Partnership Operations

Net Income Determination

Determining the net income of a
partnership is the same with the income
determination in sole proprietorships.in simplest
terms, net income or loss is determined by
deducting expenses from revenues.
Accounting for Profit/Loss Sharing
The journal entries in the sharing of
profit/loss for partnerships are done after the first
2 steps of the closing entries. It is to be noted
that in this aspect, careful analysis of data and
agreement should be done in order to come up
with
the
correct
profit/loss
share
and
consequently, to have a correct journal entry.
Rules in Profit Sharing
1. Profit
sharing
based
on
partners
agreement
As a matter of principle, a
partnership being consensual in
nature will have a profit/loss ratio
which will be the basis for sharing
profit/loss. Thus, in determining the
share of each partner, the P/L ratio
should be followed precisely and
carefully.
2. Profit
sharing
based
on
capital
contribution
If an industrial partner exists, he
shall first receive a just equitable
share in the profits before the
capitalist partners share in the
remainder of the profit based on
their capital contribution.
If there is no specified profit
sharing for an industrial partner, he
shall receive a share equal to the
share of a capitalist partner with
the least profit share.
If there is a capitalist-industrial
partner, he shall first have a just
equitable share for his services and
then share in the remaining profit
together with the other capitalist
partners based on their capital
balances.
Rules in Loss Sharing
1. Loss
sharing
based
on
partners
agreement
As a general rule, loss should be
distributed among the partners
based on the profit or loss ratio.
If there is only a profit ratio and a
loss ratio is not agreed upon, loss

shall be divided using the profit

ratio.
In this case, if an industrial partner
has a share in the loss based on
the agreed loss ratio, he is still
bound to share in the loss.
2. Loss sharing based on capital contribution
Loss shall be divided based on
capital contribution
If a pure industrial partner exists,
he shall be exempt from the
sharing of loss. Thus, only the
capitalist partners will share in the
loss
based
on
their
capital
contribution.
If a capitalist-industrial partner
exists, he still shares in the loss
based on the agreed loss sharing
ratio, based on the profit ratio, or
based on the capital contribution.
Arbitrary Agreements in Computing Profits
and Losses
Some of the most common agreements with
regards to sharing profit and loss are as follows:
1. Equally
2. Specified ratio or percentage
3. Capital ratio
Original capital
Beginning capital
Ending capital
Average capital
i. Simple
ii. Weighted- if silent
4. Providing interest to partners capital
On actual capital balance- average
capital is used since it is more
equitable if silent
In excess of investment
5. Providing salaries
6. Providing bonus
7. Multiple bases
Accounting for Interest and Salaries
As a general rule, such should not be
treated as expenses because these are only used
as a means of distributing profit.
However, if the partnership opted to
present such as an expenses with proper
disclosures to the financial statements, then
simply follow it.
Treating these items differently will affect
the profit/loss sharing, definitely.
Distributing Insufficient Net Income
These are the general guidelines:
Interest and salaries are still given and the
deficit will be distributed based on the
agreement or capital balances.

Bonus is still given as long as the bonus

base is positive.

Distributing Losses
These are the general guidelines:

Interest and salaries are still given and the

deficit will be distributed based on the
agreement or capital balances.
Bonus is not given because it is only given
as incentives to earnings.