THE PARTNERSHIP

OPERATIONS
1. Closing entries of a partnership
2. Distribution of profit or losses
3. Preparation of work sheet
4. Preparation of financial statements
a. Income Statement
b. Statement of Financial Position
c. Statement of changes in partners equity
CLOSING ENTRIES
THE FOLLOWING ARE THE BALANCES OF THE ACCOUNTS
OF MM PARTNERSHIP AT THE END OF ACCOUNTING
PERIOD:
Service income P1,450,000
Interest income 34,560
Salaries expense 438,900
Rent expense 216,500
Advertising expense 123,560
Utilites expense 87,660
Miscellaneous expense 17,940
DISTRIBUTION OF PROFITS AND LOSESS
THE FOLLOWING FACTORS SHOULD BE
CONSIDERED:

a. Services rendered by the partners.
b. Amount of capital contributed by the
partners to the business.
c. Entrepreneurial ability or managerial skills of
the partners.
1. By percentage (60% and 40%)
2. By fraction (2/5 and 3/5)
3. By decimals (0.25 and 0.75)
4. By ratio ( 2:5 respectively)
The distribution of profits and losses may
be expressed in several ways as follows:
RULES IN DIVING PROFITS AND
LOSSES:
1. As to capitalist partners:
a. Division of profits
1. In accordance with agreement.
2. In absence of agreement, division of profit is
in accordance with capital contributions.
b. Division of losses:

1. In accordance with agreements
2. If only division of profit is agreed upon, the
division of losses will be the same as the
agreement on the division of profits.
3. In absence of an agreement, division of
losses is in accordance with capital
contributions.
2. As to industrial partners

a. Division of profits
1. In accordance with agreement.
2. in absence of an agreement, the
industrial partner shall receive a just and
equitable share of the profits and the
capitalist partners shall receive profits in
accordance with their capital contributions.
METHODS OF DISTRIBUTING PROFITS BASED
ON PARTNERS AGREEMENT:
a. Equally
b. Arbitrary ratio (percentage, decimals, fractions
and ratio)
c. Capital ratio (original, beginning, ending or
average)
d. Interest on capital and balance on agreed ratio
e. Salary allowances to partners and the balance
on agreed ratio
f. Bonus to managing partner (partners) and balance on
agreed ratio
a. bonus is based on profit before deducting
bonus and income tax.
b. bonus is based on profit after deducting bonus but
before deducting income tax
c. bonus is based on profit after deducting income
tax but before deducting bonus.
d. bonus is based on profit after deducting both
bonus and income tax
g. Interest on capital, salaries to partners, bonus and
balance on agreed ratio

ILLUSTRATIVE CASES:
The following data are available in the books of Mysti and Mercedes in MM
Partnership for the year 2013:

Mysti, capital
May 1 P100,000 Jan. 1 P2,500,000
Apr. 1 250,000
Oct. 1 500,000

Mercedes, Capital
June 1 P150,000 Jan. 1 P 1,500,000
Dec. 1 50,000 Sept. 1 500,000

Mysti, Drawing
Jan1 - Dec 31. P300,000

Mercedes, Drawing
Jan1 - Dec 31. P225,0000

Income summary
Dec 31 P 600,000

CASE 1: PROFIT IS
DIVIDED EQUALLY
Entry is:
CASE 2: PROFIT IS DIVIDED
AND TO MYSTI AND
MERCEDES RESPECTIVELY.
Entry is:
CASE 3: PROFIT IS DIVIDED
1:2 TO MYSTI AND
MERCEDES RESPECTIVELY.
Entry is:
CASE 4: PROFIT IS DIVIDED
20% TO MYSTI AND 80%
MERCEDES RESPECTIVELY.
Entry is:
CASE 5: PROFIT IS
ALLOCATED BASED ON
BEGINNING CAPITAL RATIO
Entry is:
CASE 6: PROFIT IS
ALLOCATED BASED ON
ENDING CAPITAL RATIO
Entry is:
CASE 7: PROFIT IS
ALLOCATED BASED ON
AVERAGE CAPITAL RATIO
Compute for average capital:


Entry is:
EXERCISES.
Hooray for today

PROBLEM #1:
The partnership contract of the Lily and Mely
Partnership, a general partnership, provided for
annual salaries of P80,000 and P100,000 to Lily and
Mely, respectively with remainder to be divided
equally. Profit before salaries for the year ended June
30, 2014 was P150,000.

Entry to record the division of profit with the partners.
PROBLEM #2
Amir and Benz formed a partnership on January 1, 2014. On this date, Amir
contributed capital of P600,000. On the other hand, Benz contributed no
capital because he will manage the firm full time. The partnership
agreement provides for the following:
Capital accounts are to be credited annually with interest at 5% of
beginning capital.
Benz is to be paid a salary of P5,000 per month.
Benz is to receive a bonus of 20% of income before interest, salaries and
bonus.
Remaining profits are to be divided between Amir and Benz in the ratio of
7:3.
Net income reported for the period is P480,000.

How much is the share of Amir and Benz in the profit? Entry to record the
distribution of profit.
PROBLEM #3
Nice Tanbengco is trying to decide whether to
accept a salary of P60,000 or a salary of P25,000 plus
a bonus of 20% of net income after bonus as a means
of allocating profit among the partners. What amount
of net income would be necessary so that Nice would
consider the choices to be equal?
PROBLEM # 4
On January 2, 2013, Ian and Sanchi formed a partnership, Ian contributed
capital ofP175,000 and Sanchi P25,000. They agreed to share profits and losses
80% and 20%, respectively. Sanchi is the general manager and works in the
partnership in full time. Sanchi is given a salary ofP5,000 a month; an interest of
5% of the starting capital (of both partners) and a bonus of 15% of net profit
before salary, interest and bonus. The following information are available for
the year ended December 31, 2013:






The bonus of Sanchi in 2013 is?:
Net Sales P875,000
Cost of sales 700,000
Gross profit P175,000
Expenses (including salary, interest and
bonus) (143,000)
Net profit P32,000