Accounting for Partnership

Operation
 Nature of Partnership Operation
A business partnership operates like any other forms of
profit – oriented business. It manufactures, sells
products or provides services for a profit.

The accounting process of a partnership’s transactions is

basically to accounting process for sole proprietorships
or corporations. Their differences, however, lie in the
plurality of presenting partners’ capital in the balance
sheet and in distribution of partnership earnings to the
partners.
 COMPARATIVE PROFIT DISTRIBUTION
SINGLE PARTNERSHIP CORPORATION
PROPRIETORSHIP
The profits or losses are The profits or losses are Profits are distributed in
all taken by the only divided based on the the forms of dividends
owner, the sole partners’ agreement based on the decision
proprietor by the board of
directors.
 Accounting Treatment for Profit and
Loss
The determination of proper income or loss is made through the
preparation of income statement with the following basic formula:

Revenue xxx
Less: Operating Expenses xxx
Net Income (loss) xxx

In the journal entry, there is net income if the income summary has a
credit balance. There is net loss if the income summary account 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
account
 Illustration 1
Assume that A&B has a credit balance of income
summary account amounting to 500,000. If
partner A & B divide profit equally, the journal
entry to distribute the net income would be:
 Illustration 1
Assume that A&B has a credit balance of income
summary account amounting to 500,000. If
partner A & B divide profit equally, the journal
entry to distribute the net income would be:
DATE DESCRIPTION DR. CR.
12/31 Income Summary 500,000
A, Capital 250,000
B, Capital 250,000
 Illustration 2
Assume that A&B Partnership has a debit
balance of income summary account amounting
to 500,000. If partners A & B divide losses with
60% and 40% loss sharing respectively, the
journal entry to distribute the net loss would be:
 Illustration 2
Assume that A&B Partnership has a debit balance
of income summary account amounting to 500,000.
If partners A & B divide losses with 60% and 40%
loss sharing respectively, the journal entry to
distribute the net loss would be:
DATE DESCRIPTION DR. CR.
12/31 A, Capital 300,000
B, Capital 200,000
Income Summary 500,000
 RULES ON PROFIT SHARING
(a) Profit Sharing Based on Partner’s Agreement
(b) Profit Sharing Based on Capital Contribution
(c) Profit Sharing Based on Capital Contribution and on Service
c. 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.

c.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

c.3 If there is 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
 (a) Profit Sharing Based on Partner’s
Agreement
Moses and Joshua have capital balances of
65,000 and 35,000 respectively. The partnership
earned a net income of 100,000. Their profit
agreement is 60% and 40%, respectively.

The profit distribution between Moses and

Joshua would be:
 (a) Profit Sharing Based on Partner’s
Agreement
Moses and Joshua have capital balances of
65,000 and 35,000 respectively. The partnership
earned a net income of 100,000. Their profit
agreement is 60% and 40%, respectively.
The profit distribution between Moses and
Joshua would be:
Profit of 100,000 Moses Joshua (40%) TOTAL
(60%)
Share of Moses 60,000 - 60,000
Share of Joshua - 40,000 40,000
TOTAL 60,000 40,000 100,000
 (b) Profit Sharing based on Capital
Contribution
Using the same data in the preceding
illustration, the profit distribution between
Moses and Joshua if they have no profit and loss
agreement be:
 (b) Profit Sharing Based on Capital
Contribution
Using the same data in the preceding
illustration, the profit distribution between
Moses and Joshua if they have no profit and loss
agreement be:
Profit of 100,000 Moses Joshua (35%) TOTAL
(65%)
Share of Moses 65,000 - 65,000
(65,000/100,000)
Share of Joshua - 35,000 35,000
(35,000/100,000)
TOTAL 65,000 35,000 100,000
 © Profit Sharing Based on Capital
Contribution and on Service
c.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.
Illustration:
Let us use the same illustration above, this time involving
a third person whom we shall call Caleb, as industrial
partner in the partnership. It was agreed that Caleb ,
being an industrial partner will receive a profit share
equivalent at 10% of the partnership net income.
The distribution of loss would be:
Profit of 100,000 Moses Joshua (35%) Caleb TOTAL
(65%)
Share of Caleb - - 10,000 10,000
Share of 58,500 - - 58,500
Moses(65/100*90,000)
Share of Joshua - 31,500 - 31,500
(35/100*90,000)
TOTAL 58,500 31,500 10,000 100,000
c.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

Again, take the illustration from previous slide,

minus the profit agreement among the capitalist
partners and industrial partner. In this case, the
distribution of the partnership net profit would
be:
PROFIT of 100,000 MOSES JOSHUA CALES TOTAL
(65%) (35%) (INDUSTRIAL)
Share of Caleb (35/135) 25,926 25,926
Share of Moses (65/135) 48,148 48,148
Share of Joshua (35/135) 25,926 25,926
TOTAL 48,148 25,926 25,926 100,000
 c.3 If there is 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

Assume that Caleb contributed a capital of

25,000 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 partner.

The distribution of profit would be:

Profit of MOSES JOSHUA CALEB TOTAL
100,000
Share of Caleb:
As an industrial 10,000
(10%)
As capitalist 18,000 28,000
(100,000*18%)

Moses 46,800 46,800

(100,000*46.80
%)
Joshua 25,200 25,200
(100,000*25.20
%)
TOTAL 100,000
 Rules on Losses Sharing
a. Loss Sharing Based on Partners’ Agreement
a.1 Loss of the partnership shall be divided
among the partners in accordance with their
profit or loss sharing agreement
a.2 In the absence of loss sharing agreement,
loss shall be apportioned among the partners in
accordance with their profit sharing ratio
b. Loss Sharing Based on Capital Contribution
c. Loss Sharing of an Industrial Partner
Loss Sharing Based on Partners’ Agreement
a.1 Loss of the partnership shall be
divided among the partners in
accordance with their profit or loss
sharing agreement
Moses and Joshua have capital balances of
65,000 and 35,000, respectively. The partnership
suffered a net loss of 30,000. They agreed that
any profit shall be divided 60% and 40%,
respectively, but losses shall be divided equally.
The distribution of loss would be:
Loss Sharing Based on Partners’ Agreement
a.2 In the absence of agreement, loss
shall be apportioned among the partners
in accordance with their profit sharing
ratio
Moses and Joshua have capital balances of
65,000 and 35,000, respectively. The partnership
suffered a net loss of 30,000. They agreed that
any profit shall be divided 60% and 40%,
respectively. The distribution of loss would be:
b. Loss Sharing Based on Capital Contribution

Using the same illustration except that there is

no profit or loss agreement among the partners,
the distribution of the 30,000 partnership loss
would be:
Loss of 30,000 MOSES (65%) JOSHUS (35%) TOTAL
Share of Moses (19,500) (19,500)
Share of Joshua (10,500) (10,500)
TOTAL (19,500) (10,500) (30,000)
Loss Sharing of an Industrial Partner
Assume the same data in the previous slide, this
time with a “pure” industrial partner named
Caleb. If the partnership suffered a net loss of
30,000, the distribution of loss would be:
Loss of 30,000 MOSES (65%) JOSHUS (35%) TOTAL
Share of Caleb -
Share of Moses (19,500) (19,500)
Share of Joshua (10,500) (10,500)
TOTAL (19,500) (10,500) (30,000)