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:
       1.  at the commencement of the business
\      2.  at the beginning
       3.  at the end of the period
       4. 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
          DATE                  DETAIL                             DEBIT         CREDIT       BALANCE
         Jan.  1                  begining                                                    10,000
         April 1              additional                                                        5,000       15,000
         July 1                withdraw                                 2,000                               13,000
         Dec  1              additional                                                        6,000         19,000



CAPITAL ACCOUNTS OF TONY

         JAN  1.                                                                                 20,000
         SEPT 1          additional                                                          5,000          25,000
         dEC  1.       withdraw                                   2,000                                     23,000

the average capital of PETE are as ff:

         date          capital                              months unchanged              capital equivalent
        Jan 1         10,000                                   3                                    30,000
        april 1        15,000                                   3                                    45,000
       july  1          13,000                                  5                                     65,000
       dec  1         19,000                                   1                                     19,000
                                     totals                           12                                159,000
            average capital is therefore  159,000 divide 12   =   132,500.00

the average capital of TONY is:

        jan 1           20,000                               3                                     60,000
        sept 1         25,000                                8                                   20,000
        dec 1          23,000                               1                                    23,000
          total                                                  12                                   103,000

   average capital therefore    103,000 divide 12   =  85,833.00

the TOTAL average capital  of the two partners  is 132,500  plus 85,833 = 218.833

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   =   6050.00
   TONY  X  39.5 %  X  10,000  =  3,950.00
        TOTAL                                    10,000.00

to be continued


         


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