Professional Documents
Culture Documents
- The accurate determination of periodic net income and distribution to the partners is
still the primary objective of the accounting process.
- Become more complex because of the differences in capital contributions, in abilities
and talents of individual partners, and in time spent on partnership duties by the
individual partners.
- According to Partnership law, P&L are to be divided in accordance with the ff hierarchy:
o Partners Agreement
o Original Capital Contributions
o If the Partners agreed to divide Profits only; If with loss – divide loss with the
same manner as dividing profit
o If the Partners agreed to divide losses only, if with profit – divide profit
according to original capital contributions
Profit and Loss Ratio – The ratio in which partnership profits and losses are divided.
1. Equally
2. In an unequal or arbitrary ratio
3. In the ratio of partners’ capital account balances on a particular date or, in the ratio of
average capital account balances during the year.
4. Allowing interest on partners’ capital account balances and dividing the remaining net
income or loss in a specified ratio
5. Allowing salaries to partners and dividing the remaining net income or loss in a
specified ratio
6. Bonus to managing partner based on net income
Agreement should be made for Salaries to Partners and Interest on their respective capital
account balances.
If partners’ capital is considered in allocating partnership income, the agreement should specify
whether ratio is based on the original capital contributions, beginning capital balances, ending
capital balances, or average capital balances.
The average capital balances for year can be computed using two methods:
If the partnership agreement specifies that the income is to be divided based on partners’
capital balances, but fails to specify on how capital balances are to be computed use the
following method;
1. NIBASIBB
2. NIBASIAB
3. NIAASIBB
4. NIAASIB
Any circumstance which causes the technical termination of a partnership may lead to
partnership’s permanent dissolution and liquidation, if the partners so agree.