PARTNERSHIP

OPERATIONS AND
FINANCIAL REPORTING
Source: Partnership and Corporation, Ballada
Prepared by Greg O. Saclot
for ABM SHS/BSA 1st Year/BSBA 1st Year
 REVIEW

1. In a partnership, 3 individuals with no business

may form a partnership.
A. True
B. False
 REVIEW

2. What do you call a person who takes active part

in the business of the partnership but is not
known as a partner?
A. Dormant partner
B. Secret partner
C. Silent partner
D. Nominal partner
 REVIEW
3. When non-cash assets are contributed by a partner
to the partnership, the basis of valuation is
A. at fair market value at time of contribution.
B. at fair market value a day after date of
contribution.
C. at agreed value at time of contribution.
D. at carrying amount of the asset at time of
contribution.
 REVIEW
4. Which of the following statements is incorrect?
A. The profits of a general professional partnership is
subject to 30% income tax.
B. SEC will not allow formation of professionals as a
corporation.
C. SEC will allow professionals to form a trading
partnership.
D. As trading partnership, the profits is taxed like a
corporation at 30% of taxable income.
 REVIEW
5. When sole proprietorship is contributed to the
partnership, which of the following is correct?
A. All assets and liabilities are revalued according to
agreement.
B. All assets and liabilities are revalued according to fair
market values.
C. Revaluation of assets and liabilities are adjusted to
income summary account.
D. Revaluation of assets and liabilities are adjusted to
capital account.
 REVIEW
6. In the case of liquidation and the partnership assets are
insufficient to settle partnership liabilities, which of the
following statements is correct?
A. The personal assets before personal creditors of general
partner may be used to settle unpaid partnership liabilities.
B. The personal assets before personal creditors of limited
partner may be used to settle unpaid partnership liabilities.
C. The personal assets after personal creditors of general
partner may be used to settle unpaid partnership liabilities.
D. The personal assets after personal creditors of limited partner
may be used to settle unpaid partnership liabilities.
 REVIEW

7. A limited partnership is composed of

A. all general partners.
B. all limited partners.
C. all general partners and at least one limited
partner.
D. all limited partner and at least one general
partner.
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8. A partnership with assets P20,000,000 before

financing and has 120 employees is considered as
A. micro enterprise.
B. small enterprise.
C. medium enterprise.
D. large enterprise.
 REVIEW

9. Which of the following will not be found in the

articles of partnership?
A. Partnership name
B. Residences of the partners
C. Birthdays of the partners
D. The rights and duties of each partner.
 REVIEW

10. The provisions governing partnership are in:

A. Civil Code of the Philippines
B. Revised Code of Corporation of the Philippines
C. Department of Trade and Industry
D. Securities and Exchange Commission
 LEARNING OBJECTIVES
1. Contrast a partner’s equity in assets from share in profits or
losses.
2. Summarize the rules for the distribution of profits or losses.
3. Explain prior period errors and interpret the effects on
partners’ share in profits or losses.
4. Identify, describe and account for the different methods of
dividing partnership profits or losses based on agreement.
5. Ascertain the effects of using original, beginning, ending and
average capitals on the partners’ share in profits or losses.
6. Show the treatment of interest on capital, partners’ salaries
and bonus in the distribution of profits or losses.
 PARTNERS’ EQUITY IN ASSETS
CONTRASTED WITH SHARE IN PROFITS OR LOSSES

If “A is one-fourth partner,” does not always mean

that A, who has one-fourth (1/4) equity in the net
assets of the partnership, might have smaller or larger
than 1/4 share in the partnership profits or losses. Or
A, who shares 1/4 of partnership profits or losses, has
more or less than one-fourth (1/4) equity in the net
assets of the partnership.
 PARTNERS’ EQUITY IN ASSETS
CONTRASTED WITH SHARE IN PROFITS OR LOSSES

Keep in mind, regardless of the capital contribution

of partners, they may agree on a specific profit or loss
sharing.
 RULES FOR THE DISTRIBUTION OF PROFITS OR LOSSES
Profits
1. The profits will be divided according to partners’ agreement.
2. If there is no agreement,
a. As to capitalist partners, the profits shall be divided according
to their capital contributions (according to the ratio of
original capital investments or in its absence, the ratio of
capital balances at the beginning of the year).
b. As to industrial partners (if any) such share as may be just
and equitable under circumstances, provided, that the
industrial partner shall receive such share before the capitalist
partners shall divide the profits.
 RULES FOR THE DISTRIBUTION OF PROFITS OR LOSSES
Losses
1. The losses will be divided according to partners’ agreement.
2. If there is no agreement as to distribution of losses, but there is an
agreement to profits, the losses shall be distributed according to
the profit sharing ratio.
3. In the absence of any agreement,
a. As to capitalist partners, the losses shall be divided according to
their capital contributions (according to the ratio of original
capital investment or in its absence, the ratio of capital balances at
the beginning of the year.
b. As to purely industrial partners (if there’s any) shall not be liable
for any losses.
 CORRECTION OF PRIOR PERIOD ERRORS
Per International Accounting Standards (IAS) No. 8, Accounting Policies,
Changes in Accounting Estimates and Errors ,
prior period errors
are omissions from and other misstatements of the
entity’s financial statements for one or more prior periods
that are discovered in the current period. Errors may
occur as a result of mathematical mistakes, mistakes in
applying accounting policies, misinterpretations of facts,
fraud or oversights. Examples include errors in the
estimation of depreciation, errors in inventory valuation
and omission of accruals of revenue and expenses.
 CORRECTION OF PRIOR PERIOD ERRORS
Material prior periods must be restated to report
financial position and results of operations as they
would have been presented had the error never taken
place. The amount of the correction of a prior period
error that relates to prior periods should be reported
by adjusting the opening balances of partners’ equity
and affected assets and liabilities. The correction of a
prior period error is excluded from profit or loss for
the period in which the error is discovered.
 DISTRIBUTION OF PROFITS OR LOSSES
BASED ON PARTNERS’ AGREEMENT
1. Equally or in other agreed ratio.
2. Based on partners’ capital contributions:
a. ratio of original capital contributions
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. By allowing interest on partners’ capital and the balance in an agreed ratio.
4. By allowing salaries to partners and the balance in an agreed ratio.
5. By allowing bonus to the managing partner based on profit and the balance in an
agreed ratio.
6. By allowing salaries, interest on partners’ capital, bonus to managing partner
and the balance in an agreed ratio.
 ILLUSTRATION
Rod Ann Cabarles invested P400,000 on January 1,
2019 and an additional P100,000 on April 1. Dennis
Valencia invested P800,000 on January 1 and
withdrew P50,000 on July 1. For the year ended
December 31, 2019, Cabarles and Valencia Company
had a profit of P300,000. The partnership contract
provided that each partner may withdraw P5,000 on
the last day of each month, both partners did so
during the year.
 1. EQUALLY OR IN OTHER AGREED RATIO
Cabarles Valencia

Share in profit - equally P150,000 P150,000

Total P150,000 P150,000

Entry:
Income Summary 300,000
Cabarles, Capital 150,000
Valencia, Capital 150,000
To record the distribution of profits.
 1. EQUALLY OR IN OTHER AGREED RATIO

Effect on partners’ capital accounts:

Cabarles Valencia

Investments on January 1, 2019 P400,000 P800,000

Additional investment on April 1 100,000

Withdrawals on July 1 ( 50,000)

Monthly drawings P5,000 each ( 60,000) ( 60,000)

Share in the year-end profit 150,000 150,000

Balance at December 31, 2019 P590,000 P840,000

 1. EQUALLY OR IN OTHER AGREED RATIO

If the partnership incurred a P300,000 loss, the entry

is:
Cabarles, Capital 150,000
Valencia, Capital 150,000
Income Summary
300,000
To record the distribution of losses.
 2A. RATIO OF ORIGINAL INVESTMENT
Cabarles Valencia

Original Investment P400,000 P800,000

Share in the profit P100,000 P200,000

(computed as) P300,000 x (400,000/P1,200,000) P300,000 x (P800,000/P1,200,000)

Entry:
Income Summary 300,000
Cabarles, Capital 100,000
Valencia, Capital 200,000
To record the distribution of profits.
 2B. RATIO OF CAPITAL BALANCES
AT THE BEGINNING OF THE YEAR
Cabarles Valencia

Capital balance at Jan. P400,000 P800,000

1, 2019
Share in the profit P100,000 P200,000
(computed as) P300,000 x (400,000/P1,200,000) P300,000 x (P800,000/P1,200,000)

Entry:
Income Summary 300,000
Cabarles, Capital 100,000
Valencia, Capital 200,000
To record the distribution of profits.
 2C. RATIO OF CAPITAL BALANCES
AT THE END OF THE YEAR
Cabarles Valencia

Capital balances at P500,000 P750,000

December 31, 2019
Share in the profit P120,000 P180,000
(computed as) P300,000 x (500,000/P1,250,000) P300,000 x (P750,000/P1,250,000)

Entry:
Income Summary 300,000
Cabarles, Capital 120,000
Valencia, Capital 180,000
To record the distribution of profits.
 2D. RATIO OF AVERAGE CAPITAL BALANCES
Cabarles Valencia

Original Investment P400,000 P800,000

Additional investment on 100,000

April 1
Withdrawal on July 1 50,000

Capital balances at P500,000 P750,000

December 31, 2019
Average capital 400,000 x 12 = 4,800,000 800,000 x 12 = 9,600,000
balances 100,000 x 9 = 900,000 50,000 x 6 = ( 300,000)
Total 5,700,000 Total 9,300,000
Average = 5,700,000 / 12 = 475,000 Average = 9,300,000 / 12 = 775,000
 2D. RATIO OF AVERAGE CAPITAL BALANCES
Cabarles Valencia

Average capital P475,000 P775,000

balances
Share in the profit P114,000 P186,000
(computed as) P300,000 x (475,000/P1,250,000) P300,000 x (P775,000/P1,250,000)

Entry:
Income Summary 300,000
Cabarles, Capital 114,000
Valencia, Capital 186,000
To record the distribution of profits.
 3. ALLOWING 15% INTEREST ON AVERAGE CAPITAL AND
REMAINING PROFIT IS DISTRIBUTED EQUALLY
Share of Profit Cabarles Valencia

15% interest on capital P 71,250 P116,250

P475,000 x 15% = P71,250 P775,000 x 15% = P116,250
Remainder – equally P 56,250 P 56,250
P300,000 – P71,250 – P112,500 / 2 = P56,250 P112,500 / 2 = P56,250
P116,250 = P112,500
Total share in profit P127,500 P172,500

Entry:
Income Summary 300,000
Cabarles, Capital 127,500
Valencia, Capital 172,500
To record the distribution of profits.
 4. ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000
TO VALENCIA, ANY BALANCE EQUALLY
Share of Profit Cabarles Valencia

Annual salary P 50,000 P 30,000

Remainder, equally 110,000 110,000

P300,000 – P50,000 – P220,000 / 2 = P110,000 P220,000 / 2= P110,000
P30,000 = P220,000
Total share in profit P160,000 P140,000

Entry:
Income Summary 300,000
Cabarles, Capital 160,000
Valencia, Capital 140,000
To record the distribution of profits.
 5A. ALLOWING 25% BONUS BEFORE BONUS TO CABARLES
AND ANY REMAINDER EQUALLY
Share of Profit Cabarles Valencia

25% Bonus before P 75,000

bonus P300,000 x 25% = P75,000
Remainder, equally 112,500 112,500
P300,000 – P75,000 = P225,000 / 2 = P112,500 P225,000 / 2= P112,500
P225,000
Total share in profit P187,500 P112,500

Entry:
Income Summary 300,000
Cabarles, Capital 187,500
Valencia, Capital 112,500
To record the distribution of profits.
 5B. ALLOWING 25% BONUS AFTER BONUS TO CABARLES AND
ANY REMAINDER EQUALLY
Share of Profit Cabarles Valencia

25% Bonus after bonus P 60,000

P300,000 / 1.25 x 25% = P60,000
Remainder, equally 120,000 120,000
P300,000 – P60,000 = P240,000 / 2 = P120,000 P240,000 / 2 = P120,000
P240,000
Total share in profit P180,000 P120,000

Entry:
Income Summary 300,000
Cabarles, Capital 180,000
Valencia, Capital 120,000
To record the distribution of profits.
 6A. TOTAL PROFIT IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING
ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS BEFORE
BONUS TO CABARLES AND ANY REMAINDER EQUALLY

Share of Profit Cabarles Valencia

15% interest on capital P 71,250.00 P116,250.00

Annual Salary 50,000.00 30,000.00

25% bonus before bonus 8,125.00

Balance, equally 12,187.50 12,187.50

Total share in profit P141,562.50 P158,437.50

Entry:
Income Summary 300,000
Cabarles, Capital 141,562.50
Valencia, Capital 158,437.50
To record the distribution of profits.
 6B. TOTAL PROFIT IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING 25%
BONUS BEFORE BONUS TO CABARLES, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND
P30,000 TO VALENCIA, AND ANY REMAINDER EQUALLY

Share of Profit Cabarles Valencia

15% interest on capital P 71,250.00 P116,250.00

25% bonus before bonus 28,125.00

Annual salary 50,000.00 30,000.00

Balance, equally 2,187.50 2,187.50

Total share in profit P151,562.50 P148,437.50

Entry:
Income Summary 300,000
Cabarles, Capital 151,562.50
Valencia, Capital 148,437.50
To record the distribution of profits.
 6C. TOTAL PROFIT IS P300,000. ALLOWING 25% BONUS BEFORE BONUS TO CABARLES, ALLOWING
15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND
P30,000 TO VALENCIA, AND ANY REMAINDER EQUALLY

Share of Profit Cabarles Valencia

25% bonus before bonus P 75,000.00

15% interest on average 71,250.00 P116,250.00

capital
Annual salary 50,000.00 30,000.00

Balance, equally ( 21,250.00) ( 21,250.00)

Total share in profit P175,000.00 P125,000.00

Entry:
Income Summary 300,000
Cabarles, Capital 175,000
Valencia, Capital 125,000
To record the distribution of profits.
 6D. TOTAL LOSS IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL
SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS BEFORE BONUS TO
CABARLES AND ANY REMAINDER EQUALLY

Share of Profit Cabarles Valencia

15% interest on capital P 71,250.00 P116,250.00

Annual Salary 50,000.00 30,000.00

25% bonus before bonus 0.00

Balance, equally (283,750.00) (283,750.00)

Total share in profit (P162,500.00) (P137,500.00)

Entry:
Cabarles, Capital 162,500
Valencia, Capital137,500
Income Summary 300,000
To record the distribution of loss.
 6E. TOTAL LOSS IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING
ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS
BEFORE BONUS TO CABARLES AND ANY REMAINDER IN THE RATIO 1:4

Share of Profit Cabarles Valencia

15% interest on capital P 71,250.00 P116,250.00

Annual Salary 50,000.00 30,000.00

25% bonus before bonus 0.00

Balance, ratio 1:4 (113,500.00) (454,000.00)

Total share in profit P 7,750.00 (P307,750.00)

Entry:
Valencia, Capital 307,750
Cabarles, Capital 7,750
Income Summary 300,000
To record the distribution of loss.
 7A. TOTAL PROFIT IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING
ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS AFTER
BONUS TO CABARLES AND ANY REMAINDER EQUALLY

Share of Profit Cabarles Valencia

15% interest on capital P 71,250.00 P116,250.00

Annual Salary 50,000.00 30,000.00

25% bonus after bonus 6,500.00

Balance, equally 13,000.00 13,000.00

Total share in profit P 140,750.00 P 159,250.00

Entry:
Income Summary 300,000
Cabarles, Capital 140,750
Valencia, Capital 159,250
To record the distribution of profits.
 7B. TOTAL PROFIT IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING 25%
BONUS AFTER BONUS TO CABARLES, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000
TO VALENCIA, AND ANY REMAINDER EQUALLY

Share of Profit Cabarles Valencia

15% interest on capital P 71,250.00 P116,250.00

25% bonus after bonus 22,500.00

Annual salary 50,000.00 30,000.00

Balance, equally 5,000.00 5,000.00

Total share in profit P148,750.00 P151,250.00

Entry:
Income Summary 300,000
Cabarles, Capital 148,750
Valencia, Capital 151,250
To record the distribution of profits.
 7C. TOTAL PROFIT IS P300,000. ALLOWING 25% BONUS AFTER BONUS TO CABARLES, ALLOWING 15%
INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000
TO VALENCIA, AND ANY REMAINDER EQUALLY

Share of Profit Cabarles Valencia

25% bonus after bonus P 60,000.00

15% interest on average 71,250.00 P116,250.00

capital
Annual salary 50,000.00 30,000.00

Balance, equally ( 13,750.00) ( 13,750.00)

Total share in profit P167,500.00 P132,500.00

Entry:
Income Summary 300,000
Cabarles, Capital 167,500
Valencia, Capital 132,500
To record the distribution of profits.
 7D. TOTAL LOSS IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL
SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS AFTER BONUS TO
CABARLES AND ANY REMAINDER EQUALLY

Share of Profit Cabarles Valencia

15% interest on capital P 71,250.00 P116,250.00

Annual Salary 50,000.00 30,000.00

25% bonus after bonus 0.00

Balance, equally (283,750.00) (283,750.00)

Total share in profit (loss) (P162,500.00) (P137,500.00)

Entry:
Cabarles, Capital 162,500
Valencia, Capital 137,500
Income Summary 300,000
To record the distribution of loss.
 7E. TOTAL LOSS IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING
ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS AFTER
BONUS TO CABARLES AND ANY REMAINDER IN THE RATIO 1:4

Share of Profit Cabarles Valencia

15% interest on capital P 71,250.00 P116,250.00

Annual Salary 50,000.00 30,000.00

25% bonus before bonus

Balance, ratio 1:4 (113,500.00) (454,000.00)

Total share in profit (loss) P 7,750.00 (P307,750.00)

Entry:
Valencia, Capital 307,750
Cabarles, Capital 7,750
Income Summary 300,000
To record the distribution of loss.
What do you think is the purpose of providing (1)
interest on capital investments, (2) salaries to partners,
and (3) bonus to managing partner?
Topic for next meeting:
Dissolution
Thank you!