PARTNERSHIP OPERATIONS

Accounting Cycle of a Partnership same as in sole proprietorship

1. 1. Prepare journal entries
2. 2. Post to ledgers
3. 3. Prepare a trial balance
4. 4. Prepare adjusting entries
5. 5. Prepare financial statements
6. 6. Prepare closing entries
7. 7. Prepare a post-closing trial balance
8. 8. Prepare reversing entries

Special Concerns

I. I. Journal entries same as in sole proprietorship except for the following transactions which
are peculiar to a partnership:

a. a. Partners loans partner lends money to partnership

Cash xxx
Accounts/Loans/ xxx
Notes Payable or Due
to Partner or Loan
from
Partner

a. b. Partners borrowings from partnership partnership lends money to partners

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

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

a. a. Statement of Financial Position the owners equity section is labeled Partners

Equity

a. 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.
 a. 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.

a. 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 xx
Income Summary xx
To set up ending inventory

2. All Nominal Accounts with Credit Balances xx

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 xx
Partners Drawing xx
To distribute profits to partners

NET LOSS
4. Partners Drawing xx
Income Summary xx
To distribute losses to partners
 INCREASES/DECREASES IN CAPITAL &
DRAWING ACCOUNTS

CAPITAL DRAWING
Decrease Increase Increase Decrease
Permanent Initial investment Temporary Share in Net
withdrawal0 withdrawal Income
Sale of equity Additional Share in Net Loss
Investment
Payment of
partnership
liability from
personal funds
Debit balance in Credit balance in
drawing drawing

Rules for Dividing Profit and Loss

a. 1. As to Capitalist Partner
a. 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.

a. 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.

a. 2. As to Industrial Partner
b. 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.

a. 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

a. 1. services rendered (salaries)

b. 2. capital investment (interest)
c. 3. entrepreneurial ability or managerial skills (bonus)

Methods of Dividing Net Income

a. 1. Equally

a. 2. Arbitrary Ratio
b. a. Fractions
c. b. Percentages
d. c. Ratio and Proportion

a. 3. Capital Ratio
b. a. Original/Initial investment
c. b. Beginning capital balance
d. c. Ending capital balance
e. d. Average capital most equitable method

a. 4. Allowing Salaries, Interest and Bonus considered as part of the distribution of net
income

a. a. Salaries to give recognition to the ability, experience or time devoted by a

partner to the business.

a. b. Interest - to give recognition to differences in the capital contribution given in

proportion to the period such capital was actually used.

a. c. Bonus incentive/special compensation given to a partner for superior income

realized. It is usually based on net income.

General Guidelines

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

1. 2. The provision on salaries and interest must be enforced regardless of whether

 operating results is a profit or loss.

1. 3. The provision on bonus is enforced only when operating results is a profit.

1. 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 Credit
Permanent Initial Investment
Withdrawals Additional
Investments

Partner, Drawing
Debit Credit
Net Loss Net Income
Temporary
Withdrawals

Pro-forma Entries

To distribute Income Summary xxx

net income A, Drawing xxx
B, Drawing xxx

To distribute A, Drawing xxx

net loss B, Drawing xxx
Income xxx
Summary
EXAMPLE

JOHN CAPITAL MARTHA

CAPITAL
5/1 10,000 1/1 400,00 7/1 50,000 1/1 300,000
0
10/31 50,000 7/1 160,00 4/1 200,000
0
9/30 150,000
NET INCOME FOR THE PERIOD P 150,000

DIVISION OF PROFITS & LOSSES

1. 1. equally
Income Summary 150,000
John, Drawing 75,000
Martha, Drawing 75,000
To distribute profits
to partners

1. 2. arbitrary ratio
b. a. percentage 40%:60%
c. b. fraction 2/5:3/5

Income Summary 150,000

John, Drawing 60,000
Martha, Drawing 90,000
To distribute profits
to partners
 a. 3. Capital RATIO

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

Income Summary 150,000

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

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

Income Summary 150,000

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

c. Average Capital Ratio

Income Summary 150,000

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

Computation of Average Capital

Date Capital Peso Months No. of Average
Balance Months Capital
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
Martha P5,580,000/1 P465,000
2
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
P5,550,000/1 462,500
2

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 P40,000
John (400,000 x P30,000 P70,000
10%)
Martha (300,000 x
10%)
Balance 40,000 40,000 80,000
equally(150,000-
70,000)
Share in Net P80,000 P70,000 P150,000
Income

Income Summary 150,000

John, Drawing 80,000
Martha, Drawing 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 P74,000 P76,000 P150,000
Income

Income Summary 150,000

John, Drawing 74,000
Martha, Drawing 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 P30,000 P30,000
John
Balance equally 60,000 60,000 120,000
Share in Net P90,000 P60,000 P150,000
Income

Income Summary 150,000

John, Drawing 90,000
Martha, Drawing 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 P25,000
John- 500,000 P30,000 P55,000
x5%
Martha-
600,000 x 5%
Salary allowance 30,000 40,000 70,000
10% Bonus to 15,000 15,000
John
Balance equally 5,000 5,000 10,000
Share in Net P75,000 P75,000 P150,000
Income

Income Summary 150,000

John, Drawing 75,000
Martha, Drawing 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 P50,000
John- 500,000 P60,000 P110,000
x10%
Martha-
600,000 x 10%
Salary allowance 50,000 60,000 110,000
20% Bonus to 30,000 30,000
John
Excess equally (50,000) (50,000) (100,000)
Share in Net P80,000 P70,000 P150,000
Income

Income Summary 150,000

 John, Drawing 80,000
Martha, Drawing 70,000
To distribute profits
to partners

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 Martha Total
10% interest on
ending capital P50,000
John- 500,000 P60,000 P110,000
x10%
Martha-
600,000 x 10%
Salary allowance 50,000 60,000 110,000
Balance 4:6 (148,000) (222,000) (370,000)
Share in Net (P48,000) (P102,000) (P150,000)
Income
No bonus since Bonus is always based on net income.

John, Drawing 48,000

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

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 366,200
Purchase Discount 3,653
Purchase Returns and Allowances 18,265
Rent Expense 30,000
Salaries & Wages 54,200
Sales 642,775
Sales Commission 18,935
Sales Discount 10,580
Sales Returns & Allowances 4,560
 NMA Company
Income Statement
For the Year Ended, December 31, 2015

Note
Net Sales 1 P627,635
Cost of Sales 2 (456,225)
Gross Profit P171,410
Other Income 3 1,771
Total Income P173,181
Operating
expenses
Administrative 4 P90,890
expense
Distribution 5 19,615
costs
Finance cost 7 5,100 (114.625)
NET INCOME P57,576
======

Schedule of Distribution of Profits

Marlon Miranda Total
10% interest on
beginning capital P12,000
Marlon- P10,000 P22,000
120,000 x10%
Miranda-
100,000 x 10%
Balance equally 17,788 17,788 35,576
Share in Net P29,788 P27,788 P57,576
Income
====== ====== ======
NOTES
TO
FINAN
CIAL
STATE
MENTS
 Net
Note 1 Sales
642,77
Sales P 5
Sales
Discou 10
nt P ,580
Sales
Return
s&
Allowa 4 1
nces ,560 5,140
Net
Sales
Reven 62
ue P 7,635

Cost
of
Note 2 Sales
Merch
andise
Invent
ory,
Januar 18
y1 P 8,500
Add:
Net
cost of
purcha
ses
Purch 36
ases P 6,200
Purch P 3,
ase 653
Discou
 nts
Purch
ase
Return
s and
Allowa 18, 21
nces 265 ,918
Net
purcha 34
ses P 4,282
Add:
Freight 1 34
in ,250 5,532
Total
goods
availa
ble for 53
sale P 4,032
Merch
andise
Invent
ory,
Dece
mber 7
31 7,777
Cost
of 45
Sales P 6,255

Other
Incom
Note 3 e
Gain
on
Sale of
Office
Equip
ment P 351
Interes
t
Incom
e 1,420
Total P 1
 ,771

Admini
strativ
e
Expen
Note 4 ses
Salarie
s&
Wages P 54,200
Rent
Expen
se 30,000
Depre
ciation
Expen
se-
Office
Equip
ment 3,830
Doubtf
ul
Accou
nts
Expen
se 2,340
Office
Suppli
es
used 520
Total P 90,890

Distrib
ution
Note 5 Costs
Sales
Comm
ission P 18,935
Freight
out 680
Total P 19,615
 Financ
Note 7 e cost
Interes
t
expen
se P 4,850
Discou P 250
nt lost
Total P 5,100

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

Marlon Miranda Total

Capital balances, P120,000 P100,000 P220,000
January 1
Net Income 29,788 27,788 57,576
Sub-total P149,788 P127,788 P277,576
Partners Drawing (5,500) (10,500) (16,000)
Capital balances, P144,288 P117,288 P261,576
December 31
======== ======== ========

Classroom Exercises Partnership Operations

 a. 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 30,000 1/1 50,000
6/1 10,000

Bea, Capital
3/1 20,000 1/1 70,000

Carmi, Capital
1/1 30,000
4/1 10,000

Prepare the entry to distribute net income among the three partners assuming:
a. a. Net income is divided equally.
b. b. Net income is divided as follows: Ana ; Bea ; Carmi .
c. c. Net income is divided as follows: Ana 50%; Bea 30%; Carmi 20%.
d. d. Net income is divided as follows: 3:2:1
e. 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. f. Net income is divided based on beginning capital balances.
g. g. Net income is divided based on ending capital balances.
h. h. Net income is divided based on average capital.

a. 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. a. Interest of 10% on beginning capital balances.
b. b. Annual salaries of P5,000 to Ana and P4,000 to Bea.
c. c. Bonus to Carmi amounting to P16,000.
d. d. Remainder to be divided 50:30:20.

a. 3. Using the same given information in No. 2, prepare the entry to divide net income if net
income is P35,000 only.

a. 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