Distribution of Partnership Income

Distribution of Partnership Income Accounting

The distribution of partnership income is the process of sharing the net income or net loss of a partnership between the partners in proportion to the income sharing ratio.

In the absence of a partnership agreement, each partner receives an equal share of the net income or net loss of the partnership. For a two partner firm, this would mean that the income sharing ratio could be expressed as 1:1.

Suppose for example, a partnership is formed between two people, partner A and partner B, sharing net income and net losses equally (income sharing ratio of 1:1). If the net income for the year is 40,000 then the following mdct.ru entries would be made:

Distribution of Partnership Income
Account Debit Credit
Income Summary 40,000
Capital A 20,000
Capital B 20,000
Total 40,000 40,000

The net income of 40,000 is shared equally between the two partners by transferring 20,000 to each of the capital accounts.

Distribution of Partnership Income and Drawings

If partner A had drawings during the year of 5,000 this would now need to be transferred to the capital account with the following journal.

Distribution of Partnership Income – Drawings
Account Debit Credit
Drawings A 5,000
Capital A 5,000
Total 5,000 5,000

The capital of partner A is reduced by the drawings of 5,000.

Distribution of Partnership Income and Salaries

If the net income of the partnership was 40,000 but partner B had a salary of 15,000, then the amount to be distributed equally would be 40,000 – 15,000 = 25,000, so each partner would receive 25,000 / 2 = 12,500. The allocation of net income would be as follows:

Distribution of Partnership Income – Allocation of Net Income
A B Total
Salary 0 15,000 15,000
Capital 12,500 12,500 25,000
Total 12,500 27,500 40,000

The mdct.ru journal to record the allocation of net income would be as follows:

Distribution of Partnership Income – With Salaries
Account Debit Credit
Income summary 40,000
Capital A 12,500
Capital B 27,500
Total 40,000 40,000

Distribution of Partnership Income and Interest

If the net income of the partnership was 40,000 but partner A receives interest on the opening capital balance of 30,000 at 5%, then partner A would receive interest of 30,000 x 5% = 1,500.

The amount to be distributed equally would be 40,000 – 1,500 = 38,500, so each partner would receive 38,500 / 2 = 19,250. The allocation of net income would be as follows:

Distribution of Partnership Income – Allocation of Net Income
Account A B Total
Interest 1,500 0 1,500
Capital 19,250 19,250 38,500
Total 20.750 19,250 40,000

The mdct.ru journal to record the allocation of net income would be as follows:

Distribution of Partnership Income – With Interest
Account Debit Credit
Income summary 40,000
Capital A 20,750
Capital B 19,250
Total 40,000 40,000

In practice any combination of salary and interest can be deducted using a allocation table, and the resulting net income or loss is then shared out between the partners in the income sharing ratio.

It should be noted that the salary and interest is charged even if the partnership has made a loss, the resulting net loss is then allocated to the partners according to the sharing ratio.

Distribution of Partnership Income November 6th, 2016Team

You May Also Like


Related pages


implicit calculatorwhat are special journals in accountingwhat is the final step in the accounting cyclereturn of capital journal entryperpetual accounting journal entrieshow to prepare debtors aging analysisowners equity equationnet salvage value formulabad debts written off balance sheeterrors and suspense accountsaccounting journal template excelwhat is petty cash voucherworking out margin calculatorassets liabilities equity equationnpv example excelprice and quantity variancehow to find direct labor cost in accountingannuity table excelbasic balance sheet equationreplenish petty cashmeasurement of information about a business in the monetary unitaccounting allowance methodreceivables turnover days formulathe formula for computing annual straight-line depreciation iscalculating gross margin percentagereorder point and safety stockaccounts payable test questionstrade discount examplejournal entry for credit salesreturns outwardsbond payable balance sheetbookeeping basicsexcel internal rate of returnaccounts receivable with recoursefactory overhead control accounthow to record depreciation expense in journal entryare accounts receivable debit or credithow to closing entriessample of petty cash voucher formnet operating working capital formulaprovision for bad debts journal entry effectaccounting equation definitiondouble entry journal templatemultiple-step income statementscollection of accounts receivable journal entrypurchase ledger templateequation for gross profit marginequation of depreciationdouble declining depreciation tabledefinition of adjusting entriesstraight-line method of depreciation calculatoraccounting ledger excelhistorical accounting conceptformat of general ledgerp&l basicseffects of business transactions on the accounting equationhow to calculate aging of accounts receivableunfavorable variancemark up and profitfinancial ratios calculator excelfixed asset turnover definitionnrv inventoryincreasing annuity calculatorequation for gross profitaccounting rate of return arrdebtors formulaconstant growth annuitycash journal templateselling inventory journal entryhow to calculate present value annuitygeneral ledger worksheetformula for dividend payout rationet profit on sales ratio