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: 1- Equally. 2 - Using a specific ratio. 3- 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.

1- Allocating the Profits Equally: Example(1) On 1 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 = / 2 = And the entry is: Dr Cr Income Summary Partner-A- Capital Partner-B- Capital

Q: What is the entry if the result in ex. 1 is loss ?? The entry of allocating the loss is: Dr Cr Partner '‘A'‘, Capital Partner '‘B'‘, Capital Income Summary 200,000

2- Allocating the Profits using a Specific ratio: Example(2) On 1 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 3 1 = 4 So, the partner’s A share = * ( 3/4) = So, the partner’s B share = * (1/4 ) = And the entry is: Dr Cr Income Summary Partner-A- Capital Partner-B- Capital 75000

Example(3) On 1 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 = * 70% = So, the partner’s B share = * 30% = And the entry is: Dr Cr Income Summary Partner-A- Capital Partner-B- Capital 90000

3- 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: 1- The balances of capital at the beginning of the period. 2- The balances of capital at the end of the period. 3- The Weighted -Average capital of partners. First: Using the balances of capital at the beginning of the period:

Example (4) On 1 Jan. 2011, A and B formed a general partnership. The partnership realized net income of 360,000 for the year ended 31/12/2011. 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,Capita l cr dr Partner B,Capital cr 1 July Jan Jan May Apr balance400000Balance500000

We calculate the share of each partner as follows: Partner’s A Capital 1 Jan 200,000 Partner’s B Capital 1 Jan 400,000 Total 600,000 Partner’s A share in the net income = 360,000 * 200/600 = Partner’s B share in the net income = 360,000 * 400/600 = The entry is: DrCr Income Summary Partner’s A Capital Partner’s B Capital

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 = Partner’s B share in the net income = 360,000 * 500/900 = The entry is: DrCr Income Summary Partner’s A Capital Partner’s B Capital

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 ) 1- Partner, A:

2- 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. 350,000 Partner’s B Weighted -Average Capital 475,000 Total 825,000 So: Partner’s A share in the net income = 360,000 * 350/825 = Partner’s B share in the net income = 360,000 * 475/825 = The entry is: Dr Cr Income Summary Partner-A- Capital Partner-B- Capital

4- 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 1 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: 1) Calculating interest on capital balances with a rate of 10%and the balances of the partners were and respectively. 2)The rest of profits and losses is allocated with a ratio of 3:2respectively. 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 : TitlePartner APartner B Total Net income ) Interest on capital ( (50000 The remainder ) Allocating the rest (3:2) (100000) The partner’s share

First: The calculations: 1) Interest on capital = The partner’s capital balance * % of interest Partner, A = * 10% = Partner, B = * 10% = ) Allocating the remainder after the interest: Partner A Partner B Total 3 2 = 5 So, the partner’s A share = * ( 3/5) = So, the partner’s B share = * (2/5 ) = Second: the entry: We prepare the entry by the amounts from the statement. Dr Cr Income Summary Partner-A- Capital Partner-B- Capital 70000