Use various methods to share profit/loss among partnersSection 8 Objective 6

Methods to share profit/loss among partners• The partnership agreement should state the basis for

sharing net income or net loss• Examples of the methods are as follows:– Fixed ratio expressed as a percentage, as a

proportion or a fraction– Ratio based either on capital balances at the

beginning of the year or on average balances– Salaries paid to partners and the remainder on a

fixed ratio– Interest on partner’s capital balances and the

remainder on a fixed ratio– Salaries to partners, interest on partners’ capital

and the remainder on a fixe ratio

Methods to share profit/loss among partners

• The objective of the choice of ratio is to settle on a basis that will equitably reflect the partner’s capital investment and service to the partnership

• When there is no written agreement on how to share the profits or losses, it is advisable to apply the terms of the partnership act of 1890. The terms are

• Profits and losses are to be shared equally• There can be no provision for a partnership salary,

interest on capitals or interest on drawings• If a partner gave a loan to the partnership company he

or she should receive an interest of 5% per annum

Methods to share profit/loss among partners

Sample journal and ledger entry to show a ratio on capital balances

Sample of income ratios – salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio