PARTNERSHIP OPERATIONS

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 withdrawal0 Initial investment Temporary withdrawal Share in Net Income
Sale of equity Additional Investment Share in Net Loss
Payment of partnership Partnership pays the
liability from personal personal liability of a
funds partner
Debit balance in Credit balance in
drawing drawing

DIVISION OF PROFITS & LOSSES

Profits and Losses may be shared partners according to the following agreements:

1. equally
2. arbitrary ratio
a. percentage
b. fraction
3. capital ratio
a. original/beginning capital
b. ending capital
c. average capital

4. allowing interest on partners’ capital balances

5. allowing salaries to partners
6. bonus to managing partner based on net income
EXAMPLE

JOHN CAPITAL MARTHA CAPITAL

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

DIVISION OF PROFITS & LOSSES

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

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

Income Summary 150,000

John, Drawing 60,000
Martha, Drawing 90,000
To distribute profits to partners

3. Capital RATIO

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 No. of Months Peso Months Average Capital
Balance 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 P5,580,000/12 P465,000
‘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
P5,550,000/12 462,500
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
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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
John (400,000 x 10%) P40,000
Martha (300,000 x 10%) P30,000 P70,000
Balance equally(150,000-70,000) 40,000 40,000 80,000
Share in Net Income P80,000 P70,000 P150,000

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 Income P74,000 P76,000 P150,000

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

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
John- 500,000 x5% P25,000
Martha- 600,000 x 5% P30,000 P55,000

Salary allowance 30,000 40,000 70,000

10% Bonus to John 15,000 15,000
Balance equally 5,000 5,000 10,000
Share in Net Income P75,000 P75,000 P150,000

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
John- 500,000 x10% P50,000
Martha- 600,000 x 10% P60,000 P110,000

Salary allowance 50,000 60,000 110,000

20% Bonus to John 30,000 30,000
Excess equally (50,000) (50,000) (100,000)
Share in Net Income P80,000 P70,000 P150,000

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
John- 500,000 x10% P50,000
Martha- 600,000 x 10% P60,000 P110,000

Salary allowance 50,000 60,000 110,000

Balance 4:6 (148,000) (222,000) (370,000)
Share in Net Income (P48,000) (P102,000) (P150,000)
• 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, 2006

Note
Net Sales 1 P627,635
 Cost of Sales 2 (456,225)
Gross Profit P171,410
Other Income 3 1,771
Gross Profit and Other Income P173,181
Operating expenses
General and Administrative expense 4 P90,890
Selling expenses 5 19,615
Other expenses 6 250 110,775
Operating Income P62,426
Interest expense (4850)
NET INCOME P57,576
======

Schedule of Distribution of Profits

Marlon Miranda Total
10% interest on beginning capital
Marlon- 120,000 x10% P12,000
Miranda- 100,000 x 10% P10,000 P22,000

Balance equally 17,788 17,788 35,576

Share in Net Income P29,788 P27,788 P57,576
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NOTES TO FINANCIAL STATEMENTS

Note 1 Net Sales

Sales P 642,775
Sales Discount P 10,580
Sales Returns & Allowances 4,560 15,140

Net Sales Revenue P 627,635

Note 2 Cost of Sales

Merchandise Inventory, January 1 P 188,500

Add: Net cost of purchases

Purchases P 366,200
Purchase Discounts P 3,653
Purchase Returns and Allowances 18,265 21,918

Net purchases P 344,282

Add: Freight in 1,250 345,532

Total goods available for sale P 534,032

Merchandise Inventory, December 31 77,777

Cost of Sales P 456,255

Note 3 Other Income

Gain on Sale of Office Equipment P 351

Interest Income 1,420
 Total P 1,771

Note 4 General and Administrative Expenses

Salaries & Wages P 54,200
Rent Expense 30,000
Depreciation Expense-Office Equipment 3,830
Doubtful Accounts Expense 2,340
Office Supplies used 520
Total P 90,890

Note 5 Selling Expenses

Sales Commission P 18,935
Freight out 680
Total P 19,615

Note 6 Other expense

Discount lost P 250
=========

NMA Company
Statement of Changes in Partners’ Equity
For the Year Ended, December 31, 2006

Marlon Miranda Total

Capital balances, January 1 P120,000 P100,000 P220,000
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, December 31 P144,288 P117,288 P261,576
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