Accounting 3 & 4
Module 3 Division of Profit or Loss
Introduction
Module 3 contains the different ways of dividing profit or loss between or among partners.
Learning Outcomes
At the end of the course, you should be able to:
(1) Compute the share of each partner in the profit/loss of the partnership using the various
methods
(2) Prepare journal entries to close the revenue and expense summary account and drawing
account
(3) Prepare a worksheet for the partnership
(4) Prepare financial statements such as income statement, statement of financial position, and
statement of changes in partners’ equity for the partnership
Instruction
Read the lessons well, and after you have understood them, answer the exercises given after
the lessons.
Lessons
Division of Profits/Losses
All partners are entitled to receive a fair share in the profits earned by the business.
Profit/loss sharing is based on the agreement as stipulated in their written contract. In the
absence of any stipulation, however, the industrial partner shall receive a just and equitable
share in the profit and the capitalist partner shall receive profits in accordance with their actual
capital contributions in the partnership.
In some cases, however, the results of the business operations may not always be a
profit. Revenues may tremendously decrease due to some unavoidable factors, and this may
result to a loss. Agreement as to division of profits also applies to the division of losses. In the
absence of agreement, however, the capitalist-industrial partner in his/her capacity as an
industrial partner, has no share in the losses; but in his/her capacity as a capitalist partner,
he/she shares in the losses in proportion to his/her capital contribution.
Page 1 of 18
Methods of Dividing Profits
(1) Equally
(2) Arbitrary ratio
(3) Capital ratio
(a) Original capital ratio
(b) Beginning capital ratio
(c) Ending capital ratio
(d) Average capital ratio
(4) Allowing interest to partners’ capital, balance equally or in agreed ratios;
(5) Allowing both salaries and interest on partners’ capital, balance equally or in agreed
ratios;
(6) Allowing interest, salaries, and bonus to partners, balance in agreed ratios
Example
AB Partnership earned a net income of Php120,000 as of December 31, 200A. Their capital
balances as of that date are shown below:
A, capital B, capital_____
|1/1Php180,000 |1/1 Php120,000
|4/20 50,000 | 7/5 45,000
A, drawing B, drawing_____
11/13 Php10,000| 2/24 Php5,000 |
Required:
Journal entries to close the Revenue and Expense Summary account and Drawing account with
computations.
Profit Divided Equally
Revenue and Expense Summary Php120,000
A, drawing Php60,000
B, drawing 60,000
To divide the profit and to close the Revenue
and Expense Summary account to drawing accounts.
(A’s share: 1/2x120,000=60,000
B’s share: 1/2x120,000=60,000)
Page 2 of 18
A, drawing 50,000
B, drawing 55,000
A, capital 50,000
B, capital 55,000
To close the drawing accounts to capital accounts.
(A: 60,000-10,000=50,000
B: 60,000-5,000=55,0000)
Profit Divided According to Arbitrary Ratio
Supposed A and B agreed to divide the profit in the ratio of 60% and 40%, respectively.
Revenue and Expense Summary 120,000
A, drawing 72,000
B, drawing 48,000
To divide the profit and to close the Revenue
and Expense Summary account to drawing accounts.
(A: 120,000x.6=72,000
B: 120,000x.4=48,000)
A, drawing 62,000
B, drawing 43,000
A, capital 62,000
B, capital 43,000
To close the drawing accounts to capital accounts.
(A: 72,000-10,000=62,000
B: 48,000- 5,000=43,000)
Profit Divided According to Original/Beginning Capital Ratio
Revenue and Expense Summary 120,000
A, drawing 72,000
B, drawing 48,000
To divide the profit and to close the Revenue
and Expense Summary account to drawing accounts.
(A: 120,000x18/30=72,000
B: 120,000x12/30=48,000)
A, drawing 62,000
B, drawing 43,000
A, capital 62,000
B, capital 48,000
Page 3 of 18
To close the drawing accounts to capital accounts.
(A: 72,000-10,000=62,000
B: 48,000- 5,000=43,000)
Profit Divided According to Ending Capital Ratio
Revenue and Expense Summary 120,000
A, drawing 69,474
B, drawing 50,526
To divide the profit and to close the Revenue
and Expense Summary account to drawing accounts.
(A: 120,000x22/38=69,474
B: 120,000x16/38=50,526)
A, drawing 59,474
B, drawing 45,526
A, capital 59,474
B, capital 45,526
To close the drawing accounts to capital accounts.
(A: 69,474-10,000=59,474
B: 50,526- 5,000=45,526)
Profit Divided According to Average Capital Ratio
If average capital is the basis of dividing profit, a table as shown below has to be prepared:
A, capital No. of Mos._____________________________
Date Debit Credit Balance Unchanged Peso Month Ave. Capital
Jan. 1 180,000 180,000 4 mos. 720,000
Apr. 20 50,000 230,000 6 mos. 1,380,000
Nov.13 10,000 220,000 2 mos. 440,000
12 mos 2,540,000 211,667
B, capital No. of Mos.___________________________
Date Debit Credit Balance Unchanged Peso Month Ave. Capital
Jan. 1 120,000 120,000 2 mos. 240,000
Feb. 24 5,000 115,000 4 mos. 460,000
July 5 45,000 160,000 6 mos. 960,000
12 mos 1,660,000 138,333
350,000
Page 4 of 18
No. of Months Unchanged – the number of months the balance is not changed. However, if there is any
change and If the change happens on the first half of the month (1 to 15), it is considered 0 or no
change; if the change happens on the second half of the month (16 to 31), it is considered as one (1)
month.
Peso Month – the product of the balance and the number of months unchanged
Average Capital – to get the average capital, divide the total peso month by twelve (12) months Revenue
and Expense 120,000
A, drawing 72,572
B, drawing 47,428
To divide the profit and to close the Revenue and
Expense Summary account to drawing accounts.
(A: 120,000x211,667/350,000=72,572
B: 120,000x138,333/350,000=47,428)
A, drawing 62,572
B, drawing 42,428
A, capital 62,572
B, capital 42,428
To close the drawing accounts to capital accounts.
(A: 72,572-10,000=62,572
B: 47,428- 5,000=42,428)
Profit Divided by Allowing Interest, Salaries and any Balance Divided Equally
Assume that A and B agreed to allow 6% interest on their beginning capital, each of them will receive
Php25,000 salary allowances, and any remainder will be divided equally between them.
If this is the kind of agreement, a table as shown below has to be prepared to find the share of each
partner in the profit:
Total A B__
Interest of 6% on beginning capital 18,000 10,800 7,200
Salary allowances 50,000 25,000 25,000
Balance – equally 52,000 26,000 26,000
Total 120,000 61,800 58,200
Revenue and Expense Summary 120,000
A, drawing 61,800
B, drawing 58,200
To divide the profit and to close the Revenue and
Expense Summary account to drawing accounts.
Page 5 of 18
A, drawing 51,800
B, drawing 53,200
A, capital 51,800
B, capital 53,200
To close the drawing accounts to capital accounts.
(A: 61,800-10,000=51,800
B: 58,200- 5,000 =53,800)
Profit Divided by Giving Bonus to Partner and the Balance on Agreed Ratio
A, as the managing partner, is entitled to a 20% bonus. Any remainder will be divided in the
ratio of 45% and 55%, respectively.
There are two treatments for bonus: (a) a distribution of profit; and (b) as an expense
(a) Bonus as a distribution of profit
Total A B__
Bonus (.2 x 120,000) 24,000 24,000 -------
Remainder – 45%, 55% 96,000 43,200 52,800
Total 120,000 67,200 52,800
Revenue and Expense Summary 120,000
A, drawing 67,200
B, drawing 52,800
To divide the profit and to close the Revenue and
Expense Summary account to drawing accounts.
A, drawing 57,200
B, drawing 47,800
A, capital 57,200
B, capital 47,800
To close the drawing accounts to capital accounts.
(A: 67,200-10,000=57,200
B: 52,800- 5,000=47,800)
(b) Bonus as an expense
Computation:
100% = profit after bonus
20% = bonus
Page 6 of 18
X = profit after bonus
1.2X = profit before bonus
1.2X = 120,000
X = 120,000/1.2
X = 100,000
Bonus = 100,000 x .2
Bonus = 20,000
Other way of finding bonus
Bonus = Profit before bonus – Profit after bonus
= 120,000-100,000
= 20,000
Total A
B
Bonus to A 20,000 20,000 ----- Balance:
45%; 55% 100,000 45,000 55,000
Total 120,000 65,000 55,000
Revenue and Expense Summary 120,000
A, drawing 65,000
B, drawing 55,000
To divide the profit and to close the Revenue
and Expense Summary account.
A, drawing 55,000
B, drawing 50,000
A, capital 55,000
B, capital 50,000
To close the drawing accounts to capital accounts.
(A: 65,000-10,000=55,000
B: 55,000- 5,000=50,000)
Posting the Closing Entries
Postings using the first closing entry (profit equally divided)
Revenue and Expense Summary A, drawing B, drawing__
(1) 120,000 | 120,000 10,000 | (1) 60,000 5,000 |(1)60,000
50,000 |__________ 55,000 |_________
60,000 60,000 60,000 60,000
_________A, capital______ ________ B, capital________
| 220,000 | 160,000
|(2) 50,000 |(2) 55,000____
270,000 215,000
Page 7 of 18
Note: You may post the other closing entries for your own exercise.
Division of Loss
The methods of dividing profits are applicable to division of losses except for giving bonus to
partner/s.
Example
Using the same data of A and B capital balances, but instead of Php80,000 profit, the AB
Partnership incurred a Php50,000 losses during the period.
Required: Compute the share of each partner in the loss of the partnership and give the closing
entries.
Losses Divided Equally
A, drawing 25,000
B, drawing 25,000
Revenue and Expense Summary
50,000 To divide the losses and to close the Revenue and
Expense Summary account to drawing accounts.
(A: 50,000x1/2=25,000
B: 50,000x1/2=25,000)
A, capital 35,000
B, capital 30,000
A, drawing 35,000
B, drawing 30,000
To close the drawing accounts to capital accounts.
(A: 10,000+25,000=35,000
B: 5,000+25,000=30,000)
Posting the closing entries
___________A, drawing____________ ____________B, drawing________
10,000 | 35,000 5,000 | 30,000
25,000 | ________ 25,000 | _______
35,000 | 35,000 30,000 | 30,000
___________A, capital____________ ____________B, capital_______
35,000 | 180,000 30,000 | 120,000
145,000 | _______ 90,000 ___ |___________
Page 8 of 18
180,000 | 180,000 120,000 | 120,000
Bal.145,000 Bal. 90,000
Interest, Salary Allowances and the Balance Divided Equally
Total A B________
Interest of 6% on beginning capital 18,000 10,800 7,200
Salary allowances 50,000 25,000 25,000
Balance equally (118,000) (59,000) (59,000) Total
(50,000) (23,200) (26,800)
Note: For your own exercises, you may compute the shares in losses using the
original/beginning capital, ending capital, and average capital ratios. Prepare the
closing entries and post them.
Worksheet and Financial Statements
Preparation and formats of worksheets and financial statements for a partnership are
similar to that of a sole proprietorship.
Example
CD MERCHANDISING
Trial Balance
December 31, 200A
Cash Php100,000
Accounts Receivable 21,000
Allowance for Bad Debts Php 1,000
Merchandise Inventory, January 1 240,000
Furniture and Fixtures 40,000
Other Assets 60,000
Accounts Payable 30,000
C, capital 150,000
C, drawing 60,000
D, capital 160,000
D, drawing 40,000
Sales 1,200,000
Purchases 732,000
Freight-in 5,000
Page 9 of 18
Purchase returns 7,000
Salesmen’s salaries 50,000
Office salaries 63,000
Advertising 26,500
Freight-out 43,500
Office expense 35,000
Travelling expense 22,000
Miscellaneous expense 10,000 ________
Php1,548,000 Php1,548,000
Additional Information:
(1) Merchandise Inventory, December 31, 200A Php270,000;
(2) The Allowance for Bad Debts should be increased by 10% of the accounts receivable;
(3) Unrecorded expenses: Office expense Php2,500; Office salaries Php5,000;
(4) Fixed assets are to be depreciated at 10% per annum.
(5) Profit and Loss Agreement:
(a) 15% interest on beginning capital;
(b) A bonus of 25% is allowed to C (bonus as a distribution of profit)
(c) Monthly salaries: C Php9,000; D Php8,500;
Page 10 of 18
(d) Balance – equally
(6) Beginning capital of partners: Php100,000 and Php140,000, respectively.
Required:
A. Adjusting entries
B. Worksheet
C. Income Statement
D. Statement of Financial Position
E. Statement of Changes in Partners’ Equity
F. Schedule of Profit Distribution
Solution:
A. Adjusting Entries
1. Merchandise Inventory, December 31 270,000
Revenue and Expense Summary 270,000
2. Bad Debts 2,100
Allowance for Bad Debts 2,100
(21,000x.10=2,100)
3. Office expense 2,500
Accrued office expense 2,500
4. Office salaries 5,000
Accrued office salaries 5,000
5. Depreciation-furniture and fixtures 4,000
Accumulated Depreciation-FF 4,000
(40,000x.10=4,000)
B. Worksheet
CD MERCHANDISING
Worksheet
For the Period Ended December 31, 200A
(Please see Module 3a)
Page 11 of 18
C. Income Statement
CD MERCHANDISING
Income Statement For the Period Ended December 31, 200A
Sales Php1,200,000
Less: Cost of Sales
Merchandise Inventory, Jan. 1 Php240,000
Purchases Php732,000
Freight-in __ 5,000
Gross Purchases Php737,000
Purchase returns 7,000 730,000
Goods available for sale Php970,000
Less: Merchandise Inventory, Dec. 31 270,0000 700,000
Gross Profit on sales Php 500,000
Less: Operating Expenses:
Salesmen’s salaries Php 50,000
Office salaries 68,000
Advertising expense 26,500
Freight-out 43,500
Office expense 37,500
Travelling expense 22,000
Bad debts 2,100
Depreciation 4,000
Miscellaneous expenses 10,000 263,600
Net Profit Php 236,400
Page 12 of 18
D. Statement of Financial Position
CD MERCHANDISING
Statement of Financial Position
As of December 31, 200A
Assets Current
Assets:
Cash Php100,000
Accounts Receivable Php21,000
Less: Allowance for Bad Debts 3,100 17,900
Merchandise Inventory, Dec. 31 270,000
Total Current Assets Php387,900
Property and Equipment:
Furniture and Fixtures Php40,000
Less: Accumulated Depreciation 4,000 36,000
Other Assets 60,000
Total Assets Php483,900
Liabilities
Current Liabilities:
Accounts Payable Php 30,000
Accrued office expense 2,500
Accrued salaries 5,000
Total Current Liabilities Php 37,500
Capital
C, capital Php237,750
D, capital 208,650
Total Liabilities and Capital Php483,900
Page 13 of 18
E. Statement of Changes in Partners’ Equity
CD MERCHANDISING
Statement of Changes in Partners’ Equity December 31, 200A
Total C D_______
Capital balances, January 1 Php240,000 Php100,000 Php140,000
Additional Investments 70,000 50,000 20,000
Share in net profit 236,400 147,750 88,650
Total Php546,400 Php297,750 Php248,650
Regular drawings (100,000) (60,000) (40,000)
Capital balances, December 31 Php446,400 Php237,750 Php208,650
F. Schedule of Division of Profits
CD Merchandising
Schedule of Division of Profit December 31, 200A
Total C D______
15% interest on beginning capital Php36,000 Php15,000 Php21,000
Bonus – 25% 59,100 59,100 ----- Salaries
210,000 108,000 102,000
Balances – equally (68,700) (34,350) (34,350) Total
Php236,400 Php147,750 Php88,650
Exercises:
1. The capital balances of partners E and F for the year ended December 31, 200A are as
follows:
____________A, capital_______________ __________B, capital__________
Apr. 20 50,000 | Jan. 1 600,000 March 28 70,000|Jan.1 400,000
Page 14 of 18
Nov.16 95,000 | July 5 150,000 |Feb.24 220,000
The partnership earned a net profit of Php500,000.
Required: Prepare journal entries to close the Revenue and Expense Summary account by
using the methods enumerated below: (show computations)
1. Equally
2. Beginning capital ratio
3. Ending capital ratio
4. Average capital ratio
5. Interest of 8% on the beginning capital, monthly salary allowances of Php10,000 and
Php6,000, respectively; remainder, equally
6. A bonus of 25% is allowed to E, while the remainder is distributed equally (bonus is
treated as distribution of profit)
7. A bonus of 25% is allowed to F, the balance in the ratio of 3:2 (bonus is treated as
expense)
2. The Revenue and Expense Summary account of GH Partnership shows a debit balance of
Php80,000 for the year ended December 31, 200A. At the beginning of the period, the
capital balances of the partners are Php90,000 and Php100,000, respectively.
Required: Give the entries to close the Revenue and Expense Summary account by
following their profit and loss agreement as given below: (show computations)
(a) Annual salaries: G – Php30,000; H – Php24,000;
(b) 6% interest on beginning capital;
(c) Any balance is to be divided in the ratio of
3. From the given account balances of J and K Merchandising, prepare the following: a.
Adjusting entries
b. Worksheet
c. Income Statement
d. Statement of Financial Position
e. Statement of Changes in Partners’ Capital
f. Closing Entries
Page 15 of 18
J and K Merchandising
Trial Balance December 31, 200A
Cash Php226,000
Accounts Receivable 120,000
Allowance for Bad Debts Php 20,000
Notes Receivable 30,000
Merchandise Inventory, Jan. 1 150,000
Land 600,000
Building 500,000
Accumulated Depreciation-Building 50,000
Accounts Payable 62,000
Notes Payable 70,000
J, capital 650,000
J, drawing 20,000
K, capital 500,000
K, drawing 10,000
Sales 1,450,000
Sales Returns and Allowances 32,000
Purchases 700,000
Freight-in 45,000
Purchase Returns and Allowances 12,000
Salaries and Wages 80,000
Advertising Expense 65,000
Rent Expense 78,000
Freight-out 20,000
Sales Discount 25,000
Interest Expense 5,000
Miscellaneous Expense 125,000
Purchase Discount 14,000
Interest Income 3,000
Total 2,831,000 2,831,000
Data for adjustments, year ended December 31,200A:
Page 16 of 18
1. Merchandise Inventory, December 31, 200A Php300,000;
2. Depreciation of building 10% annually;
3. Allowance for Bad Debts is to be increased by 25% of accounts receivable;
4. Unpaid salaries Php40,000;
5. Prepaid advertising Php25,000
The profit and loss agreement of the partners are as follows:
1. Salary allowance to K, the managing partner, is Php60,000 per annum;
2. Each partner shall be allowed a 6% interest on their beginning capital;
3. Balance in the ratio of 5:3, respectively
Page 17 of 18
Page 18 of 18
