Chapter 1.

2: Required: Prepare the entry recording the distribution of

PARTNERSHIP ACCOUNTING – Part 2 profits.

Learning Objectives: Answer:

 State the items that affect the division of a partnership’s Income Summary 430,000
profits or losses among the partners. Gian, Capital 215,000
 Compute for the share of a partner in the partnership’s Justin, Capital 143,333
profit or loss. Ryven, Capital 71,667

Computation:
Start of Discussion Partner Proportion Allocation
Gian 430,000 x 3/6 215,000
Justin 430,000 x 2/6 143,333
PARTNERSHIP OPERATIONS Ryven 430,000 x 1/6 71,667
430,000
Methods of Dividing Profits or Losses
1. Equal Distribution 3. Capital Ratio
- An equal distribution of profits and losses disregards the - The distribution of the profits and losses based on the
capital balances of or any efforts contributed by the capital ratio emphasizes to the contributions of the
partners to the partnership. partners. In this perspective, the services, efforts, or
time provided by the partners to the partnership are
Illustration: disregarded.
The Golden Partnership realized a net profit of P360,000 for - The term “capital” may refer to any of the following:
the period which ended on December 31, 2020. The capital 1. original capital
balances of the partners are as follows: 2. beginning capital
3. ending capital
Jocelyn, Capital P 490,000 4. average capital
Loddy, Capital 510,000
Joji, Capital 600,000 - The general concept is that the profits and losses are
distributed in accordance with the agreement of the
Required: prepare the entry recording the distribution of the partners.
profits equally.
- In the absence of an agreement, the share of each
Answer: partner in the profits and losses is determined by their
To record the distribution of the profits, the following entry is contribution to the partnership. If there is no stipulation
made: as to the division of the profits and losses, the share will
Income Summary 360,000 be based on the original capital of each partner as
Jocelyn, Capital 120,000 specified in the articles of co-partnership.
Loddy, Capital 120,000
Joji, Capital 120,000 - However, if the original capital is not provided or
explicitly indicated in the articles, the term “capital” will
2. Arbitrary Ratio refer to the beginning capital of each partner at the
- In dividing the profits and losses based on the arbitrary start of any particular period.
ratio, the capital contributions or the service rendered
are not given much consideration. In other words, the - In case the partnership agreement provides only the
partners agree on a specific profit and loss distribution provision for the division of profits, the share of each
mechanism based on what they believe is equitable, fair partner in the losses will be in the same proportion as
and just. the profit distribution.
- Arbitrary ratio can be presented in any of the following
forms: fraction; percentage; decimal; and ratio. Illustration:
HI Partnership started its operation on January 1, 2019 with
Illustration: the following original capital contributions of the partners as
The general partners in Prime Partnership are Gian and Justin, indicated in the articles of co-partnership: Hazel’s total
with capital contribution of P320,000 and P180,000, contributions, P200,000; Ivy’s total contributions, P300,000.
respectively. And Ryven, who contributes his services. Gian,
Justin and Ryven share the profits and losses of the On December 31, 2020, two years after the formation of the
partnership as follows: 3/6, 2/6, and 1/6, respectively. The partnership, the capital accounts of the partners showed the
partnership realized a profit amounting to P430,000 for 2020. following information:
 Hazel, Capital D. Average Capital
Date Particula Debit Credit Balance Income Summary 400,000
r Hazel, Capital 174,286
Jan. 1, 2020 Beg. P270,000 Izzy, Capital 225,714
Balance
Mar. 1, 2020 Withdrawal P20,000 250,000 The distribution of profit:
Jun. 1, 2020 Additional P60,000 310,000
Investment
Hazel 305/700 x P400,000 = P174,286
Aug. 1, Additional 40,000 350,000 Izzy 395/700 x P400,000 = 225, 714
2020 Investment
Computation of Average Capital:
Izzy, Capital Hazel Average Capital
Date Particula Debit Credit Balance No. of Mos.
r Period Covered Balance Unchanged Total
Jan. 1, 2020 Beg. P330,000 Jan 1- Feb 28 P270,000 2 P540,000
Balance Mar 1- May 31 250,000 3 750,000
May 1, 2020 Additional P90,000 420,000 Jun 1 – Jul 31 310,000 2 620,000
Investment
July 1, 2020 Withdrawal
Aug 1- Dec 31 350,000 5 1,750,000
P30,000 390,000
Sep. 1, 2020 Additional P3,660,000
60,000 450,000
Investment
Average Capital (P3,660,000/12months) P 305,000
The partnership realized a profit of P400,000 for the year
2020. Izzy Average Capital
No. of Mos.
Period Covered Balance Unchanged Total
Required: Distribute the profit of P400,000 based on the
following: Jan 1- Apr. 30 P330,000 4 P1,320,000
a. original capital May 1- Jun 30 420,000 2 840,000
b. beginning capital Jul 1 – Aug 31 390,000 2 780,000
c. ending capital Sep 1- Dec 31 450,000 4 1,800,000
d. average capital P4,740,000

A. Original Capital Average Capital (P4,740,000/12months) P 395,000

Income Summary 400,000
Hazel, Capital 160,000
Izzy, Capital 240,000 Bonus Computation
A partnership contract may provide for a bonus to the
The distribution of profit: managing partner equal to a specified percentage of income.
Hazel 2/5 x P400,000 = P160,000
Izzy 3/5 x P400,000 = 240,000 The bonus computation usually has four variations:
Illustration:
Income before bonus and tax
B. Beginning Capital 4,400,000
Income Summary 400,000 Bonus 10%
Hazel, Capital 180,000 Income tax rate 30%
Izzy, Capital 220,000
1. Bonus is expressed as a certain percent of income before
The distribution of profit: bonus and before tax.
Hazel 27/60 x P400,000 = P180,000
Izzy 33/60 x P400,000 = 220,000 Income before bonus and tax 4,400,000
Multiply by
10%
C. Ending Capital Bonus 440,000
Income Summary 400,000
Hazel, Capital 175,000 2. Bonus is expressed as a certain percent of income after
Izzy, Capital 225,000 bonus but before tax.

The distribution of profit: B = .10 (4,400,000 – B)

Hazel 35/80 x P400,000 = P175,000 B = 440,000 - .10B
Izzy 45/80 x P400,000 = 225,000 B + .10B = 440,000
1.10B = 440,000
 B = 440,000/1.10
B = 400,000 Journal entry to record the distribution of profit to partners:
Income Summary 44,000
3. Bonus is expressed as a certain percent of income after AJ, Capital 16,800
bonus and after tax. BJ, Capital 7,800
CJ, Capital 19,400
B = .10 (4,400,000 – B – T)
T = .30 (4,400,000 – B)
B = .10 [4,400,000 – B – .30 (4,400,000 – B)] -End of Discussion-
B = .10 (4,400,000 – B – 1,320,000 + .30B)
B = 440,000 - .10B – 132,000 + .03B
B + .10B - .03B = 440,000 – 132,000
1.07B = 308,000
B = 308,000/ 1.07
B = 287,850
T = .30 (4,400,000 – 287,850)
T = 1,233,645

4. Bonus is expressed as a certain percent of income after tax

but before bonus.

B = .10 (4,400,000 – T)
T = .30 (4,400,000 – B)
B = .10 [4,400,000 – .30 (4,400,000 – B)]
B = .10 (4,400,000 – 1,320,000 + .30B)
B = 440,000 – 132,000 + .03B
B - .03B = 440,000 – 132,000
.97B = 308,000
B = 308,000/.97
B = 317,526

Illustration:
Profit Distribution with Salary, Interest and Bonus.
AJ, BJ and CJ are partners in an accounting firm. Their capital
account balances at December 31, 2020 were: AJ, P90,000;
BJ, P110,000; CJ, P50,000. They share profits and losses in a
4:4:2 ratio, after the following special terms:

1. Partner CJ is to receive a bonus of 10% of the net income

after the bonus.
2. Interest of 10% shall be paid on that portion of partner’s
capital in excess of P100,000.
3. Salaries of P10,000 and P12,000 shall be paid to partners
AJ and CJ, respectively.

The income summary account for the year 2020 shows a credit
balance of P44,000. What is the profit share of each partner?

Computations:
AJ BJ CJ Total
Bonus to CJ
Net profit before bonus P44,000
Net profit after bonus (P44,000/110%)P40,000 – – P4,000 P4,000
Interest to BJ – P1,000 – 1,000
Salaries P 10,000 – 12,000 22,000
Balance,4:4:2 __6,800 6,800 3,400
_17,000
Total P  16,800 P7,800 P19,400
P44,000