The Partnership law provides that profits and losses are to be divided in accordance with the partners agreement. If no agreement is made between and among the partners, profits and losses are to be divided according to their capital contributions. Should the partners agree to divide the profits only, losses, if any are to divided in the same manner as that of dividing profits. However, should the partners agree to divide losses only, profits, if any shall be divided by the partners according to their capital contributions.
            The ratio in which partnership profits and losses are divided is known as the profit and loss ratio. The most common methods of dividing profits and losses among partners may be summarized as follows:

1. Equally
2. In an unequal or arbitrary ratio
3. In accordance with the ratio of partners' capitals or investments
   1. Ratio of original capitals
   2. Ratio of capitals at beginning of year
   3. Ratio of capitals at end of year
   4. Ratio of average capitals
   1. Simple Average Method
   2. Peso-Month/Peso-Day Method
4. By allowing interest on capital or loan accounts with the remaining profit or loss to be divided in an agreed ratio
5. By allowing salaries or bonuses to partners with the remaining profit or loss to be divided in an agreed ratio

The computation of the bonus can be based on:

1. Income before allowance for salaries and/or interest on capital balances.
2. Income after salaries and interest and/or before the bonus.
3. Income after salaries, interest, and/or after bonus.

Partners may agree to change their profit and loss ratio. When changes in the profit and loss ratio occur, several problems will be encountered in the valuation of partners' interests, among which are the following:

1. There may be a difference between the book value and the current market value of the tangible assets.
2. The partnership might have intangibles such as goodwill that are not recorded in the books of the partnership but which must be considered in determining the fair value of the partners' interests.
3. The partnership might keep its books on a cash basis, and as a result, there may be unrecorded assets and unrecorded liabilities. These, too, must be considered for purposes of determining the value of the respective partner's interest.

The above items must be taken into account to reflect fair valuation of all the partners' interests. There are two general approaches, for a fair valuation of interests:

1. Adjust all assets and liabilities to reflect their fair market values, and record any unrecorded assets or liabilities. The resulting net gain or loss should be recorded in the respective partner's capital account in accordance with their old profit and loss ratio.
2. Calculate the effects of all the differences between book values and fair market values as well as the unrecorded assets and liabilities, and adjust only the respective partners' capital account for the net effects of these adjustments using the old profit and loss ratio. Under this approach, no adjustments of asset and/or liabilities are reflected on the books of the partnership.

The partnership may discover errors made in computing net income of prior years. Examples of these errors are: error in computing depreciation, error in inventory valuation, omission of accrual of expense or income. When these errors are discovered, the partner's capital accounts should be adjusted. The following procedure may be used:

1. Determine the correct net profit of the prior period.
2. Compute the proper share of each partner using the profit and loss ratio in the year in which the error occurred.
3. Get the difference between the share in the profit that each partner actually received and the share each should have received.
4. Adjust the capital accounts by the amount computed in step 3.