POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

ACCO 30103 – Integrated Review in Advanced Financial Accounting and Reporting

CHAPTER 1.2.: PARTNERSHIP OPERATION

Accounting for partnership operations is essentially the same as accounting for the operations of any other forms of
business organization. Sale of merchandise on account is debited to Accounts Receivable and credited to Sales. Collection
of accounts is debited to Cash and credited to Accounts Receivable. The purchase of merchandise on account is recorded
by a debit to Purchases and credit to Accounts Payable. Payment of accounts is debited to Accounts Payable and credited
to Cash. Payment of expenses is debited to Expenses and credited to Cash.

At the end of the accounting period, adjustments are made for merchandise inventory, accruals, prepayments, provisions
for uncollectible accounts and provision for depreciation. Profit is determined in the usual manner that is by matching
revenues and expenses.

Special Problems in Partnership Accounting

1. Closing Entries
2. Distribution of Profits and Losses
3. Preparation of Worksheet/Working Paper
4. Preparation of Financial Statements

DISTRIBUTION OF PROFITS AND LOSSES

Since a partnership is composed of two or more persons, there should be a clear indication on how the partnership profit
or loss be equitably divided among the partners. The following are the factors to be considered in establishing a just and
fair profit and loss sharing agreement:
• Services rendered by the partners to the partnership. Salaries are given to partners proportionate to time devoted to
the organization. Those who devote more time should have greater salary share. (Salaries)
• Amount of capital contributed by the partners. Interest on capital contribution is allowed to each partner to give
recognition to the differences in capital contributed to the partnership. Thus, a partner with highest capital
contribution gets the highest interest share. (Interest on Capital – Beginning, Ending or Average)
• Entrepreneurship ability or managerial skills of the partners. Bonus is allowed to partner when the partnership
realizes profits in order to give recognition to managerial skills. (Bonus)

RULES FOR DIVIDING PROFITS AND LOSSES

The following is the list of rules in the division of profits and losses:
1. As to Capitalist Partners
a. Division of Profits
• In accordance with agreement
• In the absence of an agreement, division of profits is in accordance with capital contribution
b. Division of Losses
• In accordance with agreement
• If only the division of profits is agreed upon, then the division of losses will follow the same proportion
• In In the absence of an agreement, division of profits is in accordance with capital contribution

2. As to Industrial Partners
a. Division of Profits
• In accordance with agreement
• In the absence of an agreement, division of profits is in accordance with capital contribution
b. Division of Losses
• In accordance with agreement
• In the absence of an agreement, the industrial partner shall have no share in his character as an industrial
partner

CORRECTION OF ERRORS

Corrections to Net Income of current

No Particulars year for the errors made in
Prior Year Current Year
1 Unrecorded prepaid expenses - +
2 Unrecorded accrued expenses + -
3 Unrecorded accrued income - +
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 4 Unrecorded unearned income + -
5 Overstatement of inventories + -
6 Understatement of inventories - +
7 Overstatement of purchases - +
8 Understatement of purchases + -
9 Overstatement of depreciation none +
10 Understatement of depreciation none -

It is understood that the tax implications of these corrections are properly accounted for especially if the partnership is
not a general professional partnership.

PROBLEM SOLVING

PROBLEM 1
X, Y, Z formed a partnership on April 02, 2022 with the following investment: X – P500,000; Y – P600,000 and Z –P700,000.
During the year, the following transactions took place:
Additional Investment: X – P100,000; Y – P0 and Z – P0
Withdrawal: X – P0; Y – P150,000 and Z – P100,000

During the year, the partnership reported a net income of P120,000. The profit and loss agreement of the partnership
contains the following:
• 10% interest is to be paid on that portion of a partner’s ending capital balance in excess of P500,000.
• Partner Y is to receive a bonus equal to 10% of partnership income after interest and salaries.
• Annual salaries of P24,000 and P36,000 are to be paid to Partners X and Z respectively.
• Balance to be divided equally.

Determine the following:

a. Share of X, Y and Z in the net income
b. Capital Balances on December 31, 2022

PROBLEM 2
The partnership of A, B and C provides that profits are to be divided as follows:
• Partners are to receive a 10% interest on average capital.
• Each partner is to receive an annual salary of P24,000.
• Partner A, the managing partner, is to receive a bonus equivalent to 10% of the net income after interest and salaries.
• Remaining profit is to be divided equally among partners.

The movement of the capital of the partners is summarized below:

A B C
Investments:
January 1 110,000 180,000 150,000
February 1 20,000
March 1 10,000
May 1 50,000
August 1 20,000
September 1 20,000 50,000
November 1 20,000
December 1 30,000 10,000

Withdrawals:
February 1 10,000
August 1 5,000 5,000
September 1 5,000
November 1 10,000 10,000

The partnership had a net loss of P200,000 for the year 2022.

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 Determine the following:
a. Share of A, B and C in the net loss
b. Capital Balances on December 31, 2022

PROBLEM 3
A, B and C are partners sharing profits and losses in 3:3:4 ratio. For the year 2022, the partnership books showed a net
income of P125,000. It was disclosed however, that the following errors were made:

2021 2022
Accrued Expenses not recognized 2,500
Expired Portion of Prepaid Insurance not adjusted 3,600
Inventory overstated 5,000
Unrecorded purchases still in transit FOB SP 10,000
Office supplies used not recognized 4,000

Determine the following:

a. Total effects of the errors in the capital of the firm
b. Corrected Net Income in 2022

PROBLEM 4
On January 01, 2022, A, B, C and D formed ABCD Trading Co., a partnership, with capital contributions as follow: A,
P50,000; B, P25,000; C, P25,000; and D, P20,000. The partnership contract provided that each partner shall receive a 5%
interest on contributed capital, and that A and B shall receive salaries of P5,000 and P3,000, respectively. The contract also
provided that C shall receive a minimum of P2,500 per annum, and D a minimum of P6,000 per annum, which is inclusive
of amounts representing interest and share of remaining profits. The balance of the profits shall be distributed to A, B, C
and D in a 3:3:2:2 ratio.
What amount must be earned by the partnership, before any charge for interest and salaries, so that A may receive an
aggregate of P12,500 including interest, salary and share of profits? 32,333

PROBLEM 5
Bong and Kris entered into partnership on March 1, 2021 with the following investments: Bong, P250,000 and Kris P150,000.
Bong is the managing partner and he is to receive salary of P24,000 per year plus bonus equal to 10% of net profit. The
partners also agreed to give 10% interest on their beginning capital. On December 31, 2021, the trial balance of the
partnership is as follows:
Debit Credit
Cash P 140,000
Accounts Receivable 134,000
Prepaid Insurance 24,000
Office Supplies 5,000
Furniture and Fixtures 45,000
Store Equipment 200,000
Purchases 390,000
Purchase Returns P 26,000
Sales 562,000
Sales Returns 15,000
Operating Expenses 115,000
Accounts Payable 120,000
Bong, Capital 210,000
Kris, Capital 150,000
Total P 1,068,000 P 1,068,000
Data for adjustments:
a) Inventories on December 31, 2021 were: Merchandise, P75,000 and Office Supplies on hand was P2,800 only.
b) The prepaid insurance is for one year from March 1, 2021.
c) Accrued utilities of P6,200 is to be recognized.
d) All depreciable assets have 5 years estimated life from March 1, 2021. Straight line method is used. Income tax
rate of 30% is to be considered.

a. Determine the net income of the partnership.

b. Distribute the net income to the partners.

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