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ACCOUNTING TUTORIAL
Wednesday, May 21, 2014 Partnership accounting - part II PROFIT DISTRIBUTION
A bonus is simply transfer of capital from one partner to the other , so there is no change in the total capital capitalization.. A goodwill is where the total capitalization will have some changes because there will be an additional investment of the other partner in the form of goodwill. It is possible that both partners can receive a goodwill or even bonus and goodwill.
Now , let me talk about the manner of PROFIT DISTRIBUTION:
FIRST is the purely ARBITRARY RATIO, that means either EQUAL SHARING or UNEQUAL SHARING that means , ratio other than 50%, 50%. This sharing does not necessarily mean that it is based on CAPITAL RATIO, it will be dependent upon their agreement.
this is self explanatory that , any profit shall be multiplied by the ratio of each partner that was agreed upon. let us say the profit is 30,000 and sharing is equal, then 15,000 each.
SECOND : THE BASIS OF PROFIT DISTRIBUTION IS BASED ON THE STATUS OF THEIR CAPITAL BALANCES , EITHER at the commencement of the business, or at the beginning or at the end of the current period or the average capital balances during the year.
If the business operation largely /highly depends on capitalization then the division of profits should be based on the capital balances of the partners.
the capital amount as a basis in computing profit distribution are as ff:
- at the commencement of the business \ 2. at the beginning
- at the end of the period
- average investment.
this method is simple. all you have to do is to determine the capital result on each of the four situation mentioned above then, extract the equivalent ratio of each of the capital of the partners then that ratio is multiplied to the profits to obtain the profit share of each partner.
But maybe the AVERAGE INVESTMENT OR CAPITAL is worth discussing How does it works.
It would be more fair to use this averaging method because during the year there are additions and withdrawal of capital.
When you say average, you have to determine how many months a certain capital remains constant in a period of 12 months then multiply it by that number of months to obtain the equivalent capital and if there is some changes succeeding , then it will again be multiplied with the months it is unchanged.t until you have computed till december if calendar year, then add up that total equivalent capital by 12 months to get the average capital for one year.
EXAMPLE:
CAPITAL ACCOUNTS OF PETE
jan 1 20,000 3 60, sept 1 25,000 8 20, dec 1 23,000 1 23, total 12 103,
average capital therefore 103,000 divide 12 = 85,833.
the TOTAL average capital of the two partners is 132,500 plus 85,833 = 218.
the capital ratio therefore is : PETE 132,500 divide 218,833 = 60.5% TONY 85,833 divide 218,833 = 39.5% total 100 %
if the profit is 10,000. the profit is divided as ff: PETE X 60.5% X 10,000 = 6050. TONY X 39.5 % X 10,000 = 3,950. TOTAL 10,000.
to be continued
Pete Del Rosario at 8:44 PM Share
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