: Second The allocation of Profits and Losses )) How to divide the Profits among the ? ?partners The allocation of profits)net income) or losses among partners depends on the agreement of them and there are many methods to :allocate such as Equally- Using a specific ratio - Using the ratio of capital balances of the partners - 4- Granting the partners interest on the capital and allocating the rest of net income in a specific ratio 5- Granting the partners interest on the capital and salaries and allocating the rest of net income in a specific ratio 6- Granting the partners interest on the capital , salaries and bonuses and allocating the rest of net income in a specific ratio :Allocating the Profits Equally- )Example)1 On Jan 2011, A and B formed a general partnership The partnership realized net income of 200,000 for the year ended 31/12/2011 The partners have agreed to share profits and losses equally : Required  Prepare the journal entry to record the allocation of profit Solution If the profit is distributed equally, we calculate the share of each partner as follows: = profit ) or loss) / no of partners So, the partner’s share = 200000 / = 100000 And the entry is: Dr Cr Income Summary 200000 Partner-A- Capital 100000 Partner-B- Capital 100000 Q: What is the entry if the result in ex is loss 200000?? The entry of allocating the loss is: Dr Cr Partner '‘A'‘, Capital 100000 Partner '‘B'‘, Capital 100000 Income Summary 200,000 : Allocating the Profits using a Specific ratio- )Example)2 : On Jan 2011, A and B formed a general partnership The partnership realized net income of 300,000 for the year ended 31/12/2011 The partners have agreed to share profits and losses with the ratio 3:1 respectively  Required Prepare the journal entry to record the allocation of profit Solution We calculate the share of each partner as follows: Partner A Partner B Total = So, the partner’s A share = 300000 * ) 3/4) = 225000 So, the partner’s B share = 300000 * )1/4 ) = 75000 300000 And the entry is: Dr Cr Income Summary 300000 Partner-A- Capital 225000 Partner-B- Capital 75000 )Example)3 On Jan 2011, A and B formed a general partnership The partnership realized net income of 300,000 for the year ended 31/12/2011 The partners have agreed to share profits and losses with the percentage of 70% and 30% respectively : Required Prepare the journal entry to record the allocation of profit Solution We calculate the share of each partner as follows: Partner A Partner B 70% 30% So, the partner’s A share = 300000 * 70% = 210000 So, the partner’s B share = 300000 * 30% = 90000 300000 And the entry is: Dr Cr Income Summary 300000 Partner-A- Capital 210000 Partner-B- Capital 90000 : Allocating the Profits using the capital balances ratio - The partners may agree to use the ratio of their capital balances to allocate the net income ,in this case we can use one of the :following balances The balances of capital at the beginning of the period- The balances of capital at the end of the period- The Weighted -Average capital of partners-   First: Using the balances of capital at the beginning of the period: We calculate the share of each partner as follows:  Partner’s A Capital Jan 200,000  Partner’s B Capital Jan 400,000  Total 600,000 Partner’s A share in the net income = 360,000 * 200/600 = 120000 Partner’s B share in the net income = 360,000 * 400/600 = 240000 360000 The entry is: Dr Income Summary Cr 360000 Partner’s A Capital Partner’s B Capital 120000 240000 Second: Using the balances of capital at the End of the period: We calculate the share of each partner as follows:  Partner’s A Capital 31 Dec 400,000  Partner’s B Capital 31 Dec 500,000  Total 900,000 Partner’s A share in the net income = 360,000 * 400/900 = 160000 Partner’s B share in the net income = 360,000 * 500/900 = 200000 360000 The entry is: Dr Income Summary Cr 360000 Partner’s A Capital Partner’s B Capital 160000 200000 :Third : Using the Weighted –Average capital of partners Firstly we have to calculate the Weighted -Average capital of partners by preparing the following schedules: )The schedule requires the identification of increase and decrease in capital and its related period ) :Partner, A-    :Partner, B-   After calculating the Weighted -Average capital balances of partners ,we use them to allocate the net income like using the beginning and ending balances as follows:  Partner’s A Weighted -Average Capital Partner’s B Weighted -Average Capital Total   350,000 475,000 825,000 So: Partner’s A share in the net income = 360,000 * 350/825 = 152727 Partner’s B share in the net income = 360,000 * 475/825 = 207273  360000 The entry is: Dr Income Summary Partner-A- Capital Partner-B- Capital Cr 360000 152727 207273 Granting the partners interest on the capital and allocating the rest of - :net income in a specific ratio  In this case, the partners agree to calculate interest on their capital balances and the rest will be allocated using specific ratio or capital balances or equally The interest on capital balances should be calculated to all partners regardless the company realized net income or loss  Example )5) On Jan 2011, A and B formed a partnership The partnership realized net income of 150,000 for the year ended 31/12/2011 According to the partnership agreement :the net income is allocated as follows Calculating interest on capital balances with a rate of 10%and the balances of the ) partners were 200000 and 300000 respectively The rest of profits and losses is allocated with a ratio of 3:2respectively )2 :Required Prepare the journal entry to record the allocation of profit Solution If the net income distribution include interest on capital : or salaries or bonus , we prepare statement of distribution as follows Title Partner A Partner B Total Net income Interest on capital( 150000 20000 30000 50000( The remainder 2( Allocating the rest (3:2( The partner’s share ( 100000 60000 80000 40000 (100000( 70000 First: The calculations: 1) Interest on capital = The partner’s capital balance * % of interest Partner, A = 200000 * 10% = 20000 Partner, B = 300000 * 10% = 30000 2) Allocating the remainder after the interest: Partner A Partner B Total = So, the partner’s A share = 100000 * ) 3/5) = 60000 So, the partner’s B share = 100000 * )2/5 ) = 40000 100000 Second: the entry: We prepare the entry by the amounts from the statement Dr Cr Income Summary 150000 Partner-A- Capital 80000 Partner-B- Capital 70000 Granting the partners interest on the capital and salaries allocating - :the rest of net income in a specific ratio  In this case, the partners agree to calculate interest on their capital balances and salaries to partner )s) who manages the company and the rest will be allocated using specific ratio or capital balances or equally The interest on capital balances and salaries should be calculated to the partners regardless the company realized net income or loss  Example )6) On Jan 2011, A and B formed a partnership The partnership realized net income of 150,000 for the year ended 31/12/2011 According to the partnership agreement :the net income is allocated as follows Calculating interest on capital balances with a rate of 10%and the balances of the ) partners were 200000 and 300000 respectively 2) Calculating salary to partner B of 1000 monthly .The rest of profits and losses is allocated with a ratio of 3:5respectively)3 :Required Prepare the journal entry to record the allocation of profit Solution We prepare statement of distribution as follows: Title Partner A Partner B Total Net income Interest on capital( 150000 20000 30000 50000( The remainder 100000 2( Salary to partner B 12000 The remainder 3( Allocating the rest (3:5( The partner’s share ( (12000( 88000 33000 53000 55000 (88000( 97000 First: The calculations: 1) Interest on capital = The partner’s capital balance * % of interest Partner, A = 200000 * 10% = 20000 Partner, B = 300000 * 10% = 30000 2) The salary of partner B : We calculate the annual salary = 1000 monthly * 12 = 12000 3) Allocating the remainder after the interest and salary: Partner A Partner B Total = So, the partner’s A share = 88000 * ) 3/8) = 33000 So, the partner’s B share = 88000 * )5/8 ) = 55000 88000 Second: the entry: We prepare the entry by the amounts from the statement Dr Cr Income Summary 150000 Partner-A- Capital 53000 Partner-B- Capital 97000 Granting the partners interest on the capital, salaries and bonuses - :and allocating the rest of net income in a specific ratio   In this case, the partners agree to calculate interest on their capital balances , salaries to partner )s) who manages the company and bonus to partner )s) who renders services to the company and the rest will be allocated using specific ratio or capital balances or equally The interest on capital balances and salaries should be calculated to the partners regardless the company realized net income or loss but the bonus is calculated when the company realizes net income only  Example )7) On Jan 2011, A and B formed a partnership The partnership realized net income of 150,000 for the year :ended 31/12/2011 According to the partnership agreement the net income is allocated as follows Calculating interest on capital balances with a rate of 10%and the balances of the partners were 200000 ) and 300000 respectively 2) Calculating salary to partner B of 1000 monthly 3) Calculating bonus to partner A of 20% of the net income after deducting the interest on capital and salaries 3)The rest of profits and losses is allocated equally :Required Prepare the journal entry to record the allocation of profit Solution We prepare statement of distribution as follows: Title Partner A Partner B Total Net income 150000 Interest on capital( 20000 30000 50000( The remainder 100000 2( Salary of partner B 12000 The remainder 3( The bonus of partner A The partner’s share (12000( 88000 17600 (17600( The remainder 3( Allocating the rest equally ( 70400 35200 72800 35200 (70400( 77200 First: The calculations: 1) Interest on capital = The partner’s capital balance * % of interest Partner, A = 200000 * 10% = 20000 Partner, B = 300000 * 10% = 30000 2) The salary of partner B : We calculate the annual salary = 1000 monthly * 12 = 12000 3) The bonus of partner A: According to the example: The bonus = {The net income – )interest + salary)} * % of bonus = { 150000 – ) 50000 + 12000)} * 20 % = 88000 * 20% = 17600 Note: 1- If the agreement is calculating the bonus as a percentage of the net income after the interest only: The bonus = {The net income – interest } * % of bonus 2- If the agreement is calculating the bonus as a percentage of the net income only: The bonus = The net income * % of bonus 4) Allocating the remainder after the interest, salary and bonus equally: So, the share of each partner = 70400 / no of partners = Second: the entry: We prepare the entry by the amounts from the statement Dr Cr Income Summary 150000 Partner-A- Capital 77800 Partner-B- Capital 77200 35200 [...]... )4) On 1 Jan 2 011 , A and B formed a general partnership The partnership realized net income of 360,000 for the year ended 31/ 12/2 011 The partners have agreed to share profits and losses using the percentage of capital balances at the beginning of the year If you know that the :capital’s accounts of the partners were dr Partner A ,Capital July 1 100000 Jan 1 cr dr Partner B ,Capital cr 200000 Jan 1 40 0000... calculated to all partners regardless the company realized net income or loss  Example )5) On 1 Jan 2 011 , A and B formed a partnership The partnership realized net income of 15 0,000 for the year ended 31/ 12/2 011 According to the partnership agreement :the net income is allocated as follows Calculating interest on capital balances with a rate of 10 %and the balances of the ) 1 partners were 200000 and 300000... income 15 0000 Interest on capital( 1 20000 30000 50000( The remainder 10 0000 2( Salary of partner B 12 000 The remainder 3( The bonus of partner A The partner’s share (12 000( 88000 17 600 (17 600( The remainder 3( Allocating the rest equally ( 7 040 0 35200 72800 35200 (7 040 0( 77200 0 First: The calculations: 1) Interest on capital = The partner’s capital balance * % of interest Partner, A = 200000 * 10 % =... partner )s) who manages the company and the rest will be allocated using specific ratio or capital balances or equally The interest on capital balances and salaries should be calculated to the partners regardless the company realized net income or loss  Example )6) On 1 Jan 2 011 , A and B formed a partnership The partnership realized net income of 15 0,000 for the year ended 31/ 12/2 011 According to the partnership... Partner B ,Capital cr 200000 Jan 1 40 0000 May 1 300000 Apr 1 100000 balance 40 0000 Balance 500000 We calculate the share of each partner as follows:  Partner’s A Capital 1 Jan 200,000  Partner’s B Capital 1 Jan 40 0,000  Total 600,000 Partner’s A share in the net income = 360,000 * 200/600 = 12 0000 Partner’s B share in the net income = 360,000 * 40 0/600 = 240 000 360000 The entry is: Dr Income Summary... formed a partnership The partnership realized net income of 15 0,000 for the year :ended 31/ 12/2 011 According to the partnership agreement the net income is allocated as follows Calculating interest on capital balances with a rate of 10 %and the balances of the partners were 200000 ) 1 and 300000 respectively 2) Calculating salary to partner B of 10 00 monthly 3) Calculating bonus to partner A of 20% of... Partner A Partner B Total Net income Interest on capital( 1 150000 20000 30000 50000( The remainder 2( Allocating the rest (3:2( The partner’s share ( 10 0000 60000 80000 40 000 (10 0000( 70000 0 First: The calculations: 1) Interest on capital = The partner’s capital balance * % of interest Partner, A = 200000 * 10 % = 20000 Partner, B = 300000 * 10 % = 30000 2) Allocating the remainder after the interest:... interest Partner, A = 200000 * 10 % = 20000 Partner, B = 300000 * 10 % = 30000 2) The salary of partner B : We calculate the annual salary = 10 00 monthly * 12 = 12 000 3) The bonus of partner A: According to the example: The bonus = {The net income – )interest + salary)} * % of bonus = { 15 0000 – ) 50000 + 12 000)} * 20 % = 88000 * 20% = 17 600 Note: 1- If the agreement is calculating the bonus as a percentage... Income Summary Cr 360000 Partner’s A Capital Partner’s B Capital 12 0000 240 000 Second: Using the balances of capital at the End of the period: We calculate the share of each partner as follows:  Partner’s A Capital 31 Dec 40 0,000  Partner’s B Capital 31 Dec 500,000  Total 900,000 Partner’s A share in the net income = 360,000 * 40 0/900 = 16 0000 Partner’s B share in the net income = 360,000 * 500/900... income Interest on capital( 1 150000 20000 30000 50000( The remainder 10 0000 2( Salary to partner B 12 000 The remainder 3( Allocating the rest (3:5( The partner’s share ( (12 000( 88000 33000 53000 55000 (88000( 97000 0 First: The calculations: 1) Interest on capital = The partner’s capital balance * % of interest Partner, A = 200000 * 10 % = 20000 Partner, B = 300000 * 10 % = 30000 2) The salary of partner ... regardless the company realized net income or loss  Example )5) On Jan 2 011 , A and B formed a partnership The partnership realized net income of 15 0,000 for the year ended 31/ 12/2 011 According... beginning of the period: Example )4) On Jan 2 011 , A and B formed a general partnership The partnership realized net income of 360,000 for the year ended 31/ 12/2 011 The partners have agreed to share... :Allocating the Profits Equally- )Example )1 On Jan 2 011 , A and B formed a general partnership The partnership realized net income of 200,000 for the year ended 31/ 12/2 011 The partners have agreed to share