GAME 2: Truth or Lie About Partnership Business Operation Transactions
Partnership Business Operation
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Topics of this game:
- The equity of a partner in the net assets of the partnership is NOT the same as the partner's share in profits or losses.
- A partnership contract should be drawn up at the end of each year, prior to distributing profit to the partners.
- Partnership profits and losses are divided among partners according to their sharing agreement. If no sharing agreement exists, profits or losses are divided equally.
- 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 same proportion.
- In the absence of stipulation, the share of each partner in profits or losses shall be in the same proportion to what he may have contributed, but the industrial partner may not be liable for the losses.
- The industrial partner is not liable for losses because he cannot withdraw the work or labor already done by him.
- Profits or losses are divided equally among the partners unless the partnership agreement specifies otherwise.
- It is possible to allocate profit or loss to partners based solely on the stated ratio.
- If a partnership agreement does not specify how profits or losses are to be distributed, they should be allocated based on relative capital account balances.
- When a loss is closed into the partners' capital accounts, income summary is credited.
- It is possible to allocate profit or loss to partners based solely on average capital balances.
- When salary and interest allocations exceed profit, a loss has occurred.
- It is possible for a partner's capital account to increase as a result of the allocation of a loss.
- The salary allocation to partners also appears as salaries expense on the partnership's statement of recognized income and expense.
- The salary, interest and stated ratio method of allocation cannot be applied when a loss has occurred.
- It is possible to allocate profit or loss to partners based solely on salaries.
- The use of salaries in the allocation of profit or loss allows for the differences in the services that partners provide the business.
- It is possible to allocate profit or loss to partners based solely on interest.
- The increase in equity of the partner due to distribution of profits can be attributed to a particular asset.
- In the absence of a specific agreement, the law requires that partnership profits be divided equally among the partners.
- The basis on which profits or losses are shared is a matter of agreement among the partners and may not necessarily be the same as their capital contribution ratio.
- The basis for distribution of profits or losses is a matter of agreement among the partners. It may be based on their capital contribution ratio.
- When beginning capital balances are used in allocating profits, year-end investments are discouraged.
- When ending capital balances are used, additional investments during the year are encouraged.
- Using average capital balances as a basis for profit distribution is preferable because it reflects the capital actually available for use by the partnership during the year. Temporary withdrawals is considered within limits.
- The interest on partners' capital can be considered as expenses depending on the partners' agreement.
- Interest collected on loan payments from partners is recognized as partnership income.
- The provision for interest on partners' capital will not be honored because the operations resulted to a loss even if the agreement provided for such interest.
- Under the pure capital ratio plan of allocating profits, the partner who invested more capital will ultimately shoulder a bigger share of the loss.
- When a profit or loss sharing agreement provides for salary and interest allowances to the partners, these salary and interest allowances should be deducted from revenues in arriving at partnership profit.
- In certain cases when distribution of profits or losses involves salary and interest allowances, some partners may receive an increase in equity and others may suffer a decrease in equity.
- In the absence of any agreement, salary allowances shall be provided even when operations yielded losses.
- A partnership agreement may validly stipulate that one partner shall receive no share in profits or losses.
- A stipulation that excludes one or more partners from any share in the profits or losses is valid.
- Salary and interest allowances are reported in the statement of recognized income and expense as salaries and interest expenses.
- The form and content of the statement of recognized income and expense of a partnership resemble those of a sole proprietorship with no exceptions.
- The income summary account is credited in the entry to record distribution of profits among partners.
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