Divisionofprofits

Lecture notes of Prof.
Placido Menaje 1
Division of Profits
Division of Profits
RULES IN DIVIDING PROFITS
1. According to partner’s agreement
2. In the absence of agreement, according to the ration of their
original capital contribution
3. If the agreement provides only for division of profits but not
for losses, the divison of losses shall be deemed similar to that
for profits
ACCOUNTS MAINTAINED FOR CASH PARTNER

1. Capital Account
- it is credited for
o initial investment of partner in the form of cash,
merchandise or other assets
o additional investments in the form of cash,
merchandise or assets
o payment of partnership obligated by a partner from
his personal funds (assuming that it is an additional
investment)
 liability account  capital of partner
o collection by the partnership of personal claims of a
partner (assuming that the amount is his additional
investment)
o in certain cases, the credit balance of a partner’s
drawing account Note: Increase or decrease of
capital account will need amendment of the article of
co-partnership
- it is debited for
o permanent withdrawals by partner provided that
other partners agree and that the withdrawals will
not prejudice the partnership creditors
o amount of interest sold with consent of the other
partners
2. Drawing Account
- this is also called the partner’s personal account
o allowed to withdraw cash in the business
o more acting than capital
- profit  credit account; loss  debit account
- it is debited for
o the routinary or temporary withdrawals of the partner
in cash or other partnership assets
Partner B, Drawing xxx
Cash xxx
o share of the partner in the losses from partnership
operations
Partner B, Drawing xxx
Income Summary xxx
- it is credited for
DISSOLUTION OF A PARTNERSHIP 1
Lecture notes of Prof. Placido Menaje 2
Division of Profits
o the share of partner in partnership profits

o interest salary and bonuses allowed to a partner
3. Loan Account
- partner gives loan to the partnership
Accounts Payable xxx
Partner A, Loan xxx
NOTES ON DIVISION OF PROFITS
1. The income summary account is used to close the net income
or net loss of the firm
2. The balance of the income summary account is closed to the
individual partner’s drawing account
3. If the result of operation is a net income, the income summary
is debited and he partner’s drawing accounts are credited
Direct
o closed to capital account for net income and balance
of drawing
Indirect
o income summary for net income and drawing
thencapital account
Credit Balance – income summary  net income

Debit Balance – income summary  net loss
4. If the result of operation is a net loss, the income summary is

credited and the partner’s drawing accounts are debited
UNLESS specifically agreed upon, the partner’s drawing
account is not closed to the capital account.
- NOT if it is an article of co-partnership
- If it has a credit balance, you add it at the end of the year
o Happens if the partner did not withdraw in the end of
the term
WAYS OF DIVIDING PROFIT

1. Equally
2. Using arbitrary ratios
- Fraction: 1:2 (1/3 and 2/3), 2:3 (2/5 and 3/5)
- Percentages: 25% and 75%
3. In the ratio of partner’s capital balances
- original capital
- capital at the beginning of each fiscal period
- capital at the end of each fiscal period
- average capital for each period
o simple average capital – beg + end / 2
o weighted average capital – allowing partners
 it is computed by preparing a schedule
containing columns for
• date
• capital balance
Lecture notes of Prof. Placido Menaje 3
Division of Profits
• number of months unchanged

• peso-months
• average capital
4. Allowing interest salary allowances and bonuses
Interest on partner’s capital – this is to give recognition to the
difference in partner’s capital contributed firms. Interest
on capital may be base on original, beg, end, or average
capital balances.
Example: 6% interest on beginning capital
Salary allowance – to give recognition to the ability,
experience or time devoted by a partner to the business
Bonus – this is to give recognition to the senses of the partner
at manager of the partnership.
- is expressed either as a specified amount or a certain
percentage of net income
* When the partnership agreement provides that interest C
salary allowances
be allowed, these should be given to partners even if the
partnership suffered a net loss or if the partnership net
income is not sufficient to cover the interest and salary
allowances
* Bonus is given only to the managing partner and only when
there is a net profit

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Lecture notes of Prof.

ACCOUNTS MAINTAINED FOR CASH PARTNER

o the share of partner in partnership profits

Credit Balance – income summary  net income

4. If the result of operation is a net loss, the income summary is

WAYS OF DIVIDING PROFIT

• number of months unchanged

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