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 NET Loss 4. Partners Drawing Income Summary To distribute losses to partners 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 DIVISION OF PROFITS & LOSSES Profits and Losses may be shared partners according to the following agreements: 1. 2. 3. 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 DRAWING Increase Decrease Temporary withdrawal Share in Net Income Share in Net Loss Partnership pays the personal liability of a partner xx xx xx

xx xx

4. 5. 6.

EXAMPLE 5/1 10/31 JOHN CAPITAL 10,000 1/1 50,000 7/1 MARTHA CAPITAL 400,000 7/1 50,000 160,000 1/1 4/1 9/30 300,000 200,000 150,000

NET INCOME FOR THE PERIOD P 150,000 DIVISION OF PROFITS & LOSSES 1. equally Income Summary John, Drawing Martha, Drawing To distribute profits to partners arbitrary ratio a. percentage 40%:60% b. fraction 2/5:3/5 Income Summary John, Drawing Martha, Drawing To distribute profits to partners 3. Capital RATIO a. Beginning Capital Ratio : 400:300 or 4/7:3/7 150,000 85,714.29 64,285.71 150,000 60,000 90,000 150,000 75,000 75,000

2.

Income Summary John, Drawing Martha, Drawing To distribute profits to partners

b. Ending Capital Ratio 500: 600 or 5/11:6/11 Income Summary John, Drawing Martha, Drawing To distribute profits to partners c. Average Capital Ratio Income Summary John, Drawing Martha, Drawing To distribute profits to partners 150,000 75,202.16 74,797.84 150,000 68,181.82 81,818.18

COMPUTATION OF AVERAGE CAPITAL

Date John Jan 1 May 1 July1 Oct 31 Martha Jan 1 April 1 July1 Sept 30 Computation

Capital Balance 400,000 390,000 550,000 500,000 300,000 500,000 450,000 600,000

No. of Months Unchanged 4 2 4 2

Peso Months

Average Capital

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 P40,000 40,000 P80,000 150,000 80,000 70,000 P30,000 40,000 P70,000 P70,000 80,000 P150,000 Martha Total

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 P74,000 150,000 74,000 76,000 Martha P40,000 36,000 P76,000 Total P90,000 60,000 P150,000

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 150,000

Martha 60,000 P60,000 90,000

Total P30,000 120,000 P150,000

60,000

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 10% interest on ending capital John- 500,000 x5% Martha- 600,000 x 5% Salary allowance 10% Bonus to John Balance equally Share in Net Income Income Summary John, Drawing Martha, Drawing To distribute profits to partners 150,000 75,000 75,000 P25,000 P30,000 30,000 15,000 5,000 P75,000 40,000 5,000 P75,000 P55,000 70,000 15,000 10,000 P150,000 Martha Total

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 10% interest on ending capital John- 500,000 x10% Martha- 600,000 x 10% Salary allowance 20% Bonus to John Excess equally Share in Net Income P50,000 P60,000 50,000 30,000 (50,000) P80,000 60,000 30,000 (50,000) P70,000 (100,000) P150,000 P110,000 110,000 Martha Total

Income Summary John, Drawing Martha, Drawing To distribute profits to partners

150,000 80,000 70,000

NET LOSS- P150,000 9. Allowing interest on partners capital balances, salaries and bonus, balance 4:6

-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% 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 48,000 102,000 150,000 P50,000 P60,000 50,000 (148,000) (P48,000) 60,000 (222,000) (P102,000) P110,000 110,000 (370,000) (P150,000) Martha Total

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 Schedule of Distribution of Profits

2 3 4 5 6 P90,890 19,615 250

(456,225) P171,410 1,771 P173,181

110,775 P62,426 (4850) P57,576 ====== Total P22,000

Marlon 10% interest on beginning capital Marlon- 120,000 x10% Miranda- 100,000 x 10% Balance equally Share in Net Income P12,000

Miranda P10,000 17,788 P29,788 ======

17,788 35,576 P27,788 P57,576 ====== ======

NOTES TO FINANCIAL STATEMENTS Note 1 Net Sales Sales Sales Discount Sales Returns & Allowances Net Sales Revenue Note 2 Cost of Sales Merchandise Inventory, January 1 Add: Net cost of purchases Purchases Purchase Discounts Purchase Returns and Allowances Net purchases Add: Freight in Total goods available for sale Merchandise Inventory, December 31 Cost of Sales P P 3,653 18,265 P 366,200 21,918 344,282 1,250 P P 188,500

P P 10,580 4,560 P

642,775 15,140 627,635

345,532 534,032 77,777 456,255

P

Note 3

Other Income Gain on Sale of Office Equipment Interest Income P 351 1,420

Total

P

1,771

Note 4

General and Administrative Expenses Salaries & Wages Rent Expense Depreciation Expense-Office Equipment Doubtful Accounts Expense Office Supplies used Total Selling Expenses Sales Commission Freight out Total Other expense Discount lost

P

P

54,200 30,000 3,830 2,340 520 90,890

Note 5

P P

18,935 680 19,615

Note 6

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