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

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