Peso Months No. of Months Unchanged Average Capital
Balance
John
Jan 1 400,000 4 P1,600,000
May 1 390,000 2 780,000
July1 550,000 4 2,200,000
Oct 31 500,000 2 1,000,000
Martha P5,580,000/12 P465,000
Jan 1 300,000 3 P900,000
April 1 500,000 3 1,500,000
July1 450,000 3 1,350,000
Sept 30 600,000 3 1,800,000
P5,550,000/12 462,500

Computation Share in Net Income of P150,000

Average Capital:
John P465,000 150,000 x 465000/927,500= P 75,202.16
Martha 462,500 150,000x 462,500/927,500 = P 74,797.84
P927,500
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4. Allowing interest on partners capital balances

10% interest on beginning capital, balance equally

Schedule of Distribution of Profits

John Martha Total
10% Interest on beginning Capital
John (400,000 x 10%) P40,000
 Martha (300,000 x 10%) P30,000 P70,000
Balance equally(150,000-70,000) 40,000 40,000 80,000
Share in Net Income P80,000 P70,000 P150,000

Income Summary 150,000

John, Drawing 80,000
Martha, Drawing 70,000
To distribute profits to partners

5.Allowing salaries to partners

Salary allowance of P50,000 to John and P40,000 to Martha, balance in the ratio of 2:3

Schedule of Distribution of Profits

John Martha Total
Salary allowance P50,000 P40,000 P90,000
Balance 2:3 24,000 36,000 60,000
Share in Net Income P74,000 P76,000 P150,000

Income Summary 150,000

John, Drawing 74,000
Martha, Drawing 76,000
To distribute profits to partners

6.Bonus to managing partner based on net income

20% Bonus to John, the managing partner, balance equally

Schedule of Distribution of Profits

John Martha Total
20% Bonus to John P30,000 P30,000
Balance equally 60,000 60,000 120,000
Share in Net Income P90,000 P60,000 P150,000

Income Summary 150,000

John, Drawing 90,000
Martha, Drawing 60,000
To distribute profits to partners

7. Allowing interest on partners capital balances, salaries and bonus, balance equally.

-5% interest on ending capital,

-salary allowance to John, P30,000; Martha, P40,000
-10% bonus to John
-balance equally

Schedule of Distribution of Profits

John Martha Total
 10% interest on ending capital
John- 500,000 x5% P25,000
Martha- 600,000 x 5% P30,000 P55,000
Salary allowance 30,000 40,000 70,000
10% Bonus to John 15,000 15,000
Balance equally 5,000 5,000 10,000
Share in Net Income P75,000 P75,000 P150,000

Income Summary 150,000

John, Drawing 75,000
Martha, Drawing 75,000
To distribute profits to partners

8. Allowing interest on partners capital balances, salaries and bonus, balance equally.(NET INCOME IS
INSUFFICIENT)
-10% interest on ending capital,
-salary allowance to John, P50,000; Martha, P60,000
-20% bonus to John
-balance equally

Schedule of Distribution of Profits

John Martha Total
10% interest on ending capital
John- 500,000 x10% P50,000
Martha- 600,000 x 10% P60,000 P110,000
Salary allowance 50,000 60,000 110,000
20% Bonus to John 30,000 30,000
Excess equally (50,000) (50,000) (100,000)
Share in Net Income P80,000 P70,000 P150,000

Income Summary 150,000

John, Drawing 80,000
Martha, Drawing 70,000
To distribute profits to partners

NET LOSS- P150,000

9. Allowing interest on partners capital balances, salaries and bonus, balance 4:6

-10% interest on ending capital,

-salary allowance to John, P50,000; Martha, P60,000
-20% bonus to John
-balance 4:6
 Schedule of Distribution of Net Loss
John Martha Total
10% interest on ending capital
John- 500,000 x10% P50,000
Martha- 600,000 x 10% P60,000 P110,000
Salary allowance 50,000 60,000 110,000
Balance 4:6 (148,000) (222,000) (370,000)
Share in Net Income (P48,000) (P102,000) (P150,000)
No bonus since Bonus is always based on net income.

John, Drawing 48,000

Martha, Drawing 102,000
Income Summary 150,000
To distribute losses to partners

PREPARATION OF INCOME STATEMENT & STATEMENT OF PARTNERS EQUITY

The following selected ledger balances were taken from the books of NMA Company
Depreciation Expense-Office Equipment 3,830
Discount Lost 250
Doubtful Accounts Expense 2,340
Freight in 1,250
Freight out 680
Gain on Sale of Office Equipment 351
 Interest Expense 4,850
Interest Income 1,420
Marlon, Drawing 5,500
120,0
Marlon, Capital 00
10,50
Miranda, Drawing 0
100,0
Miranda, Capital 00
188,5
Merchandise Inventory, January 1 00
77,77
Merchandise Inventory, December 31 7
Office Supplies used 520
366,2
Purchases 00
Purchase Discount 3,653
18,26
Purchase Returns and Allowances 5
30,00
Rent Expense 0
54,20
Salaries & Wages 0
642,7
Sales 75
18,93
Sales Commission 5
10,58
Sales Discount 0
Sales Returns & Allowances 4,560

NMA Company
Income Statement
For the Year Ended, December 31, 2014

Note
Net Sales 1 P627,635
Cost of Sales 2 (456,225)
Gross Profit P171,410
Other Income 3 1,771
Total Income P173,181
Operating expenses
Administrative expense 4 P90,890
Distribution costs 5 19,615
Finance cost 7 5,100 (114.625)
NET INCOME P57,576
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 Schedule of Distribution of Profits
Marlon Miranda Total
10% interest on beginning capital
Marlon- 120,000 x10% P12,000
Miranda- 100,000 x 10% P10,000 P22,000
Balance equally 17,788 17,788 35,576
Share in Net Income P29,788 P27,788 P57,576
====== ====== ======

NOTES TO FINANCIAL STATEMENTS

Note 1 Net Sales

Sales P 642,775
10,58
Sales Discount P 0
4,56 15,14
Sales Returns & Allowances 0 0
627,6
Net Sales Revenue P 35

Note 2 Cost of Sales

188,5
Merchandise Inventory, January 1 P 00
Add: Net cost of purchases
366,2
Purchases P 00
3,65
Purchase Discounts P 3
18,2 21,91
Purchase Returns and Allowances 65 8
344,2
Net purchases P 82
1,25 345,5
Add: Freight in 0 32
534,0
Total goods available for sale P 32
77,77
Merchandise Inventory, December 31 7
456,2
Cost of Sales P 55

Note 3 Other Income

Gain on Sale of Office Equipment 351
 P
Interest Income 1,420
1,77
Total P 1

Note 4 Administrative Expenses

Salaries & Wages P 54,200
Rent Expense 30,000
Depreciation Expense-Office Equipment 3,830
Doubtful Accounts Expense 2,340
Office Supplies used 520
Total P 90,890

Note 5 Distribution Costs

Sales Commission P 18,935
Freight out 680
Total P 19,615

Note 7 Finance cost

Interest expense P 4,850
Discount lost P 250
Total P 5,100

NMA Company
Statement of Changes in Partners Equity
For the Year Ended, December 31, 2014

Marlon Miranda Total

Capital balances, January 1 P120,000 P100,000 P220,000
Net Income 29,788 27,788 57,576
Sub-total P149,788 P127,788 P277,576
Partners Drawing (5,500) (10,500) (16,000)
Capital balances, December 31 P144,288 P117,288 P261,576
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