1. Second: ( (The allocation of Profits and Losses

2. 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.

3. 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.

4. 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 / 2 = 100000 And the entry is: Dr Cr Income Summary 200000 Partner-A- Capital 100000 Partner-B- Capital 100000

5. Q: What is the entry if the result in ex. 1 is loss 200000?? The entry of allocating the loss is: Dr Cr Partner '‘A'‘, Capital 100000 Partner '‘B'‘, Capital 100000 Income Summary 200,000

6. 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.

7. Solution We calculate the share of each partner as follows: Partner A Partner B Total 3 1 = 4 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

8. 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.

9. 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

10. 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:

11. 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 July100000 1 Jan2000001 Jan400000 1 May3000001 Apr100000 balance400000Balance500000

12. 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 = 120000 Partner’s B share in the net income = 360,000 * 400/600 = 240000 360000 The entry is: DrCr Income Summary360000 Partner’s A Capital Partner’s B Capital 120000 240000

13. 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: DrCr Income Summary360000 Partner’s A Capital Partner’s B Capital 160000 200000

14. 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:

15. 2- Partner, B:

16. 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 = 152727 Partner’s B share in the net income = 360,000 * 475/825 = 207273 360000 The entry is: Dr Cr Income Summary 360000 Partner-A- Capital 152727 Partner-B- Capital 207273

17. 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 200000 and 300000 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

18. 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 income150000 1) Interest on capital 2000030000( (50000 The remainder 100000 2) Allocating the rest (3:2)6000040000 (100000) The partner’s share 80000 70000 0

19. 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 3 2 = 5 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

20. 5- 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 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 200000 and 300000 respectively. 2) Calculating salary to partner B of 1000 monthly. 3)The rest of profits and losses is allocated with a ratio of 3:5respectively. Required: Prepare the journal entry to record the allocation of profit

21. Solution We prepare statement of distribution as follows: TitlePartner APartner B Total Net income150000 1) Interest on capital 2000030000( (50000 The remainder 100000 2) Salary to partner B 12000 (12000) The remainder 88000 3) Allocating the rest (3:5) 3300055000 (88000) The partner’s share 53000 97000 0

22. 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 3 5 = 8 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

23. 5- 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 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 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

24. Solution We prepare statement of distribution as follows: TitlePartner APartner B Total Net income150000 1) Interest on capital 2000030000( (50000 The remainder 100000 2) Salary of partner B 12000 (12000) The remainder 88000 3) The bonus of partner A 17600 (17600) The remainder 70400 3) Allocating the rest equally 35200 (70400) The partner’s share 72800 77200 0

25. 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

26. 4) Allocating the remainder after the interest, salary and bonus equally: So, the share of each partner = 70400 / 2 no. of partners = 35200 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