Partnership Operations Lecture Notes2
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PARTNERSHIP OPERATIONS 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 xx To close all nominal accounts with credit balances to income summary. 3. Income Summary xx All Nominal Accounts with Debit Balances To close all nominal accounts with debit balances to income summary. NET Income 4. Income Summary Partners’ Drawing To distribute profits to partners
xx
xx xx
NET Loss 4. Partners’ Drawing Income Summary To distribute losses to partners
xx xx
INCREASES/DECREASES IN CAPITAL & DRAWING 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 arbitrary ratio a. percentage b. fraction capital ratio a. original/beginning capital b. ending capital c. average capital allowing interest on partners’ capital balances allowing salaries to partners bonus to managing partner based on net 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
arbitrary ratio a. percentage 40%:60% b. fraction 2/5:3/5 Income Summary John, Drawing Martha, Drawing To distribute profits to partners
3.
150,000
150,000 60,000 90,000
Capital RATIO a.
Beginning Capital Ratio : 400:300 or 4/7:3/7
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 Income Summary John, Drawing Martha, Drawing To distribute profits to partners
150,000 68,181.82 81,818.18
c. Average Capital Ratio Income Summary John, Drawing Martha, Drawing To distribute profits to partners
COMPUTATION OF 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 Martha 462,500 150,000x 462,500/927,500 = P 74,797.84 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. -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. (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 the books of NMA Company Depreciation Expense-Office Equipment Discount Lost Doubtful Accounts Expense Freight in Freight out Gain on Sale of Office Equipment Interest Expense Interest Income Marlon, Drawing Marlon, Capital Miranda, Drawing Miranda, Capital Merchandise Inventory, January 1 Merchandise Inventory, December 31 Office Supplies used Purchases Purchase Discount Purchase Returns and Allowances Rent Expense Salaries & Wages Sales Sales Commission Sales Discount Sales Returns & Allowances
3,830 250 2,340 1,250 680 351 4,850 1,420 5,500 120,000 10,500 100,000 188,500 77,777 520 366,200 3,653 18,265 30,000 54,200 642,775 18,935 10,580 4,560
NMA Company Income Statement For the Year Ended, December 31, 2006 Net Sales
Note 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 57,576 P127,788 P277,576 (10,500) (16,000) P117,288 P261,576 ======== ========
xx xx
2. All Nominal Accounts with Credit Balances xx Income Summary xx To close all nominal accounts with credit balances to income summary. 3. Income Summary xx All Nominal Accounts with Debit Balances To close all nominal accounts with debit balances to income summary. NET Income 4. Income Summary Partners’ Drawing To distribute profits to partners
xx
xx xx
NET Loss 4. Partners’ Drawing Income Summary To distribute losses to partners
xx xx
INCREASES/DECREASES IN CAPITAL & DRAWING 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 arbitrary ratio a. percentage b. fraction capital ratio a. original/beginning capital b. ending capital c. average capital allowing interest on partners’ capital balances allowing salaries to partners bonus to managing partner based on net 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
arbitrary ratio a. percentage 40%:60% b. fraction 2/5:3/5 Income Summary John, Drawing Martha, Drawing To distribute profits to partners
3.
150,000
150,000 60,000 90,000
Capital RATIO a.
Beginning Capital Ratio : 400:300 or 4/7:3/7
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 Income Summary John, Drawing Martha, Drawing To distribute profits to partners
150,000 68,181.82 81,818.18
c. Average Capital Ratio Income Summary John, Drawing Martha, Drawing To distribute profits to partners
COMPUTATION OF 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 Martha 462,500 150,000x 462,500/927,500 = P 74,797.84 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. -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. (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 the books of NMA Company Depreciation Expense-Office Equipment Discount Lost Doubtful Accounts Expense Freight in Freight out Gain on Sale of Office Equipment Interest Expense Interest Income Marlon, Drawing Marlon, Capital Miranda, Drawing Miranda, Capital Merchandise Inventory, January 1 Merchandise Inventory, December 31 Office Supplies used Purchases Purchase Discount Purchase Returns and Allowances Rent Expense Salaries & Wages Sales Sales Commission Sales Discount Sales Returns & Allowances
3,830 250 2,340 1,250 680 351 4,850 1,420 5,500 120,000 10,500 100,000 188,500 77,777 520 366,200 3,653 18,265 30,000 54,200 642,775 18,935 10,580 4,560
NMA Company Income Statement For the Year Ended, December 31, 2006 Net Sales
Note 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 57,576 P127,788 P277,576 (10,500) (16,000) P117,288 P261,576 ======== ========
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