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Methods of Dividing Profit and Loss

Arbitrary Ratio (any agreed ratio) Capital Ratio Based on any of the following: Initial or original capital Beginning yearly capital Ending yearly capital Average Capital Interest on investments, balance in an agreed ratio. Methods of Dividing Profit and Loss.

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Methods of Dividing Profit and Loss

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  1. Arbitrary Ratio (any agreed ratio) • Capital Ratio Based on any of the following: • Initial or original capital • Beginning yearly capital • Ending yearly capital • Average Capital • Interest on investments, balance in an agreed ratio Methods of Dividing Profit and Loss

  2. METHODS OF DIVIDING PROFIT AND LOSS • 4. Salaries to partners, balance in an agreed ratio • 5. Interest on investments, salaries to partners, balance in an agreed ratio • 6. Interest on investments, salaries to partners, bonus to managing partner, balance in an agreed ratio. Where bonus is expressed as: • A distribution of profit (certain percentage of income) • An expense (a certain percent of net income after bonus)

  3. GIVEN: A, Capital P300,000 B, Capital 200,000 C, Capital 100,000 Net Income P90,000.000 Arbitrary Ratio ( 3:2:1) A, Drawing (3/6 x 90,000) P45,000 B, Drawing (2/6 x 90,000) 30,000 C, Drawing (1/6 x 90,000) 15,000 GIVEN: A,CAPITAL B,CAPITAL Jan 1 300,000 200,000 Apr 1 50,000 Jun 30 250,000 Oct 1 (200,000) Net Income P300,000

  4. 1.a) Initial or Beginning Capital Income & Expense Summary P300,000.00 A,Drawing (300/500 x P300,000) P180,000.00 B, Drawing (200/500 x P300,000) 120,000.00 b) Ending Ratio Income & Expense Summary 300,000.00 A, Drawing (350/600 x P300,000) P175,000.00 B,Drawing (250/600 x P300,000 125,000.00 c) Average Capital A,Capital 1/1 300,000.00 x 6mos 1,800,000 6/30 550,000.00 x 3mos 1,650,000 10/1 350,000.00 x 3 mos 1,050,000 Total 4,500,000 Dividend by 12 months 375,000

  5. B, Capital 1/1 200,000 x 3 mos 600,000 4/1 250,000 x 9 mos 2,250,000 Total 2,850,000 Divided by 12 mos 237,500 INTEREST ON PARTNERS CONTRIBUTION BALANCE DISTRIBUTED IN AN AGREED RATIO GIVEN: A, CAPITAL 350,000 B,CAPITAL 250,000 NET INCOME : P300,000.00 INTEREST 12% RATIO 2:1 A,DRAWING B,DRAWING 12% interest on capital (12% x 350,000) 42,000 (12% x 250,000) 30,000 Balance at 2:1 (2/3 x 228,000) 152,000 (1/3 x 228,000) 76,000 TOTAL 194,000 106,000 Income and Expense Summary 300,000 A, Drawing 194,000 B, Drawing 106,000

  6. Case 2 Net Income is P60,000 A, Drawing B,Drawing 12% interest on Contribution (12% x 350,000) 42,000 (12% x 250,000) 30,000 Balance based ib 2:1 (2/3 x 12,000) ( 8,000) (1/3 x 12,000) ( 4,000) TOTAL 34,000 26,000 ENTRY : Income and Expense Summary 72,000 A, Drawing 42,000 B, Drawing 30,000 To distribute interest to partners. A,Drawing 8,000 B, Drawing 4,000 Income and Expense Summary 12,000 To distribute the remaining profit based on arbitrary ratio.

  7. COMBINATION OF INTEREST AND SALARIES, BALANCE IN AN AGREED RATIO Case 3 : A, Capital P500,000 B, Capital P300,000 P&L ratio agreement : 12% Interest on Capital balances, Salary of 15,000 per month to B Balance to be divided equally NET LOSS P24,000 A, Drawing B,Drawing Total 12% Interest on capital 60,000 36,000 96,000 Salary to B 15,000 per month 180,000 180,000 Balance equally (P300,000/2) (150,000) (150,000) (300,000) Total (90,000) P66,000P 24,000 Entries: Income and Expense Summary 96,000 A, Drawing 60,000 B,Drawing 36,000

  8. Income and Expense Summary 180,000 B, Drawing 180,000 A,Drawing 150,000 B,Drawing 150,000 Income and Expense Summary 300,000

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