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Accounting For Partnership Operations: Methods To Allocate Net Income or Loss Method 1

1. This document outlines several methods for allocating partnership net income or loss including allocating based on capital contribution ratios, profit/loss distribution agreements, providing interest on partners' capital balances, and paying salaries or bonuses. 2. It provides examples of calculating weighted average capital and allocating net income according to different profit distribution schemes like equal allocation, pre-determined ratios, interest on capital balances, and salaries. 3. Partners' capital account statements are shown to record changes in capital balances from initial investments, additional contributions, capital withdrawals, net income/loss allocations, and ending capital balances.

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133 views2 pages

Accounting For Partnership Operations: Methods To Allocate Net Income or Loss Method 1

1. This document outlines several methods for allocating partnership net income or loss including allocating based on capital contribution ratios, profit/loss distribution agreements, providing interest on partners' capital balances, and paying salaries or bonuses. 2. It provides examples of calculating weighted average capital and allocating net income according to different profit distribution schemes like equal allocation, pre-determined ratios, interest on capital balances, and salaries. 3. Partners' capital account statements are shown to record changes in capital balances from initial investments, additional contributions, capital withdrawals, net income/loss allocations, and ending capital balances.

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We take content rights seriously. If you suspect this is your content, claim it here.
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Accounting for Partnership Operations: Methods to Allocate Net Income or Loss METHOD 1

1. Profit or Loss should be distributed as stipulated. Date Cap. Bal x No. of mos. Unchanged = Weight of Capital
2. If there is an agreement on how to distribute profit but none as to loss, loss 1/1 420,000 x 2 = P 840,000
should be distributed according to profit agreement. 3/1 390,000 x 8 = 3,120,000
3. In absence of profit or loss distribution agreement, profit or loss should be 11/1 450,000 x 2 = 900,000
distributed according to the original/initial contribution of capital partners. In 12 = P 4,860,000 /12
case of industrial partner, he should receive just and equitable portion of the Average Capital = P 405,000
profit.
4. In case of net loss, industrial partner does not share in partnership’s net loss. METHOD 2
Date in Bal x No. of mos. Affected = Weight of Capital
Common Profit or Loss Distribution Scheme. 1/1 420,000x 12 = P 5,040,000
1. Equally; 3/1 (30,000) x 10 = ( 300,000)
2. Arbitrary Ratio; EXAMPLE: 2:2:1, 30%:40%:30%, 1/3:1/6:1/2 11/1 60,000 x 2 = 120,000
3. Capital Ratio: 12 = P 4,860,000 /12
a. Original Capital Average Capital = P 405,000
b. Beginning Capital for the period
c. Average Capital  Interest on Capital Balance
1. Simple Average - is given to recognize the differences on capital contribution of the
2. Weighted Average; partners.
4. Interest on partners’ capital (Original, Beginning, Ending or Average) and - These interests are not charged to Interest Expense/ Payable account.
dividing the balance on agreed ratio; - Interest rates given are usually per annum.
5. Salaries to partners and dividing the balance on agreed ratio; - Provision of interests must be enforced regardless of whether operations
6. Bonus to partners and dividing the balance on agreed ratio; and are profitable or not.
7. Interest on capital account balance, salaries and bonus to partners and dividing - Interests on temporary loans from partners are charged to Interest
the balance on agreed ratio. Expense account, thus not include in here.
NOTES:  Salaries
 Original capital balance is the initial investment or capital of the partner at the - is given to recognize the differences on personal contribution as well as
time of formation. other factors that are responsible for the success of the partnership.
 Simple average is the average of beginning and ending capital balance of the - These salaries are not charged to Salaries Expense/ Payable account.
partner for the period. - Salaries given are sometimes at per annum, quarter month, etc. basis.
 Weighted average capital is computed as follows: - Provision of interests must be enforced regardless of whether operations
EXAMPLE: are profitable or not.
A, Capital  Bonus
3/1 P 30,000 1/1 P 420,000 - is used for providing additional compensation to partners who have
11/1 60,000
provided services to the partnership.
12/31 P 450,000 - The concept of bonus is NOT applicable to a net loss.

ACCTG 2 – PARTNERSHIP AND CORPORATION Page 1


- In some cases, partnership’s net income may be less than the interest, Exercise:
salary and/or bonus provided for in the partnership agreement, thus, no A, Capital
bonus can be distributed. 10/1 P 5,000 1/1 P 40,000
4/1 10,000
Correction of Partnership Net Income of Prior Period 12/31 P 45,000
The correction in net income is allocated to the individual partners’ capital
accounts based on the profit or loss agreement in effect during the period of error. B, Capital
1/1 P 35,000
Statement of Changes in Partner’s Capital Accounts 7/1 5,000
Illustration: 12/31 P 40,000
X and Y Partnership
Statement of Changes in Partners’ Equity C, Capital
For the Year Ended, December 31, 20x6 1/1 P 50,000
12/31 P 50,000
X Y Total
Capitals, January 1, 20x6 P 30,000 P 42,000 P 72,000
Add: Additional Investments 6,000 6,000 12,000 Distribute the P120,000 profit according to the following cases.
Total 36,000 48,000 84,000 1. Equally
Less: Capital Withdrawals -0- 3,000 3,000 2. 1/3:1/6:1/2
Ending Capital Before Net Income 36,000 45,000 81,000 3. 10% interest on beginning capital and balance at 2:1:2.
Add: Net Income (see schedule) 9,360 19,440 28,800 4. 10% interest on weighted average capital and balance at 2:1:2.
Total 45,360 64,440 109,800
Less: Personal Withdrawals 3,600 11,400 15,000
5. Salaries of P10,000, P15,000 and P20,000 to A, B and C respectively, 5% interest
Capitals, December 31, 20x6 P 41,760 P 53,040 P 94,800 on initial capital and remainder at 2:1:2.
a. Salary is annually
X and Y Partnership b. Salary is quarterly
Schedule – Allocation of Net Income 6. Bonus of 10% to B
For the Year Ended, December 31, 20x6 a. Before bonus, interest, salaries and taxes.
b. After salaries and interest but before bonus and taxes.
X Y Total c. After bonus, salaries and interests.
Interest on average capital P 2,070 P 2,430 P 4,500 7. Salaries of P10,000 each, bonus of 5% after bonus, after salaries, before taxes
Balance 7,290 17,010 24,300 and before interests, interests of 5% on initial capital balance and remainder at
Total P 9,360 P 19,440 P 28,800 2:1:2
a. Salary is annually
b. Salary is quarterly

ARCINO
4/10/16

ACCTG 2 – PARTNERSHIP AND CORPORATION Page 2

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