PARTNERSHIPS OPERATIONS

Article 1797 of the New Civil Code gives the following provisions on how to distribute profit or loss:
1. Profit or loss may be distributed on the basis of partners’ agreement as provided in the articles of co-partnership
2. If the agreement is only on how to distribute the profit but result of operations is a net loss then the same
agreement is applicable
3. In the absence of an agreement on how to distribute the profit or loss, then the distribution should be based on
what the partners contributed with the industrial partner receiving what may be just and equitable
4. An industrial partner has a priority in the profit distribution. It means that the share of the industrial partner must
be computed first before that of the other partners. An industrial partner does not share in the losses incurred by
the firm

FAIREST WAY OF DISTRIBUTING PROFIT?

1. Capital Contribution
Capital
Ratio
Contribution
A 100,000 33.33%
B 100,000 33.33%
C 100,000 33.33%
300,000 100.00%

2. Service rendered
Capital Division of
Rendered Service
Contribution Profits*
A 100,000 8 hours per day 50.00%
B 100,000 4 hours per day 25.00%
C 100,000 4 hours per day 25.00%
300,000 100.00%

3. Skill or expertise
Capital Rendered Service/ Division of
Contribution Expertise Profits*
A 100,000 Managing Partner 45.00%
B 100,000 General Partner 27.50%
C 100,000 General Partner 27.50%
300,000 100.00%

*Giving salary, interest and/ or bonus is also another way of distributing profit
The foregoing are not considered as business expense

METHODS OF DISTIBUTING PROFIT AND LOSS

Arbitrary Ratio (any agreed ratio)

Capital
Ratio
Contribution
A 300,000 33.33%
B 200,000 33.33%
C 100,000 33.33%
600,000 100.00%
If the partnership earned net income of P90,000
Income summary 90,000
A, Drawing 30,000
B, Drawing 30,000
C, Drawing 30,000

Capital Ratio based on:

Juan Pedro TOTALS
Beginning Capital - Jan. 1 400,000 200,000 600,000
Additional Investment - Apr 1 100,000 100,000
Withdrawal - Oct. 1 -200,000 -200,000
Ending Capital 200,000 300,000 500,000

income is 300,000 and to be distributed based on Beginning capital

Income summary 300,000

Juan, Drawing 200,000.00
Pedro, Drawing 100,000.00

income is 300,000 and to be distributed based on ending capital

Income summary 300,000
Juan, Drawing 120,000.00
Pedro, Drawing 180,000.00

income is 300,000 and to be distributed based on average capital

Income summary 300,000
Juan, Drawing 168000
Pedro, Drawing 132000

No. of Months Average Capital

Average capital: Date Capital Peso Months Alternative
used (Monthly)
Juan Jan. 1 400,000 9 3,600,000.00 400,000.00
Oct. 1 200,000 3 600,000.00 (50,000.00)
4,200,000.00 350,000.00 350,000.00

Pedro Jan. 1 200,000 3 600,000.00 200,000.00

Apr. 1 300,000 9 2,700,000.00 75,000.00
3,300,000.00 275,000.00 275,000.00
625,000.00

Interest based on contributions made, residual profit in an agreed ratio

Assume Juan and Pedro are partners with capital of P350,00 and P250,000, respectively.
Share of profit is: 12% interest on capital and remainder divided equally.
Assume P300,000 net income

Income summary 300,000

Juan, Drawing 156,000.00
Pedro, Drawing 144,000.00

Juan Pedro Total

12% interest on capital 42,000.00 30,000.00 72,000.00
Remainder 114,000.00 114,000.00 228,000.00
156,000.00 144,000.00 300,000.00

Assume P60,000 net income

Income summary 300,000

Juan, Drawing 36,000.00
Pedro, Drawing 24,000.00

Juan Pedro Total

12% interest on capital 42,000.00 30,000.00 72,000.00
Remainder (6,000.00) (6,000.00) (12,000.00)
36,000.00 24,000.00 60,000.00

Assume P28,000 net loss

Juan, Drawing 8,000.00

Pedro, Drawing 20,000.00
Income summary 300,000

Juan Pedro Total

12% interest on capital 42,000.00 30,000.00 72,000.00
Remainder (50,000.00) (50,000.00) (100,000.00)
(8,000.00) (20,000.00) (28,000.00)

Salaries to partners for services rendered, residual profit based on contributions

Capital
Ratio
Contribution
Juan 300,000 50.00%
Pedro 200,000 33.33%
Jose 100,000 16.67%
600,000 100.00%
Assuming A, as a managing partner is to receive annual salary of P120,000 and remainder
disttributed based on capital ratio
Assume that net income after tax is P180,000

Income summary 180,000

Juan, Drawing 150,000.00
Pedro, Drawing 20,000.00
Jose, Drawing 10,000.00

Juan Pedro Jose Total

Salary to Juan 120,000.00 120,000.00
Remainder 30,000.00 20,000.00 10,000.00 60,000.00
150,000.00 20,000.00 10,000.00 180,000.00

Assume that net income after tax is P90,000

Income summary 90,000

Pedro, Drawing 10,000.00
Jose, Drawing 5,000.00
Juan, Drawing 105,000.00

Juan Pedro Jose Total

Salary to Juan 120,000.00 120,000.00
Remainder (15,000.00) (10,000.00) (5,000.00) (30,000.00)
105,000.00 (10,000.00) (5,000.00) 90,000.00

Assume that net loss after tax is P30,000

Pedro, Drawing 50,000.00

Jose, Drawing 25,000.00
Juan, Drawing 45,000.00
Income summary 30,000.00

Juan Pedro Jose Total

Salary to Juan 120,000.00 120,000.00
Remainder (75,000.00) (50,000.00) (25,000.00) (150,000.00)
45,000.00 (50,000.00) (25,000.00) (30,000.00)

Interest on contributions, salaries to partners, residual profit in an agreed ratio

Assuming Juan and Pedro are partners with capital of P500,000 and P300,000, respectively, agreed on the following:
12% interest on capital contributions, salary of P15,000 per month for B, residual profit equally distributed
Assume net income of P376,000

Income summary 376,000.00

Juan, Drawing 110,000.00
Pedro, Drawing 266,000.00

Juan Pedro Total

12% interest on capital 60,000.00 36,000.00 96,000.00
Salary to B 180,000.00 180,000.00
Remainder 50,000.00 50,000.00 100,000.00
110,000.00 266,000.00 376,000.00

Assume net income of P200,000

Income summary 200,000.00

Juan, Drawing 22,000.00
Pedro, Drawing 178,000.00

Juan Pedro Total

12% interest on capital 60,000.00 36,000.00 96,000.00
Salary to B 180,000.00 180,000.00
Remainder (38,000.00) (38,000.00) (76,000.00)
22,000.00 178,000.00 200,000.00

Assume net loss of P24,000

Juan, Drawing 90,000.00

Pedro, Drawing 66,000.00
Income summary 24,000.00

Juan Pedro Total

12% interest on capital 60,000.00 36,000.00 96,000.00
Salary to B 180,000.00 180,000.00
Remainder (150,000.00) (150,000.00) (300,000.00)
(90,000.00) 66,000.00 (24,000.00)
Interest on contributions, salaries to partners, bonus to managing partner, and residual profit in an agreed ratio.
Where bonus is expressed as follows:

A distribution of profit/ Minimum Required Profit Share of a Partner

Juan, Pedro and Jose agreed to an equal profit sharing after giving Juan P60,000 salary and a guaranteed minimum
profit share of P100,000. Transfer of profit or bonus made to partners are as follows (assume P135,000 income):

Juan Pedro Jose Total

Salary to Juan 60,000.00 60,000.00
Remainder 25,000.00 25,000.00 25,000.00 75,000.00
Transfer of profit 15,000.00 (7,500.00) (7,500.00)
100,000.00 17,500.00 17,500.00 135,000.00

Bonus to Managing Partner - entitled, by agreement, to receiva a bonus. Not applicable when there is a loss

Assuming Juan and Pedro are partners with capital of P300,000 and P500,000, respectively, agreed on the following:
12% interest on capital contributions, 25% bonus to Juan as managing partner, residual profit equally distributed
Net income earned is P400,000

If Bonus is based on net income before interest and bonus

Juan Pedro Total

12% interest on capital 36,000.00 60,000.00 96,000.00
Bonus to Juan 100,000.00 100,000.00
Remainder 102,000.00 102,000.00 204,000.00
238,000.00 162,000.00 400,000.00

If Bonus is based on net income after interest and bonus

Juan Pedro Total

12% interest on capital 36,000.00 60,000.00 96,000.00
Bonus to Juan 60,800.00 60,800.00
Remainder 121,600.00 121,600.00 243,200.00
218,400.00 181,600.00 400,000.00

B= 25% (Net income - Interest - Bonus)

B= 25% (400,000 - 96,000 - B)
B= 76,000 - 0.25B
1.25 B = 76,000 / 1.25
B= 60,800