PARTNERSHIP
OPERATION
PARTNERSHIP OPERATION
Learning Objectives:
o
Understand the different methods of dividing partnership’s profit
or loss.
o
Compute share of the partners in the net income or net loss of the
business considering interest on capital invested, salaries for
services rendered, and bonus as part of partnership’s profit
distribution.
o
Prepare the complete set of partnership financial statements.
PARTNERSHIP OPERATION
ACCOUNTING CYCLE OF A PARTNERSHIP:
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Analyzing business transactions
Journalizing in the general and special journals
Posting to the general ledger
Trial balance preparation
Worksheet preparation
Journalizing and posting adjusting entries
Preparing financial statements
Journalizing and posting closing entries
Preparing post closing trial balance
Journalizing and posting reversing entries
PARTNERSHIP OPERATION
CAPITAL ACCOUNT:
PARTNERSHIP OPERATION
DRAWING ACCOUNT:
PARTNERSHIP OPERATION
Partner may also extend loan or credit to the partnership when the
business needs additional working fund.
This financing provided by the partner will be credited to Partner,
Loan or Loan Payable to Partner.
PARTNERSHIP OPERATION
A partner may experience a personal need for funds and will make
a loan from the partnership.
This financing extended by the partnership to the partner will not
be debited to the partner’s drawing account but to Receivable
from Partner.
PARTNERSHIP OPERATION
Recording of the closing entries of a partnership – individual
drawing accounts of partners are not automatically closed to their
capital accounts in order to maintain the original capital balances
of the partners as stated in the Articles of Co-Partnership.
Under the indirect method, the result of the business operations
whether net income or net loss reflected in the Income Summary
account is closed to the individual drawing accounts of partners at
the end of the reporting period.
PARTNERSHIP OPERATION
Recording of the closing entries of a partnership – individual
drawing accounts of partners are not automatically closed to their
capital accounts in order to maintain the original capital balances
of the partners as stated in the Articles of Co-Partnership.
Under the indirect method, the result of the business operations
whether net income or net loss reflected in the Income Summary
account is closed to the individual drawing accounts of partners at
the end of the reporting period.
PARTNERSHIP OPERATION
Share in Profit
1. Agreement – profit and loss ratio or profit ratio
2. Contributed capital*
Share in Losses
1. Agreement – profit and loss ratio
2. Profit ratio**
3. Contributed capital - for capitalist partner/s only
*Philippine Partnership Law
**The law also provides that if the sharing of profits has been agreed upon by the
partners, but no provision was made as to the distribution of losses, the share of
each partner in the losses shall be divided in the same manner that profits are
divided.
PARTNERSHIP OPERATION
Methods of Dividing Net Income
Profit and Loss Ratios
1. Equally
2. Arbitrary Ratio
• Fractions
• Percentages
• Ratio and Proportion
3. Based on Capital Ratio
• Original/Initial investment
• Beginning capital balance
• Ending capital balance
• Simple average capital
• Peso Month Average capital – most equitable method
4. Allowing Salaries, Interest and Bonus – considered as part of the distribution of
net income
PARTNERSHIP OPERATION
If profits or losses are to be divided fairly and equitably these
contributions by the partners must be properly considered.
Therefore, the following scheme may be adapted since the
partnership’s net income may be viewed as a return for:
1. services rendered – provide salaries to give recognition to the
ability, experience or time devoted by a partner to the business
2. capital investment – provide interest to give recognition to
differences in the capital contribution given in proportion to the
period such capital was actually used
3. entrepreneurial ability or managerial skills - provide bonus
which is an incentive or special compensation which is usually
based on net income.
FINANCIAL
STATEMENTS
PARTNERSHIP OPERATION
PARTNERSHIP OPERATION
PARTNERSHIP OPERATION
Income Statement or Statement of Profits and Losses
• an additional section called Distribution of Net Income or Net
Loss is included.
• This profit or loss distribution provides a full analysis of the
distribution of earnings or losses which is presented at the
bottom part of the partnership income statement.
PARTNERSHIP OPERATION
PARTNERSHIP OPERATION
Income Tax Rate
Partnerships are subject to income tax rate of 20% or 25% rate
beginning the fiscal year 2021 except for general professional
partnerships (i.e., those partnerships organized for the exercise of
professions, e.g., CPAs, doctors, lawyers, etc.).
20% will apply if total assets (excluding Land where property,
building, and equipment) do not exceed 100 million pesos and
taxable income does not exceed 5 million pesos. These two
requirements must be both met.
Otherwise, the 25% tax rate will apply (CREATE Act, 2021)
PARTNERSHIP OPERATION
PARTNERSHIP OPERATION
PARTNERSHIP OPERATION
PARTNERSHIP OPERATION
Statement of Changes in Partners’ Equity
• the report includes a separate column for each partner showing
the changes that happened to the individual partner’s capital
account during the period plus a total column
PARTNERSHIP OPERATION
PARTNERSHIP OPERATION
Statement of Financial Position
• The Owner’s Equity is labeled Partners’ Equity
PARTNERSHIP OPERATION
METHODS ON THE
DISTRIBUTION OF
NET INCOME OF THE
PARTNERSHIP
PARTNERSHIP OPERATION
Pio and Benedict decided to form and operate PB Partnership Law
Firm on February 1, 2018 where they initially invested capital
amounting to P400,000 and P600,000 respectively.
For the year ending December 31, 2020, the partnership generated
a total service income amounting to ₱1,800,000 while at same time
incurred expenses totaling to ₱1,220,000.
The capital accounts of Pio and Benedict show the following facts
for the year ended December 31, 2020:
PARTNERSHIP OPERATION
a) Equally dividing Net income of P580,000
b) Arbitrary Ratio
Fractions: Net income (¼ to Pio and ¾ to Benedict)
PARTNERSHIP OPERATION
b) Arbitrary Ratio
Percentages: Net income (40% to Pio and 60% to Benedict)
b) Arbitrary Ratio
Ratio and proportion: Net income (2:6 to Pio and Benedict)
PARTNERSHIP OPERATION
c) Based on capital ratio
c.1) Original/Initial investment:
c) Based on capital ratio
c.2) Beginning capital balance (Final answers rounded to the
nearest peso value)
PARTNERSHIP OPERATION
c) Based on capital ratio
c.3) Ending capital balance:)
PARTNERSHIP OPERATION
c) Based on capital ratio
c.4) Simple average capital (Final answers rounded to the
nearest peso value)
PARTNERSHIP OPERATION
c) Based on capital ratio
c.5) Peso month average capital (Final answers rounded to the
nearest peso value)
PARTNERSHIP OPERATION
c) Based on capital ratio
c.5) Peso month average capital (Final answers rounded to the
nearest peso value)
PARTNERSHIP OPERATION
d) Allowing Salaries, Interest and Bonus – considered as part of the
distribution of net income
PARTNERSHIP OPERATION
PARTNERSHIP OPERATION
Let us assume that instead of earning total Service Income
amounting to P1,800,000, PB Partnership Law Firm earned only
P1,100,000.
PARTNERSHIP OPERATION
a) Equally dividing Net Loss of P120,000
b) Arbitrary Ratio
Fractions: Net income (¼ to Pio and ¾ to Benedict)
PARTNERSHIP OPERATION
b) Arbitrary Ratio
Percentages: Net income (40% to Pio and 60% to Benedict)
b) Arbitrary Ratio
Ratio and proportion: Net income (2:6 to Pio and Benedict)
PARTNERSHIP OPERATION
c) Based on capital ratio
c.1) Original/Initial investment:
c) Based on capital ratio
c.2) Beginning capital balance (Final answers rounded to the
nearest peso value)
PARTNERSHIP OPERATION
c) Based on capital ratio
c.3) Ending capital balance:
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c) Based on capital ratio
c.4) Simple average capital (Final answers rounded to the
nearest peso value)
PARTNERSHIP OPERATION
c) Based on capital ratio
c.5) Peso month average capital (Final answers rounded to the
nearest peso value)
PARTNERSHIP OPERATION
d) Allowing Salaries, Interest and Bonus – considered as part of the
distribution of net income
PARTNERSHIP OPERATION
Thanks!
Does anyone have any questions?
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