Partnership Operation: Acp 311 - Ulob

PARTNERSHIP
OPERATION
ACP 311 - ULOb
• Profits (Losses). The amount
resulted from the operation
Operational derived from revenues earned

and expenses incurred within
Definition the accounting period. Profit
of terms (loss) is the difference of
Revenues and Expenses for a
particular period.
• Profit and Loss Ratio. The
agreed rate of sharing of
Operational profits among partners. Profit
and loss ratio must be agreed
Definition upon by the partners and
expressly stated in the
of terms agreement, otherwise no profit
and loss agreement exists.
Operational • Interest. The agreed interest
Definition on the capital contributed as
part of the profit distribution.
of terms
• Salaries. These are
compensation paid to partner
Operational who really devotes time in the
operation. Sometime profits
Definition may fluctuate, that’s why, for
the fair sharing of profits they
of terms provide salaries. Usually given
to managing partner.
• Bonuses. These are given to
Operational the one who exerted
extraordinary to maximize
Definition profits. Usually given to
managing partner to motivate
of terms him for profit maximization.
Accounting for
Partnership
operation
• The computation of partnership net income from
partnership operation is still the same with other
forms of business.
• However it differs on the way it is distributed to the
respective partners.
• The usual accounting issues in this section are the
proper distribution of partnership profits and losses
among partners, preparation of financial statements,
changes in the profit or loss ratios and calculating the
correct net income (loss) from prior and current
period.
Division of
Profit and
Losses
Division of
Profit and
Losses
The following are the possible methods of dividing the profit or loss
among the partners:
The provisions of interest, salaries, and bonuses
must be agreed upon by the partners. If ever these
provisions exist, these must be distributed first
and any remaining profits or losses must be
divided based on the agreed ratios.
A partner who contributed his expertise, his must

receive an equitable share in the profits or losses
of the operations.
Illustration
Compute each partner’s share in the profi t or
loss under the following agreement:
1. Equally.
2. Arbitrary Ratio.
3. Based on capital balances on a particular date.
4. The allowance of the following:
a.Interest on capital.
b.Salaries to partners.
c. Bonus to managing partner based on net income.
d.Remaining balance of net income or loss.
Case 1: Divisions of Profit and Loss Equally
Case 2: Division of Profit and Loss in an Arbitrary Ratio
Case 2: Division of Profit and Loss in an Arbitrary Ratio
Case 2: Division of Profit and loss in the ratio based on Partners Capital Balances
P/L ratios based on capital balances may be taken

from:
• Original capital
• Beginning capital
• Ending capital
• Average capital
• If we are to compare the two approaches, the peso-month approach is

more complicated in terms of computation, however this approach
gives a more reasonable sharing of profit and loss.
• If the partners agreed that the net income should be divided based on
capital balances, but failed to specify whether it is average or original
capital, then use the average capital balances if it can be computed.
However, if the average capital cannot be computed, then use the
original capital balances.
Case 4.a : Allowance for Interest on Partner’s Capital
Case 4.b : Salary Allowance to Partners
• If the partners agree to provide salaries to partners, then

this must be distributed to the partners regardless if there is
profit or loss unless they agreed to omit the allowance for
interest on capital in case the operating results is loss.
• The partners may also provide an agreement that the

salaries allowed will only up to the extent of the earnings. In
case the salaries will exceed the net income, it must be
allocated based on the agreed salaries for each partner.
Case 4.c : Bonus to Partners based on Net Income
The computation of bonus may be based on the

following:
1.Net income before salaries, interest, and bonus.
2.Net income before salaries and interest but after
bonus.
3.Net income after salaries and interest but before
bonus
4.Net income after salaries, interest, and bonus.
Case 4.c : Bonus to Partners based on Net Income
Case 4.c.1 : Bo nu s to Partn ers b ased on Net In come b efo re salaries, interest an d bon us
Case 4.c.1 : Bo nu s to Partn ers b ased on Net In come b efo re salaries, interest an d bon us
C a s e 4 . c . 2 : B o n u s t o Pa r t n e r s b a s e d o n N e t I n c o m e b e f o r e s a l a r i e s a n d i n t e r e s t b u t a f t e r b o n u s
C a s e 4 . c . 2 : B o n u s t o Pa r t n e r s b a s e d o n N e t I n c o m e b e f o r e s a l a r i e s a n d i n t e r e s t b u t a f t e r b o n u s
C a s e 4 . c . 3 : B o n u s t o Pa r t n e r s b a s e d o n N e t I n c o m e a f t e r s a l a r i e s a n d i n t e r e s t b u t b e f o r e b o n u s
C a s e 4 . c . 3 : B o n u s t o Pa r t n e r s b a s e d o n N e t I n c o m e a f t e r s a l a r i e s a n d i n t e r e s t b u t b e f o r e b o n u s
Case 4.c.4 : Bonus to Partners bas ed on Ne t Income a fter s al arie s, interes t and bonus
• Take note that the provision for bonus is applicable only if the
partnership has a profit. Thus, when partnership is operating at loss,
no bonus shall be given to a specified partner.
• Salaries, interest and bonus given to partners are not considered as

operating expenses, these are only a way of distributing the profit and
loss of the partnership. These are all part of the net income being
distributed to the partners. Thus, if the partnership treated these as
operating expenses, the net income must be adjusted to arrive the
correct net income to be distributed to the partners.
THE END.

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PARTNERSHIP

Operational derived from revenues earned

A partner who contributed his expertise, his must

P/L ratios based on capital balances may be taken

• If we are to compare the two approaches, the peso-month approach is

• If the partners agree to provide salaries to partners, then

• The partners may also provide an agreement that the

The computation of bonus may be based on the

• Salaries, interest and bonus given to partners are not considered as

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