MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY

COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

DEPARTMENT OF ACCOUNTANCY

ACT130: Accounting for Special Transactions

Partnership Operations

LESSON OBJECTIVES
At the end of this module, you will be able to:
1. State the items that affect the division of a partnership’s profits or losses among the partners;
2. Compute for the share of a partner in the partnership’s profit and loss

OVERVIEW
The operations of a partnership are similar in most respects to those of other organizations
operating in the same line of business. At the end of each fiscal year, when revenues and
expenses are closed out, some assignments must be made of the resulting income figure
because a partnership will have two or more capital accounts rather than a single retained
earnings balance. This allocation to the capital accounts is based on the agreement established
by the partners preferably as a part of the Articles of Partnership.

ABSTRACTION

ACCOUNTING FOR PARTNERSHIP OPERATIONS: METHODS TO ALLOCATE NET

INCOME OR LOSS

General Rule: The partners share in partnership profits or losses in accordance with their
partnership agreement.

Article 1797 of the Philippine Civil Code provides the following additional rules:
1. If only Profit-Sharing Ratio has been agreed upon, each partner must share in the losses
with the same proportion. (No Loss-Sharing Ratio)
2. In the absence of an agreement/stipulation, partners must share in the Income or Loss
based on their capital contributions.
(Take note, Industrial Partners only contribute industry to the partnership, thus
unmeasurable. Industrial partners shall receive share as may be just and equitable under
circumstances.)

Other Matters to Consider:

a) Salaries – normally, an industrial partner receives salary in addition to his share in the
partnership’s profits compensation for his services to the partnership;
b) Bonuses – the managing partner may be entitled to a bonus for excellent management
performance. (NOTE: Partners are not entitled to any Bonus if the operation of the
partnership is at a LOSS)
c) Interest – the partnership agreement may stipulate that capitalist partners are entitled to
an annual interest on their capital contributions.

Items A, B, & C are normally provided first to the respective partners and any remaining amount
of the profit or loss is shared among the partners based on their stipulated profit or loss ratio.

Profits and Loss can be shared in many ways among partners since it will be based on their
stipulation. Most profit and loss sharing formula includes one or more of the following features or
techniques:
1. Equally

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

2. Arbitrary Ratio;
3. In the ratio of partner’s capital account balances and the dividing balance on agreed ratio:
i) Original Capital – the beginning capital of the partners;
ii) Beginning Capital
iii) Ending Capital
iv) Average Capital
(1) Simple Average
(2) Weighted Average
4. Interest on partner’s capital accounts and dividing the balance on agreed ratio;
5. Salaries to partners and dividing the balance on agreed ratio;
6. Bonus to partners and dividing the balance on agreed ratio;
7. Interest on capital account balance, salaries, and bonus to partners and dividing the
balance on agreed ratio.

APPLICATION

ILLUSTRATION 1
X and Y formed a partnership. The partnership agreement stipulates the following:
▪ Annual salary allowances of P50,000 for X and P30,000 for Y. salary allowances are
to be withdrawn by the partners throughout the period and are to be debited to their
respective drawings account.
▪ The partners share profits equally losses on a 60:40 ratio.
▪ During the period the period earned profit of P100,000 before salary allowances.

Requirements:
a. Compute for the respective shares of the partners in the profit
X Y Total
Amount being allocated P100K
Allocation:
1. Salaries 50,000 30,000 80K
2. Allocation of the remaining profits
(100K-80K) x (50%) x (50%) 10,000 10,000 20K
As allocated 60,000 40,000 100k

b. Provide journal entries

X, Drawings 50,000
Y, Drawings 30,000
Cash 80,000
To record the withdrawal of salary allowance

Income summary 100,000

X, Capital 60,000
Y, Capital 40,000
To record the distribution of profit
NOTES:
1. Salaries are provided first and the remaining amount is allocated based on the
profit-sharing ratio.
2. The sum of the amounts allocated to the partners is equal to the amount being
allocated (i.e., 60K + 40K = 100K)

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

ILLUSTRATION 2
J and K formed a partnership. The partnership agreement stipulates the following:
▪ Annual salary allowances of P25,000 for J and P4,000 for K.
▪ Bonus to J of 10% of the profit after partner’s salaries and bonus.
▪ The partners share profits and losses on a 60:40 ratio
▪ During the period, the partnership incurred a loss of P10,000 before deduction of
salaries

Requirements:
a. Compute for the respective shares of the partners in the profit.
J K Total
Amount being allocated (10K)
1. Salaries 25,000 4,000 29K
2. Bonus - - -
3. Allocation of remaining loss
(-10k-29k) = -39k (60:40) (23,400) (15,600) (39K)
As allocated 1,600 (11,600) (10K)

b. By what amount did J’s Capital account change?

➢ From the solution above, J’s Capital increased by P1,600. Notice that it is possible for a
partner’s capital to increase even if the partnership incurs a loss.

c. Provide journal entry

K, Capital 11,600
Income Summary 10,000
J, Capital 1,600
To record the distribution of loss
NOTE:
1. No bonus is allocated because the partnership incurred a loss. However, salaries are
provided whether the partnership earns profit or incurs loss because salaries are
compensation for services rendered.

ILLUSTRATION 3
A and B formed a partnership. The partnership agreement stipulates the following:
▪ Annual salary allowance of P50,000 for A
▪ Interest of 10% on the weighted average capital balance of B
▪ The partners share profits and losses on a 60:40 ratio.
▪ During the period, the partnership earned profit of P100,000

The movements in B’s Capital account are as follows:

1/1 Initial Investment P60,000
4/1 Additional Investment 20,000
7/31 Withdrawal (30,000)
9/30 Additional Investment 40,000
12/31 Additional Investment 10,000
Ending Balance 100,000

Requirement:
Compute for respective shares of the partners in the profit.

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

The weighted average balance of B’s capital account is computed as follows:

Balances Mo. Outstanding/12mos. Weighted Ave

Beg. Balance 60,000 12/12 60,000
Apr. 1 Additional investment 20,000 9/12 15,000
Jul. 31 Additional investment (30,000) 5/12 (12,500)
Sep. 30 additional investment 40,000 3/12 10,000
Dec. 31 additional investment 10,000 0/12 0
Weighted average capital balance P72,500

A B Total
Amount being allocated 100,000
Allocation:
1. Salaries 50,000 - 50,000
2. Interest (10%x72.5k) 7,250 7,250
3. Allocation of remaining profit
(100K-50K-7.25K) (60:40) 25,650 17,100 42,750
As Allocated 75,650 24,350 100,000

SUMMARY:
✓ The partners share in the profit in the profits and losses of a partnership in accordance
with their partnership agreement.

✓ If only the share of each partner in the profits has been agreed upon, the share of each
in the losses shall be in the same proportion.

✓ In the absence of stipulation, the share of each partner in the profits and losses shall be
in proportion to what he may have contributed, but the industrial partner shall not
be liable for the losses.

✓ Before allocation of profit, the following items are allocated first, if they are stipulated in
the partnership agreement: (a) salaries, (b) bonuses to partners (allocated only if there
is a profit), and (c) interest on capital. After allocating these items, any remaining profit
or loss is allocated based in the stipulated P/L ratio.

ASSESSMENT

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Problem No. 1
A, B, and C operate a partnership with a complex profit and loss sharing agreement. The
average capital balance for each partner on December 31, 2006 is $300,000 for A, $250,000 for
B, and $325,000 for C. An 8% interest allocation is provided to each partner. A and B receive
salary allocations of $10,000 and $15,000, respectively. If partnership net income is above
$25,000, after the salary allocations are considered (but before the interest allocations are
considered), Gault will receive a bonus of 10% of the original amount of net income. All residual
income is allocated in the ratios of 2:3:5 to A, B, and C, respectively.

Required:
1. Prepare a schedule to allocate income to the partners assuming that partnership net
income is $250,000.
2. Prepare a journal entry to distribute the partnership's income to the partners (assume that
an Income Summary account is used by the partnership).

Problem No. 2
A, B, and C have a retail partnership business selling personal computers. The partners are
allowed an interest allocation of 8% on their average capital. Capital account balances on the
first day of each month are used in determining weighted average capital, regardless of
additional partner investment or withdrawal transactions during any given month. Drawings are
disregarded in computing average capital, but temporary withdrawals of capital that are debited
to the capital account are used in the average calculation. Partner capital activity for the year
was:

Capital accounts A B C
Jan 1 balance $ 200,000 $ 300,000 $ 250,000
Feb 2 investment 50,000
Mar 6 investment 10,000 20,000
Apr 20 withdrawal ( 10,000 )
Jul 3 withdrawal
and investment ( 7,000 ) 10,000
Sep 29 investment 5,000 4,000 5,000
Nov 5 investment 5,000

Required:
Calculate weighted average capital for each partner, and determine the amount of interest that
each partner will be allocated.

Problem No. 3
The PQ partnership has the following plan for the distribution of partnership net income (loss):

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Required:
Calculate the distribution of partnership net income (loss) for each independent situation below.
Prepare allocation scheme for each. (for each situation, assume the average capital balance of
P is $140,000 and of Q is $240,000).
1. Partnership net income is $360,000.
2. Partnership net income is $240,000.
3. Partnership net loss is $40,000.

REFERENCES
Dayag, A. J. (2015). Advanced Accounting 1. Manila: Lajara Publishing House.
MILLAN, Z. V. (2018). Accounting for Special Transactions. Baguio City: Bandolin Enterprise.