Essay about Two Methods Used for Accounting for Equity in Partnership

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Two methods used for accounting for equity in partnership: - Method 1: use capital accounts for each partner that not only record capital contributed and withdrawn but also include each partner periodic share of profits or loss.(Hoggett, 2012, P 619) - Method 2: used of capital accounts with fixed balances for each partner reflecting only the capital contributed and capital withdrawn. A partner’s share of profits or loss and drawings from profits are recorded in a separate retain earnings account for each partner. (Hoggett, 2012, P 619) Allocation of Partnership profits and losses These methods of sharing are the agreement of profit and loss used in partnership to distinguish each of partner’s contribution to the business.…show more content…
For example, If the partner suggest distributing the profits to the ratio of the original capital balances, it means: Partner 1’s Profit: 400,000/700,000 x 100,000 = 57,142.857 Partner 2’s profit: 300,000/700,000 x 100,000 = 42,857.142 Fixed Ratio after Allowing for Interest and Salaries This is not expense of partnership. So in partnership, the salary giving to the employee is considered as salaries expense. This is the same as Interest expense regarding the money lent from creditors. But the partners are the owner of the business. They are not employee or creditors of the business. Moreover, partner is not legally entitled to recieve compensation for services perfromed for the partnership or interest on capital investment. So, if profit to be allocated equitably to compansate the partners for unequal contributions, a profit allocation method that contains a provision for interest and salaries must be included in the agreement. Example: Profit: 200,000 Capital from partner 1: 400,000 Capital from partner 2: 300,000 Interest on the initial capital balance for partner 1 and 2 are 10% Partner 1 and partner 2 received salary allowance per year of 20,000 and 15,000 respectively. Partner 1 Partner 2 Total Salary 20,000 15,000 35,000 Interest 10% x 400,000=40,000 10% x 300,000=30,000 70,000 105,000

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