Partnership & Corporation Acctg

Presented by: Mr. Francis H. Villamin DLSU January 26, 2012

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Partnership & Corporation Accounting

Accounting for Division of Profits and Losses

Partnership Operation

1. 2. 3. 4. 5. 6. 7. 8. 9.

Accounting Cycle of Partnership

Recording of the business transaction. Posting to ledgers. Preparing a trial balance. Preparing the worksheet. Recording adjusting entries. Prepare financial statements. Recording and posting closing entries. Preparing a post-closing trial balance. Recording and posting reversing entries.
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Partnership Operation

Recording of partners loan account when a partner lends money to the partnership. Cash Pxxx Loan Payable to Partner Pxxx

Partnership Operation

Recording of loan extended by the partnership to the partners.

Receivable/Loan from Partnerxxx Cash xxx

Partnership Operation

Division of Net Income

Income summaryxxx Partners Drawingxxx

Partnership Operation

Division of net loss

Partners Drawing ..xxx Income Summary..xxx

Division of Profits
The partnership contract must clearly state or stipulate how the partners will divide the profits or losses to avoid misunderstanding among them in the future.

Division of Profits

The following factors are considered in the equitable distribution of profits or losses: 1. The capital contribution of partner. 2. The services to be rendered by the partner. 3. The management skill or expertise of the partner.
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Division of Profits
4. The duties and responsibilities of the partner/s. 5. The time to be spent by the partner/s in the business.

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Division of Profits

Other factors that may be incorporated in the profit or loss (p/l) sharing agreement: a. Salary the partners may be allowed fixed salaries. b. Interest the partners may allow interest on capital investments or withdrawals.
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Division of Profits
c. Bonus the managing partner may be allowed a certain percentage of the net profit as bonus.

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Rules in the Division of Profits

A. As to the Capitalist Partner Division of Profits 1. In accordance with the partners agreement. 2. In the absence of an agreement, profits should be divided in proportion to their capital contributions.

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Rules in the Division of Profits

A. As to the Capitalist Partner
Division of Losses 1. In accordance with the partners agreement. 2. If only the division of profits is agreed upon, the division of losses will be the same as their profit sharing agreement. 3. In the absence of an agreement, losses will be divided according to their capital contribution.
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Rules in the Division of Profits

B. As to an Industrial Partner
Division of Profits 1. In accordance with the partners agreement. 2. In the absence of an agreement , the industrial partner shall received a just and equitable share in the profits and the balance will be divided by the capitalist partners based on their capital contributions. Note: An industrial partner does not share in the losses.

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Rules in the Division of Profits

C.

As to an Capitalist -Industrial Partner

Division of Profits 1. In accordance with the partners agreement. 2. In the absence of an agreement , he shall receive in his capacity as an industrial partner such share as may be just and equitable and in his character as a capitalist partner, his share should be in proportion to his capital contribution.
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Rules in the Division of Profits

C.

As to an Capitalist -Industrial Partner

Division of Losses 1. In accordance with the partners agreement.

2. In the absence of an agreement , he will not share in the losses in his capacity as an industrial partner, but in his character as a capitalist partner, his share should be in proportion to his capital contribution.

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Methods in the Division of Profits and Losses

1. Equally 2. Using an arbitrary ratio a. Expressed as a percentage. b. Expressed in fraction. c. Expressed a a ratio.

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Methods in the Division of Profits and Losses

3. Using the capital ratio a. Original capital the partners capital at the date of formation. b. Beginning capital the partners capital at the beginning of the current period.
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Methods in the Division of Profits and Losses

3. Using the capital ratio c. Ending capital the partners capital at the end of the period. d. Weighted average capital the weighted average capital during the period.
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Methods in the Division of Profits and Losses

4. Interest is to be allowed on the partners capital and the balance will be divided at an agreed ratio. 5. Salaries are to be allowed and the balance will be divided using an agreed ratio.
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Methods in the Division of Profits and Losses

6. Bonus is to be allowed to the managing partner and the balance will be divided using an agreed ratio. 7. Interest on the partners capital, salary allowances, and bonus will be allowed and the balance will be divided using an agreed ratio.
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Illustrative Cases
Mark and Spencer are partners whose capital Investments at the date of formation were P200,000 and P300,000 respectively. Their capital accounts at the end of the year showed the following:

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Illustrative Cases

Mark, Capital
03/01 80,000

01/01
08/01

300,000
280,000

07/01 180,000

01/01 700,000
12/01 480,000

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Illustrative Cases

The Income & Expense Summary account showed a

credit balance of P240,000.

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Illustrative Cases
a. Profits are divided equally.
Income & Expense Summary 240,000

Mark, Drawing (1/2) Spencer, Drawing (1/2)

120,000 120,000

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Illustrative Cases
b. Profits are divided 20% to Mark and 80% to Spencer.
Income & Expense Summary 240,000
48,000 192,000

Mark, Drawing (.20 x P240,000) Spencer, Drawing (.80 x P240,000)

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Illustrative Cases
c. Profits are divided 3:5 for Mark and Spencer respectively.
Income & Expense Summary 240,000

Mark, Drawing (3/8 x P240,000) Spencer, Drawing (5/8 x P240,000)

90,000 150,000

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Illustrative Cases
d. Profits are divided 1/4 to Mark and 3/4 to Spencer
Income & Expense Summary 240,000

Mark, Drawing (1/4 x P240,000) Spencer, Drawing (3/4 x P240,000)

60,000 180,000

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Illustrative Cases
e. Profits are divided using the original capital ratio.
Income & Expense Summary
Mark, Drawing (2/5 x P240,000) Spencer, Drawing (3/5 x P240,000)

240,000
96,000 144,000

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Illustrative Cases
f. Profits are divided using the beginning capital ratio.
Income & Expense Summary 240,000
72,000 168,000

Mark, Drawing (3/10 P240,000) Spencer, Drawing (7/10 x P240,000)

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Illustrative Cases
f. Profits are divided using the ending capital ratio.
Income & Expense Summary 240,000
80,000 160,000

Mark, Drawing (5/15 P240,000) Spencer, Drawing (10/15 x P240,000)

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Illustrative Cases
h. Profits are divided using the weighted average capital ratio.
Income & Expense Summary 240,000
84,000 156,000

Mark, Drawing (35/100P240,000) Spencer, Drawing (65/100 x P240,000)

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Illustrative Cases
Computation of weighted average capital
Mark Date
01.01 03.01 08.01

Capital Balance
300,000 220,000 500,000 x x x

Months Unchanged
2 5 5 -----12 ===

Total

= 600,000 = 1,100,000 = 2,500,000 -----------4,200,000 ======

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Illustrative Cases

Average Capital of Mark

4,200,000 / 12 = 350,000 =====

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Illustrative Cases
Computation of weighted average capital
Spencer Date
01.01 07.01 12.01

Capital Balance
700,000 520,000 1,000,000 x x x

Months Unchanged
6 5 1 -----12 ===

Total

= 4,200,000 = 2,600,000 = 1,000,000 ------------7,800,000 =======

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Illustrative Cases

Average Capital of Spencer

7,800,000 / 12 = 650,000 =====

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Illustrative Cases
i. Interest of 10% on the beginning capital will be allowed and the balance to be divided equally.
Income & Expense Summary Mark, Drawing Spencer, Drawing 240,000 100,000 140,000

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Illustrative Cases
Mark Interest of 10% on beginning capital Balance: Equally Spencer Total

30,000 70,000 -------100,000 =====

70,000 70,000 --------140,000 =====

100,000 140,000 ----------240,000 =====

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Illustrative Cases
j. Mark and Spencer are allowed salaries of P60,000 and P80,000, respectively, and the balance is to be divided 40% for Mark and 60% for Spencer.
Income & Expense Summary Mark, Drawing Spencer, Drawing 240,000 100,000 140,000

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Illustrative Cases
Mark Salaries Balance: 40%, 60% 60,000 40,000 -------100,000 ===== Spencer 80,000 60,000 --------140,000 ===== Total 140,000 100,000 ----------240,000 =====

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Illustrative Cases
k. Spencer, the managing partner is allowed a bonus of 20% of the net profit before bonus and the balance is to be divided equally.
Income & Expense Summary Mark Drawing Spencer Drawing 240,000 96,000 144,000

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Illustrative Cases
Mark Bonus (.20 x 240,000) Balance: Equally Spencer 48,000 96,000 --------144,000 ===== Total 48,000 192,000 ----------240,000 =====

96,000 -------96,000 =====

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Illustrative Cases
l. Spencer, the managing partner is allowed a bonus of 20% of the net profit after bonus and the balance is to be divided 2:8 for Mark and Spencer.
Income & Expense Summary Mark, Drawing Spencer, Drawing 240,000 40,000 200,000

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Illustrative Cases
Mark Bonus (.20 x 200,000) Balance: 2:8 Spencer 40,000 160,000 --------200,000 ===== Total 40,000 200,000 ----------240,000 =====

40,000 -------40,000 =====

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Illustrative Cases
Computation of bonus:
Net profit before bonus Less: Bonus Net profit after bonus 120% 20% -------100%
=====

P240,000 40,000 (.20 x 200,000) ----------P200,000 (240,000/120%)

=======

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Illustrative Cases
m. 10% interest is allowed on the beginning capital; each partner is allowed a salary of P50,000. Spencer, the managing partner is entitled to a bonus of 10% of the net profit before interest, salaries and bonus, the remaining profit is to be divided equally.
Income & Expense Summary Mark, Drawing Spencer, Drawing 240,000 88,000 152,000

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Illustrative Cases
Mark
10% interest Salaries Bonus (10% x 240,000) Balance: Equally 30,000 50,000 8,000 ---------88,000 =====

Spencer
70,000 50,000 24,000 8,000 ---------152,000 =====

Total
100,000 100,000 24,000 16,000 ---------240,000 =====

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Illustrative Cases
n. 10% interest is allowed on the beginning capital; P40,000 salary to Mark and P56,000 to Spencer plus a bonus of 10% of the net profit after subtracting interest, salaries and bonus, the remaining income is to be divided equally.
Income & Expense Summary Mark, Drawing Spencer, Drawing 240,000

90,000 150,000
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Illustrative Cases
Mark
10% interest Salaries Bonus (10% x 40,000) Balance: Equally 30,000 40,000 20,000 ---------90,000 =====

Spencer
70,000 56,000 4,000 20,000 ---------150,000 =====

Total
100,000 96,000 4,000 40,000 ---------240,000 =====

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Illustrative Cases
Computation of bonus:
Net profit Interest Salaries Net profit before bonus Bonus 110% 10% -------100% ==== 240,000 (100,000) (96,000) ----------44,000 4,000 (.10 x 40,000) --------40,000 (44,000/110%) =====

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Thank you. Thats all for today!!

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