PARTNERSHIP OPERATIONS CAPITAL ACCOUNT DEBIT TO Permanent decrease
PARTNERSHIP OPERATIONS
CAPITAL ACCOUNT DEBIT TO: • Permanent decrease in capital • Excess amount allowable for withdrawal CREDIT TO • Original investment • Additional investment While profit or loss is closed to the capital account in sole proprietorship, the partner’s capital account will not show its share of profit or loss. It is shown instead in the partners drawing account
DRAWING ACCOUNT DEBIT TO: • Share in loss • Temporary withdrawals • Withdrawals of share in profit CREDIT TO • Share in profit The Securities and Exchange Commission rules that a partner can make withdrawals only up to the extent of his share in profits realized from business operations. When his withdrawal exceeds what had been agreed upon, the excess is chargeable to capital account.
DRAWING ACCOUNT The purpose that profit or loss is shown in the drawing account is to keep intact the capital account for original and additional investments and permanent withdrawals and excess of withdrawals. If however, the partners will agree that the balance of their drawing account will be closed to capital accounts forming part of the original capital, they may do so provided that the partnership contract has to be amended.
PARTNER’S LOAN ACCOUNT When the partnership is badly need of additional cash, the partnership borrows money from the partners. The partnership becomes the debtor and the partners, the creditors. DEBIT TO: • Payment to partners who have extended loan to the partnership CREDIT TO • Loan granted by partners and received by partnership Partner’s Loan Payable is a liability account.
Illustration Blue and Green are partners of BG Partnership. Both partners extended loans to the partnership in the amount of P 10, 000 and P 20, 000 respectively. After a month, the partnership paid the partners. Cash P 30, 000 Blue, Loan Payable P 10, 000 Green, Loan Payable P 20, 000 to record loans granted by partners Blue, Loan Payable P 10, 000 Green, Loan Payable P 20, 000 Cash P 30, 000 to record payment of loans to partners
PARTNER’S RECEIVABLE ACCOUNT There are instances when the partners borrow from the partnership. Said borrowing is not recorded as withdrawal from the capital but as a separate account, “ Receivable from partner” DEBIT TO: • Sale of merchandise on account of partners • Advances to partners CREDIT TO • Collection from partners
DIVISION OF PROFITS AND LOSSES Generally, division of profits or losses is contained in the Articles of Partnership. In the absence of such agreement, the law provides that the share of each partner shall be in proportion to what he has contributed. In case of an industrial partner, he shall receive such share as what is just and equitable under the circumstances but shall not be liable for any losses. If the sharing of profits has been agreed upon, the share of each in the losses shall be in the same manner that profits are divided.
Factors in setting up the basis of distributing profits and losses: 1. Services rendered by partners to the partnership 2. Amount of capital contributed by the partners 3. Managerial skills and expertise
PROFIT AND LOSS RATIO( the ratio in which the partners divide their profits and losses Illustration Yacapin and Perez sharing profits and losses based on their capital contributions of P 40, 000 and 60, 000 respectively. PERCENTAGE Yacapin Perez 40% ( P 40, 000 / P 100, 000 ) 60% ( P 60, 000/P 100, 000)
FRACTIONAL Yacapin Perez 4/10 or 2/5 6/10 or 3/5 DECIMAL Yacapin Perez . 40. 60 RATIO Yacapin Perez 4: 6 or 2: 3
METHODS OF DIVIDING PROFITS OR LOSSES 1. EQUALLY Navales and Mindo agreed to divide the P 80, 000 profits equally: Income and Expense Summary Navales, Drawing Mindo, Drawing to distribute profit equally. P 80, 000 P 40, 000 Navales and Mindo agreed to divide the P 80, 000 losses equally: Navales, Drawing Mindo, Drawing Income and Expense Summary to distribute loss equally. P 40, 000 P 80, 000
METHODS OF DIVIDING PROFITS OR LOSSES 2. ARBITRARY RATIO A. Fractional Ratio Grumo and Trillo agreed to divide the profits of P 100, 000 in the ratio of 3: 2 Grumo’s share Trillo’s share P 100, 000 x 3/5 = 60, 000 P 100, 00 x 2/5 = 40, 000 Income and Expense Summary P 100, 000 Grumo, Drawing P 60, 000 Trillo, Drawing P 40, 000 to distribute profit to partners
METHODS OF DIVIDING PROFITS OR LOSSES 2. ARBITRARY RATIO B. Percentage Grumo and Trillo agreed to divide the profits of P 100, 000 as follows: Grumo 60% and Trillo 40%. Grumo’s share Trillo’s share P 100, 000 x 60% = 60, 000 P 100, 00 x 40% = 40, 000 Income and Expense Summary P 100, 000 Grumo, Drawing P 60, 000 Trillo, Drawing P 40, 000 to distribute profit to partners
METHODS OF DIVIDING PROFITS OR LOSSES 3. CAPITAL RATIO Illustration: Profit is P 20, 000 REBUCAS, CAPITAL Aug 1 – P 10, 000 P 60, 000 - Jan 1 20, 000 - Oct 1 P 70, 000 SALAZAR, CAPITAL Nov 1– P 20, 000 P 40, 000 - Jan 1 10, 000 - June 1 P 30, 000 Any partner may draw a stipulated amount as their share of the estimated profit and any drawing in excess of what has been agreed upon is regarded as withdrawals of investment and shall be charged to their capital accounts.
METHODS OF DIVIDING PROFITS OR LOSSES a. Beginning Capital Ratio Rebucas Salazar P 60, 000 P 100, 000 P 40, 000 P 100, 000 x P 20, 000 = P 12, 000 x P 20, 000 = P 8, 000 P 20, 000 Income and Expense Summary P 20, 000 Rebucas, Drawing P 12, 000 Salazar, Drawing P 8, 000 to distribute profit to partners
METHODS OF DIVIDING PROFITS OR LOSSES b. Ending Capital Ratio Rebucas Salazar P 70, 000 P 100, 000 P 30, 000 P 100, 000 x P 20, 000 = P 14, 000 x P 20, 000 = P 6, 000 P 20, 000 Income and Expense Summary P 20, 000 Rebucas, Drawing P 14, 000 Salazar, Drawing P 6, 000 to distribute profit to partners
METHODS OF DIVIDING PROFITS OR LOSSES c. Average Capital Ratio Average capital of Rebucas and Salazar DATE Jan. 1 Aug. 1 Oct. 1 DEBIT CREDIT BALANCE 60, 000 50, 000 70, 000 10, 000 20, 000 NO. OF MONTH UNCHANGED (multiply) 7 2 3 12 Average Capital DATE Jan. 1 June 1 Nov 1 DEBIT CREDIT 40, 000 10, 000 20, 000 BALANCE 40, 000 50, 000 30, 000 Average Capital NO. OF MONTH UNCHANGED (multiply) 5 5 2 12 PESO MONTH 420, 000 100, 000 210, 000 730, 000 60, 833. 33 PESO MONTH 200, 000 250, 000 60, 000 510, 000 42, 500
METHODS OF DIVIDING PROFITS OR LOSSES c. Average Capital Ratio Rebucas Salazar P 60, 833 P 103, 333 P 42, 500 P 103, 333 x P 20, 000 = P 11, 775 x P 20, 000 = P 8, 225 P 20, 000 Income and Expense Summary P 20, 000 Rebucas, Drawing P 11, 775 Salazar, Drawing P 8, 225 to distribute profit to partners
METHODS OF DIVIDING PROFITS OR LOSSES 4. ALLOWING INTEREST ON CAPITAL AND REMAINDER ON AGREED RATIO Illustration ( Case 1) : Katrina and Sang are partners with beginning capital balances of P 80, 000 and P 60, 000 respectively. They agreed to allow 10% interest each based on their beginning capital balances and the remainder is equally divided. The profit is P 30, 000. Schedule of Profit Distribution TOTAL Interest allowed to partners Katrina Sang Total Remainder: Equally divided As Distributed Partners KATRINA SANG 8, 000 6, 000 14, 000 8, 000 16, 000 30, 000 8, 000 16, 000 8, 000 14, 000
METHODS OF DIVIDING PROFITS OR LOSSES 4. ALLOWING INTEREST ON CAPITAL AND REMAINDER ON AGREED RATIO Income and Expense Summary P 30, 000 Katrina, Drawing P 16, 000 Sang, Drawing P 14, 000 to distribute profit to partners
METHODS OF DIVIDING PROFITS OR LOSSES Illustration ( Case 2) : In case 1, the profit is only P 10, 000. Schedule of Profit Distribution TOTAL Interest allowed to partners Katrina Sang Total Remainder: Equally divided As Distributed 8, 000 6, 000 14, 000 (4, 000 ) 10, 000 Partners KATRINA SANG 8, 000 6, 000 ( 2, 000 ) 6, 000 (2, 000 ) 4, 000 Income and Expense Summary P 10, 000 Katrina, Drawing P 6, 000 Sang, Drawing P 4, 000 to distribute profit to partners
METHODS OF DIVIDING PROFITS OR LOSSES Illustration ( Case 3) : In case 1, there is a loss of P 12, 000. Schedule of Loss Distribution TOTAL Interest allowed to partners Katrina Sang Total Remainder: Equally divided As Distributed 8, 000 6, 000 14, 000 Partners KATRINA SANG 8, 000 6, 000 (26, 000 ) (13, 000 ) (12, 000 ) ( 5, 000 ) (7, 000) Katrina, Drawing P 5, 000 Sang, Drawing P 7, 000 Income and Expense Summary P 12, 000 to distribute loss to partners
METHODS OF DIVIDING PROFITS OR LOSSES 5. ALLOWING SALARIES TO PARTNERS AND REMAINDER ON AGREED RATIO Illustration ( Case 1) : Zards and Florentine agreed to have an annual salaries of P 15, 000 and 35, 000, respectively. The remainder is distributed on 40%-60%. The profit is P 70, 000. Schedule of Profit Distribution Partners Salaries allowed to partners Remainder: Zards Florentine As Distributed TOTAL 50, 000 KATRINA 15, 000 8, 000 12, 000 70, 000 8, 000 Income and Expense Summary Zards, Drawing Florentine, Drawing to distribute profit to partners 23, 000 SANG 35, 000 12, 000 47, 000 P 70, 000 P 23, 000 P 47, 000
METHODS OF DIVIDING PROFITS OR LOSSES Illustration ( Case 2) : In case 1, the profit is P 40, 000. Schedule of Profit Distribution Salaries allowed to partners Remainder: Zards Florentine As Distributed TOTAL 50, 000 (4, 000 ) (6, 000 ) 40, 000 Income and Expense Summary Zards, Drawing Florentine, Drawing to distribute profit to partners Partners KATRINA SANG 15, 000 35, 000 (4, 000) 11, 000 (6, 000) 29, 000 P 40, 000 P 11, 000 P 29, 000
METHODS OF DIVIDING PROFITS OR LOSSES Illustration ( Case 3) : In case 1, the loss is 16, 000 Schedule of Loss Distribution Salaries allowed to partners Remainder: P 66, 000 Zards ( 66, 000 x 40% ) Florentine ( 66, 000 x 60% ) As Distributed TOTAL 50, 000 (26, 400 ) (39, 600 ) (16, 000 ) Partners KATRINA SANG 15, 000 35, 000 (26, 400 ) (11, 400 ) Zards, Drawing P 11, 400 Florentine, Drawing P 4, 600 Income and Expense Summary to distribute loss to partners (39, 600 ) (4, 600) P 16, 000
METHODS OF DIVIDING PROFITS OR LOSSES 5. ALLOWING BONUS TO THE MANAGING PARTNER BASED ON INCOME AND REMAINDER ON AGREED RATIO Illustration ( Case 1): Kim and Gerald are partners. Gerald is allowed a bonus of 20% of profit before bonus and the balance to be divided equally. The profit is P 60, 000 Schedule of Profit Distribution Partners Bonus ( 20% x P 60, 000) Balance to be divided equally: (60, 000 - 12, 000 = 48, 000) Gerald: 48, 000 x 50% Kim: 48, 000 x 50% As Distributed GERALD 12, 000 KIM 24, 000 36, 000 Income and Expense Summary Gerald, Drawing Kim, Drawing to distribute profit to partners 24, 000 TOTAL 12, 000 24, 000 60, 000 P 36, 000 P 24, 000
METHODS OF DIVIDING PROFITS OR LOSSES Illustration ( Case 2) : Assuming that Gerald is allowed a bonus of 20% of profit after bonus and the remainder is equally divided. Computation of bonus: Profit before bonus Profit after bonus ( 60, 000 / 120%) Bonus 60, 000 50, 000 120% 100% 20% Schedule of Profit Distribution Partners Bonus ( 20% x P 60, 000) Balance to be divided equally: (60, 000 - 10, 000 = 50, 000) Gerald: 50, 000 x 50% Kim: 50, 000 x 50% As Distributed Income and Expense Summary Gerald, Drawing Kim, Drawing GERALD 10, 000 KIM 25, 000 35, 000 25, 000 TOTAL 10, 000 25, 000 60, 000 P 35, 000 P 25, 000
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