2-1 Review Questions 1.

Enumerate and define the two equity accounts that should be maintained for each partner in the partnership books. 1) Capital account- represents the original and additional net investment less any permanent withdrawals. 2) Drawing account- represents the temporary withdrawals and the share in net income if net income is not closed to the capital account. *Particularly relevant in partnerships to ensure that a partner is not taking too much money out of the business. 2. Enumerate three business transactions that will increase a partners capital account. a. Initial and additional investments b. Division of net income c. Partners settlement of partnership liability through personal assets 3. What are the different ways of dividing partnership profits and losses? By percentage By fraction By decimal By ratio

4. What does the law provide for if there is no agreement between or among the partners regarding the distribution of profits and losses? In the absence of any agreement on the manner of dividing profits and losses, the Philippine Partnership Law provides that the share of each partner in the profit or loss shall be in proportion to what he has contributed; while the industrial partner receives a just and equitable share under the circumstances. 5. What does the law provide if there is an agreement among partners regarding the distribution of profits but no stipulation regarding the distribution of losses? The law also provides that the division of losses shall be in the same manner profit is divided in the absence of any agreement on the division of loss. 6. What factors are considered in deciding the particular profit and loss sharing scheme that may be adopted by a partnership? Services rendered by the partners to the partnership Amount of capital contributed by the partners to the business

 Entrepreneurial ability or managerial skill of the partners 7. What are the three possible bases that can be used in computing capital ratios? Which of these three bases will give a more equitable profit or loss distribution? Beginning capital balance Ending capital balance Average capital balance The base that will give a more equitable and profit and loss distribution is the average capital balance. 8. What is meant by salary allowances given to partners? How is this recorded in the books of the partnership? Salary allowances are provided to recognize the ability, experience, or time devoted by a particular partner to the business. This is recorded in the books as a means of distributing income, which results in the capital of the receiving partner. 9.What is meant by bonus given to partners? How is this recorded in the books of the partnership? A bonus given to a partner serves as an incentive or special compensation. It is usually based on net income. This is recorded in the books as a means of distributing net income, similar to the method of recording salary allowances. 10. Enumerate some of the differences between the financial statements of a partnership and those of a sole proprietorship. a) Statement of Financial Position: Equity section is labeled as partners equity and presents more than one capital account. b) Income Statement: There is an additional section that exhibits the distribution of net income is included in order to provide a full analysis of the contribution of earnings and losses (This feature is presented at the bottom of the income statement.) c) Statement of Changes in Equity: Additional columns are provided to show the changes in the individual partners equity.