Method of Dividing Net Income/Net Loss

1. Based on Capital Contribution (and any additional on interest, allowances, bonus)

2. Profit Agreement
3. Loss Agreement
4. If there is no profit agreement, profit will be divided according to capital contribution
5. If there is no loss agreement, loss will be divided according to capital contribution but if there is a
profit agreement, loss will be divided by the profit agreement.

Journal Entry for allocation of gains/loss

Example: Net income of P 60,000, Distribution of gains to Mr. P (P 40,000) and to Mr. N (P 20,000)

Income Summary 60,000

Mr. P, Capital 40,000
Mr. N, Capital 20,000

This is to allocate income and close the income summary

Admission of a Partner

1. Purchase of Partnership Interest

This is personal transaction between the current partners and the new partner

H. Perez, sells one-half of his partnership interest to T. Requillo, for P18,000. Perez has to give up
P13,000 of his capital in the partnership

H. Perez, Capital 13,000

T. Requillo, Capital 13,000

2. Investing Assets in a Partnership

Admitting a partner by accepting assets in a transaction between the new partner and the partnership
K. Zayn and J. Zee shares a 1:1 profit/loss ratio with P52,000 and P26,000 equity respectively. Both
partners agreed to accept R. Jay if will invest:

a. No Bonus (P22,000)

Cash 22,000
R. Jay, Capital 22,000

*computation = 52,000 + 26,000 + 22,000 = 100,000 total capital where 22% belongs to R. Jay, so no
bonus as he invested 22,000. Note, dividing income and loss is a separate matter to agree upon
b. Bonus to old partners (P42,000 and R. Jay will obtain 25% equity) (divided based on income/loss
sharing agreement)

Cash 42,000
R. Jay, Capital 30,000
K. Zayn, Capital 6,000
J. Zee, Capital 6,000

*computation = 52,000 + 26,000 + 42,000 = 120,000 x .25 = 30,000 equity. So the remaining 12,000 is
distributed as a bonus to old partners

c. Bonus to new partner (18,000 and R. Jay will obtain 25% equity)

Cash 18,000
K. Zayn, Capital 3,000
J. Zee, Capital 3,000
R. Jay, Capital 24,000

*computation = 52,000 + 26,000 + 18,000 = 96,000 x .25 = 24,000 equity. R. Jay obtained 24,000 capital
by investing 18,000 thus he is given a bonus which is taken from the old partners.

Withdrawal of a Partner
1. A withdrawing partner sells his interest to another person who pays for it in cash or other assets. To
record this simply debit the withdrawing partner’s capital account and credit the new partner’s capital
account. (This is similar to admission of a new partner by purchase of partnership interest)

2. When cash and or other assets of the partnership are distributed to the withdrawing partner in
settlement of his or her interest:

S. Uy Capital P 20,000
A. Tan Capital P 30,000
K. Cue Capital P 50,000

With a 2:3:5 profit/loss agreement

a. No bonus
S. Uy sold his interest back to the partnership for P20,000

S. Uy, Capital 20,000

Cash 20,000
b. Bonus to Remaining Partners
S. Uy sold his interest back to the partnership for 15,000

S. Uy, Capital 20,000

Cash 15,000
A. Tan, Capital 1,875
K. Cue, Capital 3,125

c. Bonus to Withdrawing partner

S. Uy sold his interest back to the partnership for 25,000

S. Uy, Capital 20,000

A. Tan, Capital 1,875
K. Cue, Capital 3,125
Cash 25,000

Death of a partner
1. Close the books to determine income or loss since the end of the previous accounting period
2. Prepare financial statements

J. Doe, Capital 20,000

Cash/Any asset 20,000