Partnership Operations

Distribution of Income and Losses

 Rules – Division of Profits
1. According to the partner’s agreement
2. If there is no agreement:
 As to capitalist partners, the profits shall be
divided according to their capital
contributions (according to original
investments or in its absence, the ratio of
capital balances at the beginning of the
year).
 As to industrial partners (if there is any),
such share may be just and equitable under
the circumstances, provided, that the
industrial partner shall receive such share
before the capitalist partners shall divide the
profits.
 Rules – Division of Losses
1. According to the partner’s agreement
2. If there is no agreement as to distribution
of losses but there is agreement as to
profits, losses shall be distributed
according to profit sharing ratio.
3. In the absence of any agreement:
 As to capitalist partners, the losses shall be
divided according to their capital contributions
(according to original investments or in its
absence, the ratio of capital balances at the
beginning of the year)
 As to purely industrial partners (if there is any),
they shall not be liable for any losses.
Common Ways of Distributing Profits / 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 capital balances at the end of the year
 Ratio of average capital balances
3. By allowing interest on the partners’ capital and balance
in an agreed ratio
4. By allowing salaries to partners and the balance in an
agreed ratio
5. By allowing bonus to managing partner based on profit
and balance in agreed ratio
6. By allowing salaries, interest on partners’ capital, bonus
to managing partner and the balance in agreed ratio
 Illustration
Medina and Detoya Partnership had
300,000 of profits for the year ended, Dec. 31,
2012, the first year of operations. The
partnership contract provided that the partners
may withdraw 5,000 on the last day of each
month.
Medina invested 400,000 on January 1,
2012 and an additional 100,000 on April 1.
Detoya invested 800,000 on Jan. 1 and withdrew
50,000 on July 1.These transactions are
summarized next.
 T- Accounts
Medina, Capital Detoya, Capital

Jan. 1 400,000.00 July 1 50,000.00 Jan. 1 800,000.00

Apr. 1 100,000.00

Medina, Drawing Detoya, Drawing

Jan. - Dec. 60,000.00 Jan. - Dec. 60,000.00

Income Summary

Dec. 31 300,000.00
 Equal Sharing
Profit 300,000.00

No. of Partners 2

Share of each 150,000.00

Entry:

Income Summary 300,000.00

Medina, Capital 150,000.00

Detoya, Capital 150,000.00

to record the division of profits

 Agreed Ratio
Assume that the partners agreed to share in
the ratio of 60:40 for Medina and Detoya.
Medina Detoya Total
Sharing % 60% 40% 100%
Share in Profits 180,000.00 120,000.00 300,000.00

Journal Entry:
Income Summary 300,000.00
Medina, Drawing 180,000.00
Detoya, Drawing 120,000.00
to record the division of profits
Based on Capital Contribution – Original Capital Investments

Assume that the partners agreed to divide profits in

the ratio of their original capital investments.
Medina Detoya Total

Original Investment 400,000.00 800,000.00 1,200,000.00

Ratio 1/3 2/3 1

Share in Profits 100,000.00 200,000.00 300,000.00

Journal Entry:

Income Summary 300,000.00

Medina, Drawing 100,000.00

Detoya, Drawing 200,000.00

to record the division of profits

 Based on Capital Balances – Beginning of the
year
Assume that the partners agreed to divide profits in ratio of
capital balances at the beginning of the year.

Medina Detoya Total

Beginning Capital 400,000.00 800,000.00 1,200,000.00

Ratio 1/3 2/3 1

Share in Profits 100,000.00 200,000.00 300,000.00

Journal Entry:

Income Summary 300,000.00

Medina, Drawing 100,000.00

Detoya, Drawing 200,000.00

to record the division of profits

Based on Capital Balances – End of the year
Assume that the partners decide to divide profits in the ratio
of capital balances at the end of the year before drawings
and distribution of profit.
Medina Detoya Total

Ending Capital 500,000.00 750,000.00 1,250,000.00

Ratio 2/5 3/5 1

Share in Profits 120,000.00 180,000.00 300,000.00

Journal Entry:

Income Summary 300,000.00

Medina, Drawing 120,000.00

Detoya, Drawing 180,000.00

to record the division of profits

Based on Capital Balances – Average Capital
Assume that partners agreed to divide profits based on their average capital.

Medina and Detoya

Computation of the Average Capital Balances
for the year ended, December 31, 2012

Amount Portion of Months Average Capital

Date
Invested before year -end Balances

Medina, Capital
Jan. 1 400,000.00 X 12/12 = 400,000.00
Apr. 1 100,000.00 X 9/12 = 75,000.00
Average Capital 475,000.00

Detoya, Capital
Jan 1. 800,000.00 X 12/12 = 800,000.00
July 1 (50,000.00) X 6/12 = (25,000.00)
Average Capital 775,000.00

Total Average Capital Balances 1,250,000.00

Based on Capital Balances – Average Capital (continued…)

Medina Detoya Total

Average Capital 475,000.00 775,000.00 1,250,000.00
Ratio 3/8 5/8 1

Share in Profits 114,000.00 186,000.00 300,000.00

Journal Entry:

Income Summary 300,000.00

Medina, Drawing 114,000.00
Detoya, Drawing 186,000.00
to record the division of profits