PARTNERSHIP PAR TNERSHIP OPERATIONS O PERATIONS
Closing the books at the end of the accounting period: 1. Merchandise Inventory Income Summary To set up ending inventory
xx xx
2. All Nominal Accounts with Credit Balances xx Income Summary To close all nominal accounts with credit balances to income summary.
xx
3. Income Summary xx All Nomina Nominall Accoun Accounts ts with Debit Balan Balances ces To close all nominal accounts with debit balances to income summary. summary.
xx
NET Income 4. Income Summary Partners’ Drawing To distribute profits to partners
xx xx
NET Loss 4. Partners’ Drawing Income Summary To distribute losses to partners
xx xx
INCREASES/DECREASES IN CAPIT CAPITAL AL & DRA DRAWING WING ACCOUNTS CAPITAL Decrease Increase Permanent withdrawal0 Initial investment Sale of equity Additional Investment Payment of partnership liability from personal funds Debit balance in Credit balance in drawing drawing
DRAWING Increase Decrease Temporary withdrawal Share in Net Income Share in Net Loss Partnership pays the personal liability of a partner
DIVISION OF PROFITS & LOSSES Profits and Losses may be shared partners according to the following agreements:
1. 2.
3.
4. 5. 6.
equally arbi ar bitr trar ary y ra rati tio o a. percentage b. fraction capital ratio a. ori origi gina nal/ l/be begi ginn nnin ing g ca capi pita tall b.. en b endi ding ng ca capi pita tall c. av aver erag agee ca capi pita tall allowing allowi ng intere interest st on partne partners’ rs’ cap capita itall balance balancess allo al lowi wing ng sal salar arie iess to pa part rtne ners rs bonus bon us to man managi aging ng partn partner er based based on net net income income
EXAMPLE
JOHN CAPITAL 10,000 1/1 50,000 7/1
5/1 10/31
MARTHA CAPITAL 400,000 7/1 50,000 160,000
1/1 4/1 9/30
NET INCOME FOR THE PERIOD –P 150,000
DIVISION OF PROFITS & LOSSES 1.
2.
equally Income Summary John, Drawing Martha, Drawing To distribute profits to partners
75,000 75,000
arbi ar bitr trar ary y ra rati tio o a. pe perc rceent ntag agee 40%: 40%:60 60% % b.. fr b frac acti tion on 2/5 2/5:3 :3/5 /5 Income Summary John, Drawing Martha, Drawing To distribute profits to partners
3.
150,000
150,000 60,000 90,000
Cap apit itaal RA RATI TIO O a.
Beginn Beg inning ing Cap Capita itall Rati Ratio o : 400: 400:300 300 or 4/7 4/7:3/ :3/7 7
Income Summary John, Drawing Martha, Drawing To distribute profits to partners
150,000 85,714.29 64,285.71
b. Ending Capital Ratio 500: 600 or 5/11:6/11 5/11:6/11 Income Summary John, Drawing Martha, Drawing To distribute profits to partners
150,000 68,181.82 81,818.18
c. Average Average Capital Ratio Income Summary John, Drawing Martha, Drawing To distribute profits to partners
COMPUTATION COMPUTA TION OF AVERAGE AVERAGE CAPITAL
150,000 75,202.16 74,797.84
300,000 200,000 150,000
Date
Capital Balance
John ‘Jan 1 ‘May 1 ‘July1 Oct 31 Martha ‘Jan 1 April 1 ‘July1 Sept 30
No. of Months Unchanged
400,000 390,000 550,000 500,000 300,000 500,000 450,000 600,000
Computation
Peso Months
Average Capital
4 2 4 2
P1,600,000 780,000 2,200,000 1,000,000 P5,580,000/12 3 P900,000 3 1,500,000 3 1,350,000 3 1,800,000 P5,550,000/12 Share in Net Income of P150,000
P465,000
462,500
Average Capital: John P465,000 150,000 x 465000/927,500= P 75,202.16 Mart Ma rtha ha 46 462, 2,50 500 0 150, 15 0,0 000 00x x 46 462, 2,50 500 0/9 /927 27,5 ,500 00 = P 74 74,,79 797. 7.84 84 P927,500 ======= 4. Allowing interest on partners’ capital balances 10% interest on beginning capital, balance equally Schedule of Distribution of Profits John
10% Interest on beginning Capital John (400,000 x 10%) Martha (300,000 x 10%) Balance equally(150,000-70,000) Share in Net Income Income Summary John, Drawing Martha, Drawing To distribute profits to partners
Martha
Total
P30,000 40,000 P70,000
P70,000 80,000 P150,000
P40,000 40,000 P80,000 150,000 80,000 70,000
5.Allowing salaries to partners Salary allowance of P50,000 to John and P40,000 to Martha, balance in the ratio of 2:3 Schedule of Distribution of Profits
Salary allowance Balance 2:3 Share in Net Income Income Summary John, Drawing Martha, Drawing To distribute profits to partners
John P50,000 24,000 P74,000
Total P90,000 60,000 P150,000
150,000 74,000 76,000
6.Bonus to managing partner based on net income 20% Bonus to John, the managing partner, balance equally Schedule of Distribution of Profits John 20% Bonus to John P30,000 Balance equally 60,000 Share in Net Income P90,000 Income Summary John, Drawing Martha, Drawing To distribute profits to partners
Martha P40,000 36,000 P76,000
Martha
60,000 P60,000
150,000 90,000 60,000
Total P30,000 120,000 P150,000
7. Allowing interest on partners’ capital balances, salaries and bonus, balance equally equally.. -5% interest on ending capital, -salary allowance to John, P30,000; Martha, P40,000 -10% bonus to John -balance equally Schedule of Distribution of Profits John
Martha
10% interest on ending capital John- 500,000 x5% Martha- 600,000 x 5%
P25,000
Salary allowance 10% Bonus to John Balance equally Share in Net Income
30,000 15,000 5,000 P75,000
Income Summary John, Drawing Martha, Drawing To distribute profits to partners
Total
P30,000
P55,000
40,000
70,000 15,000 10,000 P150,000
5,000 P75,000
150,000 75,000 75,000
8. Allowing interest on partners’ capital balances, salaries and bonus, balance equally equally.. (NET INCOME IS INSUFFICIENT) -10% interest on ending capital, -salary allowance to John, P50,000; Martha, P60,000 -20% bonus to John -balance equally Schedule of Distribution of Profits John
Martha
10% interest on ending capital John- 500,000 x10% Martha- 600,000 x 10%
P50,000
Salary allowance 20% Bonus to John Excess equally Share in Net Income
50,000 30,000 (50,000) P80,000
Income Summary John, Drawing Martha, Drawing To distribute profits to partners
Total
P60,000
150,000 80,000 70,000
NET LOSS- P150,000
9. Allowing interest on partners’ capital balances, salaries and bonus, balance 4:6
P110,000
60,000
110,000 30,000
(50,000) P70,000
(100,000) P150,000
-10% interest on ending capital, -salary allowance to John, P50,000; Martha, P60,000 -20% bonus to John -balance 4:6 Schedule of Distribution of Net Loss John
10% interest on ending capital John- 500,000 x10% Martha- 600,000 x 10%
Martha
Total
P50,000
Salary allowance Balance 4:6 Share in Net Income • No bonus since Bonus is always based on net income.
John, Drawing Martha, Drawing Income Summary To distribute losses to partners
50,000 (148,000) (P48,000)
P60,000
P110,000
60,000 (222,000) (P102,000)
110,000 (370,000) (P150,000)
48,000 102,000 150,000
PREPARATION OF INCOME STATEMENT & STATEMENT OF PARTNERS’ EQUITY The following selected ledger balances were taken from th e books of NMA Company
Depreciation Expense-Office Equipment
3,830
Discount Lost
250
Doubtful Accounts Expense
2,340
Freight in
1,250
Freight out
680
Gain on Sale of Office Equipment
351
Interest Expense
4,850
Interest Income
1,420
Marlon, Drawing
5,500
Marlon, Capital
120,000
Miranda, Drawing
10,500
Miranda, Capital
100,000
Merchandise Inventory, January 1
188,500
Merchandise Inventory, December 31
77,777
Office Supplies used
520
Purchases
366,200
Purchase Discount
3,653
Purchase Returns and Allowances
18,265
Rent Expense
30,000
Salaries & Wages
54,200
Sales
642,775
Sales Commission
18,935
Sales Discount
10,580
Sales Returns & Allowances
4,560
NMA Company Income Statement For the Year Ended, December 31, 2006 Note
Net Sales
1
P627,635
Cost of Sales Gross Profit Other Income Gross Profit and Other Income Operating expenses General and Administrative expense Selling expenses Other expenses Operating Income Interest expense NET INCOME
2
(456,225) P171,410 1,771 P173,181
3
4 5 6
P90,890 19,615 250
Marlon
Miranda
110,775 P62,426 (4850) P57,576 ======
Schedule of Distribution of Profits
10% interest on beginning capital Marlon- 120,000 x10% Miranda- 100,000 x 10%
Total
P12,000 P10,000
Balance equally Share in Net Income
17,788 P29,788 ======
P22,000
17,788 35,576 P27,788 P57,576 ====== ======
NOTES TO FINANCIAL STATEMENTS
Note 1
Net Sales Sales Sales Discount Sales Returns & Allowances
P P
10,580 4,560
Net Sales Revenue Note 2
15,140 P
627,635
P
188,500
Cost of Sales Merchandise Inventory, January 1 Add: Net cost of purchases Purchases Purchase Discounts Purchase Returns and Allowances Net purchases Add: Freight in
Note 3
642,775
P P
3,653 18,265
366,200 21,918
P
344,282 1,250
345,532
Total goods available for sale Merchandise Inventory, December 31
P
534,032 77,777
Cost of Sales
P
456,255
P
351 1,420
Other Income Gain on Sale of Office Equipment Interest Income
Total
Note 4
Note 5
Note 6
General and Administrative Expenses Salaries & Wages Rent Expense Depreciation Expense-Office Equipment Doubtful Accounts Expense Office Supplies used Total
P
1,771
P
54,200 30,000 3,830 2,340 520 90,890
P
Selling Expenses Sales Commission Freight out Total
P
18,935 680 19,615
P
Other expense Discount lost
P
250 =========
NMA Company Statement of Changes in Partners’ Equity For the Year Ended, December 31, 2006 Marlon
Capital balances, January 1 Net Income Sub-total Partners’ Drawing Capital balances, December 31
P120,000 29,788 P149,788 (5,500) P144,288 ========
Miranda
Total
P100,000 P220,000 27,788 57 57,576 P127,788 P277,576 (10,500) (16,000) P117,288 P261,576 ======== ========
