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The document discusses the different methods of dividing profits and losses between partners in a partnership. It defines rules for profit and loss sharing based on partnership agreements, capital contributions, and capital ratios. Examples are provided to illustrate journal entries for different profit sharing and loss sharing scenarios between two partners.

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Shayek tyson
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23 views5 pages

Material#3

The document discusses the different methods of dividing profits and losses between partners in a partnership. It defines rules for profit and loss sharing based on partnership agreements, capital contributions, and capital ratios. Examples are provided to illustrate journal entries for different profit sharing and loss sharing scenarios between two partners.

Uploaded by

Shayek tyson
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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OBJECTIVES

 Differentiate the business operations of partnership from


sole proprietorship
 Differentiate the different profit and loss distribution
agreements
 Apply the various methods of dividing profits/losses and the
journal entries as well.

INTRODUCTION

The manner a sole proprietorship operates is basically similar with


that of a partnership, that is, when we speak of accounting principles
involved and assumptions as well. Transactions peculiar for a sole
proprietorship business engaged in merchandising, manufacturing, and
service concern are the same nature of transactions encountered in
partnership business. The steps of the accounting are also followed from
Journalizing up to preparation of Reversing Entries.
Welcome to lesson 1 of module 2, in this module, a series of activities
are made for you to know how partnership operates and divide profits and
losses. The said activities are designedProfits
Sharing Partnership to testand
your analytical ability in
Losses
solving problems. Have an enjoyable experience in learning!
The primary objective of the accounting for partnership operations is the
determination of periodic net income and its distribution to the partners.
Accountants usually observe the accrual method of accounting principles
Rules in Profit Sharing

Profit Sharing Based on Partner’s Profits of the partnership shall be


Agreement divided among the partners in
accordance with their profit-
sharing ratio agreement
Profit Sharing Based on Capital In the absence of a profit sharing
Contribution agreement, profits shall be
divided among the partners in
proportion to their respective
capital contributions
Profit Sharing Based on Capital If there is an industrial partner, he
Contribution and on Service first gets a just and equitable
share for his services, before the
capitalist partners divide the
balance of the profits in
proportion to their capital
contributions
If there is no specified profit
sharing for an industrial partner,
he shall receive a share equal to
the share of a capitalist partner
having the smallest share
If there is Capitalist/ Industrial
Partner, he gets just and
equitable share as an industrial
partner and another share. There
is no sharing agreement between
the pure capitalist partner
Rules on Losses Sharing
Loss Sharing Based on Partner’s Loss of the partnership shall be
Agreement divided among the partners in
accordance with their profit and
loss sharing agreement

In the absence of loss sharing


agreement, loss shall be
apportioned among the partners in
accordance with their profit sharing
ratio
Loss Sharing Based on Capital In the absence of any loss sharing
Contribution and profit sharing ratios, loss shall
be divided among the capitalist
partners in accordance with their
capital contribution
Loss Sharing of an Industrial Partner If there is no agreed loss or profit
sharing ratio and there is a “pure”
industrial partner, he is totally
exempt from sharing in the loss.

Division of Profit and Loss


General rule Profits and losses are to be divided
based on partner’s agreement
Absence of any agreement profits and losses shall generally be
divided in proportion to the partners’
respective contributions
Illustrative Example:

A. Ceniza and Nartea agreed to provide their profits and losses equally

Case 1. Profit is 100,000

Journal entry:
Income and Expense Summary 100,000
Ceniza, Drawing 50,000
Nartea, Drawing 50,000

100,000/2= 50,000

Case 2. Loss is 80,000

Journal entry
Ceniza, Drawing 40,000
Nartea, Drawing 40,000
Income and Expense Summary 80,000

80,000/2= 40,000

B. Ceniza and Nartea agreed to provide their profits and losses based on
percentage as follows: 60% and 40%

Journal Entry
Income and Expense 100,000
Ceniza, Drawing 60,000
Nartea, Drawing 40,000

100,000 x 60%= 60,000


100,000 x 40%= 40,000

C. Ceniza and Nartea agreed to provide their profits and losses in the ratio of
1:4. The profit amounted to P100,000

Journal Entry
Income and Expense Summary 100,000
Ceniza, Drawing 20,000
Nartea, Drawing 80,000

100,000 x 1/5= 20,000


100,000 x 4/5= 80,000
D. Capital Ratio
Note: In the absence of any agreement, profit is divided based on
capital ratio.

Ceniza and Nartea formed a partnership contributing cash of 70,000 and


30,000 respectively. After a successful business opeartions for a year. They
earned profit amounted to 200,000. The partners don’t have any agreement
regarding the profit and loss division.

Journal Entry
Income and Expense Summary 200,000
Ceniza, Drawing 140,000
Nartea, Drawing 60,000

Step 1:70,000+30,000= 100,000


Step 2: 200,000 x (70,000/100,000) = 140,000
200,000 x (30,000/100,000)= 60,000

CONGRATULATIONS! You have just the finished the lesson 2.


You had an amazing learning experience in finishing this lesson and for
sure you will answer all the given tasks in the next lessons.

Now if you are ready, let’s proceed to Lesson 3. Good luck ! 

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