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TOPIC 2: Profit Distributions

TOPIC 2: Profit Distributions. Profit or loss must be distributed to the partners in the Profit and Loss Appropriation Account. All transactions(revenue or expenses) related to the partners will be recorded in the account. Profit Distribution Ratio

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TOPIC 2: Profit Distributions

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  1. TOPIC 2: Profit Distributions • Profit or loss must be distributed to the partners in the Profit and Loss Appropriation Account. • All transactions(revenue or expenses) related to the partners will be recorded in the account. Profit Distribution Ratio • The ratio is depends to the agreement between the partners.

  2. The Factor need to be considered: • The involvement of the partners in the partnerships • The amount of capital contributed • The level of skill contribute in the partnerships • Seniority of the partners • Other factors

  3. In the situations where the ratio are not mention in the agreement: Partnerships Act 1961 Section 26 (a): “……all partners have a right to share an equal amount of capital and profit…….”

  4. Example: Bong, Beng and Bing decide to set up a Triple B and agree to share the profit and loss with a ratio of 3:2:1. Their business is selling cassette and compact disc. At the end of year 2000, the business made a profit of RM150,000. Below is part of the partnerships agreement: a. Bong and Beng is a manager of the business and they will be paid a salary of RM1,200 and RM1,500 per month.

  5. Interest on capital is 10% per annum. The balance of the capital, current and drawings account on 1 January 2000 are as follows: Capital Current Drawings Bong 145,000 18,000 28,000 Beng 90,000 24,500 22,000 Bing 45,000 9,500 14,200 On 1 July 2000, Bing made an additional capital of RM15,000.

  6. You are required to: • Prepare the Profit and Loss Appropriation account • Prepare the current account and capital account • Prepare the Balance Sheet (the owner’s equity sections)

  7. Triple B Partnerships Profit and Loss Distribution Account for the year ended 31 December 2000 Salary: Bong 14,400 Net Profit b/b 150,000 Beng 18,000 Interest on capital: Bong 14,500 Beng 9,000 Bing 5,250 Shared Profit: Bong 44,425 Beng 29,617 Bing 14,808 150,000150,000

  8. Capital Account

  9. Current Account

  10. Example 2: Additional element of loan and interest in drawings. • Using the example in Triple B, the additional information is as • follows: • Bong and Beng gives a loan to the partnerships amounted RM50,000 and RM30,000 on 1 April 2000 respectively and agree for an interest on loan at 12% per annum. • Interest on drawings is 10% per year and below is a table of partners drawings. • Date Bong Beng Bing • 1 Feb 10,000 5,000 - • 1 July 10,000 - 5,000 • 1 Dec 10,000 5,000 10,000

  11. Triple B Partnerships Profit and Loss for the year ended 31 December 2000 Interest on Loan: Net Profit 150,000 Beng 4,500 Bong 2,700 Net Profit h/b 142,800 150,000150,000

  12. Triple B Partnerships Profit and Loss for the year ended 31 December 2000 Salary: Bong 14,400 Net Profit b/b 142,800 Beng 18,000 Interest on capital: Interest on drawings: Bong 14,500 Bong 1,500 Beng 9,000 Beng 500 Bing 5,250 Bing 333 Profit Sharing: Bong 41,992 Beng 27,994 Bing 13,997 145,133 145,133

  13. Capital Account

  14. Current Account

  15. Triple B Partnerships Balance Sheet as at 31 December 2000 Capital: Bong 145,000 Beng 90,000 Bing 60,000 295,000 Current: Bong 61,892 Beng 61,694 Bing 13,414 137,000 Liability: Advance from partners 80,000 512,000

  16. Changes in profit sharing ratio in the financial year. • Changes due to the reasons: • Changes in the capital contributed • Increase in the skill contributed by partner • Changes in workload in managing the business • Steps need to be taken: • Calculate the profit or loss shared among partners by month of changes. • Divide the expenses by the month of changes. • The gross profit will be distributed using the sales volume at the period and the expenses using below ways: • Sales volume • Time period • Factor influence

  17. Example 3: Mazlan, Saiful dan Yassin set up a business baking cakes as MSY. They shared profit at ratio of 2:2:1 and profit and loss account as at 31 December 2001 as below: MSY Partnerships Profit and Loss account as at 31 December 2001 RM RM Sales 50,000 (-) Cost of Sales (20,000) 30,000 Less: Selling Expenses 8,000 Administration expenses 6,00014,000 16,000

  18. At 1 July 2001, they agree to make a few changes as below: • The profit sharing have been change to 3:2:1 • Mazlan will be paid a salary RM3,000 per year • Sales until 30 June 2001 amounted RM20,000 • Step 1: MSY Partnerships Profit and Loss account for a period ended 1.1.01 – 30.6.01 and 1.7.01 – 31.12.01

  19. Step 2: MSY Partnerships Profit and Loss account for the period ended 1.1.01 – 30.6.01 and 1.7.01 – 31.12.01

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