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 = 200000 / 2 = 100000
And the entry is:
Dr Cr
Income Summary 200000
Partner-A- Capital 100000
Partner-B- Capital 100000
 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
 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 = 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
 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 = 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
 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 ,Capital cr dr Partner B ,Capital cr
1 July 100000 1 Jan 200000 1 Jan 400000
1 May 300000 1 Apr 100000

balance 400000 Balance 500000

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:
Dr Cr
Income Summary 360000
Partner’s A Capital 120000
Partner’s B Capital 240000
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:
Dr Cr
Income Summary 360000
Partner’s A Capital 160000
Partner’s B Capital 200000
 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
Date Increase (decrease) Balance Period Weighted balance
capital
Jan. 1
and its related period ) 200000 4 800000
•May,1
1- Partner, A:300000 500000 2 1000000
July,1 -100000 400000 6 2400000
12
Total 4200000
12
Weighted Average of capital Balance = total/12 350000
• 2- Partner, B:

Date Increase (decrease) Balance Period Weighted balance

Jan. 1 400000 3 1200000
April,1 100000 500000 9 4500000

12
Total 5700000
12
Weighted Average of capital Balance = total/12 475000
• 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
 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
 Solution
If the net income distribution include interest on capital
or salaries or bonus , we prepare statement of distribution as follows :

Title Partner A Partner B Total

Net income 150000

1) Interest on capital 20000 30000 ( (50000

The remainder 100000

2) Allocating the rest (3:2) 60000 40000 (100000)

The partner’s share 80000 70000 0

 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