Partnership

PARTNERSHIP
ARTICLE 1767
PARTNERSH
IP
TWO OR MORE PERSONS BIND
THEMSELVES TO CONTRIBUTE
MONEY, PROPERTY, OR INDUSTRY
TO A COMMON FUND, WITH THE
INTENTION OF DIVIDING THE
PROFIT AMONG THEMSELVES.
PARTNERSH
IP
TWO OR MORE PERSONS MAY
ALSO FORM A PARTNERSHIP
FOR THE EXERCISE OF THEIR
PROFESSION.
PARTNERSH
IP
THE PARTNERSHIP HAS A
JURIDICAL PERSONALITY
SEPARATE AND DISTINCT FROM
THAT OF EACH OF THE
PARTNERS.
PARTNERSHIP FOR THE
PRACTICE OF PROFESSION SUCH
AS LAW, PUBLIC ACCOUNTING,
ETC.
GENERAL
PROFESSIONAL
PARTNERSHIP
Characteristics of a
Partnership
THERE CANNOT BE A
PARTNERSHIP WITHOUT
CONTRIBUTION OF MONEY,
PROPERTY, OR INDUSTRY TO A
COMMON FUND.
Partnership
1. MUTUAL CONTRIBUTION
Partnership
THE ESSENCE OF PARTNERSHIP IS
THAT EACH PARTNER MUST SHARE
IN THE PROFITS OR LOSSES OF THE
VENTURE.
Partnership
2. DIVISION OF PROFIT OR
LOSSES
Partnership
ALL ASSETS CONTRIBUTED INTO THE
PARTNERSHIP ARE OWNED BY THE
PARTNERSHIP BY VIRTUE OF ITS SEPARATE
AND DISTINCT JURIDICAL PROPERTY. IF
ONE PARTNER CONTRIBUTES AN ASSET TO
THE BUSINESS, ALL PARTNERS JOINTLY
OWN IT IN A SPECIAL SENSE.
Partnership
3. CO OWNERSHIP OF
CONTRIBUTED ASSETS
Partnership
ANY PARTNER CAN BIND THE OTHER
PARTNERS TO A CONTRACT IF HE IS
ACTING WITHIN HIS EXPRESS OR
IMPLIED AUTHORITY. ANY PARTNER CAN
BIND THE OTHER PARTNERS TO A
CONTRACT IF HE IS ACTING WITHIN HIS
EXPRESS OR IMPLIED AUTHORITY.
Partnership
4. MUTUAL AGENCY
Partnership
A PARTNERSHIP MAY BE DISSOLVED
BY THE ADMISSION, DEATH,
INSOLVENCY, INCAPACITY,
WITHDRAWAL OF A PARTNER, OR
EXPIRATION OF THE TERM SPECIFIED
IN THE PARTNERSHIP AGREEMENT.
Partnership
5. LIMITED LIFE
Partnership
ALL PARTNERS (EXCEPT LIMITED
PARTNERS), INCLUDING INDUSTRIAL
PARTNERS, ARE PERSONALLY LIABLE FOR
ALL DEBTS INCURRED BY THE PARTNERSHIP.
IF THE PARTNERSHIP CANNOT SETTLE ITS
OBLIGATIONS, CREDITORS’ CLAIMS WILL BE
SATISFIED FROM THE PERSONAL ASSETS OF
THE PARTNERS.
Partnership
6. UNLIMITED LIABILITY
Partnership
PARTNERSHIPS, EXCEPT GENERAL
PROFESSIONAL PARTNERSHIPS, ARE
SUBJECT TO TAX AT THE RATE OF 30%
OF TAXABLE INCOME.
Partnership
7. INCOME TAXES
Partnership
EACH PARTNER HAS A CAPITAL
ACCOUNT AND A WITHDRAWAL
ACCOUNT.
Partnership
8. PARTNERS’ EQUITY ACCOUNTS
Classifications of
Partnership
object
ALL CONTRIBUTIONS BECOME PART OF
THE PARTNERSHIP FUND.
A. UNIVERSAL PARTNERSHIP OF ALL PRESENT

PROPERTY.
object
ALL THAT THE PARTNERS MAY ACQUIRE BY
THEIR INDUSTRY OR WORK DURING THE
EXISTENCE OF THE PARTNERSHIP.
B. UNIVERSAL PARTNERSHIP OF PROFITS.

object
THE OBJECT OF THE PARTNERSHIP IS
DETERMINATE.
C. PARTICULAR PARTNERSHIP
Liability
ALL PARTNERS ARE LIABLE TO THE
EXTENT OF THEIR SEPARATE
PROPERTIES.
A. GENERAL
Liability
THE LIMITED PARTNERS ARE LIABLE ONLY
TO THE EXTENT OF THEIR PERSONAL
CONTRIBUTIONS. HOWEVER, THERE SHALL
BE AT LEAST ON GENERAL PARTNER.
B. LIMITED
duration
a. PARTNERSHIP WITH A FIXED TERM
OR FOR A PARTICULAR
UNDERTAKING.
b. PARTNERSHIP AT WILL. NO TERM IS
SPECIFIED AND NOT FORMED FOR A
PARTICULAR UNDERTAKING.
purpose
a.COMMERCIAL OR TRADING
PARTNERSHIP.
b.PROFESSIONAL OR NON-
TRADING PARTNERSHIP.
5. According to Legality
of Existence
A. DE JURE PARTNERSHIP.
B. DE FACTO
PARTNERSHIP.
KINDS of PARTNERS
ONE WHO IS LIABLE TO THE EXTENT OF
HIS SEPARATE PROPERTY AFTER THE
ASSETS OF THE PARTNERSHIP ARE
EXHAUSTED.
1. GENERAL PARTNER
KINDS of PARTNERS
ONE WHO IS LIABLE ONLY TO THE EXTENT
OF HIS CAPITAL CONTRIBUTION. HE IS
NOT ALLOWED TO CONTRIBUTE INDUSTRY
OR SERVICES ONLY.
2. LIMITED PARTNER
KINDS of PARTNERS
ONE WHO CONTRIBUTES MONEY
OR PROPERTY TO THE COMMON
FUND OF THE PARTNERSHIP.
3. CAPITALIST PARTNER
KINDS of PARTNERS
ONE WHO CONTRIBUTES HIS
KNOWLEDGE OR PERSONAL
SERVICES TO THE PARTNERSHIP.
4. INDUSTRIAL PARTNER
KINDS of PARTNERS
ONE WHO IS DESIGNATED TO WIND UP
OR SETTLE THE AFFAIRS OF THE
PARTNERSHIP AFTER THE DISSOLUTION.
5. LIQUIDATING PARTNER
KINDS of PARTNERS
ONE WHOM THE PARTNERS HAS
APPOINTED AS MANAGER OF THE
PARTNERSHIP.
6. MANAGING PARTNER
KINDS of PARTNERS
ONE WHO DOES NOT TAKE ACTIVE PART
IN THE BUSINESS OF THE PARTNERSHIP
AND IS NOT KNOWN AS A PARTNER.
7. DORMANT PARTNER
KINDS of PARTNERS
ONE WHO DOES NOT TAKE ACTIVE PART
IN THE BUSINESS OF THE PARTNERSHIP
THOUGH MAY BE KNOWN AS A PARTNER.
8. SILENT PARTNER
KINDS of PARTNERS
ONE WHO TAKES ACTIVE PART IN THE
BUSINESS BUT IS NOT KNOWN TO BE
A PARTNER BY OUTSIDE PARTIES.
9. SECRET PARTNER
KINDS of PARTNERS
10. ONE WHO IS ACTUALLY NOT A PARTNER
BUT WHO REPRESENTS HIMSELF AS ONE.

Loans
IF A PARTNER WITHDRAWS A SUBSTANTIAL
AMOUNT OF MONEY WITH THE INTENTION
OF REPAYING IT.
THIS ACCOUNT SHOULD BE CLASSIFIED
SEPARATELY FROM THE OTHER
RECEIVABLES OF THE PARTNERSHIP.
1. LOANS RECEIVABLE FROM PARTNERS
(LOANS TO)
Loans
A PARTNER MAY LEND AMOUNTS TO THE PARTNERSHIP IN
EXCESS IF HIS INTENDED PERMANENT INVESTMENT.
IT IS CL ASSIFIED AMONG THE LIABILITIES BUT SEPARATE
FROM LIABILITIES TO OUTSIDERS.
THIS ACCOUNT MUST BE PAID AFTER THE CLAIMS OF
OUTSIDE CREDITORS HAVE BEEN PAID IN FULL BUT HAVE
PRIORITY OVER PARTNER’S EQUITY.
2. LOANS PAYABLE TO PARTNERS (LOANS

FROM)
CONTRACT
THERE IS A NEED FOR A PARTNERSHIP
CONTRACT TO BE IN WRITING AND SAME SHALL
APPEAR IN THE PUBLIC INSTRUMENT TO BE
RECORDED IN THE OFFICE OF THE SECURITIES
AND EXCHANGE COMMISSION (SEC) WHEN:
1. THE CAPITAL OF THE PARTNERSHIP IS PHP
3,000.00 OR MORE IN MONEY OR PROPERTY;
2. IMMOVABLE PROPERTY OR REAL RIGHTS ARE
CONTRIBUTED TO THE PARTNERSHIP.
CONTRACT
NOTE: DIVISION OF PROFIT AND LOSS
SHALL BE STIPULATED IN THE
PARTNERSHIP CONTRACT. IN THE ABSENCE
OF ANY PROVISION, THE PROFIT AND LOSS
IS DIVIDED BASED ON PROPORTION TO
THEIR CAPITAL CONTRIBUTION.
ARTICLES OF CO-
PARTNERSHIP
IT MUST CONTAIN THE FOLLOWING:
1. NAME OF PARTNERSHIP, NATURE AND PLACE
OF BUSINESS.
2. NAME OF PARTNERS, INDICATING WHETHER
THEY ARE GENERAL OR LIMITED PARTNERS,
THEIR CORRESPONDING ADDRESSES AND
CONTRIBUTIONS.
3. EFFECTIVE DATE AND DURATION OF THE
PARTNERSHIP.
ARTICLES OF CO-
PARTNERSHIP
5. PROFIT AND LOSS SHARING
6. RIGHTS, POWERS AND DUTIES OF THE
PARTNERS.
7. TREATMENT OF PARTNERS’ ADDITIONAL
INVESTMENT AND WITHDRAWALS.
8. PROVISION PERTINENT TO DISSOLUTION
AND LIQUIDATION.
OPENING OF PARTNERSHIP
BOOKS
NOTE: WHEN NON-CASH ASSETS
ARE INVESTED TO THE
PARTNERSHIP, THE VALUE
ASSIGNED TO THESE ASSETS ARE
RECORDED AT THEIR FAIR MARKET
VALUES AS OF THE DATE OF
TRANSFER TO THE PARTNERSHIP
AND THAT THE VALUATION MUST
FAIR MARKET VALUE
ESTIMATED PRICE OF AN ASSET THAT A SELLER
IS WILLING TO SELL AND THE BUYER IS
WILLING TO BUY IN AN OPEN MARKET.
IT IS S THE PRICE AT WHICH AND ASSET OR

LIABILITY COULD BE EXCHANGED IN A
CURRENT TRANSACTION BETWEEN
KNOWLEDGEABLE, UNRELATED WILLING
PARTIES.
Illustration
EMERITA GERON AND EMIRITA MODESTO FORMED A

GENERAL PROFESSIONAL PARTNERSHIP. EMERITA
GERON WILL INVEST SUFFICIENT CASH TO GET AN
EQUAL INTEREST IN THE PARTNERSHIP WHILE
EMIRITA MODESTO WILL TRANSFER THE ASSETS AND
LIABILITIES OF HER BUSINESS. THE ACCOUNT
BALANCES ON THE BOOKS OF MODESTO PRIOR TO
PARTNERSHIP FORMATION FOLLOWS:
Illustration
EMERITA GERON AND EMIRITA MODESTO FORMED A

GENERAL PROFESSIONAL PARTNERSHIP. EMERITA
GERON WILL INVEST SUFFICIENT CASH TO GET AN
EQUAL INTEREST IN THE PARTNERSHIP WHILE
EMIRITA MODESTO WILL TRANSFER THE ASSETS AND
LIABILITIES OF HER BUSINESS. THE ACCOUNT
BALANCES ON THE BOOKS OF MODESTO PRIOR TO
PARTNERSHIP FORMATION FOLLOWS:
Illustration
Illustration
IT IS AGREED THAT FOR PURPOSE OF ESTABLISHING

EMERITA GERON’S INTEREST, THE FOLLOWING
ADJUSTMENTS SHALL BE MADE IN THE BOOKS OF
EMERITA MODESTO:
1. AN ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
OF 5% OF ACCOUNTS RECEIVABLE IS TO BE
ESTABLISHED.
2. PREPAID EXPENSES AMOUNTING TO 30,000 WERE
OMITTED BY THE ACCOUNTANT. THIS IS TO BE
RECOGNIZED.
3. ADDITIONAL SALARIES PAYABLE IN THE AMOUNT
A PARTNERSHIP MAY BE FORMED IN ANY
OF THE FOLLOWING WAYS.
1. INDIVIDUALS WITH NO EXISTING
BUSINESS FORM A PARTNERSHIP.
2. A SOLE PROPRIETOR AND AN
INDIVIDUAL WITHOUT AN EXISTING
BUSINESS FORM A PARTNERSHIP.
3. ADMISSION OR RETIREMENT OF A
PARTNER
1. INDIVIDUALS WITH NO EXISTING BUSINESS FORM A
PARTNERSHIP
ON JULY 1,2019, PERSON A AND

PERSON B AGREED TO FORM A
PARTNERSHIP. THE PARTNERSHIP
AGREEMENT SPECIFIED THAT PERSON
A IS TO INVEST CASH OF 700,000 AND
PERSON B IS TO CONTRIBUTE LAND
WITH A FAIR MARKET VALUE OF
1,300,000 WITH 300,000 MORTGAGE
TO BE ASSUMED BY THE PARTNERSHIP.
1. INDIVIDUALS WITH NO EXISTING BUSINESS FORM A
PARTNERSHIP
IF ONE PARTNER CONTRIBUTES HIS

INDUSTRY. ONLY A MEMORANDUM ENTRY
IN THE GENERAL JOURNAL WILL BE MADE.
2. A SOLE PROPRIETOR AND ANOTHER INDIVIDUAL FORM A
PARTNERSHIP
THE STATEMENT OF FINANCIAL POSITION OF PARTNER A ON
OCT 1,2019 BEFORE ACCEPTING PARTNER B AS PARTNER IS
Proprietor A
SHOWN AS FOLLOW:
Statement of Financial Position
Oct. 1,2019
ASSETS
Cash 60,000
Notes Receivable 30,000
Accounts Receivable 240,000
Less: Allowance for Uncollectible Accts.10,000 230,000
Merchandise Inventory 80,000
Furniture and Fixtures 60,000
Less: Accumulated Depreciation 6,000 54,000
TOTAL ASSETS 454,000
PARTNERSHIP
PARTN E R B OF FE R E D T O IN VE S T C ASH TO GE T A C AP ITAL C R E D IT E QU AL
T O ON E -H AL F OF PARTN E R A’ S C AP ITAL AFT E R T H E FO LLOW IN G
AD JU STM E N TS :
1 . T H E M E RC H AN D ISE IS TO B E VALU E D AT 74 , 000
2 . T H E AC C O UN T S RE C E IVAB L E IS E S TIM AT E D TO B E 95% C O LL E C TIB L E .
3 . IN T E RE ST AC C RUE D ON TH E N OTE S RE C E IVAB L E W ILL B E
R E C O GN IZE D :
1 0, 000 ,1 2% DAT E D JULY 1, 201 9
2 0, 000 , 1 2% DATE D AU GUS T 1, 20 19
4 . IN T E RE ST O N N OTE S PAYAB L E TO B E AC C R UE D AT 14% AN N UAL LY
F ROM AP RI L 1, 20 19.
5 . T H E FU RN IT UR E AN D F IXT URE S AR E TO B E VALU E D AT 4 6, 000 .
6 . OF FIC E SUP P L IE S O N H A N D T H AT H AVE B E E N C H AR GE D T O E XP E N SE
IN T H E PAST AM O UN T E D TO 4, 000 . T H E S E W ILL B E U SE D BY T H E
PARTN E RS H IP.
PARTNERSHIP
NEW BOOKS FOR THE PARTNERSHIP (REQUIRED
PER NIRC)
THE FOLLOWING PROCEDURES WILL BE USED:
1. ADJUST THE ASSETS AND LIABILITIES OF THE
PARTNER THAT IS AN EXISTING PROPRIETOR
2. CLOSE THE BOOKS OF THE PARTNER THAT IS
AN EXISTING PROPRIETOR
3. RECORD THE INVESTMENT OF THE PARTNER
THAT IS AN EXISTING PROPRIETOR
4. RECORD THE INVESTMENT OF THE
TWO OR MORE SOLE PROPRIETORS FORM A
PARTNERSHIP
ILLUSTRATION:
ON JUNE 30,2019, PARTNER A AND
PARTNER B, FRIENDLY COMPETITORS
IN A CERTAIN LINE OF BUSINESS,
DECIDED TO COMBINE THEIR TALENTS
AND CAPITAL TO FORM A
PARTNERSHIP.
PARTNERSHIP
PROPRIETOR A
S TAT E M E N T O F F I N A N C I A L P O S I T I O N
JUNE 30,2019
ASSETS
CASH 50,000
A C C O U N T S R E C E I VA B L E 100,000
M E RC H A N D I S E I N V E N T O RY 80,000
FURNITURE AN D FIXTURES 60,000
T O TA L A S S E T S 290,000
LIABILITIES AND OWNER’S EQUITY
A C C O U N T S PAYA B L E 30,000
PA RT N E R A , C A P I TA L 260,000
T O TA L L I A B I L I T I E S A N D O W N E R ’ S E Q U I T Y 290,000
PARTNERSHIP
PROPRIETOR B
S TAT E M E N T O F F I N A N C I A L P O S I T I O N
JUNE 30,2019
ASSETS
CASH 40,000
A C C O U N T S R E C E I VA B L E 80,000
M E RC H A N D I S E I N V E N T O RY 100,000
D E L I V E RY E Q U I P M E N T 90,000
T O TA L A S S E T S 310,000
LIABILITIES AND OWNER’S EQUITY
A C C O U N T S PAYA B L E 60,000
PA RT N E R B , C A P I TA L 250,000
T O TA L L I A B I L I T I E S A N D O W N E R ’ S E Q U I T Y 310,000
PARTNERSHIP
THE CONDITIONS AND ADJUSTMENTS AGREED UPON BY THE
PARTNERS FOR PURPOSES OF DETERMINING THEIR INTEREST
IN THE PARTNERSHIP ARE:
1. ACTUAL COUNT AND BANK RECONCILIATION ON PARTNER
A’S CASH ACCOUNT REVEALED CASH SHORT OF 3,500.
2. ESTABLISHMENT OF 10% ALLOWANCE FOR UNCOLLECTIBLE
ACCOUNTS IN EACH BOOK.
3. THE MERCHANDISE INVENTORY OF PARTNER B IS TO BE
INCREASED BY 10,000.
4. THE FURNITURE AND FIXTURES OF PARTNER A IS TO BE
DEPRECIATED BY 6,000.
5. THE DELIVERY EQUIPMENT OF PARTNER B IS TO BE
DEPRECIATED BY 9,000.
PARTNERSHIP
STEPS:
1. ADJUST THE BOOKS OF BOTH
PARTIES.
2. CLOSE THE BOOKS OF BOTH
PARTIES.
3. RECORD THE INVESTMENT OF BOTH
PARTIES.
PARTNER’S EQUITY IN
ASSETS CONTRASTED WITH
SHARE IN PROFITS OR
LOSSES
ILLUSTRATION: “NELSON
DAGANTA IS A ONE-THIRD
PARTNER” IS AN AMBIGUOUS
STATEMENT.

ILLUSTRATION. NANCY MULLES AND
ELEANOR TAN ARE PARTNERS IN A
COCO WATER BUSINESS. PARTNER
NANCY MULLES CONTRIBUTED MOST
OF THE ASSETS OF THE BUSINESS BUT
SPENDS LITTLE TIME FOR ITS DAILY
OPERATIONS. ON ONE HAND, PARTNER
ELEANOR TAN CONTRIBUTED LESS IN
ASSETS BUT DEVOTES HER FULL
RULES FOR THE
DISTRIBUTION OF
PROFITS OR LOSSES
THE PROFITS OR LOSSES SHALL
BE DISTRIBUTED IN
CONFORMITY WITH THE
AGREEMENT. IF ONLY THE
SHARE OF EACH PARTNER IN
THE PROFITS HAS BEEN AGREED
UPON, THE SHARE OF EACH IN
THE LOSSES SHALL BE IN THE
IN THE ABSENCE OF STIPULATION,
THE SHARE OF EACH PARTNER IN
PROFITS OR LOSSES SHALL BE IN
PROPORTION TO WHAT HE MAY
HAVE CONTRIBUTED (ACCORDING
TO THE RATIO OF ORIGINAL
CAPITAL INVESTMENTS OR IN ITS
ABSENCE, THE RATIO OF CAPITAL
BALANCES AT THE BEGINNING OF
THE YEAR), BUT THE INDUSTRIAL
AS FOR THE PROFITS, THE
INDUSTRIAL PARTNER SHALL
RECEIVE SUCH SHARE AS MAY BE
JUST AND EQUITABLE UNDER THE
CIRCUMSTANCES. IF ASIDE FROM
HIS SERVICES HE HAS
CONTRIBUTED CAPITAL, HE SHALL
ALSO RECEIVE A SHARE IN THE
PROFITS IN PROPORTION TO HIS
CAPITAL (CIVIL CODE OF THE
A SUMMARY OF THE ABOVE LEGAL
PROVISIONS IS PREPARED AS
FOLLOW:
PROFITS
The profits will be divided according to partners’ agreement.
If there is no agreement:
1. As to capitalist partners, the profits shall be divided
according to their capital contributions (according to the
ratio of original capital investments or in its absence, the
ratio of capital balances at the beginning of the year).
2. As to industrial partners (if any), such share as may be
just and equitable under the circumstances, provided, that
the industrial partner shall receive such share before the
capitalist partners divide the profits.
LOSSES
1. The losses will be divided according to partners’ agreement.
2. If there is no agreement as to distribution of losses but there
is an agreement as to profits, the losses shall be distributed
according to the profit sharing ratio.
In the absence of any agreement:
As to capitalist partners, the losses shall be divided according
to their capital contributions (according to the ratio of original
capital investments or in its absence, the ratio of capital
balances at the beginning of the year).
As to purely industrial partners (if there’s any), shall not
be liable for any losses.
THE INDUSTRIAL PARTNER IS NOT
LIABLE FOR LOSSES BECAUSE HE
CANNOT WITHDRAW THE WORK OR
LABOR ALREADY DONE BY HIM, UNLIKE
THE CAPITALIST PARTNERS WHO CAN
WITHDRAW THEIR CAPITAL. IN
ADDITION, IF THE PARTNERSHIP
FAILED TO REALIZE ANY PROFITS,
THEN HE HAS LABORED IN VAIN AND
IN A REAL SENSE, HE HAS ALREADY
DISTRIBUTION OF PROFITS
OR LOSSES BASED ON
PARTNERS’ AGREEMENT
THE PARTNERS MAY AGREE ON ANY OF
THE FOLLOWING SCHEME IN DISTRIBUTING
PROFITS OR LOSSES:
1. EQUALLY OR IN OTHER AGREED RATIO
2. BASED ON PARTNERS’ CAPITAL CONTRIBUTIONS:
1. Ratio or original capital investments
2. Ratio of capital balances at the beginning of the year
3. Ratio of capital balances at the end of the year
4. Ratio of average capital balances
3. BY ALLOWING INTEREST ON PARTNERS’ CAPITAL AND THE
BAL ANCE IN AN AGREED RATIO
4. BY ALLOWING S AL ARIES TO PARTNERS AND THE BAL ANCE
IN AN AGREED RATIO
5. BY ALLOWING BONUS TO THE MANAGING PARTNER BASED
ON PROFIT AND THE BALANCE IN AN AGREED RATIO
6. BY ALLOWING S AL ARIES, INTEREST ON PARTNERS’
CAPITAL, BONUS TO THE MANAGING PARTNER AND THE
BAL ANCE IN AN AGREED RATIO (COMBINATION OF 3 TO 5)
ILLUSTRATION. THE FOLLOWING SERIES OF
ILLUSTRATIONS ARE BASED ON THE FIGURES
OBTAINED FROM THE MEDINA AND DETOYA
PARTNERSHIP WHICH HAD A PROFIT OF
P300,000 FOR THE YEAR ENDED DEC. 31,
2014, THE FIRST YEAR OR OPERATIONS. THE
PARTNERSHIP CONTRACT PROVIDED THAT EACH
PARTNER MAY WITHDRAW P5,000 ON THE LAST
DAY OF EACH MONTH; BOTH PARTNERS DID SO
DURING THE YEAR. THE DRAWINGS ARE
RECORDED BY DEBITS TO THE PARTNERS’
DRAWING ACCOUNTS AND SHALL NOT BE
CONSIDERED IN THE DIVISION OF PROFIT OR
LOSS. IT IS THE INTENTION OF THE PARTNERS
LEOPOLDO MEDINA INVESTED
P400,000 ON JAN. 1, 2014 AND AN
ADDITIONAL P100,000 ON APRIL 1.
EDGAR DETOYA INVESTED P80,000
ON JAN. 1 AND WITHDREW
P500,000 ON JULY 1. THESE
TRANSACTIONS AND EVENTS ARE
SUMMARIZED IN THE FOLLOWING
CAPITAL, DRAWING AND INCOME
SUMMARY LEDGER ACCOUNTS:
LEOPOLDO MEDINA INVESTED
P400,000 ON JAN. 1, 2014 AND
AN ADDITIONAL P100,000 ON
APRIL 1. EDGAR DETOYA
INVESTED P80,000 ON JAN. 1
AND WITHDREW P500,000 ON
JULY 1.
Leopoldo Medina, Capital Edgar Detoya, Capital
Jan. 1 400,000 July 1 50,000 Jan. 1 800,000
Apr. 1 100,000
Leopoldo Medina, Drawing Edgar Detoya, Drawing

Jan. – Dec. 60,000 Jan. – Dec.
60,000
Income Summary
Dec. 31 300,000
EQUALLY OR IN OTHER
AGREED RATIO
Income Summary 300,000
Leopoldo Medina, Drawing 150,000
Edgar Detoya, Drawing 150,000
To record the division of profits.

IF THE PARTNERSHIP HAD A LOSS OF P200,000
FOR THE YEAR ENDED DEC. 31, 2014
To record the division of
losses.
ASSUME INSTEAD THAT MEDINA AND DETOYA
SHARE PROFITS AND LOSSES IN A RATIO OF
60:40 AND PROFIT WAS P300,000, THE PROFIT
WOULD BE DIVIDED AS FOLLOWS:
To record the division of
profits.
BASED ON PARTNERS’ CAPITAL
CONTRIBUTION
Division of partnership profits in proportion to the capital
invested by each partner is most likely to be found in
partnerships in which substantial investments is the
principal ingredient for success. It is essential that the
partnership contract be specific with respect to the
concept of capital. Capital may refer to either of the
following:
CONTRIBUTION
Ratio of Original Capital Investments.
CONTRIBUTION
Ratio of Capital Balances at the Beginning of the Year.
CONTRIBUTION
Ratio of Capital Balances at the End of the Year.
CONTRIBUTION
Ratio of Average Capital Balances.
The agreement should also state the amount of drawings
each partner may make. These drawings are considered
temporary and are recorded as debits to the partner’s
drawing account. Drawings within the allowable amount
will not affect the computation of the average capital
balance. On the contrary, drawings in excess of the
allowable amount are considered permanent reductions
in capital; hence, the computation of the average capital
balance is affected.
BY ALLOWING INTEREST ON CAPITAL AND
THE BALANCE IN AN AGREED RATIO
To allow interest on partners’ capital account balances is

almost similar to dividing part of profits in the ratio of
partners’ capital balances. If the partners agree to allow
interest on capital as a first step in the division of profit,
they should specify the interest rate to be used. It should
also state whether interest is to be computed on capital
balances on specific dates or on average capital balances
during the year.
Continuing the illustration of Medina and
Detoya Partnership with a profit of P300,000
for 2014 and capital balances as already
shown, assume that the partnership
agreement allowed 15% interest on average
capital account balances, with the balance
to be divided equally. The profit of P300,000
for 2014 is divided as follows:
In a related case, assume that the Medina
and Detoya Partnership had a loss of
P10,000 for the year ended Dec. 31, 2014. If
the partnership agreement provided for
interest on capital accounts, this provision
must be honoured regardless of whether
operations yielded profits or not.
Medina Detoya Total
15% Interest on Average Capital:
Medina: P475,000 x 15% P71,250
Detoya: P775,000 x 15% P116,250
Subtotal P187,500
Balance to be Divided Equally
[(10,000) – P187,500=P(197,500)]:
Medina: P(197,500) x 50% (98,750)
Detoya: P(197,500) x 50% (98,750) (197,500)
Share of Partners in Profits P(27,500) P17500 P10,000
BY ALLOWING SALARIES TO PARTNERS AND THE
BALANCE IN AN AGREED RATIO
The sharing agreement may provide for variations in
compensating the personal services contributed by
partners. Even among partners who devote equal service
time, one partner’s superior experience and knowledge
may command a greater share of the profit. To
acknowledge the harder working or more valuable
partner, the profit-sharing plan may provide for salary
allowances.
The partnership agreement should be clear on the treatment of
salary allowances when losses are incurred. In the absence of an
agreement to govern this situation, salary allowances will be
provided even when operations yielded losses. This allowance
should not be confused with salaries expense or with the
partner’s drawing account which is debited for periodic salary
allowances. The cash withdrawals will in no way affect the
division of profits; the division of profits is governed by the
sharing agreement.
Partners are the partnership’s owners; they are not employees of
the business. If partners devote their time and services to the
affairs of the partnership, they are understood to do so for profit,
not for salary. Therefore, when the partners calculate the profit
of the partnership, salaries to the partners are not deducted as
expenses in the statement of recognized income and expense.
Continuing the illustration for the Medina and Detoya
Partnership, assume that the partnership agreement
provided for an annual salary of P100,000 to Medina and
P60,000 to Deotya, and the balnce to be divided equally.
The profit of p300,000 for 2014 is divided as follows:
BALANCE IN AN AGREEDMedina
RATIO Detoya Total
Salary Allowances P 100,000 P 60,000 P 160,000
[P300,000 – P160,000 =
P140,000]
Medina : P140,000 x 50% 70,000
Detoya : P140,000 x 50% 70,000 140,000
Share of Partners in Profits P 170,000 P 130,000 P 300,000

BY ALLOWING BONUS TO THE MANAGING
PARTNER BASED ON PROFIT AND THE
BALANCE INcontract
A partnership AN AGREED RATIO
may provide for a special compensation in
the form of bonus to the managing partner when the results of
operations of the partnership are favourable. This allowance is
given in order to encourage the partner to maximize the profit
potentials of the partnership. Bonus is not being considered in
the computation of profit, rather it is a mere technique to
distribute profits.
ASSUME THAT THE MEDINA AND DETOYA PARTNERSHIP
AGREEMENT PROVIDED FOR A BONUS OF 25% OF PROFIT
BEFORE BONUS TO PARTNER MEDINA AND THE BALANCE TO
BE DIVIDED EQUALLY.
Medina Detoya Total
Bonus [25% x P300,000]: P 75,000 P 75,000
[P300,000 – P75,000 =
P225,000]
Medina : P225,000 x 50% 112,500
Detoya : P225,000 x 50% 112,500 225,000

ASSU M E IN ST E AD TH AT T H E M E D IN A AN D D E TOYA PART N E R SH IP
AGRE E M E N T P ROVID E D FO R A BON U S OF 2 5% O F P RO FIT A F T E R
B ON U S T O PARTN E R ME D IN A AN D T H E B AL AN C E T O B E D IVID E D
E QU AL LY. IT IS U N D E R STO OD IN T H E W ORD IN G OF T H E AGR E E M E N T
TH AT T H E 2 5% BON US W IL L B E B ASE D ON T H E D IFFE RE N C E AFTE R
D E D UC T IN G BON U S FRO M A C E RTAIN AM O UN T. T H IS C E RTA IN AM O UN T
IS TH E P RO FIT AFTE R C O N SID E R IN G AL L T H E O P E RATIN G E XP E N SE S B UT
B E F ORE T H IS BON U S.
Profit before Bonus P300,000 125%
Profit after Bonus (300,000/125%) 240,000 100%
Bonus P 60,000 25%

ASSU M E IN ST E AD TH AT T H E M E D IN A AN D D E TOYA PART N E R SH IP
AGRE E M E N T P ROVID E D FO R A BON U S OF 2 5% O F P RO FIT A F T E R
B ON U S T O PARTN E R ME D IN A AN D T H E B AL AN C E T O B E D IVID E D
E QU AL LY. IT IS U N D E R STO OD IN T H E W ORD IN G OF T H E AGR E E M E N T
TH AT T H E 2 5% BON US W IL L B E B ASE D ON T H E D IFFE RE N C E AFTE R
D E D UC T IN G BON U S FRO M A C E RTAIN AM O UN T. T H IS C E RTA IN AM O UN T
Medina
IS TH E P RO FIT AFTE R C O N SID E R IN G AL L T H Detoya
E O P E RATIN G E XP E N SE S B Total
UT
B E F ORE T H IS BON U S.
Bonus P 60,000 P 60,000

[P300,000 – P60,000 = P240,000]
Medina : P240,000 x 50% 120,000
Detoya : P240,000 x 50% 120,000 240,000
BY ALLOWING SALARIES, INTEREST ON CAPITAL,
BONUS TO THE MANAGING PARTNER AND THE
The service contributions and capital contributions of the
partners are often not equal. If the service contributions are not
equal, salary allowances can compensate for the differences. Or,
when capital contributions are not equal, interest allowances can
make up for the unequal investments. When both service and
capital contributions are unequal, the allocation of profits or
losses may include salary allowances, interest on their capital
balances, bonus to the managing partner, and the balance to be
divided in an agreed ratio.
BALANCE INthe
Assume that AN AGREED
profit for the yearRATIO
is P400,000 and the partnership
agreement for the Medina and Detoya Partnership agreement for the
Medina and Detoya Partnership provided for the following:
1. Bonus to Medina of 25% of profit after salaries and interest but before
bonus;
2. Annual salaries of P100,000 to Medina and P60,000 to Detoya;
3. Interest on average capital balances of P71,250 and P116,250 to
Medina and Detoya, respectively;
4. Balance to be divided in a ratio of 40:60
Medina Detoya Total
Salary Allowances P100,000 P60,000 P160,000
Interest on Average Capital Balances 71,250 116,250 187,500
Bonus [ 25% (P400,000-P100,000 – 13,125 13,125
P60,000 – 71,250 – P116,250) ]:
Balance to be Divided in a Ratio of
40:60 [ P400,000 – P160,000 –
P187,500 – P13,125 = P39,375]:
Medina: P39,375 x 40% 15,750
Detoya: P39,375 x 60% 23,625 39,375
Share of Partners in Profits P200,125 P199,875 P400,000

ASSUME INSTEAD THAT THE BONUS TO MEDINA IS 25% OF
PROFIT AFTER SALARIES, INTEREST AND AFTER BONUS.
THE COMPUTATION OF THE BONUS FOLLOWS:
Profit before Salaries, Interest and Bonus P400,000

Less: Salaries P160,000
Interest 187,500 34,500
Profit after Salaries and Interest but before P 52,500 125%
Bonus
Profit after Salaries and Interest and after 42,000 100%
Bonus*
Bonus P 10,500 25%
THE COMPUTATION OF THE BONUS FOLLOWS:
Profit before Salaries, Interest and Bonus P400,000

Less: Salaries P160,000
Interest 187,500 34,500
Profit after Salaries and Interest but before P 52,500 125%
Bonus
Profit after Salaries and Interest and after 42,000 100%
Bonus*
Bonus P 10,500 25%
THE COMPUTATION OF THE BONUS Medina
FOLLOWS: Detoya Total
Salary Allowances P100,000 P60,000 P160,000
Interest on Average Capital Balances 71,250 116,250 187,500

Bonus 10,500 10,500
Balance to be Divided in a Ratio of
40:60 [ P400,000 – P160,000 –
P187,500 – P10,500 = P42,000]:
Medina: P42,000 x 40% 16,800
Detoya: P42,000 x 60% 25,200 42,000
Share of Partners in Profits P198,550 P201,450 P400,000

Partnership

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PARTNERSHIP

A. UNIVERSAL PARTNERSHIP OF ALL PRESENT

B. UNIVERSAL PARTNERSHIP OF PROFITS.

2. LOANS PAYABLE TO PARTNERS (LOANS

IT IS S THE PRICE AT WHICH AND ASSET OR

EMERITA GERON AND EMIRITA MODESTO FORMED A

EMERITA GERON AND EMIRITA MODESTO FORMED A

IT IS AGREED THAT FOR PURPOSE OF ESTABLISHING

ON JULY 1,2019, PERSON A AND

IF ONE PARTNER CONTRIBUTES HIS

FURNITURE AN D FIXTURES 60,000

LIABILITIES AND OWNER’S EQUITY

LIABILITIES AND OWNER’S EQUITY

Leopoldo Medina, Drawing Edgar Detoya, Drawing

Leopoldo Medina, Drawing 150,000

Edgar Detoya, Drawing 150,000

To record the division of profits.

To allow interest on partners’ capital account balances is

Balance to be Divided Equally

Detoya : P140,000 x 50% 70,000 140,000

Share of Partners in Profits P 170,000 P 130,000 P 300,000

Share of Partners in Profits P 187,500 P 112,500 P 300,000

Profit after Bonus (300,000/125%) 240,000 100%

Bonus P 60,000 25%

Balance to be Divided Equally

Share of Partners in Profits P200,125 P199,875 P400,000

Profit before Salaries, Interest and Bonus P400,000

Profit before Salaries, Interest and Bonus P400,000

Interest on Average Capital Balances 71,250 116,250 187,500

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