PARTNERSHIP

OPERATIONS AND
FINANCIAL REPORTING
The basis on which profits or losses
are shared is a matter of agreement
among the partners and may not
necessarily be the same as their
capital contribution ratio.
The equity of a partner in the net
assets of the partnership should be
distinguished from a partner’s share in
profits or losses.
FACTORS TO CONSIDER
IN ARRIVING AT A PLAN
FOR DIVIDING PROFITS
OR LOSSES
 MONEY, PROPERTY OR INDUSTRY
Partnership profits are realized as a result of
putting together the contributions – money,
property or industry – of the partners.
The amount of capital invested by each
partner, the amount of time each partner
devotes to the business and other
contributions are the factors being
considered in the formulation of an
equitable profit and loss ratio.
 PERFORMANCE METHODS
Many partnerships use profit and loss
sharing arrangements that give some
weight to the specific performance of
each partner to provide incentives to
perform well.
This allocation of profits to a partner on
the basis of performance is frequently
referred to as a BONUS.
RULES FOR THE
DISTRIBUTION OF
PROFITS OR LOSSES
 REMEMBER :
The profits or losses shall be distributed in conformity with
the 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
profits or losses shall be in proportion to what he may have
contributed (according to the ratio of original capital
investments or in its absence, the ratio of capital balances
at the beginning of the year), but the industrial partner
may not be liable for the losses.
 REMEMBER :
As for the profits, the industrial partner shall receive such
share as may be just and equitable under the
circumstances.
If aside from his services he has contributed capital, he
shall also receive a share in the profits in proportion to his
capital (Civil code of the Philippines, Article 1797).
A stipulation which excludes one or more partners from
any share in the profits or losses is void (Article 1799)
The partnership must exist for the common benefit or
interest of the partners.
 SUMMARY
PROFITS
The profits will be divided according to partners’ agreement.
If there is no agreement :
As to capitalist partners, the profit shall be divided according to
their capital contributions (according to the ratio of original
capital investments or in its absence, the ratio of capital
balances at the beginning of the year).
As to industrial partner (if any), such share as may be just and
equitable under the circumstances, provided, that the industrial
partner shall receive such share before the capitalist partners
shall divide the profits.
 SUMMARY
LOSSES
The losses will be divided according to the partners’ agreement
If there is no agreement as to distribution of losses, but there is an
agreement as to profits, the losses shall be distributed according
to the profit sharing ratio.
In the absence of any agreement
As to capitalist partners, the losses shall be divided according to their
capital contributions (according to the ratio of original capital investments
or in its absence, the ratio of capital balances at the beginning of the
year).
As to PURELY industrial partners (if there’s any), shall not be liable for any
losses.
 REMEMBER :
The industrial partner is not liable for losses
because he cannot withdraw the work or
labour already done by him, unlike the
capitalist partners who can withdraw their
capital.
In addition, if the partnership failed to realize
any profits, then he has laboured in vain and
in a real sense, he has already contributed his
share in the loss.
DISTRIBUTION OF PROFITS OR
LOSSES BASED ON PARTNERS’
AGREEMENT
In general, profits or losses, shall be
divided in accordance with the
agreement of the partners.
The ratio in which profits or losses
from partnership operations are
distributed is recognized as the
PROFIT OR LOSS RATIO.
The partners may agree on any of the
following scheme in distributing profits or
losses:
 Equally or in an agreed ratio.
 Based on partner’s capital contributions:
 By allowing interest on partners’ capital and balance in an
agreed ratio.
 By allowing salaries to partners and the balance in an agreed
ratio.
 By allowing bonus to the managing partner based on profit
and the balance in an agreed ratio.
 By allowing salaries, interest on partners’ capital, bonus to the
managing partner and the balance in an agreed ratio.
 ILLUSTRATION :
Medina and Detoya which had a profit of P300,000 for the
year ended December 31, 2017, the first year of operations.
The partnership contract provided that each partner may
withdraw P5,000 on the last day of each month; both
partners did so during the years.
Medina invested P400,000 on Jan 1, 2017 and an additional
P100,000 on April 1.
Detoya invested P800,000 on Jan 1, 2017 and withdraw
P50,000 on July 1.
EQUALLY OR IN AN
AGREED RATIO
EQUALLY
 EQUALLY

Income Summary 300,000

Medina, Drawing 150,000
Detoya, Drawing 150,000
*To record the division of Profits*
AGREED RATIO 60:40
 AGREED RATIO OF 60:40

Income Summary 300,000

Medina, Drawing 180,000
Detoya, Drawing 120,000
*To record the division of Profits*
BASED ON CAPITAL
CONTRIBUTIONS
Ratio of Original
Capital Investments
 RATIO OF ORIGINAL CAPITAL
INVESTMENTS

Income Summary 300,000

Medina, Drawing 100,000
Detoya, Drawing 200,000
*To record the division of Profits*
Ratio of Capital
Balances at the
beginning of the
year
 RATIO OF CAPITAL BALANCES AT THE
BEGINNING OF THE YEAR

Income Summary 300,000

Medina, Drawing 100,000
Detoya, Drawing 200,000
*To record the division of Profits*
Ratio of Capital
investments at the
end of the year
 RATIO OF CAPITAL BALANCES AT THE
END OF THE YEAR

Income Summary 300,000

Medina, Drawing 120,000
Detoya, Drawing 180,000
*To record the division of Profits*
Ratio of Average
Capital Balances
 RATIO OF AVERAGE CAPITAL
BALANCES

Income Summary 300,000

Medina, Drawing 114,000
Detoya, Drawing 186,000
*To record the division of Profits*
 BY ALLOWING INTEREST ON CAPITAL AND
THE BALANCE IN AN AGREED RATIO

Partnerships may choose to allocate a portion of the total

profits in the capital ratio and the balance equally or in
other agreed ratio after due consideration of the partners’
other contributions.
To allow interest on partners’ capital account balances is
almost similar to dividing part of profits in the ration of
partners’ capital balances.
If the partners agree to allow interest on capital as a first
step in the division of profit, they should specify the interest
rate to be used.
 BY ALLOWING INTEREST ON CAPITAL AND
THE BALANCE IN AN AGREED RATIO
Partners invested in a partnership for profits, not for interest.
The interest on partners’ capital, along with the other profit
sharing plans to be discussed in the remainder of the
chapter are to be considered as mere techniques to share
partnership profits or losses equitably and not as expense
of the partnership.
On the other hand, the interest on loans from partners is
recognized as an expense and a factor in the
measurement of profit or loss of the partnership.
 ILLUSTRATION No. 1
 Saturn and Shekinah Partnership had a profit of P300,000 for the year
ended Dec 31, 2017, the first year of operations. The partnership
contract provided that each partner may withdraw P5,000 on the
last day of each month; both partners did so during the year.
 Saturn invested P400,000 on Jan 1, 2017 and an additional P100,000
on April 1. Shekinah invested P800,000 on Jan 1 and withdrew
P50,000 on July 1.
 Partnership agreement allowed 15% interest on average capital
account balances, with the balance to be divided equally.
 How to divide the profit?
Income Summary 300,000
Saturn, Drawing 127,500
Shekinah, Drawing172,500
*To record the division of Profits*
 ILLUSTRATION No. 2

 Saturn and Shekinah Partnership had a loss of P10,000 for the year
ended Dec 31, 2017, the first year of operations. The partnership
contract provided that each partner may withdraw P5,000 on the
last day of each month; both partners did so during the year.
 Saturn invested P400,000 on Jan 1, 2017 and an additional
P100,000 on April 1. Shekinah invested P800,000 on Jan 1 and
withdrew P50,000 on July 1.
 Partnership agreement allowed 15% interest on average capital
account balances, with the balance to be divided equally.
 How to divide the loss?
Saturn, Drawing 27,500
Income Summary 10,000
Shekinah, Drawing 17,500
*To record the division of Losses*
 COMPARISON OF DISTRIBUTION BASED
SOLELY ON CAPITAL RATIOS AS AGAINST
DISTRIBUTION WITH INTEREST ON CAPITAL
BALANCES
 There will be a significant difference between the two distribution
plans if the partnership is operating at a loss.
 Under a capital ratio plan, the partner who invested more capital
will ultimately shoulder a bigger share of the loss.
 This result may be considered inequitable because of the
investment of capital presumably is not the cause of the loss.
 Under the interest plan, the partner who invested more capital is
credited (increased) for an interest on his capital and is ultimately
debited (decreased) with a lesser share of the loss; in some cases
the result may even be a net credit (increase).
 BY ALLOWING SALARIES TO PARTNERS AND
THE BALANCE IN AN AGREED RATIO

The partnership agreement should be clear on the

treatment of salary allowances when losses are
incurred.
In the absence of an agreement to govern the
situation, salary allowances will be provided even
when operations yielded losses.
 ILLUSTRATION No. 3
Saturn and Shekinah Partnership had a profit of P300,000 for
the year ended Dec 31, 2017, the first year of operations. The
partnership contract provided that each partner may
withdraw P5,000 on the last day of each month; both partners
did so during the year.
Saturn invested P400,000 on Jan 1, 2017 and an additional
P100,000 on April 1. Shekinah invested P800,000 on Jan 1 and
withdrew P50,000 on July 1.
The partnership agreement provided for an annual salary of
P100,000 to Saturn and P60,000 to Shekinah and the balance
to be divided equally.
How to divide the profit?
Income Summary 300,000
Saturn, Drawing 170,000
Shekinah, Drawing130,000
*To record the division of Profits*
 BY ALLOWING BONUS TO THE
MANAGING PARTNER BASED ON PROFIT
AND THE BALANCE IN AN AGREED
RATIO
A partnership may contract may provide for a special
compensation in the form of bonus to the managing
partner when the results of operations of the partnerships
are favorable.
This allowance is given in order to encourage the partner
to maximize the profit potentials of the partnership.
Bonus is not being considered in the computation of
profit, rather it is a mere technique to distribute profits.
 ILLUSTRATION No. 4
Saturn and Shekinah Partnership had a profit of P300,000
for the year ended Dec 31, 2017, the first year of
operations. The partnership contract provided that each
partner may withdraw P5,000 on the last day of each
month; both partners did so during the year.
Saturn invested P400,000 on Jan 1, 2017 and an additional
P100,000 on April 1. Shekinah invested P800,000 on Jan 1
and withdrew P50,000 on July 1.
The partnership agreement provided for a bonus of 25% of
profit before bonus to Saturn and the balance to be
divided equally.
How to divide the profit?
Income Summary 300,000
Saturn, Drawing 187,500
Shekinah, Drawing112,500
*To record the division of Profits*
 ILLUSTRATION No. 5
 Saturn and Shekinah Partnership had a profit of P300,000 for the year
ended Dec 31, 2017, the first year of operations. The partnership
contract provided that each partner may withdraw P5,000 on the
last day of each month; both partners did so during the year.
 Saturn invested P400,000 on Jan 1, 2017 and an additional P100,000
on April 1. Shekinah invested P800,000 on Jan 1 and withdrew
P50,000 on July 1.
 The partnership agreement provided for a bonus of 25% of profit
after bonus to Saturn and the balance to be divided equally.
 How to divide the profit?
Income Summary 300,000
Saturn, Drawing 180,000
Shekinah, Drawing120,000
*To record the division of Profits*
 BY ALLOWING SALARIES, INTEREST ON
CAPITAL, BONUS TO THE MANAGING
PARTNER BASED ON PROIT AND THE
BALANCE IN AN AGREED RATIO
Provisions for salaries and interest in the
partnership agreement are called
allowances.
 ILLUSTRATION No. 6
The Profit for the year is P400,000 and the partnership
agreement for the Saturn and Shekinah partnership
provided the following:
Bonus to Saturn of 25% of profit after salaries and interest
but before bonus.
Annual salaries of P100,000 to Saturn and P60,000 to
Shekinah
Interest on average capital balances of P71,250 and
P116,250 to Saturn and Shekinah respectively
Balances to be divided in a ratio of 40:60
Income Summary 400,000
Saturn, Drawing 200,125
Shekinah, Drawing199,875
*To record the division of Profits*
 ILLUSTRATION No. 7

 The Profit for the year is P400,000 and the partnership agreement
for the Saturn and Shekinah partnership provided the following:
 Bonus to Saturn of 25% of profit after salaries and interest and after
bonus.
 Annual salaries of P100,000 to Saturn and P60,000 to Shekinah
 Interest on average capital balances of P71,250 and P116,250 to
Saturn and Shekinah respectively
 Balances to be divided in a ratio of 40:60
Income Summary 400,000
Saturn, Drawing 198,550
Shekinah, Drawing201,450
*To record the division of Profits*