Pointer summary chapter 2

Advance accounting

Partners equity in assets contrasted with share in profits or losses

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 equity of a partner
in the net assets of the partnership should be distinguished from a partner’s share in profit or
losses.

Factors to consider in arriving for dividing profits or losses

Money, property or industry

The profit will be realized from their contribution in of these assets and those
factors will be considered in formulation of an equitable profit and loss ratio.

Other factors:

1- Partners having considerable financial resources, strong credit standing.

2- A partner who is well known in a profession or an industry.

Performance method

Many partnerships use profit and loss sharing arrangements that give some weight to
the specific performance of each partner to provide incentives to perform well. This
allocation of profits to a partner on the basis of performance is frequently referred to as
a BONUS

Examples of the use of performance criteria are:

1- Chargeable hours.
2- Total billings.
3- Write-offs.
4- Promotional and civic and activities.
5- Profit in excess of specified levels.

Rules for the distribution profits or losses

Based on the legal provisions of the Civil Code of the Philippines, the following are the rules for
the distribution of profits or losses
 1- Profit

a.  The profits will be divided according to partners’ agreement

b. if there is no agreement:

 as to capitalist partners, the profit shall be divided to the capital

contributions.
 As to industrial partners, the industrial partners shall receive such share
before the capitalist partners shall divide the profits.

2- Losses

a. The losses will be divided according to partners’ agreement.

b. If there is no agreement for losses but there is for profit, then the losses shall be
distributed according to profit sharing ratio.
c. In the absence of any agreement

 The losses shall be divided according to their capital contribution.

 As to purely industrial partners shall not be be liable for any losses.

Correction of prior period errors

Per International Accounting Standards (IAS) No. 8, Accounting Policies, Changes in Accounting
Estimates and Errors, prior period errors are omissions from and other misstatements of the
entity’s financial statements for one or more prior periods that are discovered in the current
period.

Distribution of profit or losses based on partner’s agreement

The profit or losses shall be divided with agreement of the partners and the ratio of the profit
or losses will be recognized as the profit and losses ratio.

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:

 Ratio of original capital investments

 Ratio of capital balances at the beginning of the year.
 Ratio of the capital balances at the end of the year.
 Ratio of average capital balances.
3. By allowing interest on the partner.
4. By allowing salaries on the partner.
5. By allowing bonus to the managing partner.
 6. By allowing salaries and interest on the partner and the bonus on the managing partner.

Financial statements

The general purpose of the financial statements is to provide information about the results of
operations, financial position, and cash flows of an organization. This information is used by the
readers of financial statements to make decisions regarding the allocation of resources.

Overall considrations

 Fair presentation and compliance with (IFRSs)

 Going concern.
 accrual basis of accounting.
 Materiality and aggregation.
 Offsetting.
 Frequency of reporting and comparative information.
 Consistency of presentation.
 Identification of the financial statements.

The entity shall clearly identify each (FS):

 The name of the entity.
 Weather it is individual or for a group of entities.
 The date for the end of the reporting period.
 The presentation currency.
 The level of rounding used in presenting the amounts.

Complete set of financial statements

a. Statement of comprehensive income

Shows the profit or loss and it may be presented as single statement of

comprehensive income or as in an income statement. And the items are :
 Revenue.
 Finance cost.
 Share of profit or loss of associates.
 Tax expense.
 Single amount comprising: 1. the post-tax profit or loss discontented
operation 2. the post-tax gain or loss.
 Ptofit or loss.
 Each component classified by nature.
 Share of the other comprehensive income.
 Total comprehensive income.
b. Statement of changes in equity

a reconciliation of the beginning and ending balances in a company’s equity

during a reporting period.

c. Statement of financial position

It shows the assets and liabilities and equity of an entity for a certain period of
time. And the items are:

 PPE
 Investment property
 Intangible assets
 Financial assets
 Investment
 Biological assets
 Inventories
 Trade and other receivables
 Cash and cash equievalent
 Assets classified as held for sale
 Trade and other payables
 Provisions
 Financial liabilities
 Current tax
 Deferred tax liability
 Minority interest
 Issued capital and reserves

The entity makes the judgment for the presentation of new items separately:

 The nature and liquidity of assets.

 The function of assets.
 The amounts, nature and timing of liabilities.]

Current assets

 These are assets expected to be converted to cash used or consumed

within one year or one operating cycle.
 It holds the assets primarily.
 Expects to realize within one year.
 The assets is cash or cash equivalent.

The rest are non-current assets which is long term assets

 Current liabilities

 claims against assets that must be satisfied in one year or one

operating cycle, whichever is longer.
 It held primarily for the purpose of trading.
 Is due to be settled within one year.
 Does not have an unconditional right tight to defer settlement for at
least one year.

The rest are non-current liabilities which is obligations with maturities beyond
one year
.

d. Statement of cash flows

Provide information about the cash receipts and cash payments of an entity
during a period. The cash receipts classify as inflow and cash payment as
outflow.

Method of reporting:

1. Direct method.
2. Indirect method.

The major classes of operating cash flows using direct method:

Cash inflows

 Receipt from sales of goods and performance.

 Receipts from royalties, fees, commissions and other revenues.

Cash outflows

 Payment to suppliers of goods and services.

 Payments to employees.
 Payment for taxes.
 Payments for interest.
 Payment for other operating expenses.

Cash flows from investing activities

Cash flows
  Receipts from sale of property and equipment.
 Receipts from sale of investments in debt or equity securities.
 Receipts from collections on notes receivables.

Cash outflows

 Pqyments to acquire property and equipment.

 Payment to acquire debt or equity securities.
 Payment to make loans to to other in forms of notes receivables.

Cash flows from financing activities

Cash inflows

 Receipts from investments by owners.

 Receipts from issuance of notes payable.

Cash outflows

 Payments to owners In the form of withdrawals.

 Payments to settle notes payable.