GLENCOE / McGraw-Hill

1. GLENCOE / McGraw-Hill

2. Accounting For Partnerships

3. Allocating Income or Loss Section Objectives 4. Compute and record the division of net income or net loss between partners in accordance with the partnership agreement. 5. Prepare a statement of partners’ equities.

4. Page 684 Allocating Partnership Income or Loss Step 1. Close revenue to Income Summary. Step 2. Close expenses to Income Summary. Step 3. Close Income Summary to the partners’ capital accounts. Step 4. Close each partner’s drawing account to the partner’s capital account. In step 3 the business determines the distributive share for each partner.

5. QUESTION: What is the distributive share? ANSWER: Distributive share is the amount of net income or net loss allocated to each partner. Page 684

6. Page 684 Allocation of Partnership Income or Loss • Based on the partnership agreement • Allocated equally to each partner if the partnership agreement is “silent.” • Income distribution does not mean cash distribution.

7. Page 685 Partnership income and loss can be allocated based on • an agreed upon ratio, or • capital account balances

8. = Total 5 Page 685 Agreed Upon Ratio Example: Ross and Wright agreed that net income should be split in a 3:2 ratio to Ross and Wright, respectively. • Step 1: Add the figures given in the ratio. Ross 3 + Wright 2 • Step 2: Express each figure as a fraction of the total. Ross’ share 3/5 Wright’s share 2/5 • Step 3: Convert each fraction into a percentage. Ross’ share 3/5 = 60% Wright’s share 2/5 = 40%

9. 20-- Dec. 31 Income Summary 100,000.00 Tanya Ross, Capital 60,000.00 Don Wright, Capital 40,000.00 Page 685 Agreed Upon Ratio Net Income X partner’s share percentage Net Income = $100,000 Ross’ share ($100,000 x 60% = $60,000) Wright’s share ($100,000 x 40% = $40,000)

10. Page 685 Capital Account Balances • Step 1: Add the capital account balances. Ross $50,000 Wright +30,000 Total =$80,000 • Step 2: Express each balance as a fraction and convert it to a percentage. Ross $50,000/$80,000 = 62.5% Wright$30,000/$80,000 = 37.5%

11. Page 686 Capital Account Balances Net Income x partner’s share percentage Net Income $100,000 Ross $100,000 x 62.5% = $62,500 Wright $100,000 x 37.5% = $37,500

12. Page 687 Salary and Interest Allowances • Allowances for partners’ salaries and interest on their investments can be included in the allocation of net income or loss. • Allowances are debited to the Income Summary account and credited to the partners’ capital accounts. • The remaining net income or loss is then allocated in the proper ratio.

13. Page 687 Salary Allowances Salary allowances are intended to reward the partners for the time they spend in the business and for the expertise and talents they bring to it. Salary allowances are withdrawals. Salary allowances do not represent salary expense.

14. 20-- Dec. 31 Income Summary 52,800.00 Tanya Ross, Capital 28,800.00 Don Wright, Capital 24,000.00 Page 687 Salary Allowances • Net Income is $112,800 • Salary allowances for Ross $28,800 and Wright is $24,000.

15. Balance in Income Summary =$ 60,000 20-- Dec. 31 Income Summary 60,000.00 Tanya Ross, Capital 36,000.00 Don Wright, Capital 24,000.00 Page 688 Salary Allowances Net Income $112,800 Less: Salary Allowances – 52,800 Using the agreed upon ratio, the amount of net income after salary allowances is allocated 60% to Ross and 40% to Wright.

16. Page 689 Interest Allowance Partners may recognize their capital investments by allowing each partner a percentage of interest on their capital balance at the start of the period. Assume that Ross and Wright each have a 10 percent interest allowance.

17. Income Summary Page 690 Net Loss • Assume net loss = $30,000 • Record the salary allowances of $28,800 for Ross and $24,000 for Wright. • Record the interest allowances of $5,000 to Ross and $3,000 to Wright. Net Loss 30,000 Dec. 31 Sal. All. 52,800 Dec. 31 Int. All. 8,000 Bal. $90,800 Distributed between Ross and Wright. Their capital accounts are debited (decreased).

18. QUESTION: What is the statement of partners’ equities? ANSWER: The statement of partners’ equities summarizes the changes in the partners’ capital accounts during an accounting period. Page 693

19. Page 693 Statement of Partners’ Equities • Beginning capital • Additional investments • Share of net income or net loss • Withdrawals • Ending capital

20. THE JEAN SHOP Statement of Partners’ Equities Year Ended December 31, 20-- Ross Wright Total Capital Capital Capital Capital Balances, Jan. 1, 20-- 0.00 0.00 0.00 Investment During Year 50,000.00 30,000.00 80,000.00 Net Income (Loss) for Year 5,400.00 (1400.00) 4,000.00 Totals 55,400.00 28,600.00 84,000.00 Less Withdrawals During Year28,800.00 24,000.00 52,800.00 Capital Balances, Dec. 31, 20--26,600.00 4,600.00 31,200.00 Page 693 Statement of Partners’ Equities

21. R E V I E W Complete the following sentences: The partnership’s Income Summary account is closed to the _______________ ________. partners’ capital accounts The allocation of partnership income or loss is based on the ____________________. partnership agreement If the partnership agreement does not address income allocation, net income or net loss is _______________ to each partner. allocated equally

22. R E V I E W Complete the following sentences: Partnership income and loss can be allocated based on __________________ or ______________________. an agreed upon ratio capital account balances A salary allowance is considered a(n) __________. withdrawal The financial statement unique to partnerships is the ___________________ ________. statement of partners’ equities

23. Thank You for using College Accounting, Tenth Edition Price • Haddock • Brock