Allocation (Distribution) of Income or Loss

(Part I)

Distribution of Partnership
Income and Losses
• Objective 3
– Compute and record the income or losses
that partners share, based on stated ratios,
capital balance ratios, and partners’
salaries and interest
13–1
 Partnership Income and Losses

•…can be distributed according to whatever method the partners

specify
• in the partnership agreement

13–2
Partnership Income and Losses (cont’d)
• Partnership income normally has three
components
1. Interest on partners’ capital
• Return to the partners for the use of their capital
2. Partners’ salaries
• Compensation for services the partners have rendered
3. Other income
• For any special contributions partners may make to the
partnership or risks they may take

13–3
Distribution of Income Among Partners
• Equal distribution
– Appropriate if partners contribute equal
capital, have similar talents, and spend the
same amount of time in the business
• Unequal distribution
– Reflects the differences in partners’
contributions to the business

13–4
 Distribution of Income and Losses Among
Partners
• Accomplished by
– Using stated ratios
– Using capital balance ratios
– Paying the partners’ salaries and interest
on their capital and sharing the remaining
income according to ratios
• Salaries and interest are not expenses of the
business, rather ways of determining the
distribution of net income among partners

13–5
 Stated Ratios
…represent the percentage of income or
loss distributed to each partner

• If partners contribute unequally to the

business, unequal stated ratios can be
appropriate
– Partners’ contributions to the business may be
based on the amount of capital invested, as well
as the amount of time invested

13–6
 Illustration of Stated Ratios
Adcock and Villa had net income last year of $30,000. Their
partnership agreement states that the percentages of income
and losses distributed to Jerry Adcock and Rose Villa should
be 60 percent and 40 percent, respectively

Compute each partners’ share of net income

Adcock ($30,000 x .60) $18,000

Villa ($30,000 x .40) 12,000
Net income $30,000

Record the entry to show the distribution to the partners

20x4
June 30 Income Summary 30,000
Jerry Adcock, Capital 18,000
Rose Villa, Capital 12,000
Distribution of income for the year
to partners’ Capital accounts
13–7
 Capital Balance Ratios
• If invested capital produces the most
income for the partnership, then income
and losses may be distributed according
to capital balances
• Ratio may be based on
– Each partners’ balance at the beginning of
the year, or
– The average capital balance of each
partner during the year
The partnership agreement must describe the method used
13–8
Ratios Based on Beginning Capital Balances
At the start of the fiscal year, July 1, 20x3, Jerry Adcock,
Capital showed a $65,000 balance and Rose Villa, Capital
showed a $60,000 balance. Income for the year was $140,000

• Total partners’ equity in the business was $125,000

Beginning Capital
Balance
Jerry Adcock $ 65,000
Rose Villa 60,000
$125,000

13–9
Ratios Based on Beginning Capital Balances
At the start of the fiscal year, July 1, 20x3, Jerry Adcock,
Capital showed a $65,000 balance and Rose Villa, Capital
showed a $60,000 balance. Income for the year was $140,000

• Each partners’ beginning balance capital ratio is

equal to that partner’s capital balance at the
beginning of the year divided by the total partners’
equity at the beginning of the year

Beginning Capital
Balance Ratio
$65,000 ÷ $125,000 = .52 = 52%
$60,000 ÷ $125,000 = .48 = 48%

13–10
Ratios Based on Beginning Capital Balances
At the start of the fiscal year, July 1, 20x3, Jerry Adcock,
Capital showed a $65,000 balance and Rose Villa, Capital
showed a $60,000 balance. Income for the year was $140,000

• The income that each partner should receive is

determined by multiplying the total income by each
partner’s capital ratio

Jerry Adcock $140,000 x .52 = $ 72,800

Rose Villa 140,000 x .48 = 67,200
$140,000

13–11
Ratios Based on Average Capital Balances
• Investments and withdrawals usually
change the partners’ capital ratios
• These changes are not considered
when beginning capital balances are
used to distribute income
• Ratios based on average capital
balances may be used if partners
believe their capital balances will
change dramatically during the year

13–12
 Illustration of Ratios Based on Average Capital
Balances
The following T accounts show the activity over the year in
Adcock and Villa’s partners’ Capital and Withdrawals accounts

Jerry Adcock, Capital Jerry Adcock, Withdrawals

7/1/x3 65,000 1/1/x4 10,000

Rose Villa, Capital Rose Villa, Withdrawals

7/1/x3 60,000 11/1/x3 10,000
2/1/x4 8,000

Examine the changes that have occurred during

the year in each partner’s capital balance
13–13
Calculate Adcock’s Average Capital Balance
Jerry Adcock invested $65,000 into the partnership on July
1, 20x3, and withdrew $10,000 on January 1, 20x4

Jerry Adcock, Capital Jerry Adcock, Withdrawals

7/1/x3 65,000 1/1/x4 10,000

This means that from July through December, Adcock had $65,000
invested in the partnership and from January through June he had
$55,000 invested ($65,000 initial investment – $10,000 withdrawal)

13–14
Calculate Adcock’s Average Capital Balance

Jerry Adcock invested $65,000 into the partnership on July

1, 20x3, and withdrew $10,000 on January 1, 20x4

Jerry Adcock, Capital Jerry Adcock, Withdrawals

7/1/x3 65,000 1/1/x4 10,000

Calculate Adcock’s average capital balance

• Multiply the beginning balance by the number of months the
balance remains unchanged
• When the balance changes, multiply the new balance by the
number of months it remains unchanged
• Repeat for each time the capital balance changes

13–15
Calculate Adcock’s Average Capital Balance

Jerry Adcock invested $65,000 into the partnership on July

1, 20x3, and withdrew $10,000 on January 1, 20x4

Jerry Adcock, Capital Jerry Adcock, Withdrawals

7/1/x3 65,000 1/1/x4 10,000

Calculate Adcock’s average capital balance

Average
Capital Months Capital
Partner Date Balance X Unchanged = Total Balance
Adcock July-Dec $65,000 x 6 = $390,000
Jan-June 55,000 x 6 = 330,000
12 $720,000 ÷ 12 = $60,000

Add the totals and divide by 12 months to

determine the average capital balance
13–16
 Calculate Villa’s Average Capital Balance

Rose Villa invested $60,000 into the partnership on July 1,

20x3, withdrew $10,000 on November 1, 20x3, and invested
an additional $8,000 of equipment on February 1, 20x4

Rose Villa, Capital Rose Villa, Withdrawals

7/1/x3 60,000 11/1/x3 10,000
2/1/x4 8,000

This means that from July through November, Villa had $60,000
invested in the partnership, from November through February she
had $50,000 invested ($60,000 initial investment – $10,000
withdrawal), and from February through June she had $58,000
invested in the partnership ($50,000 balance + $8,000 investment)

13–17
 Calculate Villa’s Average Capital Balance

Rose Villa invested $60,000 into the partnership on July 1,

20x3, withdrew $10,000 on November 1, 20x3, and invested
an additional $8,000 of equipment on February 1, 20x4

Rose Villa, Capital Rose Villa, Withdrawals

7/1/x3 60,000 11/1/x3 10,000
2/1/x4 8,000

Calculate Villa’s average capital balance

Average
Capital Months Capital
Partner Date Balance X Unchanged = Total Balance
Villa July-Nov $60,000 x 4 = $240,000
Nov-Feb 50,000 x 3 = 150,000
Feb – June 58,000 x 5 = 290,000
12 $680,000 ÷ 12 = $56,667

13–18
Calculate the Total Average Capital
Average
Capital Months Capital
Partner Date Balance X Unchanged = Total Balance
Adcock July-Dec $65,000 x 6 = $390,000
Jan-June 55,000 x 6 = 330,000
12 $720,000 ÷ 12 = $ 60,000

Villa July-Nov $60,000 x 4 = $240,000

Nov-Feb 50,000 x 3 = 150,000
Feb – June 58,000 x 5 = 290,000
12 $680,000 ÷ 12 = 56,667

Total average capital = $116,667

13–19
Determine the Partners’ Average Capital Balance
Ratios Average
Capital Months Capital
Partner Date Balance X Unchanged = Total Balance
Adcock July-Dec $65,000 x 6 = $390,000
Jan-June 55,000 x 6 = 330,000
12 $720,000 ÷ 12 = $ 60,000

Villa July-Nov $60,000 x 4 = $240,000

Nov-Feb 50,000 x 3 = 150,000
Feb – June 58,000 x 5 = 290,000
12 $680,000 ÷ 12 = 56,667

Total average capital = $116,667

Average Capital Balance Ratio = Partner's Average Capital Balance

Total Average Capital

13–20
Determine the Partners’ Average Capital Balance
Ratios Average
Capital Months Capital
Partner Date Balance X Unchanged = Total Balance
Adcock July-Dec $65,000 x 6 = $390,000
Jan-June 55,000 x 6 = 330,000
12 $720,000 ÷ 12 = $ 60,000

Villa July-Nov $60,000 x 4 = $240,000

Nov-Feb 50,000 x 3 = 150,000
Feb – June 58,000 x 5 = 290,000
12 $680,000 ÷ 12 = 56,667

Total average capital = $116,667

$60,000
Adcock's Average Capital Balance Ratio = = .514 = 51.4%
$116,667

13–21
Determine the Partners’ Average Capital Balance
Ratios Average
Capital Months Capital
Partner Date Balance X Unchanged = Total Balance
Adcock July-Dec $65,000 x 6 = $390,000
Jan-June 55,000 x 6 = 330,000
12 $720,000 ÷ 12 = $ 60,000

Villa July-Nov $60,000 x 4 = $240,000

Nov-Feb 50,000 x 3 = 150,000
Feb – June 58,000 x 5 = 290,000
12 $680,000 ÷ 12 = 56,667

Total average capital = $116,667

$56,667
Villa's Average Capital Balance Ratio = = .486 = 48.6%
$116,667

13–22
 Calculate the Distribution of Income
The income for the year’s operations (July 1, 20x3 to June
30, 20x4) was $140,000

Distribution of Income
Share of
Partner Income x Ratio = Income
Adcock $140,000 x .514 = $71,960
Villa 140,000 x .486 = 68,040
Total income $140,000

13–23