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Partnership Operation
Partnership Operation
Partnership Operation
The partners should have a written agreement, called articles of co-partnership, specifying the
manner in which partnership income (loss) is to be distributed. Note that in the absence of a
predetermined agreement, the profit and loss (P&L) is divided according to original capital
contributed by partners.
A number of issues arise which complicate the allocation of partnership income (loss).
1. Partners may receive interest on their capital balances. If so, it must be determined what
constitute the capital balance (e.g., the year-end amount of some type of weighted-
average).
2. Some of the partners may receive a salary.
3. Some of the partners may receive a bonus on distributable net income. If so, you need to
determine if the bonus should be computed before or after salary, interest and bonus
allocations.
4. A formula needs to be determined for allocating the remaining income. The formula agreed
upon is usually termed the residual, remainder, or profit (loss) sharing ratio.
Finally, the partners should decide upon how income is to be allocated if net income is
insufficient to cover partner’s salaries, bonuses, and interest allocations. These allocations are
usually made even if the effect is to create a negative remainder. This is important to note that
partners may choose the allocate losses (or a negative remainder) in a different manner than
income.
The following are the capital balances and net income of ABC Partnership:
A, Capital – 300,000
B, Capital – 200,000
C, Capital – 100,000
Net Income – 150,000
Give the entry for the division of profit under each of the independent assumptions: