Accounting for

Partnership
Operations
Comparative Profit
Distribution
Sole Partnership Corporation
Proprietorship
The profits or The profits or Profits are
losses are all losses are divided distributed in the
taken by the only based on the forms of dividends
owner, the sole partners’ based on the
proprietor. agreement. decision by the
board of directors.
Accounting for
Partnership Operation
The accounting for partnership operation
is primarily concerned with the following
activities:
1. Accounting treatment of profits and loss;
2. Proper distribution of profit and loss; and
3. Preparation of financial statements such as:
a. Statement of Comprehensive Income
b. Statement of Financial Position (formerly Balance
Sheet)
c. Partners’ Capital statement (Statement of
Changes in Partners’ Equity)
Accounting Treatment of
Partnership’s Profit and
Loss
Revenues Pxxx
Less: Operating Expenses xxx
Net Income (loss) Pxxx
In the journal entry, there is a net income if the income
summary account has a credit balance. There is a loss if the
income summary has a debit balance.
The profit or loss is subsequently distributed to the partners
by closing the income summary account to the respective
partners’ capital accounts.
Illustration 1
Assume that A & B Partnership has a credit
balance of income summary account
amounting to P500,000. If partners A and B
divide profit equally, the journal entry to
distribute the net income would be:
12/31 Income Summary 500,000
A, Capital 250,000
B, Capital 250,000
To record profit distribution, equally
Illustration 2
Assume that A & B Partnership has a debit
balance of income summary account
amounting to P500,000. If partners A and B
divide losses with 60% and 40% loss sharing
respectively, the journal entry to distribute
the net loss would be:

12/31 A, Capital 300,000

B, Capital 200,000
Income Summary 500,000
To record loss distribution to A & B, 60% and 40%, respectively
Sharing Partnership
Profits and Losses
Primary objective:
a. determination of periodic net income
b. distribution to the partners

Accountants usually observe the accrual method of

accounting and generally accepted accounting
principles (GAAP) because GAAP results to a
better measure of determining income.
Sharing Partnership
Profits and Losses
The determination of net income is calculated in a traditional
manner – that is, by relating the partnership’s periodic
revenues and expenses.
In measuring partnership income for the period, however,
the expenses should be scrutinized to make sure that
personal expenses of the partners are not included among
the partnership’s business expenses.
If personal expenses of a partner are paid with partnership
assets, the payment is charged to the drawing or capital
account of the partner whose personal obligations have
been settled.
This is because the partnership business is treated as a
separate and distinct person from the partners in
accordance with the accounting entity concept.
The Laws on Partnership
Profits and Losses
Article 1799 of the New Civil Code provides that
any stipulation that excludes one or more partners
from any share in the profits or losses is void. The
reason for this is that partnership must exist for the
common benefit and interest of the partners.
Article 1797of the New Civil Code of the Philippines
provides the following guidelines on how
partnership profits and losses shall be distributed
among the partners
Rules on Profit Sharing
Profit Sharing Based on Partners’
Agreement
Illustration:
Moses and Joshua have capital balances of
P65,000 and P35,000, respectively. The
partnership earned a net income of P100,000. their
profit agreement is 60% and 40%, respectively.
Moses(60%) Joshua(40%) Total
Share of Moses P60,000 P60,000
Share of Joshua P40,000 40,000
Total P60,000 P40,000 P100,000
Rules on Profit Sharing
Profit Sharing Based on Capital
Contribution
Using the same data in the preceding illustration.

Moses(65%) Joshua(35%) Total

Share of Moses P65,000 P65,000
Share of Joshua P35,000 35,000
Total P65,000 P35,000 P100,000
Rules on Profit Sharing
Profit Sharing Based on Capital
Contribution and on Service

RULE No. 1 - If there is an industrial partner, he

first gets a just and equitable share for his services
(industry), before the capitalist partners divide the
balance of the profits in proportion to their capital
contributions.
Rules on Profit Sharing
Profit Sharing Based on Capital
Contribution and on Service
Illustration for Rule No. 1
Using the same illustration, but this time involving
a third person Caleb, an industrial partner, will
receive a profit share equivalent to 10% of the
partnership net income. Distribution of 100,000
profit would be:
Moses Joshua Caleb Total
Caleb 10,000 10,000
Moses 58,500 58,500
Joshua 31,500 31,500
58,500 31,500 10,000 100,000
Rules on Profit Sharing
Profit Sharing Based on Capital
Contribution and on Service

RULE No. 2 - If there is no specified profit sharing

for an industrial partner, he shall receive a share
equal to the share of a capitalist partner having the
smallest share. (Code of Commerce, 140)
Rules on Profit Sharing
Profit Sharing Based on Capital
Contribution and on Service
Illustration for Rule No. 2
Total
Caleb (100,000x35%/135) P25, 926
Joshua (100,000x65%/135) 48, 148
Caleb(100,000x35%/135) 25, 926
Total 100, 000
Rules on Profit Sharing
Profit Sharing Based on Capital
Contribution and on Service

RULE No. 3 - If there is a capitalist/Industrial

Partner, he gets just and equitable share as an
industrial partner and another share as a capitalist
partner according to his capital contribution. (Civil
Code of the Philippines, Art 1689a)
 Rules on Profit Sharing
Profit Sharing Based on Capital
Contribution and on Service
Illustration for Rule No. 3
Assume that Caleb contributed a capital of P25,000 and,
per partnership agreement, he would receive a profit share
of 10% from the profit of the partnership as an industrial
partner. There is no sharing agreement between the pure
capitalist partners.
Caleb
As industrial (100,000x10%) 10,000
As capitalist(100,000x18%) 18,000 28,000
Moses(100,000x46.80%) 46,800
Joshua(100,000x25.20%) 25,200
100,000
 Rules on Profit Sharing
Profit Sharing Based on Capital
Contribution and on Service
Notes: The new profit and loss sharing ratio is computed as follows:

Partner’s Capital Computations New Profit Ratio

Caleb 10%
As industrial
As capitalist P 25,000 90%x25/125 18%
Moses 65,000 90%x65/125 46.80%
Joshua 35,000 90%x35/125 25.20%
125,000 100%
Rules on Losses Sharing
Loss Sharing Based on Partners’
Agreement

RULE No. 1 – Loss of the partnership shall be

divided among the partners in accordance with
their profit or loss sharing agreement.
Rules on Losses Sharing
Loss Sharing Based on Partners’
Agreement
Illustration for Rule No. 1
Moses and Joshua have capital balances of P65,000 and
P35,000, respectively. The partnership suffered a net loss
of P30,000. They agreed that the profit shall be divided
60% and 40%, respectively, but losses shall be divided
equally.
Loss of 30,000
Moses(30,000x50%) (15,000)
Joshua(30,000x50%) (15,000)
Total (30,000)
Rules on Losses Sharing
Loss Sharing Based on Partners’
Agreement
RULE No. 2 – In the absence of loss sharing
agreement, loss shall be apportioned among the
partners in accordance with their profit sharing
ratio.
Using the same information, except that there was
no loss ratio agreement, the distribution of
partnership net loss would be:
Moses(30,000x60%) (18,000) (18,000)
Joshua(30,000x40%) (12,000) (12,000)
(30,000)
Rules on Losses Sharing
Loss Sharing Based on Capital
Contribution
In the absence of any loss sharing and profit
sharing ratios, loss shall be divided among the
capitalist partners in accordance with their capital
contributions.(Art 1797, Partnership and Corporation
Law)
Moses(30,000x65%) (19,500) (19,500)
Joshua(30,000x35%) (10,500) (10,500)
(30,000)
Rules on Losses Sharing
Loss Sharing of an Industrial Partner

RULE NO. 1 – If there is no agreed loss or profit

sharing ratio and there is a “pure” industrial
partner, he is totally exempt from sharing in the
loss. (Hector de Leon, Laws on Partnership and
Corporation, p.54)
Rules on Losses Sharing
Loss Sharing of an Industrial Partner
In the absence of any loss sharing and profit sharing
ratios, loss shall be divided among the capitalist
partners in accordance with their capital
contributions.(Art 1797, Partnership and Corporation
Law)
Assume the same data as stated above, this time with a
“pure” industrial partner named Caleb. If the partnership
suffered a net loss of P30,000, the distribution of the net
loss would be:
Caleb -0-
Moses(30,000x65%) (19,500) (19,500)
Joshua(30,000x35%) (10,500) (10,500)
(30,000)
Rules on Losses Sharing
Loss Sharing of an Industrial Partner
Notes:
1. Industrial partner does not share in partnership losses
because he already rendered his service in vain.
2. If there is profit and loss ratio agreement in which the
industrial partner is included in the profit and loss sharing
ratio, he is bound to respect the contract between them by
co-partners. He shall therefore share in the loss equivalent
to his agreed loss ratio even if he is an industrial partner.
3. However, if there is a profit sharing ratio and there is no
loss ratio, the industrial partner is not bound to share in the
partnership losses because he did not give his consent to
have his share in the partnership losses.
Rules on Losses Sharing
Loss Sharing of an Industrial Partner

RULE NO. 2 – If a partner is capitalist-industrial

partner and there is no loss agreement but there is
a profit sharing agreement in which the capitalist-
industrial partner is entitled to a profit ratio, he then
becomes liable for the losses of the partnership in
the same proportion as his profit sharing ratio.
Rules on Losses Sharing
Loss Sharing Based on Partners’
Agreement
Illustration for Rule No. 2
Assume that Caleb contributed a capital of P25,000 and
per agreement, he would receive 10% of partnership profit
as an industrial partner. The partnership agreement also
stipulates that the capitalist partner will share equally in the
partnership’s profit and loss. The distribution of P30,000
net loss would be:
Loss of 30,000
Caleb as capitalist partner (30,000x1/3) (10,000)
Moses(30,000x1/3) (10,000)
Joshua(30,000x1/3) (10,000)
Total (30,000)
Rules on Losses Sharing
Loss Sharing of an Industrial Partner
Notes:
1. The industrial partner is not exempted from the
loss sharing once he becomes a capitalist partner.

2. If there are partnership losses, however, the

industrial partner shall not absorb a share from the
net losses. He shall share only in the loss as a
capitalist partner.