MODULE XII

TITLE: PARTNERSHIP OPERATIONS

Introduction

The operations of a partnership are Similar in most respects to those other forms of organizations
operating 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
partnership will have two or more capital accounts rather than a Single retained earnings balance
this: allocation to the capital accounts is based established by the partners preferably as a part of
the Articles of Partnership.

A wide range of allocation is found in the business world. Some partnerships have
straightforward distribution plans while others have extremely complex ones. It is the
accountant's responsibility to distribute he profit or loss according to the partnership agreement
regardless of how simple or complex that agreement is. This chapter will be your guide in profit
and loss allocation among partnerships.

Unit Learning Outcomes:

1. State the items that affect the division of a partnership’s profits or losses among partners.
2. Compute for the share of a partner in the partnership’s profit or loss.

Topic 1: DIVISION OF PROFITS AND LOSS

Time Allotment: 2 hours

Learning Objectives:

At the end of the module, you will be able to:

a. Identify the bases for dividing net income and net loss
b. Compute for the share of a partner in the partnership’s profit or loss.

Activating Prior Learning

TRUE OR FALSE
1. A partner who contributes cash or other non-cash assets to the partnership, rather than
services, is called an industrial partner.

Use the following information for the next four questions:

You and I are business partners. We agreed to share profits and losses equally.

2. If our partnership business earns profit of P10, your share is P3.

3. We agreed that I should receive a salary of Pl. If our partnership business earns profit of
P10, my share is P5.5 while your share is P4.5.

4. We agreed that I should receive a P1 bonus in addition to my P1 salary. If our partnership

business earns profit of P10, my share is P6, while your share is P4.

5. We agreed that I should receive a P1 bonus in addition to my P1 salary while you receive
a P1 interest on your capital contribution. If our partnership business earns profit of P10,
my share is P5.5 while your share is P4.5.

Answer:
1. False
2. False
3. True
4. True
5. True

How much score did you get?

Try to assess your performance based on the given scores and their descriptive value.
5 - Excellent
4 - Good
3 - Fair
0-2 - Poor

Congratulations! You did a great job.

Presentation of Content

Definition of Terms
 a. Salaries — normally, an industrial partner receives salary in addition to his
share in the partnership's profits as compensation for his services to the partnership.
b. Bonuses — the managing partner may be entitled to a bonus for excellent
management performance. Unlike for salaries, a partner is entitled to a bonus only if
the partnership earns profit. The partner is not entitled to any bonus if the partnership
incurs loss.
c. Interest on capital contributions — the partnership, agreement may stipulate
that capitalist partners are entitled to an annual interest on their capital contributions.

**The items above 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.
d. Industrial partner- one who contributes services to the partnership rather than
cash or other non-cash assets.
e. Capitalist partner- one who contributes cash or other non-cash assets to the
partnership
f. Capitalist-industrial partner- one who contributes both services and cash or
other non-cash assets.

Profits and Losses may be shared partners according to the following level of priority:

1. Agreed proportion of profit and loss sharing;

2. In proportion to what the partners have contributed; but industrial partner shall not be
liable for the losses. If capitalist-industrial partner, he shall also receive a share in the
profits in proportion to his capital.

Level of priority:
a. original/beginning capital;
b. ending capital;
c. average capital
3. Equally among partners
EXAMPLE

JOHN CAPITAL MARTHA CAPITAL

Debit Credit Debit Credit

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

Income Summary 150,000

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

2. Capital ratio

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

Income Summary 150,000

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

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

Income Summary 150,000

John, Capital 68,181.82
Martha, Capital 81,818.18
To distribute profits to partners

c. Average Capital Ratio

Income Summary 150,000

John, Capital 75,202.16
Martha, Capital 74,797.84
To distribute profits to partners

3. Equally

Income Summary 150,000

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

COMPUTATION OF AVERAGE CAPITAL

Date Capital No. of Months Peso Months Average Capital
Balance Unchanged
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
Average Cap. P5,580,000/12 P465,000
Martha
‘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
Average Cap. 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
=======
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, Capital 80,000
Martha, Capital 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, Capital 74,000
Martha, Capital 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, Capital 90,000
Martha, Capital 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, Capital 75,000
Martha, Capital 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, Capital 80,000
Martha, Capital 70,000
To distribute profits to partners

9. Allowing interest on partners’ capital balances, salaries and bonus, balance 4:6
NET LOSS- P150,000

-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, Capital 48,000

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

10. Reconstruction of information

Partner A has a 25% participation in the profits of a partnership. During the year, A's capital account has a net
increase of P10,000. Partner A made contributions of P40,000 and capital withdrawals of P 60,000 during the
year.

Requirement: How much profit did the partnership earn during the year?

Solution:

Step 1: We will place the given information on the T-account.

A, Capital

-* Beg.
60,000 40,000

?
End 10, 000*
To show the net increase in A's capital, we assign zero as the beginning balance and the amount of net increase as
the ending balance. Thus, P10,000 ending less P 0 beginning equals P10,000 net increase from beginning to end.

2: We will squeeze for the missing amount.

-* Beg.
60,000 40,000

?
End 10, 000*
 30,000 Share in profit (squeeze) end.
3. We will squeeze for the requirement of the problem:
30,000/25%= P120,000 Profit the partnership earned

Application

Congratulations! You have just completed Topic 1.

I prepared some activities for you to refresh your thoughts. These activities
are assessment if you understand that discussions we had. Though this will
not be recorded, it will still form part of your class standing so make sure to
accomplish the tasks given to you.

Division of profits and losses

Use the following information for the next two questions:

A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowance of P100,000 for A, the managing partner.
 10% bonus to A after salaries but before deduction for the bonus.
 The partners share in profits and losses equally.
Case 1: With profit
1. The partnership earned profit of P 1,000,000 before salary allowance.
Requirements:

a. Compute for the respective shares of the partners in the profit.

Answer: A B Total
As allocated 595,000 405,000 1,000,000

b. the journal entry to close the Income summary account to the partners'
respective equity accounts.

Closing entry Income summary 1,000,000

A, Capital 595,000
B, Capital 405,000

Case 2: With loss

2. The partnership incurred a loss of P80,000 before salary allowance.

Requirements:
a. Compute for the respective shares of the partners in the loss.
Answer:
As allocated 10,000 (90,000) (80,000)

b. Provide the journal entry to close the Income summary account to

the partners' respective equity accounts.

Closing entry B, Capital 90,000

Income summary 80,000
A, Capital 10,000

Interest on capital
3. A and B formed a partnership. The partnership- agreement stipulates the
following:
 Annual salary allowance of P100,000 for A, the managing partner.
 10% bonus to A after salaries but before deductions for bonus and interest.
 12% interest on the weighted average capital balance of B.
 The partners share in profits and losses equally.
The partnership earned profit of P1,000,000. The movements in B's capital account
are as follows:

B, Capital
500,000 Beg.
200,000 July 31, 100,000 April 1 Add.
with. 400,000 Sept.1 Add.
300,000 Dec. 1 Add
1,100,000

Requirement: Compute for the respective shares of the partners in the profit.
Answer:
As allocated 556,000 444,000 1,000,000

PROBLEM 3: COMPUTATIONS
Use the following information for the next two questions:
A and B formed a partnership. The partnership agreement stipulates the following:
 Annual salary allowances of P80,000 for A and P 20,000 for B.
 10% bonus to A after salaries but before deduction for the bonus.
 The partners share in profits and losses on a 70:30 basis.
1. The partnership earned profit of P1,200,000 before salary allowance.

Requirements:

a. Compute for the respective shares of the partners in the profit.

Answer:
As allocated 883,000 317,000 1,200,000

b. Provide the journal entry to close the Income summary account to the partners' respective
equity accounts.

Closing entry Income summary 1,200,000

A, Capital 883,000
B, Capital 317,000
2. The partnership incurred a loss of P60,000 before salary allowance.

Requirements:

a. Compute for the respective shares of the partners in the loss.

Answer:
As allocated (32,000) (28,000) (60,000)

b. Provide the journal entry to close the Income summary account to the partners' respective
equity accounts.

Closing entry A, Capital 32,000

B, Capital 28,000
Income summary 60,000

3. A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salaries of P100,000 for A and P20,00 for B.

 10% bonus to A after salaries but before deductions for bonus and interest.
 10% interest on the weighted average capital balance of B.
 The partners share in profits and losses equally.

The partnership earned profit of P1,200,000. The movements in B's

capital account are as follows:
400,000 Beg.
300,000 4/30
200,000 5/31
100,000 8/1 300,000 12/1
End. 1,100,000
Requirement: Compute for the respective shares of the partners in the profit.

Answer:
As allocated 659,000 541,000 1,200,000

MULTIPLE CHOICE

1. The partners share in partnership profits or losses in accordance with their partnership
agreement. If there is no stipulation on how the partners should share in the profits or
losses of the partnership,
a. they should share equally.
b. they should let one of the partners decide unilaterally on how the profits should be divided
among the partners.
c their respective shares would be in proportion to their contributions.
d.they should not share at all but donate their profits to the world.

2 A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowances of P80,000 for A and for B.
 partners share in profits and losses equally.

Partnership earned profit of P100,000. How much is the share of B?

a. 70,000 c. 48,000
b. 30,000 d. 52,000

3. A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowances of P10,000 for A and P40,000 for
B.
 bonus to A of 10% of the profit after partner's salaries but before bonus.
 The partners share profits and losses on a 60:40 ratio.
During the period the partnership incurred a loss of P20,000 before deduction for salaries. By
what amount did B's capital
account change?

a. Increased by P12,000 c. Increased by P32,000

b. Decreased by P12,000 d. Decreased by P32,000
 4. A and B formed a partnership. The partnership agreement stipulates the following:
 Annual salary allowances of P10,000 for A and for B.
 Bonus to A of 10% of the profit after partners salaries but before bonus and interest.
 Interest of 12% on the beginning capital balance of B.
 The partners share profits and losses on a 60:40 ratio.

During the period the partnership earned profit of before deduction for salaries. B's
beginning capital balance was P60,000. How much is the share of A in the profit?
a. 101,680 c. 110,820
b, 98,320 d. 96,720

5, A and B formed a partnership. The partnership agreement stipulates the following

 First, A shall receive 2% of profit up to and 5% over P200,000.
 Second, B shall receive 1% of the remaining profit over
 Any remainder shall be shared equally.

During the year, the partnership earned profit of P500,000.

How much is the share of A in the profit?

a. 258,095 c. 241,095

b. 268,885 d. 241,905

6.A, B and C formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowances of P100,000 for A and P20,000 for B.

 10% interest on the beginning capital balance of C.
 The partners share in profits and losses on a 40:40:20 ratio.

The partnership earned profit of P500,000. C's capital account had a beginning balance of
P300,000. The difference between the amounts received by A and B is
a. 160,000. c. 80,000.
b. 240,000. d. 60,000.

7.A and B formed a partnership. The partnership agreement stipulates the following:
 Annual salary allowances of P80,000 for A and P40,000 for B.
  The partners share in profits and losses equally.

The partnership earned profit of P100,000 after salaries. HOW much is the share of B?
a. 70,000 c. 130,000
b, 30,000 d. 90,000

8. A and B formed a partnership. The partnership agreement stipulates the following:

 Monthly salary allowances of P 10,000 for A and P4,000 for B. The salaries are recognized
as expenses.
 The partners share equally in profits and losses.
The partnership earned profit of P360,000. How much is the share of A?
a. 300,000 c. 148,000
b. 228,000 d. 128,000

9. A and B share equally in partnership profits and losses. During the year, A's capital
account has a net increase P50,000. Partner A made contributions of P10,000 and capital
withdrawals of P60,000 during the year. How much was the partnership profit for the
year?
a. 180,000 c. 210,000
b. 200,000 d. 480,000

10. 10. A and B formed a partnership. The partnership agreement stipulates the following:
 Annual salary allowance of P100,000 for A, the managing partner.
 10% bonus to A after salaries but before deduction for the bonus.
 The partners share in profits and losses equally.

The share of A in the partnership profit during the period was P595,000, including a bonus of
P90,000. How much was the share of B?
a. 386,000 c. 405,000
b. 398,000 d. 504,000

Unit Summary

In this unit, we discussed:

 The partners share 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.

 If both cannot be identified, then profit and loss shall be distributed equally among partners.

 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 profit), and
(c) interest on capital. After allocating these items, any remaining profit or loss is allocated
based on the stipulated P/L ratio.

Feedback

Name: _________________________ Section: ____________ Score:_____

A. The JR Asia Consultancy Firm which is owned and managed by two CPAS, Joffre and Ric started
operation on March 31, 2015. Initial investments of the partners are: Mat P800,000 and Stella
P400,000. Profit agreement as shown in the articles of co-partnership follows:
Distribute profit by giving partners a 6.75% interest on contributions, a 10% bonus treated
as a distribution of profit to Mat, remaining profit divided equally as both are CPAs.
1. If profit at the end of Dec 31 is reported as P200,000, how much will be Mat’s profit share?
2. If Stella earns a total profit share of P69,750 at the end of 2015, how much will Mat earn?
3. Stella was not satisfied with the agreement. She wants the bonus to be 10% after interest
and bonus. If Stella earns P69,750, how much will the bonus be?
B. Beth, Luz and Ana established an internet shop and agreed to divide profit and loss in the ratio of
2:1:1 respectively, after giving a monthly salary of P10,000 to each partner and bonus of 20% to
Beth. What is the profit share of Beth based on the following independent situations?
4. Net taxable income earned is P480,000 and 20% bonus is based on net income before
salaries but after bonus and the tax rate is 30%.
5. Net income after salaries but before tax and bonus is P480,000. 20% bonus is based on net income
after tax, salaries and bonus.
6. Net income is P480,000 including salaries and bonus. 20% Bonus is based on net income before
salaries but after bonus.
 7. Net income is P480,000 before salaries bonus and tax. Bonus is based on net income after
salaries, bonus and tax. Salaries and bonus are treated as deductible expenses . Tax rate is
30%.

TEST II. True or False- Answers beside the number. If false, correct the statement by crossing the
wrong word(s) or amounts(s) and place your correction above it.
_____1  Partner’s regular cash withdrawal is credited to a separate withdrawal account.
_____2. In closing the accounts at the end of a period, the partners' capital accounts are
credited for their share of the partnership loss or debited for their share of the
partnership net income
_____3. The statement of changes in partners' equity shows the beginning balance only in the
capital accounts if the accountant uses the fixed capital method.
_____4. The statement of changes in partners’ equity should present regular salary drawings as
a reduction from equity whether salary allowances withdrawn are of the same amount
or not as agreed in their profit sharing agreement.
_____5. If partners devote their time and services to their partnership, their salaries should be
presented as expenses. 
_____6. An industrial partner may receive salary allowance but not interest profit.
_____7. A limited partner may receive interest profit and salary allowance.
_____8. Reggie is a partner in Time To Sleep. An analysis of her capital account indicates that
during the year, her residual share was a loss of P16,000 after a salary allowance of
P20,000 which she withdrew during the year. Her total loss share for the year was
P36,000.
_____9. Refer to. No. 8. If Reggie’s capital account at the end of the year reached P150,000 after
she made an additional mid year contribution of P10,000, her capital balance at the
start of the year must have been P144,000 including beginning drawing balance.
_____10. The accountant briefly explained this entry as cash investment of Helen with bonus
given by the other partners:
Cash 900,000
Ben Chan, Capital 50,000
Rose Jocson, Capital 50,000
Helen Reyes, Capital 800,000

SOLUTION
A. 1.
Profit |Distribution Table Mat Stella Total
6.75 % interest on contributions 54,000 27,000 81,000
10% bonus on P200,000 20,000 20,000
 Remainder equally 49,500 49,500 99,000
123,500 76,500 200,000
2.
Profit |Distribution Table Mat Stella Total
6.75 % interest on contributions 54,000 27,000 81,000
10% bonus 18,500 18,500 *
Remainder equally 42,750 42,750 85,500
115,250 69,750 185,000#
x-.1x-81k=85,500
.9x=185k
X=185k

3. Mat=54,000 + 42,750 + 10% of 85,500* = P 105,300

* bonus is based on residual profit (net income after interest and bonus)

4. NI after tax 480,000 x .7= P336,000

Profit |Distribution Table Beth Total
Salaries 120,000 360,000
Bonus (336,000/1.2) x .2 56,000 56,000
Remainder (40,000) (80,000)
Total (480,000 x .7) 136,000 336,000

5.
Profit |Distribution Table Beth Total
Salaries 120,000 360,000
Bonus 38,000 38,000*
Remainder 95,000 190,000
Total 253,000 588,000#
#(480,000+360,000) x .7= 588,000
*588,000 – 360,000= NI Aft salaries 228,000/1.2 x .2
6.
Profit |Distribution Table Beth Total
Salaries 120,000 360,000
Bonus 80,000 80,000
Remainder 20,000 40,000
Total 220,000 480,000
#(480,000 /1.2= 400,000 x .2

7.a) Tax= 30% (480,000-360,000-B) c)Tax= 36,000 - .3(14,736.84)

= 144,000-108,000-.3B = 31,579

b) Bonus= 20%(480,000 – 360,000- B – (36,000-.3B)

= 96,000- 72,000 -.2B – 7,200+ .06B
1.14 = 16,800
= 14,736.84

Distribution Table Beth Total

Salaries 120,000.00 360,000.00
Bonus 14,736.84 14,736.84
 Remainder 36,842.08 73,684.16
Total 171,578.92 448,421.00

Question: What was the net income for distribution? 480,000 – 31,579= 448,421

TEST II. True nos. 3, 4, 6,7, 11

False
1  Partner’s regular cash withdrawal is credited debited to a separate withdrawal account
2. In closing the accounts at the end of a period, the partners' capital drawing accounts are
credited debited for their share of the partnership loss or debited credited for their share of
the partnership net income
5. If partners devote their time and services to their partnership, their salaries should be
presented as expenses distribution of profit.
8. Reggie’s total profit share is P36,000 4,000 (20,000 salary – 16,000 share in loss).
9 Reggie’s beginning capital must have been P 144,000 P156,000.
10. Cash investment of Helen with bonus given by to the other partners.

Reflection

This part of the module will be a time for you to look back, and reflect on what
you have learned from this unit. Though, this will not be checked and recorded,
would appreciate if you will do this wholeheartedly and with all seriousness.

Your task! Answer the following questions, and keep on solving problems that
would sharpen your problem-solving skills.

1. How much did you know about the subject before we started?

2. In what area do you find it the hardest?

References:
Millan, Zeus Vernon B. (2019). Financial Accounting and Reporting Baguio City, Philippines:
Bandolin Enterprise Publishing and Printing