Module 1

<Accounting for Partnership

Formation and Operations.>

<CCIA1>
<Intermediate Accounting Part 1>

This module is a combination of

synchronous & asynchronous learning
and will last for <2-3 > week/s
Pretest will be given via
Google Form in asynchronous test

< Carmelita J. Mercado>

<[email protected] Cp # 0967 274 3640.>
Instructor

August 25, 2021

Date Initiated
September10, 2021
Date of Completion
 SAN MATEO MUNICIPAL COLLEGE
General Luna St., Guitnang Bayan I, San Mateo, Rizal
Tel. No. (02) 997-9070
www.smmc.edu.ph

MODULE 1
ACCOUNTING FOR PARTNERSHIP FORMATION
AND OPERATIONS

MODULE SCHEDULE (This module is good for 2 weeks )

i. Synchronous Meeting: August 25, 2021 - Sept. 10, 2021
ii. Asynchronous Meeting: (Individual Assignment with Peer Collaboration)

LEARNING OBJECTIVES
At the end of the module, you are expected to:
1- define partnership and distinguish it from single proprietorship and corporate form of business
organizations;
2- understand the different characteristics of a partnership;
3- acquire knowledge on how to account for partner’s capital and drawing accounts;
4- learn and understand accounting for the formation and operation of a partnership;
5- record transactions related to partnership formation;
6- record transactions related to partnership operation; and
7- prepare reports for a partnership form of business organization .

INFORMATION INPUTS

The idea of a partnership is quite ancient that in 2200 B.C. Hammurabi, the King of Babylon, provided for
the regulation of partnerships.

During the Middle Ages in Italy, the laws of partnership began to develop. Italian merchants operated as limited
partners. Their approach was introduced throughout Europe. Then later the English stters brought the concept to
the US so the partnership law in the United States evolved from the English Law. Then the Uniform Partnership
Act was approved in 1914, and the Uniform Limited Partnership Act in 1916.

In the Philippines before the effectivity of the new Civil Code on Aug. 30, 1950, there were two types of
partnerships: Commercial and Civil.

Commercial or mercantile partnerships were governed by the Code of Commerce. The old Civil Code governed
the civil or non-commercial partnerships. The New Civil Code repealed the provisions of the two codes relating to
mercantile and civil partnerships.

Definition- In a contract of partnership, two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons
may form a partnership for the exercise of a profession (Civil Code of the Philippines, Article 1767).
CHARACTERISTICS OF A PARTNERSHIP

Mutual Contribution.- There is a need for contribution of money, property or industry to a common fund
to put up a partnership.

Division of Profits or Losses - The essence of partnership is that each partner must share in the profits and
losses of the venture.

Co-ownership of Contributed Assets - All assets contributed into the partnership are owned by the partnership by
virtue of its separate and distinct juridical personality. If one partner contributes an asset to the business, all
partners jointly own it in special sense.

Mutual Agency - Any partner can bind the other parters to a contract if he is acting within his express or implied
authority.

Limited Life- A partnership has a limited life, It may be dissolved by the admission, death, injsolvency, incapacity ,
withdrawal of a partner or expiration of the term specified in the partner ship agreement.

Unlimited Liability- All partners (except limited partners), including industrial partners, are personally liable for all
debts incurred by a partnership. If the partnership can not settle its obligations, creditors’ claims will be satisfied
from personal assets of the partners without prejudice to the rights of the separate creditors of the partners.

Income Taxes- partnerships except general professional partnerships are subject to tax at the rate of 30% (per
R.A. No. 9337) of taxable income.

Partners’ Equity Accounts - Accounting for partnerships are much like accounting for sole proprietorships. The
difference lies in the number of partners’’ equity accounts. Each partner has a capital and a withdrawal account
that serves similar functions as the related accounts for sole proprietorships.

PARTNERSHIP DISTINGUISHED FROM CORPORATION

Partnership Corporation
Manner of Creation By mere agreement By operation of law
Number of persons Two or more At least five (5) not exceeding
fifteen (15)
Commencement of Juridical From the execution of the From the issuance of the
personality articles of partnership Certificate of Incorporation
Management Every partner is an agent of a Management is vested on the
partnership if no managing Board of Directors
partner has been appointed.
Extent of liability Ach partner except a limited Stockholders are liable only up
partner is liable up to his to the extent of their interest or
personal assets investment in the corporation.
Right of Succession No right of succession It has the capacity of continued
existence regardless of the
death, withdrawal, insolvency,
or incapacity of its directors or
stockholders.

CLASSIFICATION OF PARTNERSHIPS

1- According to Object -

A- Universal partnership of all present property – All contributions become part of the partnership
funds.
B- Universal partnership of profits - All that the partners may acquire by their industry or work
during the existence of the partnership and – the use of whatever the partners contributed at the
time of the institution of the contract belong to the partnership. If the articles of universal partnership
did not specify its nature, it will be considered a universal partnership of profits.
C- Particular partner ship – the object of the partnership is determinate- its use or fruit, specific
undertaking, or the exercise of a profession or vocation.
2- According to liability:
A-General – All partners are liable to the extent of their separate properties
B- Limited – The limited partners are liable only to the extent of their personal contributions. In a limited
partnership, the law states that there shall be at least one general partner.
 3- According to Duration:
A- Partnership with fixed term- or for particular undertaking
B- Partnership at will- One in which no term is specified and is not formed for any particular
undertaking
4- According to Purpose:
A- Commercial or Trading partnership – one formed for the transaction of business
B- Professional or non-trading partnership- one formed for the exercise of profession
5- According to legality of existence:
A- De jure partnership- one which has complied with all the legal requirements for its establishment.
B- De facto partnership - one which has failed to comply with all the legal requirements for its
establishment.

KINDS OF PARTNERS
1- General
2- Limited
3- Capitalist
4- Industrial
5- Managing
6- Liquidating
7- Dormant partner- one who does not take active part in lthe business of the partnership and is not
known as a partner.
8- Silent partner- one who does not take active part in the business of the partnership theough may
be known as a partner
9- Secret Partner – one who takes active part in the business but is not known to be a partner by
outside parties.
10- Nominal partner or partner by estoppel- one who is actually not a partner but who represents
himself as one.

ARTICLES OF PARTNERSHIP

Partnership agreements are embodied in the Articles of Partnership. The following are essential agreements
contained in the Articles :

1- The partnership name, nature purpose and location

2- The names, residences and citizenship of the partners
3- The date of formation and the duration of the partnership
4- The capital contribution of each partner, the procedure for valuing non-cash investments, treatment of
excess contributions (as capital or as loan) and the penalties for a partner’s failure to invest and maintain
the agreed capital
5- The rights and duties of each partner
6- The accounting period to be adopted, the nature of accounting records, financial statements and audits by
independent public accountants
7- The method of sharing profit or loss, frequency of income measurements and distribution, including any
provisions for the recognition of differences in contributions
8- The drawings or salaries to be allowed to partners
9- The provision for arbitration of disputes, dissolution and liquidation

SEC REGISTRATION

When the partnership capital is P3,000 or more, in money, or property, the public instrument must be
recorded with the Securities and Exchange Commission .

The SEC shall not register any corporation organized for the practice of Public accountancy (The Philippine
Accountancy Act of 2004, Sec. 28).

Philippine Accountancy Act 2004 , Sec. 31- states that CPAs firms and partnerships of CPAs, engaged in the
practice of public accountancy, including partners and staff members thereof, shall register with PRC and
Professional Regulatory Board of Accountancy. The registration shall be renewed every three (3) years. The rules
and regulations covering the accreditation for the practice of public accountancy are specified in Annex B of the
Rules and Regulations Implementing RA- 9298 otherwise known as the Philippine Accountancy Act of 2004.

ACCOUNTING FOR PARTNERSHIPS

In Basic Accounting, generally accepted accounting principles were discussed in the context of a sole
proprietorship. These accounting principles also apply to a partnership. Thus, the recording of assets, liabilities,
income and expenses is consistent for both proprietorship and partnerships.
However, differences arise between the two forms of business concerning owners’ equity. For a proprietorship,
there is only a single owner. Therefore, there is only one capital account and one drawing account. On the other
hand, since a partnership has two or more owners, separate capital and drawing accounts are established for each
partner.

A partner’s capital account is credited for his initial and additional net investments (assets contributed less liabilities
assumed by the partnership), and credit balance of the drawing account at the end of the period. It is debited for
his permanent withdrawals and debit balance of the drawing account at the end of the period.

Typically, partners do not wait until the end of the year to determine how much of the profits they wish to withdraw
from the partnership. To meet personal living expenses, partners customarily withdraw money on a periodic basis
throughout the year. A partners’ drawing is debited to reflect assets temporarily withdrawn by him from the
partnership. At the end of each accounting period, the balances in the drawing accounts are closed to the related
capital accounts

Partner’s Capital Account

Debit Credit

1- Permanent withdrawals 1- Original investment

2- Debit balance of drawing account 2- Additional investment
At the end of the period 3- Credit balance of the drawing account
At the end of the period

Partner’s Drawing Account

Debit Credit
1- Temporary withdrawals 1- share in profit (this may be credited
2- Share in loss ( this may be debited directly to Capital)
directly to capital)

On September 6, 2007, the International Accounting Standards Board (IASB) issued a revised International
Accounting Standards (IAS) No. 1, Presentation of Financial Statements. This standard supersedes the
2003 version of IAS 1 as amended in 2005. It’s common to encounter “profit or loss” rather than usual “ net
income or loss” as the descriptive term used in the Statement of Comprehensive Income (the new title of
the Income Statement per revised IAS No. 1). The Balance sheet is called the Statement of Financial
Position.

Loans Receivable from or Payable to Partners

If a partner withdraws a substantial amount of money with the intention of repaying it, the debit should be to Loans
Receivable-Partner account instead to Partner’s Drawing Account. This account should be classified separately
from the other receivables of the partnership.

A partner may lend amounts to the partnership in excess of his intended permanent investment. These advances
should be credited to Loans Payable –Partner account and not to Partner’s Capital account classified among others
the liabilities but separate from liabilities to outsiders. This distinction is important in case of liquidation. Loans
payable to partners must be paid after the claims of outside creditors have been paid in full. These loans have
priority over partner’s equity.

PARTNERSHIP FORMATION

The books of the partnership are opened with entries reflecting the net contributions of the partners to the firm.
Asset accounts are debited for assets contributed to the partnership, liability accounts are credited for any liabilities
assumed by the partnership and separate capital accounts are credited for the amount of each partner’s net
investment (assets less liabilities).

Partners may invest cash or non-cash assets in the partnership. When a partner invests non-cash assets, they are
to be recorded at values agreed upon by the partners.
In the absence of any agreement, the contributions will be recognized at fair market value at the date of transfer to
the partnership.
Per International Financial Reporting Standards (IFRS) No. 3, Fair value is the price at which an asset or liability
could be exchanged in a current transaction between knowledgeable, unrelated willing parties. (in a free market).

Adjustment of Accounts Prior to Formation

In cases where the prospective partners have existing businesses, their respective books will have to be adjusted
to reflect the fair market values of their assets or to correct misstatements in the accounts. If the adjustments will
not be made, the initial capital balances of the partners maybe inequitable.

The adjustments of the assets and liabilities prior to formation will be similar to the adjustments that we are already
familiar with. However, when the adjustment involves a debit or credit to a nominal account, the Capital account
would instead be debited or credited. This is so because the business has ceased to be a going concern. A
business is not viewed as a going concern if liquidation appears imminent.

Illustration: Emerita Geron and Emerita Modesto formed a general professional partnership. Emerita Geron will
invest sufficient cash to get equal interest in the partnership while Emerita Modesto will transfer the assets and
liabilities of her business. The account balances on the books of Modesto prior to partnership formation follows:

Debit Credit
Cash P 180,000
Accounts Receivable 300,000
Office Equipment 1,500,000
Accumulated Depreciation P 600,000
Accounts Payable 155,000
Salaries Payable 25,000
Emerita Modesto, Capital 1,200,000

It was agreed that for purposes of establishing Emerita Geron’s interest, the following adjustments shall be made in
the books of Emerita Modesto:
1- An allowance for uncollectible accounts of 5% of accounts receivable is to be established.
2- Prepaid expenses amounting to P30,000 were omitted by the accountant. This is to be recognized.
3- Additional salaries payable in the amount of P10,000 is to be established.

Adjusting entries and explanation:

1- An allowance of 5% of P300,000 or P15,000 needs to be established.

An allowance for Uncollectible accounts is a contra-asset account. When this account is increased, the
effect is to decrease the related asset account. Since provision for uncollectible account is an expense in
the ordinary course of business, the owner’s equity account is also decreased with the entry as ff:

Emerita Modesto, Capital 15,000

Allowance for Uncollectible Accounts 15,000

2- An omission to record the asset – prepaid expenses will denote that the expenses of the business are
overstated. When the expenses are overstated, profit and correspondingly the owner’s equity is
understated. To correct the misstatement the entry would be:

Prepaid Expenses 30,000

Emerita Modesto, Capital 30,000

3- The establishment of additional salaries payable will increase liabilities. It can be deduced that the salaries
expenses are understated and to correct the misstatement the owner’s equity will be decreased.

Emerita Modesto, Capital 10,000

Salaries Payable 10,000

The adjustments prior to formation will entail debits or credits to asset or liability accounts. To maintain the
double entry system of accounting, a corresponding debit or credit to owner’s equity account will be made. The
following T-account will serve to summarize thee necessary adjustments to the capital account:
 Owner’s Equity Account

Debit Credit

1- Decrease in asset 1- increase in asset

2- Increase in liability 2- decrease in liability
3- Increase in contra-asset 3- decrease in contra-asset

Opening Entries of a Partnership Upon Formation

A partnership may be formed in any of the following ways:

1- Individuals with no existing business form a partnership

2- Conversion of a sole proprietorship to a partnership
a- A Sole proprietor and an individual without an existing business form a partnership
b- Two or more sole proprietors form a partnership
3- Admission or retirement of a partner (to be covered in the next module).

Individuals with No Existing Business Form a Partnership

The opening entry to recognize the contributions of each partner into the partnership is simply to debit the assets
contributed, and to credit the liabilities assumed and the capital account of each partner.

Illustration: On July 1,2019, Nilo Burgos and Elenita Ruiz Agreed to form a partnership. The partnership
agreement specified that Burgos is to invest cash of P700,000 and Ruiz is to contribute land with a fair value of
P1,300,000 with P300,000 mortgage to be assumed by the partnership. The entries are as follow:

Cash 700,000
Land 1,300,000
Mortgage Payable 300,000
Nilo Burgos, Capital 700,000
Elenita Ruiz, Capital 1,000,000
To record the initial investments
Of Burgos and Ruiz.

After the formation , the statement of financial position (the new title of the balance sheet per revised IAS No.
1) of the newly formed partnership is:

Burgos and Ruiz

Statement of Financial Position
July 1, 2019

Assets

Cash P 700,000
Land 1,300,000

Total Assets P 2,000,000

Liabilities and Owner’s Equity

Mortgage Payable P 300,000

Nilo Burgos, Capital 700,000
Elenita Ruiz, Capital 1,000,000

Total Liabilities and Owner’s Equity P 2,000,000

Suppose that Burgos and Ruiz formed another partnership with Dr. Debbie Abiog-Adriano. Burgos and Ruiz
considered Adriano who has vast business network in Bicol.as an industrial partner. The partnership did not
receive any asset from Adriano, In this case, only a memorandum entry in the general journal will be made.
A Sole Proprietor and Another Individual Form a Partnership:

Illustration: The statement of Financial Position of Galicano Del Mundo on October 1, 2019, before accepting
Christine Resultay as partner is shown below:

Galicano Del Mundo

Statement of Financial Position
October 2, 2019

Assets

Cash P 60,000
Notes Receivable 30,000
Accounts Receivable P 240,000
Less: Allowance for Uncollectible Accounts 10,000 230,000
Merchandise 80,000
Furniture & Fixtures 60,000
Less: Accum. Depreciation 6,000 54,000

Total Assets P 454,000

Liabilities & Owner’s Equity

Notes Payable P 40,000

Accounts Payable 100,000
Galicano Del Mundo, Capital 314,000

Total Liabilities & Owner’s Equity P 454,000

ACCOUNTING FOR PARTNERSHIP OPERATIONS AND FINANCIAL REPORTING

The basis on which profits or losses are shared is a matter of agreement among 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 loses.

Illustration: “Nelson Deganta is a one-third partner” ia an ambiguous statement. Deganta may have one-third
equity in the net assets of the partnership but might have a larger or smaller share in the profit or loss of the firm.
Such that, partners may agree on any type of profit or loss ratio regardless of the amount of their respective capital
account balances.

FACTORS TO CONSIDER IN ARRIVING AT A PLAN FOR DIVIDING PROFITS OR LOSSES

1- Money , Property or Industry- The amount of capital invested by each partner, the amount of time each
partner devotes to the business and other contributions are factors being considered in the formulation of
an equitable profit and loss ratio.
2- Performance methods –many partnerships use profit and loss sharing arrangements that give some
weight to the specific performance of eachpartner to provide incentives to perform well. Some criteria are
as follows:
a- Chargeable hours
b- Total billings
c- Write offs
d- Promotional and civic activities
e- Profits in excess of specified levels

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 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 of the year), but the industrial partner may not be liable for the losses,

A stipulation which excludes one or more partners from any share in the profits or losses is void. (Article 1797).

DISTRIBUTION OF PROFITS OR LOSSES BASED ON PARTNERS’ AGREEMENT

In general, profits or losses shall be divided in accordance with the agreement of partners. The ratio in which
Profits or losses from partnership operations are distributed is recognized as profit and loss ratio..

The partners may agree on any of the following scheme in distributing profits or losses:

1- Equally or in other agreed ratio

2- Based on partners’ capital contribution
a- Ratio of original capital investments
b- Ratio of capital balances at the beginning of the year
c- Ratio of capital balances at the end of the year
d- Ratio of average capital balances
3- By allowing interest on partners’ capital and the balance in an agreed ratio
4- By allowing salaries to partners and the balance in an agreed ratio
5- By allowing bonus to managing partner based on profit and the balance in an agreed ratio
6- By allowing salaries, interest on partners’ capital, bonus to the managing partner and the balance
in an agreed ratio (combination of 3 and 4).

Illustration: The following series of illustrations are based on the figures obtained from Medina and Detoya
Partnership which had a profit of P300,000 for the year ended December 31, 2019, 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. The drawings are recorded by debits to the partners’ drawing accounts
and shall not be considered in the division of profit or loss. It is the intention of the partners that each
partner’s share in the profit or loss be either credited or debited to the drawing account.

L. Medina, invested P400,000 on Jan. 1, 2019 and an additional P100,000 on April 1. E. Detoya invested
P800,000 on Jan. 1 and withdraw P50,000 on July 1. These transactions and events are summarized in the
following capital , drawing and income summary ledger accounts.

Medina, Capital Detoya, Capital

Jan. 1--- 400,000 July 1 - 50,000 Jan. 1 -- 800,000

Apr. 1 --- 100,000

Medina, Drawing Detoya, Drawing

Jan-Dec. 60,000 Jan- Dec. 60,000

Income Summary

Dec. 31 300,000

Case 1- Equally or in other Agreed Ratio

Partnership contract may provide that profit or loss be divided equally.

Income Summary 300,000

Medina, Drawing 150,000
Detoya, Drawing 150,000
To record the distribution of profits

Assume that instead that Medina and Detoya share profits and losses in the ratio of 60:40 respectively.
With the profit of P300,000 the distribution would be:

Income Summary 300,000

Medina, Drawing 180,000
Detoya, Drawing 120,000
 Computation:
Medina (300,000 x 60%) 180,000
Detoya ( 300,000 x 40%) 120,000

Total Profit 300,000

Case 2- Based on partners’ Capital Contribution

a- Ratio of original capital investment :

L. Medina, Capital 400,000

E. Detoya, Capital 800,000
Total Original investment 1,200,000

Distribution would be:

L. Medina (400,000/1,200,000 x 300,000) 100,000
E. Detoya (800,000/ 1,200,000 x 300,000) 200,000
Total 300,000

Income Summary 300,000

L. Medina Drawing 100,000
E. Detoya, Drawing 200,000

b- Ratio of Capital balances at the end of the year:

Assume that the profits is divided in the ratio of capital balances at the end of the year before
drawings and the distribution of profit. The ending balances are P500,000 for Medina and P750,000 for
Detoya; the entry to record the distribution should be:

Income Summary 300,000

L. Medina, Drawing 120,000
E. Detoya, Drawing 180,000

Computation:

Medina 300,000 x 500,000/1250,000 120,000

Detoya 300,000 x 750,000/1250,000 180,000
Total 300,000

c- Ratio of average capital balances

Ratio of capital balances at the beginning or end of the year if there are material changes in the
capital accounts during the year may prove inequitable

Using average balances as a basis for distributing profits or losses may be considered preferable.
Agreement should also state the amount of drawings each partner may make and these drawings
are considered temporary and recorded as debits to the partner’s drawing account. Drawings
within the allowable amount will not affect computation of the average capital balance. On the
other hand drawings in excess of allowable amount are considered permanent reductions in
capital hence computation of the average capital.

In the continuing illustration for the Medina and Detoya Partnership, the partners are entitled to
withdraw P5,000 monthly or a total of P60,000 per annum. Any additional withdrawals are directly
debited to the partner’s capital accounts and therefore affect the computation of the average
capital ratio.

Medina and Detoya

Computation of average Capital balances
For the year ended December 31, 2019

L. Medina, Capital

Date Capital Account Portion of the Average Capital

Balances Year Unchanged Balances

Jan 1 P400,000 3/12 x 400,000 P100,000

Apr. 1 500,000 9/12 x 500,000 375,000
P475,000
 E. Detoya, Capital

Jan. 1 P800,000 6/12 x 800,000 P400,000

July 1 750,000 6/12 x 750,000 375,000
P 775,000

Total Average Capital P1,250,000

Entry to record the distribution of profit under the average capital method is:

Income Summary 300,000

L. Medina, Drawing (300,000 x 475,000/1250,000) 114,000
E. Detoya, Drawing I775,000/1250,000 x 300,000) 186,000

3- Case 3 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 partner’s capital, along with
the other profit sharing plans to be discussed in the remainder of this chapter, are to be considered as a
mere techniques to share partnership profits or losses equitably and not as an expenses of the partnership.
On the other hand, the interest on loans from partners is recognized as expense and a factor in the
measurement of profit or loss of the partnership; similarly, interest earned on loans to partners is
recognized as partnership income.

Continuing the illustration of Medina and Detoya Partnership with a profit of P300,000 for 2019 and capital
balances as already shown, assume that the partnership agreement allowed 15% interest on average
capital account balances, with the balance to be divided equally.

Partnership profit of P300,000 is divided as follows:

Medina Detoya Total

15% interest on Average capital:

Medina 475,000 x 15% 71,250
Detoya 775,000 x 15% 116,250 187,500
Balance to be divided Equally:
Medina 112,500 x 50% 56,250
Detoya 112,500 x 50% 56,250 112,500

Total 127,500 172,500 300,000

Assume that instead of profit earned amounting to P300,000 is a net loss of P10,000. With the same profit and
loss agreement the distribution should be as follows:

Medina Detoya Total

15% Interest on Average capital:

Medina 15% x 475,000 71,250
Detoya 15% x 775,000 116,250 187,500
Balance to be divided equally
- P10,000 - 187,500 = - 197,500
Medina (-197,500 x 50% ) ( 98,750)
Detoya (-197,500 x 50% ) (98,750) (197,500)

Share of partners in the profits (losses) (27,500) (17,500) (10,000 )

Entry:

L.. Medina , Drawing 27,500

E. Detoya , Drawing 17,500
Income Summary 10,000
To record the distribution of net loss

Case 4- 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 the operations
yielded losses. This allowance should not be confused with the salaries expense or with partner’s
 drawing account which is debited for periodic salary allowances. Therefore, when the partners calculate the profit
of the partnership, salaries to the partners are not deducted as expenses in the statement of recognized income
and expense.

Continuing the illustration : Assume that the partnership agreement provided for an annual salary of P100,000 to
Medina and P60,000 to Detoya, and the balance to be divided equally. The profit of P300,000 for 2019 is divided
as follows:

Medina Detoya Total

Salary Allowances 100,000 60,000 160,000

Balance to be divided equally:

( 300,000 – 160,000 = 140,000 )

Medina ( 140,000 x 50%) 70,000 70,000 140,000

Partners share in the Profits (losses) 170,000 130,000 300,000

Entry:
Income Summary 300,000
L. Medina, Drawing 170,000
E. Medina, Drawing 140,000
To record the distribution of profit

Case 5- By allowing bonus based on profit to managing partner and the balance to be divided in an
agreed ratio:

A partnership contract may provide for special compensation in th form of bonus to the managing partner when
the results of operations of the partnership are favorable. The allowance is given in order to encourage the
partner to maximize the profit potentials of the partnership. Bonus is not being considered in the comutation of
profit, rather it is a mere technique to distribute profits.

Assume that Medina and Detoya Partnership agreement provided for a bonus of 25% of profit before bonus to
partner medina and the balance to be divided equally. With the profit of P300,000 the distribution should be:

Medina Detoya Total

Bonus allowed to Medina 25% of 300,000 75,000 75,000

Remainder to be divided equally

Medina ( 300,00- 75,000 / 2) 112,500 112,500 225,000

Share of Partners in the Profit 187,500 112,500 300,000

Income Summary 300,000

L. Medina , Drawing 187,500
E. Detoya, Drawing 112,500
To record the distribution of profit

FINANCIAL REPORTING
Financial statements as we all know are structured representation with the objective of providing
information about the financial position, financial performance and cash flows of an entity that is useful to wide range
of users in making economic decisions. Financial statements also show the results of the management’s
stewardship of resources entrusted to it.

The financial statements shall present fairly the financial position, financial performance and cash flows of the entity.
Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in
accordance with definitions and recognition criteria for assets, liabilities, income and expenses set out in the IASB’
framework. Under IAS No. 1 (revised 2007), entities are required to make an explicit and unreserved statement o
compliance with IFRS in the notes. Re:

1 - Going Concern
2 Accrual basis of Accounting
3 Materiality and Aggregation
 4 Offsetting
5 Frequency of Reporting and Comparative Information
6 Consistency of Presentation
7 Identification of Financial Statements

LEARNING ACTIVITIES
Module discussion during synchronous meetings with illustrative problems and solutions on different cases of
partnership formation and operations. (Investments of partners in assets and non-cash assets; Distribution of
Profits and Losses under different methods).
Assigning of problems at the end of the chapter for more exercises to enhance their skills in analyzing
problems and computations.

ASSESSMENTS/EVALUATION
This might be in the form of:
i. Online quiz/zes (Google forms with timely as add-on) / Graded recitation

ii. Summative test/ Graded recitation

LEARNING MATERIALS

I would require them to buy the textbook for them to have a better reference and to train them to read with
more problems to solve at the end of every chapter.

Partnership and Corporation accounting by Win and Susan Ballada. 2019 Issue

Financial accounting and Reporting Volume 2 by Balatbat Cabrera.