actpaco - lesson 3 (revised)

8/2/2019 ACTPACO - Lesson 3 (Revised)

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Partnership & Corporation Acctg

Presented by:

Mr. Francis H. Villamin

DLSU

January 26, 2012


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Partnership & Corporation Accounting

Accounting for Division of Profits and Losses


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Partnership Operation Accounting Cycle of Partnership

1. Recording of the business transaction.2. Posting to ledgers.3. Preparing a trial balance.4. Preparing the worksheet.5. Recording adjusting entries.6. Prepare financial statements.

7. Recording and posting closing entries.8. Preparing a post-closing trial balance.9. Recording and posting reversing entries.


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Partnership Operation Recording of partners loan

account when a partner lends

money to the partnership.

Cash Pxxx

Loan Payable to Partner Pxxx


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Partnership Operation Recording of loan extended by the

partnership to the partners.

Receivable/Loan from Partnerxxx

Cash xxx


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Partnership Operation Division of Net Income

Income summaryxxx

Partners Drawingxxx


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Partnership Operation Division of net loss

Partners Drawing ..xxx

Income Summary..xxx


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Division of Profits

The partnership contract must clearly state

or stipulate how the partners will divide theprofits or losses to avoid misunderstandingamong them in the future.


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Division of Profits The following factors are considered in the

equitable distribution of profits or losses:

1. The capital contribution of partner.

2. The services to be rendered by the

partner.

3. The management skill or expertise of

the partner.


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Division of Profits

4. The duties and responsibilities of the

partner/s.5. The time to be spent by the partner/s

in the business.


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Division of Profits

Other factors that may be incorporated in

the profit or loss (p/l) sharing agreement:a. Salary the partners may be allowed

fixed salaries.

b. Interest the partners may allowinterest on capital investments or

withdrawals.


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Division of Profits

c. Bonus the managing partner may be

allowed a certain percentage of thenet profit as bonus.


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Rules in the Division of ProfitsA.As to the Capitalist Partner

Division of Profits1. In accordance with the partners agreement.

2. In the absence of an agreement, profits

should be divided in proportion to theircapital contributions.


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Rules in the Division of ProfitsA.As to the Capitalist Partner

Division of Losses1. In accordance with the partners agreement.

2. If only the division of profits is agreed upon,

the division of losses will be the same as

their profit sharing agreement.3. In the absence of an agreement, losses will be

divided according to their capital contribution.


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Rules in the Division of ProfitsB. As to an Industrial Partner

Division of Profits1. In accordance with the partners agreement.2. In the absence of an agreement , the industrial

partner shall received a just and equitable share inthe profits and the balance will be divided by thecapitalist partners based on their capital contributions.

Note: An industrial partner does not share in the losses.


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Rules in the Division of Profits

C. As to an Capitalist -Industrial Partner

Division of Profits1. In accordance with the partners agreement.2. In the absence of an agreement , he shall

receive in his capacity as an industrialpartner such share as may be just and

equitable and in his character as acapitalist partner, his share should be inproportion to his capital contribution.


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Rules in the Division of Profits

C. As to an Capitalist -Industrial Partner

Division of Losses

1. In accordance with the partners agreement.

2. In the absence of an agreement ,he will not share inthe losses in his capacity as an industrial partner, but

in his character as a capitalist partner, his shareshould be in proportion to his capital contribution.


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Methods in the Division ofProfits and Losses

1. Equally

2. Using an arbitrary ratio

a. Expressed as a percentage.

b. Expressed in fraction.

c. Expressed a a ratio.


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3. Using the capital ratio

a. Original capitalthe partners capital

at the date of formation.

b. Beginning capitalthe partners

capital at the beginning of the currentperiod.


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3. Using the capital ratio

c. Ending capitalthe partners capital

at the end of the period.

d. Weighted average capital the

weighted average capital during theperiod.


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4. Interest is to be allowed on the partners

capital and the balance will be divided

at an agreed ratio.

5. Salaries are to be allowed and the

balance will be divided using an agreedratio.


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6. Bonus is to be allowed to the managing

partner and the balance will be divided

using an agreed ratio.

7. Interest on the partners capital, salary

allowances, and bonus will be allowedand the balance will be divided using

an agreed ratio.


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Illustrative Cases

Mark and Spencer are partners whose capital

Investments at the date of formation were

P200,000 and P300,000 respectively. Their

capital accounts at the end of the year

showed the following:


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Illustrative Cases

Mark, Capital

03/01 80,000 01/01 300,000

08/01 280,000

07/01 180,000 01/01 700,000

12/01 480,000


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Illustrative Cases

The Income & Expense Summary account showed a

credit balance of P240,000.


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Illustrative Cases

a. Profits are divided equally.

Income & Expense Summary 240,000

Mark, Drawing (1/2) 120,000

Spencer, Drawing (1/2) 120,000


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Illustrative Cases

b. Profits are divided 20% to Mark and 80%

to Spencer.


Mark, Drawing (.20 x P240,000) 48,000

Spencer, Drawing (.80 x P240,000) 192,000


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Illustrative Cases

c. Profits are divided 3:5 for Mark and Spencer

respectively.


Mark, Drawing (3/8 x P240,000) 90,000

Spencer, Drawing (5/8 x P240,000) 150,000


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Illustrative Cases

d. Profits are divided 1/4 to Mark and 3/4

to Spencer


Mark, Drawing (1/4 x P240,000) 60,000



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Illustrative Cases

e. Profits are divided using the original capitalratio.


Mark, Drawing (2/5 x P240,000) 96,000



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Illustrative Cases

f. Profits are divided using the beginningcapital ratio.


Mark, Drawing (3/10 P240,000) 72,000



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Illustrative Cases

f. Profits are divided using the ending capitalratio.


Mark, Drawing (5/15 P240,000) 80,000



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Illustrative Cases

h. Profits are divided using the weightedaverage capital ratio.


Mark, Drawing (35/100P240,000) 84,000



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Illustrative Cases

Computation of weighted average capitalMark

Date Capital Balance Months Unchanged Total01.01 300,000 x 2 = 600,000

03.01 220,000 x 5 = 1,100,000

08.01 500,000 x 5 = 2,500,000

------ ------------

12 4,200,000=== ======


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Illustrative Cases

Average Capital of Mark

4,200,000 / 12 = 350,000

=====


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Illustrative Cases

Computation of weighted average capitalSpencer

Date Capital Balance Months Unchanged Total01.01 700,000 x 6 = 4,200,000

07.01 520,000 x 5 = 2,600,000

12.01 1,000,000 x 1 = 1,000,000

------ -------------

12 7,800,000=== =======


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Illustrative Cases

Average Capital of Spencer

7,800,000 / 12 = 650,000

=====


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Illustrative Cases

i. Interest of 10% on the beginning capitalwill be allowed and the balance to be

divided equally.


Mark, Drawing 100,000

Spencer, Drawing 140,000


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Illustrative Cases

Mark Spencer Total

Interest of 10% on

beginning capital 30,000 70,000 100,000

Balance: Equally 70,000 70,000 140,000

-------- --------- -----------100,000 140,000 240,000

===== ===== =====


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Illustrative Cases

j. Mark and Spencer are allowed salaries of

P60,000 and P80,000, respectively, and the

balance is to be divided 40% for Mark and 60%for Spencer.





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Illustrative Cases

Mark Spencer Total

Salaries 60,000 80,000 140,000

Balance: 40%, 60% 40,000 60,000 100,000

-------- --------- -----------

100,000 140,000 240,000===== ===== =====


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Illustrative Cases

k. Spencer, the managing partner is allowed a bonus

of 20% of the net profit before bonus and

the balance is to be divided equally.


Mark Drawing 96,000

Spencer Drawing 144,000


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Illustrative Cases

Mark Spencer Total

Bonus (.20 x 240,000) 48,000 48,000

Balance: Equally 96,000 96,000 192,000

-------- --------- -----------

96,000 144,000 240,000===== ===== =====


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Illustrative Cases

l. Spencer, the managing partner is allowed a bonus

of 20% of the net profit after bonus and

the balance is to be divided 2:8 for Mark andSpencer.





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Illustrative Cases

Mark Spencer Total

Bonus (.20 x 200,000) 40,000 40,000

Balance: 2:8 40,000 160,000 200,000

-------- --------- -----------

40,000 200,000 240,000===== ===== =====


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Illustrative Cases

Computation of bonus:

Net profit before bonus 120% P240,000

Less: Bonus 20% 40,000 (.20 x 200,000)

-------- -----------

Net profit after bonus 100% P200,000 (240,000/120%)

===== =======


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Illustrative Cases

m. 10% interest is allowed on the beginning capital;

each partner is allowed a salary of P50,000. Spencer, themanaging partner is entitled to a bonus of 10% of the net

profit before interest, salaries and bonus, the remainingprofit is to be divided equally.





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Illustrative Cases

Mark Spencer Total

10% interest 30,000 70,000 100,000

Salaries 50,000 50,000 100,000

Bonus (10% x 240,000) 24,000 24,000

Balance: Equally 8,000 8,000 16,000

---------- ---------- ----------88,000 152,000 240,000

===== ===== =====


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Illustrative Cases

n. 10% interest is allowed on the beginning capital;

P40,000 salary to Mark and P56,000 to Spencerplus a bonus of 10% of the net profit aftersubtracting interest, salaries and bonus, theremaining income is to be divided equally.





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Illustrative Cases

Mark Spencer Total

10% interest 30,000 70,000 100,000

Salaries 40,000 56,000 96,000

Bonus (10% x 40,000) 4,000 4,000

Balance: Equally 20,000 20,000 40,000

---------- ---------- ----------90,000 150,000 240,000

===== ===== =====


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Illustrative Cases

Computation of bonus:

Net profit 240,000

Interest (100,000)

Salaries (96,000)-----------

Net profit before bonus 110% 44,000

Bonus 10% 4,000 (.10 x 40,000)

-------- ---------100% 40,000 (44,000/110%)

==== =====


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Thank you.

Thats all for today!!

actpaco - lesson 3 (revised)

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