Accounting for

Partnership
Partnership Operations and Financial
Reporting

Prepared by:
Michael Angelo M. Manayao, CPA, MBA
 Learning Objectives
 Contrast a partner’s equity in assets from share in profits
or losses.
 Summarize the rules for the distribution of profits or
losses.
 Explain prior period errors and interpret the effects on
partners’ shares in profits or losses.
 Identify, describe and account for different methods of
dividing partnership profits or losses based on agreement.
 Accounting for partnership operations.
 Partners’ Equity in Assets Contrasted
with Share in Profits or Losses

The basis on which profits or losses are

shared is a matter of agreement among
the partners and may not be
necessarily be the same as their capital
contribution ratio.
 Factors to Consider in Arriving at a
Plan for Dividing Profits or Losses

 Money, Property or Industry

 Performance Methods
 Money, Property or Industry
Partnership profits are realized as a result of
putting together the contributions of the
partners. The amount of the capital invested
by each partner, the amount of time each
partner devotes to the business and other
contributions are the factors being considered
in the formulation of an equitable profit and
loss ratio.
 Money, Property or Industry
Among the other factors which may be considered are as
follows:
1. A partner has considerable personal financial resources,
thus giving the partnership strong credit rating. In
general, partners have unlimited liability. A very solvent
partner will make the partnership attractive to creditors.
2. A partner who is well known in a profession or an
industry may contribute immensely to the success of the
partnership although he may not participate actively in
the operations of the partnership.
 Performance Methods
Many partnerships use profit and loss
sharing agreements that give some weight
to the specific performance of each
partner to provide incentives to perform
well. This allocation of profits to a partner
on the basis of performance is frequently
referred to as a bonus.
 Rules for the Distribution of Profits or Losses
 Profits
a. The profits will be divided according to partners’
agreement.
b. If there is no agreement:
 As to capitalist partners:
1. Original capital contributions
2. Beginning capital ratio
 As to industrial partners – just and equitable
compensation
 Rules for the Distribution of Profits or Losses
 Losses
a. The losses will be divided according to partners’
agreement.
b. If there is no agreement as to distribution of losses but
there is an agreement as to profits, the losses shall be
distributed according to the profit sharing ratio.
c. If there is no agreement:
 As to capitalist partners:
1. Original capital contributions
2. Beginning capital ratio
 As to purely industrial partners – not liable for any losses.
 Distribution of Profits or Losses Based on
Partners’ Agreement
The partners may agree on any of the following scheme in distributing
profits or losses:
1. Equally or in other agreed ratio.
2. Based on partners’ capital contributions:
a. Ratio of original capital investments.
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.
 Distribution of Profits or Losses Based on
Partners’ Agreement
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 the
managing partner and the balance in an agreed ratio.
Illustration
Christopher Biore, Capital Rose Besario, Capital
400,000 Jan. 1 Jul. 1 50,000 800,000 Jan. 1
100,000 Apr. 1

Christopher Biore, Drawing Rose Besario, Drawing

Jan. to 60,000 Jan. to 60,000
Dec. Dec.

Income Summary
300,000 Dec. 31
Equally or Other Agreed Ratio
Equally or Other Agreed Ratio
Equally or Other Agreed Ratio
Equally or Other Agreed Ratio
Equally or Other Agreed Ratio
 Let’s Try This!!!
Stephanie Calamba and Allan Brillantes decided to form a
partnership. They agreed that Calamba will invest
P200,000 and Brillantes, P300,000. Calamba will devote
full time to the business, and Brillantes on part-time only.

Required: Determine the partners’ share in profit or loss

assuming:
1. Profit of P1,500,o00
2.Profit of P660,000
 Let’s Try This!!!
Income summary 1,500,000
Calamba, Drawing 750,000
Brillantes, Drawing 750,000
To record the division of profits.

Calamba 1,500,000 / 2 750,000

Brillantes 1,500,000 / 2 750,000
 Let’s Try This!!!
Income summary 660,000
Calamba, Drawing 330,000
Brillantes, Drawing 330,000
To record the division of profits.

Calamba 660,000 / 2 330,000

Brillantes 660,000 / 2 330,000
 Based on Partners’ Capital Contributions
Division of partnership profits in proportion to the capital
invested by each partner is most likely to be found in
partnerships in which substantial investments is the principal
ingredient for success. It is essential that the partnership
contract be specific with respect to the concept of capital.
Capital may refer to either of the following:
 Ratio of original capital investments.
 Ratio of capital balances at the beginning of the year.
 Ratio of capital balances at the end of the year.
 Ratio of average capital balances.
 Ratio of Original Capital Investments
Income summary 300,000
Christopher Biore, Drawing 100,000
Rose Besario, Drawing 200,000
To record the distribution of profits.
Computation
Biore : 300,000 x 400,000/1,200,000 100,000
Besario: 300,000 x 800,000/1,200,000 200,000
Total 300,000
Ratio of Original Capital Investments
 Let’s Try This!!!
Stephanie Calamba and Allan Brillantes decided to form a
partnership. They agreed that Calamba will invest
P200,000 and Brillantes, P300,000. Calamba will devote
full time to the business, and Brillantes on part-time only.

Required: Determine the partners’ share in profit or loss

assuming:
1. Profit of P1,500,o00
2.Profit of P660,000
 Let’s Try This!!!
Income summary 1,500,000
Calamba, Drawing 600,000
Brillantes, Drawing 900,000
To record the distribution of profits.
Calamba 200,000 2/5 x 1,500,000 600,000
Brillantes 300,000 3/5 x 1,500,000 900,000
500,000 1,500,000
 Let’s Try This!!!

Income summary 660,000

Calamba, Drawing 264,000
Brillantes, Drawing 396,000
To record the distribution of profits.
Calamba 200,000 2/5 x 660,000 264,000
Brillantes 300,000 3/5 x 660,000 396,000
500,000 660,000
Ratio of Capital Balances at the Beginning
of the Year
 Let’s Try This!!!
Abad, Aglugub, and Onate agreed to share profits and
losses according to the ratio of their respective investments
at the beginning of the year of P300,000, P250,000, and
P450,000.

Required: Calculate the share of each partner under the

following conditions:
1. Profit of P270,000
2.Loss of P240,000
 Let’s Try This!!!
Income summary 270,000
Abad, Drawing 81,000
Aglugob, Drawing 67,500
Onate, Drawing 121,500
To record the distribution of profits.

Abad 300,000 81,000

Aglugub 250,000 67,500
Onate 450,000 121,500
1,000,000 270,000
 Let’s Try This!!!
Abad, Drawing 72,000
Aglugob, Drawing 60,000
Onate, Drawing 108,000
Income summary 240,000
To record the distribution of profits.
Abad 300,000 -72,000
Aglugub 250,000 -60,000
Onate 450,000 -108,000
1,000,000 -240,000
Ratio of Capital Balances at the End
of the Year
Ratio of Average Capital Balances
Ratio of Average Capital Balances
 Let’s Try This!!!
Orosco and Castillo divide partnership profits and losses
solely on the basis of their average capital balances. Orosco
had P450,000 invested during all of 2019. Castillo had
P300,000 invested from January 1 to September 30, and
he invested another P200,000 on October 1. If profit was
P2,000,000 during 2019, how much should each partner
receive?
 Let’s Try This!!!

Average capital
Share in profits
balances
Orosco 450,000 1,125,000
Castillo 350,000 875,000
800,000 2,000,000
 By Allowing Interest on Capital and
the Balance in an Agreed Ratio
To allow interest on partners’ capital account balances is
almost similar to dividing part of profits in the ratio of
partners’ capital balances. If the partners agree to allow
interest on capital as first step in the division of profit, they
should specify the interest rate to be used. It should also
state whether interest is to be computed on capital
balances on specific dates or on average capital balances
during the year.
 Let’s Try This!!!
Continuing the illustration of Biore and Besario
Partnership with a profit of P300,000 for 2019 and
capital balances as already shown, assume that the
partnership agreement allowed 15% interest on
average capital account balances, with the balance to
be divided equally.
Let’s Try This!!!
 By Allowing Salaries to Partners and
the Balance in an Agreed Ratio
 The sharing agreement may provide for variations in
compensating the personal services contributed by
partners.
 The partnership agreement should be clear on the
treatment of salary allowances when losses are incurred.
In the absence of an agreement to govern this situation,
salary allowances will be provided even when operations
yielded losses.
 Let’s Try This!!!
Continuing the illustration for the Biore and
Besario Partnership, assume that the
partnership agreement provided for an annual
salary of P100,000 to Biore and P60,000 to
Besario, and the balance to be divided equally.
Let’s Try This!!!
 Let’s Try This!!!
Buenviaje and Refozar are partners in a business. Buenviaje’s
original contribution was P400,000, and Refozar was
P600,000. They agreed to share profits and losses as follows:

Calculate each partner’s share of profits and losses, assuming:

(a) profit was P1,000,000; (b) profit was P700,000, and (c) loss
was P80,000.
Let’s Try This!!!
 By Allowing Bonus to Managing Partner Based
on Profit and the Balance in an Agreed Ratio

A partnership contract may provide for a special

compensation in the form of bonus to the managing
partner when the results of operations of the
partnership are favorable.
 Let’s Try This!!!
Assume that the Biore and Besario Partnership
agreement provided for a bonus of 25% of profit
before bonus to Partner Biore and the balance to be
divided equally.
Let’s Try This!!!
 Let’s Try This!!!
Assume that the Biore and Besario Partnership
agreement provided for a bonus of 25% of profit
after bonus to Partner Biore and the balance to be
divided equally.
Let’s Try This!!!

Income Summary 300,000

Christopher Biore, Drawing 180,000
Rose Besario, Drawing 120,000
To record the distribution of profits.
 By Allowing Salaries, Interest on Capital, Bonus
to Managing Partner Based on Profit and the
Balance in an Agreed Ratio
The service contributions and capital contributions of the
partners are often not equal. If the service contributions are not
equal, salary allowances can compensate for the differences. Or,
when capital contributions are not equal, interest allowances can
make up for the unequal investments. When both service and
capital contributions are unequal, the allocation of profits or
losses may include salary allowances, interest on their capital
balances, bonus to the managing partner, and the balance to be
divided in an agreed ratio.
 Let’s Try This!!!
Assume that the profit for the year is P400,000 and the
partnership agreement for the Biore and Besario
Partnership provided for the following:
1. Bonus to Biore of 25% of profit after salaries and interest
but before bonus;
2.Annual salaries of P100,000 to Biore and P60,000 to
Besario;
3.Interest on average capital balances of P71,250 and
P116,250 to Biore and Besario, respectively;
4.Balance to be divided in a ratio of 40:60.
Let’s Try This!!!
 Let’s Try This!!!
Labasan, Gabayan, and Villanueva are manufacturers’
representatives in the architecture business. Their capital
accounts were as follows:
 Let’s Try This!!!
Required: Prepare the profit distribution schedule.
1. Salaries are P150,000 to Labasan, P200,000 to
Gabayan, and P180,000 to Villanueva. Labasan receives a
bonus of 5% of profit after bonus. Interest is 10% of ending
capital balances. Labasan, Gabayan, and Villanueva divide
any remainder in a 3:3:4 ratio. Profit was P789,600.
Let’s Try This!!!
 Let’s Try This!!!
Labasan, Gabayan, and Villanueva are manufacturers’
representatives in the architecture business. Their capital
accounts were as follows:
 Let’s Try This!!!
Required: Prepare the profit distribution schedule.
2. Interest is 10% of average capital balances. Salaries are
P240,00 to Labasan, P210,000 to Gabayan, and P250,000
to Villanueva. Gabayan receives a bonus of 10% of profit
after bonus and salary. Any remainder is divided equally.
Profit was P680,800.
Let’s Try This!!!
 Let’s Try This!!!
Labasan, Gabayan, and Villanueva are manufacturers’
representatives in the architecture business. Their capital
accounts were as follows:
 Let’s Try This!!!
Required: Prepare the profit distribution schedule.
3. Villanueva receives a bonus of 20% of profit after bonus
and salaries. Salaries are P210,000 to Labasan, P180,000
to Gabayan, and P150,000 to Villanueva. Interest is 10% of
the beginning capital balances. Labasan, Gabayan, and
Villanueva divide any remainder in an 8:7:5 ratio. The
profit was P929,400.
Let’s Try This!!!
 Correction of Prior Period Errors
Prior period errors – are omissions from
the other misstatements of the entity’s
financial statements for one or more prior
periods that are discovered in the current
period.
 Correction of Prior Period Errors
If an error resulted in an understatement of
profit in previous periods, a correcting entry
would be needed to increase Capital. If an error
overstated profit in prior periods, then Capital
would have to be decreased. The effect of error
correction will be divided based on the
applicable profit or loss ratio.
 Financial Reporting
Purpose of Financial Statements
Overall Considerations
Complete Set of Financial Statements
 Purpose of Financial Reporting
Financial statements are a structured
representation with the objective of providing
information about the financial position,
financial performance and cash flows of an
entity that is useful to a wide range of users in
making economic decisions.
 Overall Considerations
 Fair Presentation and Compliance with International
Financial Reporting Standards
 Going Concern
 Accrual Basis of Accounting
 Materiality and Aggregation
 Offsetting
 Frequency of Reporting and Comparative Information
 Consistency of Presentation
 Identification of the Financial Statements
Identification of the Financial
Statements
Identification of the Financial
Statements
 Complete Set of Financial Statements
A complete set of financial statements consist of:
1. Statement of financial position;
2. Statement of comprehensive income;
3. Statement of changes in equity;
4. Statement of cash flows;
5. Notes;
6. Additional statement of financial position
(required only when certain instances occur)
 Statement of Comprehensive Income

The form and content of the income statement

of the partnership resemble those of the sole
proprietorship with the exception of the
presentation of the division of profits or losses
at the lower portion of the statement.
 Statement of Changes in Equity
An entity shall present a statement of changes in equity, showing in the
statement:
a. Total comprehensive income for the period showing separately the total
amounts attributable to owners of the parent and to minority interests;
b. For each component of equity, the effects of retrospective restatement
recognized in accordance with PAS 8, Accounting Policies, Changes in
Accounting Estimates and Errors;
c. The amount of transactions with owners in their capacity as owners,
showing separately contributions by and distributions to owners; and
d. For each component of equity, a reconciliation between the carrying amount
at the beginning and the end of the period, separately disclosing each
change.
 Statement of Financial Position
The statement of financial position shows the
entity’s financial condition (i.e., status of
assets, liabilities and equity) as at a certain
date.
 Statement of Cash Flows
 The cash flow statement serves as a basis for
evaluating the entity’s ability to generate
cash and cash equivalents and the needs to
utilize these cash flows.
 The statement of cash flows provides
information about the cash receipts and cash
payments of an entity during a period.
 Classification of Cash Flows
The statement of cash flows present cash flows
according to the following classifications:
1.Operating Activities
2.Investing Activities
3.Financing Activities
 Statement of Financial Position
The statement of financial position shows the
entity’s financial condition (i.e., status of
assets, liabilities and equity) as at a certain
date.
 Operating Activities
 “Cash flows from operating activities are
primarily derived from the principal revenue-
reproducing activities of the entity.” (PAS 7.14)
 Operating activities usually include cash inflows
and outflows on items of income and
expenses, or those that enter into the
determination of profit or loss (i.e., included in
the income statement).
 Operating Activities
This cash flow can be presented using either:
1. Direct method – the entity’s net cash provided by
(used in) operating activities is obtained by
adding the individual operating cash inflows and
then subtracting the individual operating cash
outflows.
2. Indirect method – derives the net cash provided
by (used in) operating activities by adjusting
profit for income and expenses items not
resulting from cash transactions.
 Investing Activities
Investing activities include making and
collecting loans; acquiring and disposing of
investments in debt or equity securities; and
obtaining and selling of property and
equipment and other productive assets.
 Financing Activities
Financing activities include obtaining
resources from owners and creditors.
 Partnership in Asia
Partner’s Equity
Capital accounts
Current accounts
Drawing accounts
Interest on drawings
 Capital Accounts
The capital accounts of each partner will be
credited with the partner’s original and
additional capital contributions, and debited
with any permanent withdrawals.
Current Accounts
 Drawing Accounts
A drawing account is maintained for each
partner. This will be debited for any cash
drawings during the year. The balance of this
account is transferred to the partner’s current
account at the end of the year.
 Interest on Drawings
Some partnership agreements will provide that
partners will be charged interest on any
drawings made during the year. This is to deter
partners from drawing cash from the business.
QUESTIONS?
Thank you for
listening!

Michael Angelo M. Manayao, CPA, MBA