2. Dividing Partnership Income or Loss

How is income or loss divided?

Partners can agree to any method of dividing income or loss. If there is no agreement stating otherwise, income and losses are divided equally.

What are three common methods to divide income or loss?

1. A stated ratio basis.

2. The ratio of capital balances.

3. Salary and interest allowances and any remainder according to a fixed ratio.

What is the stated ratio for dividing partnership income or loss?

method of allocating partnership income or loss gives each partner a fraction of the total.

What are other names for stated ratio?

income-and-loss-sharing ratio, the profit and loss ratio, or the P&L ratio

Review example under Allocation on Stated Ratios.

What is the capital balance method for dividing partnership income or loss?

Allocates income and loss based on the ratio of each partner's relative capital balance.

Review example under allocation of capital balances.

What is the services, capital, and stated ratio for dividing partnership income or loss?

Often used when partners' service (time) and capital contributions are not equal.

Salary allowances are given to partners who spend more time working for the business.

Interest allowances are given to partners who made larger capital contributions.

Are salary and interest allowances reported as expenses on the income statement?

No. They are simply a way of dividing partnership income or loss.

Review example under when income exceeds allowances.

Is the allocation agreement followed even if net income is less than the total of the allowances?

Yes.

Review example under when allowances exceed income.

If a company has a net loss, how would it be shared?

The same way as income. The only difference is that the beginning number would be a negative amount because of the loss. The total negative balance after adding salary and interest allowances would be allocated between partners.

What financial statements do partnership have?

Partnership financial statements are similar to those we already covered. The statement of partners' equity, or statement of partners' capital, is one exception.

What does the statement of partner’s equity show?

The statement of partners' equity shows each partner's beginning capital balance, additional investments, allocated income or loss, withdrawals, and ending capital balance.

What does the equity section of the balance sheet of a partnership show?

Shows the separate capital account balance of each partner.

Review example under Partnership Financial Statements

Review Need-To-Know 12-2