Partnership Operation

Unit 3
Partnership Operation
A business owned by two or more individuals which is called a partnership will essentially follow
the same accounting procedures compared to a sole proprietorship form of business as discussed in
Unit 1. The nature of the activity of the partnership whether service or merchandising will
determine how the transactions will be recorded. The main difference between the sole
proprietorship and partnership accounting is mainly found in the aspect of dividing net income or
net loss from the business operation since there are more than one owner who will share in the profit
or loss of the company.
Learning Objectives
After studying this unit, the learner will be able to acquire following competencies:
1. Understand the different methods of dividing partnership’s profit or loss.
2. 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.
3. Prepare the complete set of partnership financial statements.
4.
Making
5.
Partnership Succeed: Charito and Guadalupe Couturier, Ltd.
Business Case
6.
On January 2, 2023, Guadalupe accepted the invitation of Charito to become her partner in the
Charito couturier business to form Charito and Guadalupe Couturier, Ltd. Guadalupe invested cash
and at the same time co-manage the partnership business with Charito. A good balance of expertise
and abilities coupled with mutual trust and open communication best describes the partnership of
these two friends.
The two partners believe that a good and harmonious work relationship between partners is
important for business to survive and succeed. There were times that they did not agree with each
other, but they were both open for discussion. They discuss the disagreement behind closed doors
without affecting employees’ morale. They also turned to trusted advisers like Luz, their CPA
friend to mediate management and financial issues when the two could not reach an agreement.
Charito and Guadalupe both ensured that they have the same vision and expectations on the
operation and management of the business. They are also ready to support each other when
misjudgments and mistakes were committed by anyone of them.
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Copyright © 2021 Marivic Valenzuela-Manalo. All rights reserved.
No part of this learning module may be used, reproduced, stored, or transmitted in any form or by any means without the written
consent of the author.
The two partners agreed on the following on how to divide profits and losses of the business:
• 12% interest on original capital of the partners which is P2,500,000 for Charito and P 625,000
for Guadalupe.
• Annual salaries amounting to P420,000 for each partner.
• 10% bonus to Guadalupe based on the amount of net income after tax after deducting
interest on capital and annual salaries of partners.
• Any remaining balance to be divided equally between the partners.
The following shows the financial statements of CGCL on its initial year of operation as a
partnership form of business:
Charito & Guadalupe Couturier, Ltd
Income Statement
For the year ended December 31, 2023
Service Income ₱ 4,285,295
Add: Interest Income 10,900 ₱ 4,296,195
Less: Expenses
Salaries and wages Expense ₱ 1,816,410
Depreciation Expense 273,750
Utilities Expense 139,800
Sewing Supplies Expense 122,250
Insurance Expense 102,675
SSS, Philhealth, and Pag-ibig Expense 62,325
Bad Debts Expense 32,310
Repairs and Maintenance Expense 25,000
Transportation Expense 13,500
Miscellaneous Expense 27,600
Interest Expense 6,600 2,622,220
Net Income before tax ₱ 1,673,975
Less: 20% Income tax 334,795
Net Income after Tax ₱ 1,339,180
Distribution of Net Income

Charito Guadalupe Total
12% interest on original capital ₱ 300,000 ₱ 75,000 ₱ 375,000
Annual salaries 420,000 420,000 840,000
10% bonus based on net income after tax after
deducting interest and salaries 12,418 12,418
Balance: equally divided 55,881 55,881 111,762
Net Income after Tax ₱ 775,881 ₱ 563,299 ₱ 1,339,180
Charito and Guadalupe Couturier, Ltd.
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Statement of Changes in Equity
Capital, January 2 ₱ 2,500,000 ₱ 625,000 ₱ 3,125,000
Add: Share in the net income 775,881 563,299 1,339,180
Sub-total ₱ 3,275,881 ₱ 1,188,299 ₱ 4,464,180
Less: Drawing 50,000 50,000 100,000
Capital, December 31 ₱ 3,225,881 ₱ 1,138,299 ₱ 4,364,180

Statement of Financial Position
December 31, 2023
ASSETS
Current Assets
Cash (Note 1) ₱ 1,069,295
Trade and Other receivables (Note 2) 539,310
Sewing Supplies on Hand 78,500
Total Current Assets ₱ 1,687,105
Non-Current Assets
Property, Plant, and Equipment (Note 3) 3,290,000
Total Assets ₱ 4,977,105
LIABILITIES and PARTNERS' EQUITY

Current Liabilities
Trade and Other Payables ₱ 228,130
Income Tax Payable 334,795 ₱ 562,925
Non-Current Liabilities
Notes Payable due in 2 years 50,000
Total Liabilities ₱ 612,925
Partners' Equity 4,364,180

Total Liabilities and Partners' Equity ₱ 4,977,105
IMPORTANT
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
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does not exceed 5 million pesos. These two requirements must be both met. Otherwise, the 25%
tax rate will apply (CREATE Act, 2021).
Computational Notes to the Financial Statements

Note 1: Cash
Cash in Bank ₱ 1,059,295
Petty Cash Fund 10,000
Total Cash ₱ 1,069,295
Note 2: Trade and Other Receivables

Accounts Receivable ₱ 585,900
Less: Allowance for Doubtful Accounts 58,590 ₱ 527,310
Advances to Employees 12,000
Total Trade and Other Receivables ₱ 539,310
Note 3: Property, Plant, and Equipment

Land ₱ 1,850,000
Building ₱ 550,000
Less: Accumulated Depreciation 50,000 500,000
Sewing and Designing Equipment ₱ 750,000
Shop Equipment ₱ 198,750
Furniture and Fixture ₱ 215,000
Total Carrying Value ₱ 3,290,000
Note 4: Trade and Other Payables

Accounts Payable ₱ 112,930
Unearned Service Income 100,000
Withholding Taxes Payable 10,700
Utilities Payable 4,500
Total Trade and Other Payables ₱ 228,130
The key success factor in the first year of Charito and Guadalupe Couturier, Ltd. (CGCL)
partnership was the different areas of expertise that each partner brought to the business. Charito
was keen in the quality of the sewing, designing, and innovating clothing apparels that the shop
produces. Guadalupe’s responsibility covers the expansion of the business and digital
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marketing which also includes all legal and customer related issues. The business thrives since
the two have complementing areas of skills and interests.
Mutual trust, complimentary skills and the ability to listen and work harmoniously together were
just some of the key attributes why the first-year operation of CGCL was successful!
Discussion Questions
1. What are the factors to be considered in dividing profits and losses of a partnership?
2. What is the main difference in the income statement of a partnership compared to that of
a sole proprietorship form of business?
3. Would you consider the manner of dividing the profits of Charito and Guadalupe
Couturier, Ltd. just and equitable?
4. What was the total amount of increase in the equity of the Charito and Guadalupe?
5. What makes a partnership business successful and profitable according to Charito and
Guadalupe? Do you agree with them? Why?
PARTNERSHIP OPERATIONS
1. Accounting Cycle of a Partnership Form of Business

Accounting for a partnership form of business is basically similar to that of a sole
proprietorship. For example, Purchase of supplies is debited either to Supplies or Supplies
Expense account and when merchandise is sold on account, the entry is to debit Accounts
Receivable and credit the Sales account which is the same as that of a sole proprietorship. In
fact, the Accounting Cycle of a Partnership is similar to that of sole proprietorship:
1. Analyzing business documents and recording of the business transactions

2. Posting to ledgers
3. Preparing a trial balance
4. Preparing worksheet
5. Recording adjusting entries
6. Preparing financial statements
7. Recording and posting closing entries
8. Preparing a post-closing trial balance
9. Recording and posting reversing entries
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Although partnership form of business is basically similar to that of a sole proprietorship, the
following makes it different to the latter:
a) Every partner forming the partnership whether capitalist or industrial partner have their
separate capital and drawing accounts.
Partner, Capital
Debit Credit
▪ Permanent withdrawal ▪ Initial or additional

▪ Withdrawal or investment
retirement of the partner ▪ Paying of partnership
▪ Selling capital interest liabilities using personal
to another partner fund/cash
Partner, Drawing
Debit Credit
▪ Temporary withdrawals ▪ Share in the business
in anticipation of future operation’s net income
partnership profits
▪ Share in the business
operation’s net loss
b) 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.
Date PARTICULARS P/R DEBIT CREDIT
July 1 Cash X X X X
Partner, loan or Loan Payable to Partner X X X X
c) A partner may experience 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.
July 1 Receivable from Partner X X X X
Cash X X X X
d) 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
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reflected in the Income Summary account is closed to the individual drawing accounts of
partners at the end of the reporting period.
Distributing net income
Dec. 31 Income Summary X X X X
Rose, drawing X X X X
Guada, drawing X X X X
Distributing net loss

Dec. 31 Rose, drawing X X X X
Guada, drawing X X X X
Income Summary X X X X
2. Preparation of financial statements

The financial statements prepared for a partnership form of business is basically the same
as sole proprietorship except for the following:
a) Income Statement or Statement of Profits and Loss – 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.
Distribution of Net Income

12% interest on original capital ₱ 300,000 ₱ 75,000 ₱ 375,000
Annual salaries 420,000 420,000 840,000
10% bonus based on net income after tax after
deducting interest and salaries 12,418 12,418
Balance: equally divided 55,881 55,881 111,762
Net Income after Tax ₱ 775,881 ₱ 563,299 ₱ 1,339,180
b) 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.
Statement of Changes in Equity
Capital, January 2 ₱ 2,500,000 ₱ 625,000 ₱ 3,125,000
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Add: Share in the net income 775,881 563,299 1,339,180
Sub-total ₱ 3,275,881 ₱ 1,188,299 ₱ 4,464,180
Less: Drawing 50,000 50,000 100,000
Capital, December 31 ₱ 3,225,881 ₱ 1,138,299 ₱ 4,364,180
c) Statement of Financial Position - the owner’s equity section is labeled Partners’ Equity.
LIABILITIES and PARTNERS' EQUITY

Current Liabilities
Trade and Other Payables ₱ 228,130
Non-Current Liabilities
Notes Payable due in 2 years 50,000
Total Liabilities ₱ 278,130
Partners' Equity
Partners’ Equity 4,364,180
Total Liabilities and Partners' Equity ₱ 4,642,310
Journal entry to record share in the profit of Charito and Guadalupe

P a g e 1 7
DATE PARTICULARS P/R D E B I T C R E D I T
Dec. 31 Income Summary 1 3 3 9 1 8 0

Charito, Drawing 7 7 5 8 8 1
Guadalupe, Drawing 5 6 3 2 9 9
Distribution of net income to partners.
The computation of the result of business’ operation of a partnership is essentially the same as
that of the sole proprietorship. But the distribution to individual partners of this profit or loss
is the primary objective of the accounting process.
The income of the partnership is realized as the result of combining the contribution of the
partners in terms of capital investment, services rendered, or time devoted in the management
of the business, and entrepreneurial ability or the partner’s personal business contacts and his
credit rating in the business community. And 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:
a) services rendered – provide salaries to give recognition to the ability, experience or

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time devoted by a partner to the business.
b) capital investment – provide interest to give recognition to differences in the capital
contribution given in proportion to the period such capital was actually used.
c) entrepreneurial ability or managerial skills - provide bonus which is an incentive
or special compensation which is usually based on net income.
The partnership may come up with their profit and loss ratio in the distribution of profits and
losses of the firm. This is the ratio in which partnership profits and losses are divided and must
be stated in the Articles of Co-Partnership. In the absence of any agreement as to the division
of profits or losses, the Philippine Partnership Law provides that the share of each partner in
the profit or loss shall be in proportion to what he has contributed, i.e., in accordance with the
partners’ contributed capital, but the industrial partner shall receive such shares as what is just
and equitable under the circumstances. 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.
3. Summary of Methods of Dividing Net Income or Net Loss

a) Equally
b) Arbitrary Ratio
▪ Fractions
▪ Percentages
▪ Ratio and Proportion
c) Based on Capital Ratio
▪ Original/Initial investment
▪ Beginning capital balance
▪ Ending capital balance
▪ Simple average capital
▪ Peso Month Average capital – most equitable method
d) Allowing Salaries, Interest and Bonus – considered as part of the distribution of net
income
4. Problems Illustrating Methods of Dividing Net Income or Net Loss

Let us use the following problem to illustrate the different methods of dividing net income or
net loss.
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
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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:
Date Pio Date Benedict

January 1 Balance ₱ 800,000 January 1 Balance ₱ 900,000
March 1 Withdrawal 100,000 June 30 Withdrawal 80,000
September 1 Investment 40,000 November 1 Withdrawal 40,000
December 1 Investment 60,000 December 1 Investment 20,000

Less: Expenses 1,220,000
Net Income ₱ 580,000
a) Equally dividing Net income of P580,000.

Pio Benedict Total
Net income divided equally 290,000 290,000 580,000
b) Arbitrary Ratio
a. Fractions
Pio Benedict Total
Net income (¼ to Pio and ¾ to Benedict) 145,000 435,000 580,000
b. Percentages
Pio Benedict Total
Net income (40% to Pio and 60% to Benedict) 232,000 348,000 580,000
c. Ratio and proportion

Pio Benedict Total
Net income (2:6 to Pio and Benedict) 145,000 435,000 580,000
c) Based on capital ratio
c.1) Original/Initial investment
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Pio Benedict Total
Net income (P400,000 Pio and P600,000 Benedict) 232,000 348,000 580,000
c.2) Beginning capital balance (Final answers rounded to the nearest peso value)
Pio Benedict Total
c.3) Ending capital balance

Pio Benedict Total
c.4) Simple average capital (Final answers rounded to the nearest peso value)
Pio Benedict
Beginning Capital 800,000 900,000
Ending Capital 800,000 800,000
Total 1,600,000 1,700,000
Divided by 2 ➗2 ➗2
Simple Average 800,000 850,000
Pio Benedict Total

c.5) Peso month average capital (Final answers rounded to the nearest peso value)
Pio
Capital No. of mos. Peso Total Peso Average
Date Balance Unchanged Month Month Capital
Jan. 1 800,000 2 1,600,000
Mar. 1 700,000 6 4,200,000
Sept. 1 740,000 3 2,220,000
Dec. 1 800,000 1 800,000
12 8,820,000 735,000
Benedict
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Jan. 1 900,000 6 5,400,000
Jun. 30 820,000 4 3,280,000
Nov. 1 780,000 1 780,000
Dec. 1 800,000 1 800,000
12 10,260,000 855,000
19,080,000 1,590,000
Pio Benedict Total

Another way to compute average capital using running balance method
Peso Month
Pio, Capital Running Months Average
Date Debit Credit Balance Unchanged Capital
Jan. 1 800,000 800,000 2/12 133,333
Mar. 1 100,000 700,000 6/12 350,000
Sept. 1 40,000 740,000 3/12 185,000
Dec. 1 60,000 800,000 1/12 66,667
735,000
Peso Month
Benedict, Capital Running Months Average
Date Debit Credit Balance Unchanged Capital
Jan. 1 900,000 900,000 6/12 450,000
Jun. 30 80,000 820,000 4/12 273,333
Nov. 1 40,000 780,000 1/12 65,000
Dec. 1 20,000 800,000 1/12 66,667
855,000
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d) Allowing Salaries, Interest and Bonus – considered as part of the distribution of net income
Pio Benedict
Annual salaries ₱ 120,000 ₱ 150,000
Interest on original capital contribution 10% 10%
5% Bonus to Pio computed based on net income
after deducting salaries and interest on capital
Balance 40% 60%
Pio Benedict Total

Annual salaries 120,000 150,000 270,000
10% Interest on original capital contribution 40,000 60,000 100,000
5% Bonus to Pio on net income after salaries and
10,500 10,500
interest on capital
Balance: 40%, 60% 79,800 119,700 199,500
Net income 250,300 329,700 580,000
P a g e 1 7
Dec. 31 Income Summary 5 8 0 0 0 0
Pio, Drawing 2 5 0 3 0 0
Benedict, Drawing 3 2 9 7 0 0
Distribution of net income to partners.
Let us assume that instead of earning total Service Income amounting to P1,800,000, PB
Partnership Law Firm earned only P1,100,000.
Less: Expenses 1,220,000
Net Loss ₱ 120,000
a) Equally dividing Net loss of P120,000.

Pio Benedict Total
Net loss (60,000) (60,000) (120,000)
b) Arbitrary Ratio
b.1) Fractions
Pio Benedict Total
Net loss (¼ to Pio and ¾ to Benedict) (30,000) (90,000) (120,000)
b.2) Percentages
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Pio Benedict Total
Net loss (40% to Pio and 60% to Benedict) (48,000) (72,000) (120,000)
b.3) Ratio and proportion

Pio Benedict Total
Net loss ( 2:6 to Pio and Benedict ) (30,000) (90,000) (120,000)
c) Based on capital ratio
c.1) Original/Initial investment

Pio Benedict Total
Net loss (P400,000 Pio and P600,000 Benedict) (48,000) (72,000) (120,000)
c.2) Beginning capital balance (Final answers rounded to the nearest peso value)
Pio Benedict Total
c.3) Ending capital balance

Pio Benedict Total
c.4) Simple average capital (Final answers rounded to the nearest peso value)
Pio Benedict
Beginning Capital 800,000 900,000
Ending Capital 800,000 800,000
Total 1,600,000 1,700,000
Divided by 2 2 2
Simple Average 800,000 850,000
Pio Benedict Total

c.5) Peso month average capital (Final answers rounded to the nearest peso value)
Pio
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Capital No. of mos. Peso Total Peso Average
Date Balance Unchanged Month Month Capital
Jan. 1 800,000 2 1,600,000
Mar. 1 700,000 6 4,200,000
Sept. 1 740,000 3 2,220,000
Dec. 1 800,000 1 800,000
12 8,820,000 735,000
Benedict
Jan. 1 900,000 6 5,400,000
Jun. 30 820,000 4 3,280,000
Nov. 1 780,000 1 780,000
Dec. 1 800,000 1 800,000
12 10,260,000 855,000
19,080,000 1,590,000
Pio Benedict Total

d) Allowing Salaries, Interest and Bonus – considered as part of the distribution of net income
Pio Benedict
Annual salaries P 120,000 P 150,000
Interest on original capital contribution 10% 10%
5% Bonus to Pio computed based on net income
after deducting salaries and interest on capital
Balance 40% 60%
Pio Benedict Total

Annual salaries 120,000 150,000 270,000
10% Interest on original capital contribution 40,000 60,000 100,000
Balance: 40%, 60% (196,000) (294,000) (490,000)
Net loss (36,000) (84,000) (120,000)
Important: Bonus is only given if the result of the operation is a net income.
P a g e 1 7
Dec. 31 Pio, Drawing 3 6 0 0 0
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Benedict, Drawing 8 4 0 0 0
Income Summary 1 2 0 0 0 0
Distribution of net loss to partners.
Discussion Questions
1. Enumerate and define the two equity accounts that would have to be maintained for every
partner in a partnership book of accounts?
2. Enumerate four reasons why the partner's capital account may be increased.
3. What are the different ways of dividing partnership profits and losses?
4. What does the law provide if there was no agreement between or among the partners
regarding the distribution of profits and losses?
5. What does the law provide if there was an agreement among partners regarding the
distribution of profits but no stipulation was made regarding distribution of losses?
6. What are the factors that can be considered in deciding what particular scheme of profit and
loss sharing may be adopted by the partnership?
7. What are the three possible bases that can be used in computing capital ratios? Which of
these three bases would give a more equitable profit or loss distribution?
8. What is meant by "salary allowances" to partners? What is the normal treatment to this?
9. What is meant by "bonus" given to partner/s? How is this recorded in the books?
10. Enumerate some of the differences in the financial statements of a partnership and sole
proprietorship.
Practice Exercises
Exercise 3 - 1 Alternate Response: On the space provided, write True, if the statement is true or
False, if the statement is false.
1. The profits of the partnership will be divided among the partners based on their
agreement, regardless of the partners’ interest in the partnership.
2. The ratio in which partnership profits and losses are divided is known as the capital ratio.
3. All partners are to share equally on partnership profits and losses.
4. During partnership operation, all partners are to be held liable for debts of the partnership.
5. Personal income tax are to be paid on the net share of a partner on the net income of the
general professional partnership.
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____6. Only general partners are to be held liable for debts incurred by the partnership due to
unprofitable operations.
7. When partners are entitled to salaries, they are to be credited for this even when the
operations result is a loss.
8. A limited partner shares not only in the profits but also in the losses of the partnership.
9. Withdrawal that would be made by a partner is limited to the net income for the year.
10. Industrial partners do not share in the losses sustained by the partnership due to
unprofitable operation.
Exercise 3-2: IDENTIFICATION. On the space provided after each number, write the word/s
that best describes the given statement.
1. The account title debited whenever a managing partner is paid of his salary.
2. As a general rule, the partner who does not share in the losses of the partnership.
3. The basis of partnership profits and losses sharing in the absence of any agreement.
4. The portion that makes the income statement of a partnership different from that of the sole
proprietorship.
5. This is paid to a partner in order to recognize services extended by the partner to the
partnership operations.
6. Incentive paid to a managing partner that is usually based on net income.
7. The end goal of the bookkeeping process of the partnership form of business.
8. The ratio in which partnership results of business operation are divided and must be stated in
the Articles of Co-Partnership.
9. The statement that reports the changes that have taken place in the partners’ equity during the
period.
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10. The result of partnership operation is shown as the balance of this account.
Exercise 3 – 3. MULTIPLE CHOICE. Encircle the letter of the correct answer.

1. If the salary allowances to partners exceed the net income of the partnership
a. the partnership must be terminated
b. the difference must be distributed equally
c. the difference is usually distributed according to the profit and loss sharing ratio
d. the difference is treated as a reduction of any salaries allocated to the partner
2. In the following statements, which is not true in the profit and loss division
allowing interest, salaries, and bonus?
a. Interest on capital must be allowed whether the partnership operation resulted in a
loss or a profit
b. Bonus must be allowed only to partners if the firm’s revenues exceed the expenses
c. Interest rate need not be clearly specified in the agreement of allowance of interest
d. The amount of salaries will depend upon the partner’s expertise and the extent of his
services.
3. The drawing account of a partner will be credited with the following transactions, except for
a. Salaries allowed to the partner c. Share in the partnership’s income
b. Share in the net loss of the partnership d. Interest allowed to the partners
4. In a partnership, when there is agreement as to profit distribution but no agreement on

how losses will be divided among the partners, it will be divided:
a. in the same manner as the profits are distributed. c. equally
b. according to capital contributions. d. by any appropriate ratio.
5. The most equitable distribution of partnership income based on capital contributions uses
a. beginning capital c. average capital
b. ending capital d. equally
6. Which of the following is TRUE regarding distribution of profits?
a. When the Income Summary account has a debit balance, salary allowance is still given
to the partners if previously agreed upon.
b. The unfavorable result of operation does not preclude a managing partner from
receiving his bonus.
c. A partner’s share in the profit and loss is closed to his capital account.
d. Interests and salary allowances are treated as legitimate expenses of the partnership.
7. Which of the following differentiates a partnership Income Statement from the Income
Statement of a sole proprietorship?
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a. Presence of the notes or schedules in the partnership income statement
b. Presentation of Interest Expense as the last deduction to obtain net income.
c. Presentation of how profit is divided among the partners
d. Classification of partnership expenses into Selling and Administrative Expenses
8. The following partner should share in the losses of the partnership, except
a. industrial partner c. industrial-capitalist partner
b. capitalist partner d. limited partner
9. This allowance for profit distribution is granted only if there is profit.
a. Salary c. Bonus
b. Interest d. all of the above
10. In a partnership, salaries given to partners are considered as
a. an expense of the business. c. a loss.
b. a liability. d. an allocation of profits and losses.
Exercise 3 – 4. Journalizing Closing Entries
The following is the list of income and expense accounts of JJJ Partnership as of year-end
December 31, 2020.
Freight-in ₱ 7,500
Merchandise Inventory, Jan. 1 50,000
Purchase Discount 8,000
Purchases 300,000
Rent Expense 10,000
Sales 800,000
Salaries and Wages 90,000
Sales Discount 12,000
Sales Returns and Allowances 4,500
Supplies Expenses 9,500
Taxes and Licenses Expense 15,000
Utilities Expense 60,000
Additional information:
Merchandise Inventory, Dec. 31 26,500
Required:
1. Prepare the income statement JJJ Partnership for the year-end December 31, 2020.
2. Net income or loss is divided equally among the three partners James, John, and Jude.
3. Income tax rate is at 20%.
Exercise 3–5. Distribution of Net Income
Luz, Olivia, Vera, and Ethel are partners of LOVE Trading sharing profits in the ratio of 3:4:2:1.
At the end of the accounting period, the partnership’s operation resulted a net profit of P450,000.
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Record the journal entry to distribute net income of the partnership.
Exercise 3–6. Computing Average Capital and Distribution of Net Income

Maria and Martha are partners in the M & M Ltd. During the last calendar year, the partnership
earned P120,000 net income. Shown below are the summary of the capital accounts of each partner
as they appear in the general ledger of the partnership:
Maria
Jan.1 Balance P 200,000
Mar.1 50,000 Aug.31 100,000
Oct.1 20,000 Dec.1 150,000
Martha
Jan.1 Balance P 400,000
Feb.1 10,000 May 31 50,000
July 1 30,000 Nov.1 100,000
Maria and Martha agreed on the following profit distribution:
a. 12% interest is given on the basis of the peso month average capital balance of each
partners;
b. annual salaries allowed to Maria P60,000 and to Martha P80,000; and
c. the balance to be shared as follows: 1/3 to Maria and 2/3 to Martha.
1. Compute the average capital of Maria.
2. Compute the average capital of Martha.
3. Compute for the share in the net income of Maria and Martha.
20
Exercise 3 - 7
1. Martin and Isidore form a partnership with investments of P 1,000,000 and P 500,000 respectively.
Compute their share in the net income of P210,000 for six months of the partnership’s operation under
the following agreement:
a. 10% interest is allowed on partners’ original investments.
b. Allowance of annual salary of P120,000 to Martin and P144,000 to Isidore.
c. Balance 2:1 respectively.
2. With the same information in number 1, assuming the partnership incurred a loss of P72,000 for the year
instead of a net income of P210,000 for six months.
Exercise 3 – 8. Distribution of Net Loss to partners

The following is the statement of financial position of MEC Partnership as of June 30,2020:
MEC Partnership
Statement of Financial Position
June 30, 2020
ASSETS LIABILITIES and PARTNERS' EQUITY
Cash ₱ 175,000 Liabilities ₱ 108,000
Other Assets 495,000 Margaret, Capital ₱ 250,000
Elizabeth, Capital 200,000
Cecilia, Capital 112,000 562,000
Total Assets ₱ 670,000 Total Equities ₱ 670,000
The partners agreed to distribute the profits as follows: (a) interest on ending capital of 10%; (b)
Annual salaries to Elizabeth and Cecilia of P120,000 each; and (c) Remainder: 4:3:3.
Compute the share of each of the partners in the net loss amounting to P250,000 for the fiscal
year ending June 30, 2020.
Exercise 3 – 9. Net Income distribution and computation of partner’s capital balance
On July 1, 2020, Lucia and Jacinta formed LJ Partnership with initial investment of P1,500,000 and P1,000,000,
respectively. Lucia is the managing partner of the business.
The articles of co-partnership provides that profit or loss shall be distributed accordingly:
• 12% interest on original capital contributed by the partners.
• Monthly salary of P40,000 and P20,000 respectively for Lucia and Jacinta.
• Lucia will be given bonus of 5% of net income of the business.
• The remainder shall be distributed in ratio of 4:6 to Lucia and Jacinta respectively.
For the year ended December 31, 2021, the partnership reported net income of P1,200,000.
1) What is the share in net income of Lucia and Jacinta for the year ended December 31,
2021?
21
2) How much is the capital balances of the partners for the year ending December 31,
2021?
Exercise 3 – 10 Financial Statements Preparation

The following adjusted balances were taken from the books of RGem Trading as of December 31,
2020. Subject the partnership net income to 20% income tax rate.
Accounts Payable ₱ 93,033
Accounts Receivable 143,000
Accumulated Depreciation- Delivery Equipment 140,000
Allowance for Doubtful Accounts 5,000
Cash 150,000
Delivery Equipment 350,000
Freight in 18,000
Gem, Capital 80,000
Romy, Capital 70,000
Gem, Drawing 10,000
Romy, Drawing 5,000
General and administrative expense 112,700
Financial Assets at Fair Value through Profit or Loss 26,000
Merchandise Inventory, January 1 100,000
Notes Payable (due 2022) 413,100
Notes Receivable 36,700
Prepaid expenses 7,633
Purchase Discounts 3,000
Purchase Returns and Allowances 5,000
Purchases 520,000
Sales 758,000
Sales Discounts 11,000
Sales Returns & Allowances 15,000
Selling and Distribution expense 103,100
SSS & Philhealth Contributions Payable 2,000
Unearned Commission Income 39,000
Additional information: Merchandise Inventory as of December 31, 2020 amounted to P145,000.

Required:
1. Prepare the income statement, statement of changes in partners’ equity and the statement of
financial position of RGem Trading.
2. The articles of co-partnership provide that net income shall be divided as follows: (a) 5% interest
on beginning capital of each partner and (b) the balance to be divided equally.
22

Partnership Operation

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Unit 3

1. Understand the different methods of dividing partnership’s profit or loss.

3. Prepare the complete set of partnership financial statements.

Distribution of Net Income

Charito and Guadalupe Couturier, Ltd.

LIABILITIES and PARTNERS' EQUITY

Partners' Equity 4,364,180

Computational Notes to the Financial Statements

Note 2: Trade and Other Receivables

Note 3: Property, Plant, and Equipment

Note 4: Trade and Other Payables

1. Accounting Cycle of a Partnership Form of Business

1. Analyzing business documents and recording of the business transactions

▪ Permanent withdrawal ▪ Initial or additional

d) Recording of the closing entries of a partnership – individual drawing accounts of partners

Distributing net loss

2. Preparation of financial statements

Distribution of Net Income

Charito Guadalupe Total

LIABILITIES and PARTNERS' EQUITY

Journal entry to record share in the profit of Charito and Guadalupe

Dec. 31 Income Summary 1 3 3 9 1 8 0

a) services rendered – provide salaries to give recognition to the ability, experience or

3. Summary of Methods of Dividing Net Income or Net Loss

4. Problems Illustrating Methods of Dividing Net Income or Net Loss

Date Pio Date Benedict

Service Income ₱ 1,800,000

a) Equally dividing Net income of P580,000.

c. Ratio and proportion

c) Based on capital ratio

c.1) Original/Initial investment

c.3) Ending capital balance

Pio Benedict Total

Pio Benedict Total

Another way to compute average capital using running balance method

Pio Benedict Total

a) Equally dividing Net loss of P120,000.

b.3) Ratio and proportion

c) Based on capital ratio

c.1) Original/Initial investment

c.3) Ending capital balance

Pio Benedict Total

Pio Benedict Total

Pio Benedict Total

10% Interest on original capital contribution 40,000 60,000 100,000

Balance: 40%, 60% (196,000) (294,000) (490,000)

Net loss (36,000) (84,000) (120,000)

6. Incentive paid to a managing partner that is usually based on net income.

Exercise 3 – 3. MULTIPLE CHOICE. Encircle the letter of the correct answer.

4. In a partnership, when there is agreement as to profit distribution but no agreement on

Exercise 3 – 4. Journalizing Closing Entries

Exercise 3–5. Distribution of Net Income

Exercise 3–6. Computing Average Capital and Distribution of Net Income

Maria and Martha agreed on the following profit distribution:

Exercise 3 – 8. Distribution of Net Loss to partners

Exercise 3 – 9. Net Income distribution and computation of partner’s capital balance

Exercise 3 – 10 Financial Statements Preparation

Additional information: Merchandise Inventory as of December 31, 2020 amounted to P145,000.

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