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157 - 50425 - Ey211 - 2012 - 1 - 1 - 1 - Company Accounting Lecture 3
157 - 50425 - Ey211 - 2012 - 1 - 1 - 1 - Company Accounting Lecture 3
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.
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:
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 :