MODULE 3

LESSON 1
PARTNERSHIP BUSINESS

Learning Objectives
At the end of the topic students are expected to:
1. Define partnership and identify its characteristics
2. Explain the advantages and disadvantages of partnership
3. Identify and describe the different types of a partnership and different kinds
of partners.
4. Discuss the contents of articles of partnership
5. Distinguish partner’s capital and drawing accounts

Partnership

By the contract of partnership two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of dividing the profits
among themselves. Two or more persons may also form a partnership for the exercise of a
profession. The partnership has a juridical personality separate and distinct from that of each
of the partners. (Civil Code of the Philippines, Article 1767).

Characteristics of a Partnership

1. Membership: At least two persons are required to begin a partnership. Further, all the
individuals entering into partnership must be legally competent to do so, as they have to enter
into a contract to become partners.
2. Unlimited liability: The members of a partnership have unlimited liability, i.e. they
are collectively and individually liable for the firm’s debts and obligations, thus, all partners
(except limited partners), are personally liable for all debts incurred by the partnership. If the
partnership cannot settle its obligations, creditor’s claims will be satisfied from the personal
assets of the partners without prejudice to the rights of the separate creditors of the partners.
So, if in case business assets are not adequate to repay liabilities, personal assets of all or any
partner can be claimed by the creditors.

3. Sharing of profit and loss: The main purpose of the partnership is to share profit in the agreed
ratio. Profits and losses will be divided among the partners based on their agreed ratio.

4. Mutual Agency: The partnership business is undertaken by all the partners or any of the
partner, who acts on behalf of all the partners. So, every partner is a principal as well as an
agent. Further, the acts of partners bind each other as well as the firm.

4. Limited Life: There is a lack of continuity in partnership, like death, bankruptcy or

retirement of any partner can lead the partnership to end. Although, if the remaining partners
want to continue operations, they can do so by a fresh agreement.

5. Contractual Relationship: The relation subsisting between partners is due to the contract,
which may be oral, written or implied.

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6. Transfer of interest: Mutual consent of all the partners is a must for transferring the interest
in the firm to any external party.

7. Income Taxes. Partnerships, except general professional partnerships, are subject to tax at
the rate of 30% (per R.A No.9937) of taxable income.

8. Partners Equity Accounts. Accounting for partnership is much like accounting for sole
proprietorships. The difference lies in the number of the partners’ equity accounts. Each partner
has a capital account and a withdrawal account that serves similar functions as the related
accounts for sole proprietorships.

Advantages and Disadvantages of Partnership Business

Group of individuals prefer to form partnership business because of its advantages.

Below are the advantages of forming partnership:

1. In partnership, capital, entrepreneurial skills and experiences of partners are combined,

hence, business potential may be greatly expanded.
2. Partnership business is easier and inexpensive compared to corporation.

However, because of some of the partnership business characteristic, there are also
disadvantages of forming a partnership which are as follows:

1. Because of mutual agency, partners are jointly and individually liable for the actions of
other partners.
2. A partnership business has unlimited liability, therefore, general partners are liable
without limit for all debts contracted by the partnership. Their liability extends to their personal
assets.
3. Partnership has limited life, thus, it could be dissolve upon death or withdrawal of a partner.
4. Unlike corporation partnership has limited capital raising abilities.

Types of Partnership
1. According to object:

• Universal partnership of all present property. All contributions become part of the
partnership fund.
• Universal partnership of profits. All that the partners may acquire by their industry or
work during the existence of the partnership and the use of whatever the partners
contributed at the time of the institution of the contract belong to the partnership.
• Particular partnership. The object of the partnership is determinate—its use or fruit,
specific undertaking, or the exercise of a profession or vocation.

2. According to liability:

• General. All partners are liable to the extent of their separate properties.
• Limited. The limited partners are liable only to the extent of their personal contributions.
In a limited partnership, the law states that there shall be at least one general partner.

3. According to duration:

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 • Partnership with a fixed term or for a particular undertaking. One for which no term is
specified and is not formed for a particular undertaking or venture and which may be
terminated any time by mutual agreement of the partners or the will of one alone.
• Partnership at will. One in which no term is specified and is not formed for any particular
undertaking.

4. According to purpose:

• Commercial or trading partnership. One formed for the transaction of business.

• Professional or non-trading partnership. One formed for the exercise of profession.

5. According to legality of existence:

• De jure partnership. One which has complied with all the legal requirements for its
establishment.
• De facto partnership. One which has failed to comply with all the legal requirements for
its establishment.

Kinds of Partners

1. General partner. One who is liable to the extent of his separate property after all the assets
of the partnership are exhausted.
2. Limited partner. One who is liable only to the extent of his capital contribution.
3. Capitalist partner. One who contributes money or property to the common fund of the
partnership.
4. Industrial partner. One who contributes his knowledge or personal service to the
partnership.
5. Managing partner. One whom the partners has appointed as manager of the partnership.
6. Liquidating partner. One who is designated to wind up or settle the affairs of the
partnership after dissolution.
7. Dormant partner. One who does not take active part in the business of the partnership and
is not known as a partner.
8. Silent partner. One who does not take active part in the business of the partnership though
may be known as a partner.
9. Secret partner. One who takes active part in the business but is not known to be a partner
by outside parties.
10. Nominal partner or partner by estoppel. One who is actually not a partner but who
represents himself as one. (https://toughnickel.com/business/CHARACTERISTICS-OF-
PARTNERSHIPS-BUSINESS)

ARTICLES OF PARTNERSHIP

A partnership may be constituted orally or in writing. In the latter case, partnership agreements
are embodied in the Articles of Partnership. The Articles of Partnership define the obligations,
responsibilities and roles of each partner and how the profits and losses will be shared and
states who the general and limited partners are. It sets forth all the terms and conditions
mutually agreed by the partners thereto. Below are several items related to the formation of a
partnership are covered in a typical articles of partnership. They include:

1. The partnership name, nature, purpose and location;

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 2. Name, citizenship, address, birthday and TIN of the partners
3. The terms of the partnership
4. When the partnership will begin and, if not infinite, when and how it will end
5. Each partner's capital contribution
6. Each partner's percentage of interest in the partnership
7. The rights and duties of each partner
8. How the partnership's profits will be distributed (equally is the default, but there may
be special conditions)
9. How the partnership will be managed
10. How salaries (if any) will be distributed

Like a corporation, a partnership has a separate juridical personality. Even if the

partnership failed to register with the SEC, it still has a separate juridical personality. Thus, the
partnership, as a separate person can acquire its own property, bring actions in court in its own
name and incur its own liabilities and obligations. A partnership action is embodied in a
Partners’ Resolution which is similar to a corporation’s Board Resolution. Partnerships are
recorded with the Securities & Exchange Commission (SEC). The following requirements
must be submitted with the SEC:

1. Name Verification Slip with the reservation of the partnership name

2.Articles of Partnership
3. Registration Data Sheet
4. Affidavit of a partner undertaking to change partnership name
5. Certificate of Bank Deposit

If a partnership has foreign partners, the following additional requirements must be filed:
1. SEC Form No. F-105
2. Bank certificate on the capital contribution of the partners
3. For foreign partners who want to register their investments with the Bangko Sentral
ng Pilipinas, proof of the remittance (https://ndvlaw.com/how-to-form-a-partnership/)

Partner’s Equity Account

Each partner in the partnership business will have his/her own equity account. The
number of capital account in the partnership business varies on the number of partners,
example, if there are five partners there will also be five capital accounts appearing in the
records of the business.
Partner’s capital account will be credited for initial and additional net investments (assets
contributed less liabilities assumed by the partnership) and credit balance of the drawing
account at the end of the period. It is debited for his permanent withdrawals and debit balance
of the drawing account at the end of the period.

Partner's Capital Account

- Permanent withdrawal - Original investment
- Debit balance of the drawing account - Additional investment
at the end of the period - Credit balance of the drawing account
at the end of the period

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 Partner's Drawing Account

- temporary withdrawals withdrawal - share in profit (this can be

- share in net loss for the period (this can directly
be directly debited to capital account) credited to capital account)

Permanent withdrawals are made with the intention of permanently decreasing the
partners’ capital while temporary withdrawals are regular advances made by the partners in
anticipation of their share in profit.

The use of drawings accounts for temporary withdrawals provides a record of each
partner’s drawings during an accounting period. Hence drawings in excess of the allowed
amounts as stated in the partnership agreement may be controlled. Notice that profit (or loss)
is credited (or debited) either to the drawing account or to the capital account. The choice of
the account to the credit or debit depends on the intention of the partners. If they wish to
maintain their capital accounts for investments and permanent withdrawals then profit or loss
should be entered in the drawing account. On the other hand if the purpose of the partners is to
make profit or loss part of their capital then the capital account should be used. In either case
the resulting partners ending capital balances will be the same.

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 LESSON 2
FORMATION OF PARTNERSHIP BUSINESS

Learning Objectives
At the end of the topic students are expected to:
1. Learn who are allowed to form partnership business
2. Prepare the journal entries for partnership formation

Forming partnership Business

In forming partnership business each partner will have to contribute money, property,
and/or industry to the business. The partner’s investment should be recorded at the value agreed
by the partners. In the absence of agreement, these investment should be recorded at the fair
value of the assets at the date of their transfer to the partnership business. Fair value refers to
the value of assets and liabilities at their current market value. The fair value is the amount that
the asset could be sold, or a liability settled for a value that is fair to both the buyer and the
seller. In recording the investment of the partners a journal entry should be prepared which
could either be in the form of joint entry for the partners’ investment or separate entry for the
investment of each partner. For the given illustrations below both entries are prepared.

Who Can Form Partnership Business?

1. Individuals with no Existing Business Form a Partnership.

To record the investment of a partner, simply to debit the assets contributed and to credit
the liabilities assumed and the capital account of each partner.

Illustration. Hello and Kitty decided to form partnership business. Each of them will contribute
cash of P300,000.

Joint entry for partners’ investments

Cash 600,000
Hello, Capital 300,000
Kitty, Capital 300,000
To record the partners’ investment

Separate entry for each partner’s investment

Cash 300,000
Hello, Capital 300,000
To record Hello’s investment

Cash 300,000
Kitty, Capital 300,000
To record Kitty’s investment
2. Sole Proprietor and Individual/s Form a Partnership.

A sole proprietor may consider forming a partnership with an individual who has no
existing. Under this type of formation the assets and the liabilities of the proprietorship will be
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transferred to the newly formed partnership at values agreed upon by all the partners or at their
current fair prices. This will require adjusting entries to reflect the agreed value of the
investments and closing entries in the books of the partner who has existing business prior to
formation. The adjustments will affect the capital of the partners.
OWNER`S EQUITY ACCOUNT⁄CAPITAL ACCOUNT
- decrease in assets - increase in assets
- increase in liability - decrease in liability
- increase in contra asset accounts - decrease in contra asset accounts

To illustrate, assume that on June 1, 2019 owner of Blink Company agreed to open partnership
business with Mr. Click. Below are the accounts and their balances of Blink Company:
Debit Credit
Cash P 180,000
Accounts Receivable 120,000
Supplies 20,000
Equipment 150,000
Accumulated Depreciation 50,000
Accounts Payable 45,000
Blink, Capital 375,000

Additional information: the partners agreed on the following:

1. The accounts receivable is determined to have 10% uncollectible value, the amount
of supplies that will be carried to the partnership business is P15,000, the net book value of the
equipment will be P120,000.
2. Mr. Click will invest cash equal to the net investment of the owner of Blink
Company.

The following journal entries will be done.

Book of Blink Company

Adjusting Entries:

a. Blink, Capital 12,000

Allowance for Doubtful Accounts 12,000

b. Blink, Capital 5,000

Supplies 5,000

c. Accumulated Depreciation 20,000

Blink, Capital 20,000

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 Closing Entry:

Accounts Payable 45,000

Allowance for Doubtful Accounts 12,000
Accumulated Depreciation 30,000
Blink, Capital 378,000
Cash 180,000
Accounts Receivable 120,000
Supplies 15,000
Equipment 150,000

To record the partners’ investment opening entries will be made in the books of the
partnership business.

Joint entry for partners’ investments

Cash 558,000
Accounts Receivable 120,000
Supplies 15,000
Equipment 120,000
Accounts Payable 45,000
Allowance for Doubtful Accounts 12,000
Blink, Capital 378,000
Click, Capital 378,000
To record the partners’ investment

Separate entry for each partner’s investment

Cash 180,000
Accounts Receivable 120,000
Supplies 15,000
Equipment 120,000
Accounts Payable 45,000
Allowance for Doubtful Accounts 12,000
Blink, Capital 378,000
To record Blink’s investment

Cash 378,000
Click, Capital 378,000
To record Click’s investment

In the opening entries in the books of partnership, all depreciable assets will be recorded
at their agreed value or fair value, thus, no accumulated depreciation will appear in the records
of the partnership upon formation. In contrast, accounts receivable balance is recorded at its
gross value and allowance for uncollectible accounts are carried forward to the partnership
because the partnership will continue to collect existing accounts receivable, some of which
are expected to be uncollectible.

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3. Two or More Sole Proprietors Form a Partnership.

Prior to formation, adjusting and closing entries will be done to each books of sole
proprietor.

Illustration. The presence of Smart One Bookstore prompted AA, proprietor of A’s Bookstore,
and BB, proprietor of B’ Supplies, to combine their businesses on January 1, 2019 to be more
competitive and called it Mind Power Store. Account balances of the two sole proprietors
before the formation of the partnership are as follows:
A’s B’s
Cash P 350,000 P 450,000
Accounts receivable 140,000 250,000
Allowance for bad debts ( 2,000) ( 5,000)
Merchandise inventory 600,000 750,000
Store equipment 400,000 200,000
Accumulated depreciation (100,000) ( 70,000)
Accounts payable 280,000 100,000
Capital 1,108,000 1,475,000
The partners agreed on the following conditions:
1. Partners’ capital in the partnership shall be equal to the net assets transferred.
2. Adjustments are to be made as follows:
a) Allowance for doubtful accounts shall be increased to 8% of accounts
receivable.
b) Inventories are to be valued at 90% of book value.
c) Fixed assets are 25% depreciated.

Adjusting Entries

A’s Book

a. AA, Capital 9,200

Allowance for bad debts 9,200
b. AA, Capital 60,000
Merchandise Inventory 60,000
c. no entry

B’s Book

a. BB, Capital 15,000

Allowance for bad debts 15,000
b. BB, Capital 75,000
Merchandise Inventory 75,000
c. BB, Capital 30,000
Accumulated Depreciation 30,000

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Closing Entries

AA’s Book

Allowance for Bad debts 11,200

Accumulated Depreciation 100,000
Accounts Payable 280,000
AA, Capital 1,038,800
Cash 350,000
Accounts Receivable 140,000
Merchandise Inventory 540,000
Store Equipment 400,000

BB’s Book

Allowance for Bad Debts 20,000

Accumulated Depreciation 100,000
Accounts Payable 100,000
BB, Capital 1,355,000
Cash 450,000
Accounts Receivable 250,000
Merchandise Inventory 675,000
Store Equipment 200,000

To record the partners’ investment opening entries will be made in the books of the
partnership business.

Joint entry for partners’ investment

Cash 800,000
Accounts Receivable 390,000
Merchandise Inventory 1,215,000
Store Equipment 400,000
Allowance for Bad Debts 31,200
Accounts Payable 380,000
AA, Capital 1,038,800
BB, Capital 1,355,000
To record the partners’ investment

Separate entry for each partner’s investment

Cash 350,000
Accounts Receivable 140,000
Merchandise Inventory 540,000
Store Equipment 300,000
Allowance for Bad debts 11,200
Accounts Payable 280,000
AA, Capital 1,038,800
To record AA’s investment

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 Cash 450,000
Accounts Receivable 250,000
Merchandise Inventory 675,000
Store Equipment 100,000
Allowance for Bad Debts 20,000
Accounts Payable 100,000
BB, Capital 1,355,000
To record BB’s investment

The statement of financial position of the partnership business upon formation will be:

MIND POWER BOOKSTORE

Statement Of Financial Position
January 1, 2019
ASSETS
Cash P 800,000
Accounts Receivable P 390,000
Less: Allowance for Bad Debts 31,200 358,800
Merchandise Inventory 1,215,000
Store Equipment 400,000
Total Assets P 2,773,800

LIABILITIES AND OWNERS`EQUITY

Accounts Payable P 380,000
AA, Capital 1,038,800
BB, Capital 1,355,000
Total Liabilities & Owners` Equity P 2,773,800

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 LESSON 3
OPERATION OF PARTNERSHIP BUSINESS

Learning Objectives
At the end of the topic students are expected to:
1. Summarize the rules for distribution of profits/losses
2. Describe and account for the different methods of dividing partnership
profits/losses
3. Analyze the effects of using original, beginning, ending and average capital
balances in distributing partnership profits/losses.
4. Prepare journal entries for partnership operations

Partnership Operation

Partnership profits are realized as a result of putting together the contribution- money,
property and industry- of the partners. The amount of the capital invested by each partner, the
amount of time of each partner devotes to the business and other contributions are the factors
being considered in the formulation of an equitable profit and loss ratio.

Partners agree on dividing the partnership profit. The agreement is usually called the
income ration, income and loss ratio or the profit and loss ratio (P/L ratio). The same basis of
division usually applies to both income and loss. A stipulation which excludes one or more
partners from any share in the profits or losses is void. Article 1797 of the Philippine Civil
Code provides the following additional rules in the division of profits and losses.

• If only share in profit has been agreed upon, the share of partners in losses shall be the
same proportion
• In the absence of any stipulation in dividing profits and losses, the basis will be the
contributed capital

Industrial partner does not share in losses but receives just and equitable share in the profits. If
besides his services he has contributed capital, he shall also receive a share in the profits in
proportion to his capital.

A summary of the above legal provisions is prepared as follows:

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 total contribution
(according to the ratio of original capital investment or its absence, the ratio of
capital balances at the beginning of the year).
➢ as to industrial partner(if any), such share as may just and equitable under the
circumstances, provided, that the industrial partner shall receive such share
before the capitalists partners shall divide the profits.
2. Losses
a. The losses will be divided according to the partners’ agreement.

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 b. If there is no agreement as to distribution of losses but there is agreement as to
profits, the losses shall be distributed according to profit sharing ratio.
c. In the absence of any agreement:
➢ As to capitalist partners, the losses shall be divided according to their capital
contribution (according to the ratio of original capital investment or in its
absence, the ratio of capital balances at the beginning of the year)
➢ As to purely industrial partner (if there’s any), shall not be liable for any losses.

Distribution of Profits or Losses

In general, profits or losses shall be divided based on the agreement of the partners. The
partners may agree on any of the following scheme in distributing profits or losses:

1. Equally or in other agreed ratio

2. In proportion to 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. Giving salaries to partners and the remainder in an agreed ratio
4. Giving interest based on partners’ capital and the remainder in an agreed ratio
5. Giving bonus to the managing partner based on profit and the remainder in an agreed
ratio. Unlike salaries, a partner is entitled to bonus if only the partnership earns profit,
no bonus shall be given if the partnership incurs losses.
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)

Note that the partners can agree on not using a residual sharing ratio (“the balance in an agreed
ratio”) if profits do not exceed the total salary and interest allowances. In such case, the partners
must agree on the priority of the various profit or loss distribution schemes.

The entry to record the distribution of profits will be:

Income Summary XXX

Partner’s, Drawing XXX

Conversely to record distribution of losses, the entry is:

Partner’s, Drawing XXX

Income Summary XXX

Illustration. The partnership of Miguel and Aquino had a net income of P200,000 for the year
ended December 31, 2019. Before the distribution of net income, the capital and drawing
accounts of the partners were:
Miguel, Capital Miguel, Drawing
Jan. 1 P30,000 Sept. 1 P 5,000
Oct. 1 20,000

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 Aquino, Capital Aquino, Drawing
Jan. 1 P 10,000 Dec. 1 P 3,000
July 1 30,000

Distribution is based on Agreed Ratio

Partnership contracts may provide that profit or loss be divided equally. The profit is transferred
to partners’ accounts by closing entry on Dec. 31, 2019 from the income summary ledger
account to the partner’s drawing accounts:

Income Summary 200,000

Miguel, Drawing 100,000
Aquino, Drawing 100,000
To record the distribution of profit.

Assume that the partners agreed to share profits and losses in a ratio of 70:30 respectively:

Income Summary 200,000

Miguel, Drawing 140,000
Aquino, Drawing 60,000
To record the distribution of profit.

Computation:
Miguel: 70% x P200,000 P140,000
Aquino: 30% x P200,000 P60,000
P200,000

If given the same capital and drawing account balances but the partnership incurred loss of
P50,000 instead of a profit the entry will be:

(the loss is shared equally)

Miguel, Drawing 25,000
Aquino, Drawing 25,000
Income Summary 50,000
To record the distribution of loss.

(the loss is shared 70:30 respectively)

Miguel, Drawing 35,000
Aquino, Drawing 15,000
Income Summary 50,000
To record the distribution of loss.

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Distribution is based on Partner’s Capital Contributions

A. Ratio of Original Capital Investments. Assume that the partnership agreement provides for
the division of profits in the ratio of original capital investments. The original investments of
Miguel and Aquino are P60,000 and P40,000, respectively. The profit of P200,000 for 2019 is
divided as follows:
Income Summary 200,000
Miguel, Drawing 120,000
Aquino, Drawing 80,000
To record the distribution of profit.

Computation:
Original Capital Share in
Profit
Miguel P60,000 P60,000/P100,0000 x P200,000 = P120,000
Aquino P40,000 P40,000/P100,000 x P200,000 = P 80,000
Total P100,000 Total Income P200,000

B. Ratio of Capital Balances at the Beginning of the Year. Assume that the partnership
agreement provided for the division of profits in the ratio of capital balances at the beginning
of the year. The beginning capital balances of Miguel and Aquino were P30,000 and P10,000
respectively. The profit of P200,000 for 2019 is divided as follows:

Income Summary 200,000

Miguel, Drawing 150,000
Aquino, Drawing 50,000
To record the distribution of profit.

Computation:
Beginning Share in
Capital Profit
Miguel P30,000 P30,000/P40,0000 x P200,000 = P150,000
Aquino P10,000 P10,000/P40,000 x P200,000 = P 50,000
Total P40,000 Total Income P200,000

C. Ratio of Capital Balances at the End of the Year. Assume that the profit is divided based on
the ratio of capital balances at the end of the year before drawings. The ending balances are
P50,000 for Miguel and P40,000 for Aquino. The profit of P200,000 for 2019 is divided as
follows:

Income Summary 200,000

Miguel, Drawing 111,111
Aquino, Drawing 88,889
To record the distribution of profits.

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Computation:
Ending Capital Share in
Profit
Miguel P50,000 P50,000/P90,0000 x P200,000 = P111,111
Aquino P40,000 P40,000/P90,000 x P200,000 = P 88,889
Total P90,000 Total Income P200,000

D. Ratio of Average Capital Balances.

Using the three preceding capital concepts – original capital investments; capital
balances at the beginning of the year; or the capital balances at the end of the year – in
distributing profit and losses may prove inequitable if there are material changes in the capital
accounts during the year.

When beginning capital balances are used in allocating profits, additional investments
during the year are discouraged because the partners making such investments are not
compensated in the division of profits until the next year.

If ending capital balances are used, year-end investments are encouraged, but there is
no incentive for a partner to make any investments before year-end. In addition, amounts earlier
withdrawn may be reinvested before year-end. These considerations suggest that using average
balances as a basis for distributing profits or losses is preferable because it reflects the capital
actually available for use by the partnership during the year.

Miguel, Capital Aquino, Capital

Jan. 1 P30,000 Jan. 1 P 10,000
Oct. 1 20,000 July 1 30,000

The average capital balance computation of the partners are:

Miguel
Date Capital Balance Portion of the Year Unchanged Average Capital
Balance
Jan. 1 P30,000 (Jan. 1 –Oct. 1- 9 mos.) 10/12 P22,500
Oct.1 50,000 (Oct. 1 – Dec.31-3 mos.) 3/12 12,500
Average Capital – Miguel P 35,000
Aquino
Jan. 1 P10,000 (Jan. 1-July 1 – 6mos.) 6/12 P5,000
July1 40,000 (July 1 – Dec. 31 -6mos.) 6/12 20,000
Average Capital – Aquino P 25,000
Total Average Capital of Partners P 60,000

Income Summary 200,000

Miguel, Drawing 116,667
Aquino, Drawing 83,333
To record the distribution of profits.

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Computation
Average Capital Share in
Profit
Miguel P35,000 P35,000/P60,0000 x P200,000 = P116,667
Aquino P25,000 P25,000/P60,000 x P200,000 = P 83,333
Total P60,000 Total Income P200,000

Salaries to partners and the Remainder in an Agreed Ratio

Allowing salaries to be given to partners may provide for variations in compensating

the personal services contributed by partners. Partners may devote equal service time but a
partner’s superior experience and knowledge may command a greater share of the profit. To
acknowledge the harder working or more valuable partner, the profit-sharing plan may provide
for salary allowances. Normally, an industrial partner receives salary in addition to his share in
the partnership’s profits s compensations for his services to the business. Salary allowances are
not included in the salary expenses since partners are owners and not considered as employees.

Example 1. Assume that Miguel will be given P20,000 salary allowance per annum while
Aquino receives P50,000 salary. The remainder will be divided equally. The profit for the year
is P200,000.

Miguel Aquino Total

Salary Allowance P 20,000 P 50,000 P 70,000
Remainder (Equally) 65,000 65,000 130,000
(200,000-70,000=130,000)
Total P 85,000 P 115,000 P 200,000
Note: Salaries are provided first and the remaining amount is allocated based on the P/L ratio.

Entry:
Income Summary 200,000
Miguel, Drawing 85,000
Aquino, Drawing 115,000

Example 2. Assume that Miguel will be given P80,000 salary allowance per annum while
Aquino receives P150,000 salary. The remainder will be divided equally. The profit for the
year is P200,000.

Miguel Aquino Total

Salary Allowance P 80,000 P 150,000 P 230,000
Remainder (Equally) (15,000) (15,000) (30,000)
(200,000-23,000=(30,000))
Total P 65,000 P 135,000 P 200,000

Entry:
Income Summary 200,000
Miguel, Drawing 65,000
Aquino, Drawing 135,000

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Interest on Capital and Remainder in an Agreed Ratio

The partnership agreement may stipulate of giving interest per annum. The interest
rate should be specified and agreed upon. The interest is computed based on capital balances
on specific dates or average capital balances during the year, depending on the partner’s
agreement. Under the interest plan, the partner who invested more capital is credited
(increased) for an interest of his capital and is ultimately debited (decreased) with a lesser share
of the loss; in some cases, the result may even be a net credit (increase).

The partners agreed that 10% interest will be given based on their ending capital
balance. Miguel and Aquino agreed to share profit and losses on a 60:40 ratio respectively.
The profit for the year is P200,000. The ending capital balances of the partners are: Miguel –
P50,000; Aquino-P40,000.

Miguel Aquino Total

Interest P 5,000 P 4,000 P 9,000
Remainder (60:40) (114,600) (76,400) (191,000)
(200,000-9,000=(191,000))
Total P 119,600 P 80,400 P 200,000

Entry:
Income Summary 200,000
Miguel, Drawing 119,600
Aquino, Drawing 80,000

Bonus (with profit)

Granting of bonus is only allowed when the company earned profit.

The given profit of P200,000 is before salaries and bonus.

Bonus is 15% of the profit after salaries but before bonus

Profit before salaries and bonus P 200,000

Salary Allowance 70,000
Profit after salary but before bonus P 130,000 (basis of the 15% bonus)
Bonus 15% of P130,000 = P19,500

Example 1. Assume that Miguel will be given P20,000 salary allowance per annum while
Aquino receives P50,000 salary. Bonus of 15% of the profit after salaries but before bonus will
be given to Aquino. The remainder will be divided equally. The profit for the year is P200,000.

Miguel Aquino Total

Salary Allowance P 20,000 P 50,000 P 70,000
Bonus 19,500 19,500
Remainder (Equally) 55,250 55,250 110,500
(200,000-89,500 = 110,500 )
Total P 75,250 P 124,750 P 200,000

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 Income Summary 200,000
Miguel, Drawing 75,250
Aquino, Drawing 124,750

Example 2. Assume that Miguel will be given P20,000 salary allowance per annum while
Aquino receives P50,000 salary. Bonus of 25% of the profit after salaries and bonus will be
given to Aquino. The remainder will be divided equally. The profit for the year is P200,000.

Bonus of 25% of the profit after salaries and bonus

Profit before salaries and bonus P 200,000

Salary Allowance 70,000
Profit after salary but before bonus P 130,000 125%
Bonus after salary and after bonus 104,000 100%
Bonus P 26,000 25%

Miguel Aquino Total

Salary Allowance P 20,000 P 50,000 P 70,000
Bonus 26,000 26,000
Remainder (Equally) 52,000 52,000 104,000
(200,000-96,000 = 104,000)
Total P 72,000 P 128,000 P 200,000

Income Summary 200,000

Miguel, Drawing 72,000
Aquino, Drawing 128,000

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References:

Aduana, N.L. (2018). Financial Accounting & Reporting. Philippines: C&E Publishing, Inc.
Ballada,W., Ballada,S. (2019). Basic Financial Accounting and Reporting. Philippines:
DomDane Publishers
Ballada,W., Ballada,S. (2020). Conceptual Framework & Accounting Standards. Philippines:
DomDane Publishe
Catacutan, V.L., Gabriel, J.A.,Mallari, M.Q. (2012). Fundamentals of Accounting Part I.
Philippines: St. Andrews Publishing
Millan, Z.V. (2018). Financial Accounting & Reporting (Fundamentals). Philippines:
Bandolin Enterprise
Millan, Z.V. (2018). Conceptual Framework & Accounting Standards. Philippines: Bandolin
Enterprise
Spiceland, Nelson (2019). Intermediate Accounting. MCGraw Hill
Valix, C.T. (2018). Practical Financial Accounting-Volume 1. Philipines: GIC Enterprises &
Co. Inc.
Valix, C.T. (2018). Practical Financial Accounting-Volume 2. Philipines: GIC Enterprises &
Co. Inc.
Weygant, Kimmel and Kieso. (2012). Accounting Principles 10th Edition. John Wiley &
Sons, Inc.
Williams, Haka, Betner, Carcelo (2013). Financial Accounting. McGraw Hill.
Philippine Accounting Standards
International Accounting Standards

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