Chapter 2 ballada

PARTNERSHIP OPERATIONS AND
FINANCIAL REPORTING
"An eye for an eye will make the whole world
blind." (Mahatma Gandhi)

The basis on which profits or losses are
shared is a matter of agreement among the
partners and may not necessarily be the
same as their capital contribution ratio. The
equity of a partner in the net assets of the
partnership should be distinguished from a
partner’s share in profit or losses.
"An eye for an eye will make the whole world blind."
(Mahatma Gandhi)

(Mahatma Gandhi)

1. Partners having considerable
financial resources, hence,
strong credit standing.
2. A partner who is well known
in a profession or an industry
may contributed immensely
to the success of the
partnership although he may
not participate actively in the
operations of the partnership.
(Mahatma Gandhi)

Many partnerships use profit and loss sharing arrangements
that give some weight to th specific performance of each partner to
provide incentives to perform well. This allocation of profits to a
partner on the basis of performance is frequently referred to as a
BONUS.
Examples of the use of performance criteria are:
1. Chargeable hours
2. Total billings
3. Write-offs
4. Promotional and civic activities
5. Profits in excess of specified levels
(Mahatma Gandhi)

Based on the legal provisions of the Civil Code of the Philippines, the following are
the rules for the distribution of profits or losses
1. PROFITS
a. The profits will be divided according to partners’ agreement
b. If there is no agreement:
 As to capitalist partners, the profits shall be divided according to
their capital contributions (according to the ratio of original capital
investments or in its absence, the ratio of capital balances at the
beginning of the year)
 As to industrial partners (if any), such share as may be just and
equitable under the circumstances, provided, that the industrial
partner shall receive such share before the capitalist partnes shall
divide the profits.
(Mahatma Gandhi)

2. LOSSES
a. The losses will be divided according to partners’ agreement
b. If there is no agreement as to distribution of losses butthere is an
agreement as to profits, the losses shall be distributed according to the
profit sharing ratio
c. In the absence of any agreement:
 As to capitalist partners, the losses shall be divided according to
their capital contributions (according to the ratio of original
capital investments or in its absence, the ratio of capital balances
at the beginning of the year).
 As to purely industrial partners (if there’s any), shall not be liable
for any losses.
(Mahatma Gandhi)

Per International Accounting Stadards (IAS) No. 8, Accounting Policies ,
Changes in Accounting Estimates and Errors, prior period errors are
omissions from and other misstatements of the entity’s financial
statements for one or more prior periods that are discovered in the
current period. Errors may occur as a result of mathematical mistakes
in applying accounting policies, misintepretation of facts, fraud or
oversights. Examples include errors in the estimation of depreciation,
errors in inventory valuation and omission of accruals of revenue and
expenses.
(Mahatma Gandhi)

The partners may agree on any of the following scheme in distributing
profits or losses:
1. Equally or in other agreed ratio
2. Based on partners’ capital contributions
a. Ratio of original capital investments
b. Ratio of capital balances at the beginning of the year
c. Ratio of capital balances at the end of the year
d. Ratio of average capital balances
3. By allowing interest on partners’ capital and the balance in an agreed
ratio
(Mahatma Gandhi)

4. By allowing salaries to partners and the balance in an agreed
ratio
5. By allowing bonus to the managing partner based on profit and
the balance in an agreed ratio
6. By allowing salaries, interest on partners’ capital, bonus to the
managing partner and the balance in an agreed ratio
(combination of 3 to 5)
(Mahatma Gandhi)

Partners’ withdrawal and salaries that are considered to be temporary
withdrawal are to be recorded in the “partner’s drawing” account. As
such the following entry:
Partner A, Drawings xxx
Cash xxx
Partner B, Drawings xxx
Cash xxx
(Mahatma Gandhi)

After computing the profits and losses, the following is the pro-forma
journal entries:
PROFITS
Income Summary xxx
Partner A, Drawing xxx
Partner B, Drawing xxx
Partner A, Capital xxx
Partner B, Capital xxx
(Mahatma Gandhi)

After computing the profits and losses, the following is the pro-forma
journal entries:
LOSSES
Income Summary xxx
Partner A, Capital xxx
Partner B, Capital xxx
(Mahatma Gandhi)

The following series of illustrations are based on the figures obtained from
the Medina and Matero Partnership which had a profit of P300,00 for
the year ended Dec. 31, 2009, the first year of operations. The
partnership contractprovided that each partner may withdraw P5,000
on the last day of each month; both partners did so during the year.
The drawings are recorded by debits to the partners’ drawing accounts
and shall not be considered in division of profit or loss. It is the
intention of the partners that each partner’s share in the profit or loss
be either credited or debited to the drawing account.
(Mahatma Gandhi)

Leopoldo Medina invested P400,000 on January 1, 2009 and an additional P100,000
on April 1. Challoner Matero invested P800,000 on January 1 and withdrew
P50,000 on July 1. These transactions and events are summarized in the
following capital, drawing and income summary ledger accounts:
L. Medina, Capital C. Matero, Capital
400,000 1/1 7/1 P50,000 P800,000 1/1
100,000 4/1
L. Medina, Drawing C. Matero, Drawing
12/31 60,000 12/31 60,000
Income Summary
300,000 12/31
(Mahatma Gandhi)

A. EQUALLY
Journal Entry:
Income Summary 300,000
L. Medina, Drawings 150,000
C. Matero, Drawings 150,000
To record to division
of profits.
L. Medina, Capital 90,000
C. Matero, Capital 90,000
To close drawing
account.
(Mahatma Gandhi)

(Mahatma Gandhi)
L. Medina, Capital
400,000 1/1
100,000 4/1
90,000 12/31
590,000
L. Medina, Drawing
12/31 60,000 150,000 12/31
12/31 90,000 _______
150,000 150,000
C. Matero, Capital
7/1 50,000 800,000 1/1
90,000 12/31
50,000 890,000
840,000
C. Matero, Drawing
12/31 60,000 150,000 12/31
12/31 90,000____________
150,000 150,000
Income Summary
12/31 300,000 300,000 12/31

Assume instead that Medina and Matero share profits and losses in a ratio
of 60:40 and profit was P300,000, the profit would be divided as
follows:
Journal Entry:
of profits.
To close drawing
account.
(Mahatma Gandhi)

(Mahatma Gandhi)
L. Medina, Capital
400,000 1/1
100,000 4/1
120,000 12/31
620,000
L. Medina, Drawing
12/31 60,000 180,000 12/31
12/31 120,000 _______
180,000 180,000
C. Matero, Capital
7/1 50,000 800,000 1/1
60,000 12/31
50,000 860,000
810,000
C. Matero, Drawing
12/31 60,000 120,000 12/31
12/31 60,000____________
120,000 120,000
Income Summary
12/31 300,000 300,000 12/31

(Mahatma Gandhi)
A. EQUALLY
Assume that there is a loss of P200,000:
Journal Entry:
of losses.
To close the drawing
accounts.

(Mahatma Gandhi)
L. Medina, Capital
12/31 120,000 400,000 1/1
100,000 4/1
120,000 500,000
380,000
L. Medina, Drawing
12/31 60,000 120,000 12/31
12/31 100,000 _______
120,000 120,000
C. Matero, Capital
7/1 50,000 800,000 1/1
12/31 120,000_____________
170,000 800,000
630,000
C. Matero, Drawing
12/31 60,000 160,000 12/31
12/31 100,000____________
160,000 160,000
Income Summary
12/31 200,000 200,000 12/31

RATIO OF ORIGINAL CAPITAL INVESTMENTS
Journal Entry:
of profits.
To close drawing
account.
Computations:
L. Medina P300,000 x 400,000/1,200,000= P100,000
C. Matero P300,000 x 800,000/1,200,000= P200,000
P300,000
(Mahatma Gandhi)

(Mahatma Gandhi)
RATIO OF CAPITAL BALANCES AT THE BEGINNING OF THE YEAR. In this case, since the
beginning is similar to the investment, the entries are the same.
Journal Entry:
of profits.
To close drawing
account.
Computations:
L. Medina P300,000 x 400,000/1,200,000= P100,000
C. Matero P300,000 x 800,000/1,200,000= P200,000
P300,000

RATIO OF CAPITAL BALANCES AT THE END OF THE YEAR.
Journal Entry:
of profits.
To close drawing
account.
Computations:
L. Medina P300,000 x 500,000/1,250,000= P120,000
C. Matero P300,000 x 750,000/1,250,000= P180,000
P300,000
(Mahatma Gandhi)

(Mahatma Gandhi)
RATIO OF AVERAGE BALANCES:
Journal Entry:
of profits.
To close drawing
account.
Computations:
L. Medina P300,000 x 475,000/1,250,000= P114,000
C. Matero P300,000 x 775,000/1,250,000= P186,000
P300,000

COMPUTATION OF AVERAGE CAPITAL BALANCES
LEOPOLDO MEDINA, CAPITAL
(Mahatma Gandhi)
Date Capital Acct.
Balances
Portion of the
Year Unchanged
Average Capital
Balances
1/1 400,000 x 3/12 = 100,000
4/1 500,000 x 9/12 = 375,000
Average Capital 475,000

(Mahatma Gandhi)
Date Capital Acct.
Balances
Portion of the
Year
Unchanged
Average Capital
Balances
1/1 800,000 x 6/12 = 400,000
7/1 750,000 x 6/12 = 375,000
Average Capital 775,000

Continuing the illustration of Medina and Matero Partnership with a
profit of P300,000 for 2009 and capital balances as already
shown, assume that the partnership agreement allowed 15%
interest on the average capital account balances, with the
balance to be divided equally. The profit of P300,000 for 2009 is
divided as follows:
(Mahatma Gandhi)

Medina Matero Total
15% interest on Average
Capital:
Medina: P475,000 x 15% 71,250
Matero: P775,000 x 15% 116,250
Sub-total 187,500
Balance to be divided
equally:
Medina: P112,500 x 50% 56,250
Matero: P112,500 x 50% 56,250
Sub-total _______ _______ 112,500
Share of Partners in Profits
127,500 172,500 300,000
(Mahatma Gandhi)

(Mahatma Gandhi)
RATIO OF AVERAGE BALANCES:
Journal Entry:
of profits.
To close drawing
account.

(Mahatma Gandhi)
L. Medina, Capital
400,000 1/1
100,000 4/1
67,500 12/31
567,500
L. Medina, Drawing
12/31 60,000 127,500 12/31
12/31 67,500 _______
127,500 127,500
C. Matero, Capital
7/1 50,000 800,000 1/1
_____________ 112,500 12/31
50,000 912,500
862,500
C. Matero, Drawing
12/31 60,000 172,500 12/31
12/31 112,500____________
172,500 172,500
Income Summary
12/31 300,000 300,000 12/31

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