LESSON 1: NATURE OF PARTNERSHIP OPERATION
Accounting for partnership operations is similar to accounting for the operations of a sole
proprietorship. The accounting process will still be the same for any form of business
organization. Acquisition of assets, incurrence of liabilities, and recognition of revenue
and expense items will follow the usual manner of recording. At the end of the accounting
period, corresponding adjustments will also be made before financial statements are
prepared. However, appropriate changes will have to be made on the following:
1. Capital and drawing accounts
2. Closing entries for distribution of profit or loss
3. Preparation of financial statements
What are the changes in partnership accounting as compared with accounting for
a sole proprietorship?
1. Plurality of capital and drawing accounts. In partnership accounting there is
plurality of capital and drawing accounts where the number of capital and drawing
accounts should be equal to the number of partners. Accordingly, each capital
and drawing account should be properly identified to a specific partner (normally
the name of the partner is written on the capital and drawing account).
2. Income summary, which represent the profit or loss for the period, shall be
closed to different capital accounts. Since partnership is for the common
benefit or interest of the partners (Article 1770 Civil Code), it is important that every
partner shall share in the profits of the partnership. Unlike a sole proprietorship
where the profits shall go to one owner, in a partnership the profits shall be
distributed among the partners.
The balance of the income summary account is transferred to various drawing
accounts or directly to capital accounts depending on the practice adopted by the
partnership. Capital account is used if the intention of the partners is to make profits
or losses part of permanent capital. Any resulting balance of the different partners
drawing accounts shall be then be transferred to its corresponding capital account.
The pro-forma entries are as follows:
A. To close credit balance of income summary (profit):
Income Summary
X, Drawing
Y, Drawing
--OR--
xxx
xxx
xxx
Income Summary
X, Capital
Y, Capital
xxx
xxx
xxx
B. To close debit balance of income summary (loss):
X, Drawing
Y, Drawing
Income Summary
xxx
xxx
xxx
--OR-X, Capital
Y, Capital
Income Summary
xxx
xxx
xxx
3. The financial statements shall include individual accounts of the partners.
The financial statements include the income statement, the statement of financial
position, and the statement of changes in partner’s equity. The income statement
shall contain a schedule showing the distribution of partnership profit or loss
among the partners. The owner’s equity section of the statement of financial
position is called partner’s equity and shall present the capital balances of
individual partners. The statement of changes in partner’s equity will show the
share of each partner in the partnership profit or loss, the amount of individual
withdrawals for the period and partner’s capital balance at the end of the period.