Methods to share profit or loss among partners
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Transcript of Methods to share profit or loss among partners
Use various methods to share profit/loss among partnersSection 8 Objective 6
Methods to share profit/loss among partners• The partnership agreement should state the basis for
sharing net income or net loss• Examples of the methods are as follows:– Fixed ratio expressed as a percentage, as a
proportion or a fraction– Ratio based either on capital balances at the
beginning of the year or on average balances– Salaries paid to partners and the remainder on a
fixed ratio– Interest on partner’s capital balances and the
remainder on a fixed ratio– Salaries to partners, interest on partners’ capital
and the remainder on a fixe ratio
Methods to share profit/loss among partners
• The objective of the choice of ratio is to settle on a basis that will equitably reflect the partner’s capital investment and service to the partnership
• When there is no written agreement on how to share the profits or losses, it is advisable to apply the terms of the partnership act of 1890. The terms are
• Profits and losses are to be shared equally• There can be no provision for a partnership salary,
interest on capitals or interest on drawings• If a partner gave a loan to the partnership company he
or she should receive an interest of 5% per annum
Methods to share profit/loss among partners
Sample journal and ledger entry to show a ratio on capital balances
Sample of income ratios – salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio