PARTNERSHIP OPERATIONS

Accounting Cycle of a Partnership same as in sole proprietorship

1.
2.
3.
4.
5.
6.
7.
8.

Prepare journal entries

Post to ledgers
Prepare a trial balance
Prepare adjusting entries
Prepare financial statements
Prepare closing entries
Prepare a post-closing trial balance
Prepare reversing entries

Special Concerns
I. Journal entries same as in sole proprietorship except for the following transactions which are peculiar to
a partnership:
a. Partners loans partner lends money to partnership
Cash
Accounts/Loans/
Notes Payable or Due
to Partner or Loan from
Partner

xxx
xxx

b. Partners borrowings from partnership partnership lends money to partners

Accounts/Loans/
Notes Receivable or Due
from Partner or Loan to
Partner
Cash

xxx

xxx

II. Financial statements the same as in sole proprietorship except:

a. Statement of Financial Position the owners equity section is labeled Partners Equity
b. Income Statement an additional section called Division of Profit and Loss is included. This
profit distribution provides a full analysis of the distribution of earnings which is presented at
the bottom of the partnership income statement.

c. Statement of Changes in Partners Equity a statement that reports the changes that have taken
place in partners equity during the period. Each partner is provided a column heading which
explains details of the changes in their equity account.
III. Closing entries drawing accounts are not automatically closed to the capital accounts; drawing accounts
are closed to the capital accounts only if agreed upon in the articles of co-partnership.

Closing the books at the end of the accounting period:

1. Merchandise Inventory
Income Summary
To set up ending inventory

xx
xx

2. All Nominal Accounts with Credit Balancesxx

Income Summary
xx
To close all nominal accounts with credit balances to income summary.
3. Income Summary
xx
All Nominal Accounts with Debit Balances xx
To close all nominal accounts with debit balances to income summary.
NET Income
4. Income Summary
Partners Drawing
To distribute profits to partners

xx
xx

NET Loss
4. Partners Drawing
Income Summary
To distribute losses to partners

xx
xx

INCREASES/DECREASES IN CAPITAL
DRAWING ACCOUNTS
CAPITAL
Decrease
Permanent
withdrawal0
Sale of equity

Debit balance in
drawing

Increase
Initial investment

&

DRAWING

Increase
Temporary
withdrawal
Additional Investment Share in Net Loss
Payment of
partnership liability
from personal funds
Credit balance in
drawing

Decrease
Share in Net Income

Rules for Dividing Profit and Loss

1. As to Capitalist Partner
a. Division of Profit
1. In accordance with agreement.
2. In the absence of an agreement, division of profits is in accordance with capital contributions.
b. Division of Loss

1. In accordance with agreement.

2. If only the division of profits is agreed upon, then the division of losses will be the same as
the agreement on division of profits.
3. In the absence of an agreement, division of losses is in accordance with capital contribution.
2. As to Industrial Partner
a. Division of Profit
1. In accordance with agreement.
2. In the absence of an agreement, the industrial partner shall receive a just and equitable share
of the profits.
b. Division of Loss
1. In accordance with agreement.
2. In the absence of an agreement, the industrial partner shall have no share in the losses.
Net income is viewed as a return for
1. services rendered (salaries)
2. capital investment (interest)
3. entrepreneurial ability or managerial skills (bonus)

Methods of Dividing Net Income

1. Equally
2. Arbitrary Ratio
a. Fractions
b. Percentages
c. Ratio and Proportion
3. Capital Ratio
a. Original/Initial investment
b. Beginning capital balance
c. Ending capital balance
d. Average capital most equitable method
4. Allowing Salaries, Interest and Bonus considered as part of the distribution of net income
a. Salaries to give recognition to the ability, experience or time devoted by a partner to the
business.
b. Interest - to give recognition to differences in the capital contribution given in proportion to the
period such capital was actually used.
c. Bonus incentive/special compensation given to a partner for superior income realized. It is
usually based on net income.

General Guidelines
1. Partner salary allowances, interest allowances on capital account balances and bonus are not expenses in
the determination of partnership net income.

2. The provision on salaries and interest must be enforced regardless of whether operating results is a
profit or loss.
3. The provision on bonus is enforced only when operating results is a profit.
4. If the partnership agreement specifies that income is to be divided based on partners capital balances
but fails to specify how capital balances are to be computed, the average capital balances should be used
if it can be computed. If not, the original capital balances should be used.

Capital and Drawing Accounts of a Partner

Partner, Capital
Debit
Permanent Withdrawals

Credit
Initial Investment
Additional Investments

Partner, Drawing
Debit
Net Loss
Temporary Withdrawals

Credit
Net Income

Pro-forma Entries
To distribute
net income

Income Summary
A, Drawing
B, Drawing

xxx

To distribute
net loss

A, Drawing
B, Drawing
Income Summary

xxx
xxx

xxx
xxx

xxx

EXAMPLE
JOHN CAPITAL
CAPITAL

MARTHA

5/1
10/31

10,000
50,000

1/1
7/1

400,000
160,000

7/1

50,000

1/1 300,000
4/1 200,000
9/30 150,000

NET INCOME FOR THE PERIOD P 150,000

DIVISION OF PROFITS & LOSSES
1. equally
Income Summary
John, Drawing
Martha, Drawing
To distribute profits to partners

150,000
75,000
75,000

2. arbitrary ratio
a. percentage 40%:60%
b. fraction 2/5:3/5
Income Summary

150,000

John, Drawing
Martha, Drawing
To distribute profits to partners

60,000
90,000

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

150,000

John, Drawing
Martha, Drawing
To distribute profits to partners

85,714.29
64,285.71

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

Income Summary

150,000

John, Drawing
Martha, Drawing
To distribute profits to partners

68,181.82
81,818.18

c. Average Capital Ratio

Income Summary

150,000

John, Drawing
Martha, Drawing
To distribute profits to partners
Computation of Average Capital
Date
Capital
Peso Months
Balance
John
Jan 1
400,000
4
May 1
390,000
2

75,202.16
74,797.84

No. of Months Unchanged Average Capital

P1,600,000
780,000

July1
Oct 31
Martha
Jan 1
April 1
July1
Sept 30

550,000
500,000

4
2

300,000
500,000
450,000
600,000

3
3
3
3

Computation
Average Capital:
John
P465,000
Martha 462,500
P927,500
=======

2,200,000
1,000,000
P5,580,000/12
P900,000
1,500,000
1,350,000
1,800,000
P5,550,000/12

Share in Net Income of

P465,000

462,500

P150,000

150,000 x 465000/927,500= P 75,202.16

150,000x 462,500/927,500 = P 74,797.84

4. Allowing interest on partners capital balances

10% interest on beginning capital, balance equally
Schedule of Distribution of Profits
John
10% Interest on beginning Capital
John (400,000 x 10%)
Martha (300,000 x 10%)
Balance equally(150,000-70,000)
Share in Net Income

Martha

Total

P30,000
40,000
P70,000

P70,000
80,000
P150,000

P40,000
40,000
P80,000

Income Summary

150,000

John, Drawing
Martha, Drawing
To distribute profits to partners

80,000
70,000

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

Salary allowance
Balance 2:3
Share in Net Income
Income Summary
John, Drawing
Martha, Drawing
To distribute profits to partners

John
P50,000
24,000
P74,000

Martha
P40,000
36,000
P76,000

150,000
74,000
76,000

Total
P90,000
60,000
P150,000

6.Bonus to managing partner based on net income

20% Bonus to John, the managing partner, balance equally
Schedule of Distribution of Profits
20% Bonus to John
Balance equally
Share in Net Income
Income Summary

John
P30,000
60,000
P90,000

Martha
60,000
P60,000

Total
P30,000
120,000
P150,000

150,000

John, Drawing
Martha, Drawing
To distribute profits to partners

90,000
60,000

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

10% interest on ending capital

John- 500,000 x5%
Martha- 600,000 x 5%

P25,000

Salary allowance
10% Bonus to John
Balance equally
Share in Net Income

30,000
15,000
5,000
P75,000

Income Summary

Total

P30,000

P55,000

40,000

70,000
15,000
10,000
P150,000

5,000
P75,000

150,000

John, Drawing
Martha, Drawing
To distribute profits to partners

75,000
75,000

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

10% interest on ending capital

John- 500,000 x10%
Martha- 600,000 x 10%

P50,000

Salary allowance
20% Bonus to John
Excess equally

50,000
30,000
(50,000)

Total

P60,000

P110,000

60,000

110,000
30,000
(100,000)

(50,000)

Share in Net Income

P80,000

Income Summary

P70,000

P150,000

150,000

John, Drawing
Martha, Drawing
To distribute profits to partners

80,000
70,000

NET LOSS- P150,000

9. Allowing interest on partners capital balances, salaries and bonus, balance 4:6
-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
10% interest on ending capital
John- 500,000 x10%
Martha- 600,000 x 10%
Salary allowance
Balance 4:6
Share in Net Income
No bonus since Bonus is always based on net income.
John, Drawing
Martha, Drawing
Income Summary
To distribute losses to partners

Martha

Total

P50,000
50,000
(148,000)
(P48,000)

P60,000

P110,000

60,000
(222,000)
(P102,000)

110,000
(370,000)
(P150,000)

48,000
102,000
150,000

PREPARATION OF INCOME STATEMENT & STATEMENT OF PARTNERS EQUITY

The following selected ledger balances were taken from the books of NMA Company
Depreciation Expense-Office Equipment
3,830
Discount Lost
250
Doubtful Accounts Expense
2,340
Freight in
1,250
Freight out
680
Gain on Sale of Office Equipment
351
Interest Expense
4,850
Interest Income
1,420
Marlon, Drawing
5,500
Marlon, Capital
120,000
Miranda, Drawing
10,500
Miranda, Capital
100,000
Merchandise Inventory, January 1
188,500
Merchandise Inventory, December 31
77,777
Office Supplies used
520

Purchases
Purchase Discount
Purchase Returns and Allowances
Rent Expense
Salaries & Wages
Sales
Sales Commission
Sales Discount
Sales Returns & Allowances

366,200
3,653
18,265
30,000
54,200
642,775
18,935
10,580
4,560

NMA Company
Income Statement
For the Year Ended, December 31, 2015
Note
Net Sales
Cost of Sales
Gross Profit
Other Income
Total Income
Operating expenses
Administrative expense
Distribution costs
Finance cost
NET INCOME

1
2

P627,635
(456,225)
P171,410
1,771
P173,181

3
4
5
7

P90,890
19,615
5,100

(114.625)
P57,576
======

Schedule of Distribution of Profits

Marlon
10% interest on beginning capital
Marlon- 120,000 x10%
Miranda- 100,000 x 10%
Balance equally
Share in Net Income

Miranda

Total

P12,000
17,788
P29,788
======

P10,000

P22,000

17,788
P27,788
======

35,576
P57,576
======

NOTES TO FINANCIAL STATEMENTS

Note 1

Net Sales
Sales
Sales Discount
Sales Returns & Allowances
Net Sales Revenue

642,775

15,140
627,635

10,580
4,560

Note 2

Note 3

Note 4

Note 5

Note 7

Cost of Sales
Merchandise Inventory, January 1
Add: Net cost of purchases
Purchases
Purchase Discounts
Purchase Returns and Allowances
Net purchases
Add: Freight in
Total goods available for sale
Merchandise Inventory, December 31
Cost of Sales

P
P

366,200

21,918
344,282
1,250

3,653
18,265

P
P

Other Income
Gain on Sale of Office Equipment
Interest Income
Total

P
P

Administrative Expenses
Salaries & Wages
Rent Expense
Depreciation Expense-Office Equipment
Doubtful Accounts Expense
Office Supplies used
Total

Distribution Costs
Sales Commission
Freight out
Total

Finance cost
Interest expense
Discount lost
Total

Capital balances, January 1

Net Income
Sub-total
Partners Drawing
Capital balances, December 31

P120,000
29,788
P149,788
(5,500)
P144,288
========

Miranda
P100,000
27,788
P127,788
(10,500)
P117,288
========

345,532
534,032
77,777
456,255

351
1,420
1,771

54,200
30,000
3,830
2,340
520
90,890

18,935
680
19,615

P
P
P

4,850
250
5,100

NMA Company
Statement of Changes in Partners Equity
For the Year Ended, December 31, 2015
Marlon

188,500

Total
P220,000
57,576
P277,576
(16,000)
P261,576
========

Classroom Exercises Partnership Operations

1. Assume ABC Partnership earned a net income of P120,000 for the year. Three partners Ana, Bea and
Carmi will share in the net income. Their capital accounts are as follows:
Ana, Capital
9/1
30,0001/1
50,000
6/1
10,000
3/1

Bea, Capital
20,0001/1

70,000

Carmi, Capital
1/1
4/1

30,000
10,000

Prepare the entry to distribute net income among the three partners assuming:
a. Net income is divided equally.
b. Net income is divided as follows: Ana ; Bea ; Carmi .
c. Net income is divided as follows: Ana 50%; Bea 30%; Carmi 20%.
d. Net income is divided as follows: 3:2:1
e. Net income is divided based on original/initial capital contribution which were as follows: Ana
P20,000; Bea P30,000; Carmi P10,000.
f. Net income is divided based on beginning capital balances.
g. Net income is divided based on ending capital balances.
h. Net income is divided based on average capital.
2. Assume the same given information in No. 1. Prepare the entry to divide net income if net income is to
be divided as follows:
a. Interest of 10% on beginning capital balances.
b. Annual salaries of P5,000 to Ana and P4,000 to Bea.
c. Bonus to Carmi amounting to P16,000.
d. Remainder to be divided 50:30:20.
3. Using the same given information in No. 2, prepare the entry to divide net income if net income is
P35,000 only.
4. Using the same given information in No. 2, prepare the entry to close income summary if the
partnership incurred a net loss of P60,000 for the year.
2016