Pointer summary chapter 2
Advance accounting
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 necessarily be the same as their capital contribution ratio. The equity of a partner
in the net assets of the partnership should be distinguished from a partner’s share in profit or
losses.
Factors to consider in arriving for dividing profits or losses
Money, property or industry
The profit will be realized from their contribution in of these assets and those
factors will be considered in formulation of an equitable profit and loss ratio.
Other factors:
1- Partners having considerable financial resources, strong credit standing.
2- A partner who is well known in a profession or an industry.
Performance method
Many partnerships use profit and loss sharing arrangements 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
Examples of the use of performance criteria are:
1- Chargeable hours.
2- Total billings.
3- Write-offs.
4- Promotional and civic and activities.
5- Profit in excess of specified levels.
Rules for the distribution profits or losses
Based on the legal provisions of the Civil Code of the Philippines, the following are the rules for
the distribution of profits or losses
1- Profit
a. The profits will be divided according to partners’ agreement
b. if there is no agreement:
as to capitalist partners, the profit shall be divided to the capital
contributions.
As to industrial partners, the industrial partners shall receive such share
before the capitalist partners shall divide the profits.
2- Losses
a. The losses will be divided according to partners’ agreement.
b. If there is no agreement for losses but there is for profit, then the losses shall be
distributed according to profit sharing ratio.
c. In the absence of any agreement
The losses shall be divided according to their capital contribution.
As to purely industrial partners shall not be be liable for any losses.
Correction of prior period errors
Per International Accounting Standards (IAS) No. 8, Accounting Policies, Changes in Accounting
Estimates and Errors, prior period errors are omissions from and other misstatements of the
entity’s financial statements for one or more prior periods that are discovered in the current
period.
Distribution of profit or losses based on partner’s agreement
The profit or losses shall be divided with agreement of the partners and the ratio of the profit
or losses will be recognized as the profit and losses ratio.
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:
Ratio of original capital investments
Ratio of capital balances at the beginning of the year.
Ratio of the capital balances at the end of the year.
Ratio of average capital balances.
3. By allowing interest on the partner.
4. By allowing salaries on the partner.
5. By allowing bonus to the managing partner.
6. By allowing salaries and interest on the partner and the bonus on the managing partner.
Financial statements
The general purpose of the financial statements is to provide information about the results of
operations, financial position, and cash flows of an organization. This information is used by the
readers of financial statements to make decisions regarding the allocation of resources.
Overall considrations
Fair presentation and compliance with (IFRSs)
Going concern.
accrual basis of accounting.
Materiality and aggregation.
Offsetting.
Frequency of reporting and comparative information.
Consistency of presentation.
Identification of the financial statements.
The entity shall clearly identify each (FS):
The name of the entity.
Weather it is individual or for a group of entities.
The date for the end of the reporting period.
The presentation currency.
The level of rounding used in presenting the amounts.
Complete set of financial statements
a. Statement of comprehensive income
Shows the profit or loss and it may be presented as single statement of
comprehensive income or as in an income statement. And the items are :
Revenue.
Finance cost.
Share of profit or loss of associates.
Tax expense.
Single amount comprising: 1. the post-tax profit or loss discontented
operation 2. the post-tax gain or loss.
Ptofit or loss.
Each component classified by nature.
Share of the other comprehensive income.
Total comprehensive income.
b. Statement of changes in equity
a reconciliation of the beginning and ending balances in a company’s equity
during a reporting period.
c. Statement of financial position
It shows the assets and liabilities and equity of an entity for a certain period of
time. And the items are:
PPE
Investment property
Intangible assets
Financial assets
Investment
Biological assets
Inventories
Trade and other receivables
Cash and cash equievalent
Assets classified as held for sale
Trade and other payables
Provisions
Financial liabilities
Current tax
Deferred tax liability
Minority interest
Issued capital and reserves
The entity makes the judgment for the presentation of new items separately:
The nature and liquidity of assets.
The function of assets.
The amounts, nature and timing of liabilities.]
Current assets
These are assets expected to be converted to cash used or consumed
within one year or one operating cycle.
It holds the assets primarily.
Expects to realize within one year.
The assets is cash or cash equivalent.
The rest are non-current assets which is long term assets
Current liabilities
claims against assets that must be satisfied in one year or one
operating cycle, whichever is longer.
It held primarily for the purpose of trading.
Is due to be settled within one year.
Does not have an unconditional right tight to defer settlement for at
least one year.
The rest are non-current liabilities which is obligations with maturities beyond
one year
.
d. Statement of cash flows
Provide information about the cash receipts and cash payments of an entity
during a period. The cash receipts classify as inflow and cash payment as
outflow.
Method of reporting:
1. Direct method.
2. Indirect method.
The major classes of operating cash flows using direct method:
Cash inflows
Receipt from sales of goods and performance.
Receipts from royalties, fees, commissions and other revenues.
Cash outflows
Payment to suppliers of goods and services.
Payments to employees.
Payment for taxes.
Payments for interest.
Payment for other operating expenses.
Cash flows from investing activities
Cash flows
Receipts from sale of property and equipment.
Receipts from sale of investments in debt or equity securities.
Receipts from collections on notes receivables.
Cash outflows
Pqyments to acquire property and equipment.
Payment to acquire debt or equity securities.
Payment to make loans to to other in forms of notes receivables.
Cash flows from financing activities
Cash inflows
Receipts from investments by owners.
Receipts from issuance of notes payable.
Cash outflows
Payments to owners In the form of withdrawals.
Payments to settle notes payable.
