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The above transactions would appear in the ledger as follows:-__________A, Capital___________B, Capital_______19991999Jan. 1. 400,000Jan.1.800,000_____________________________________________________________________Accounting for partnership Handout8
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS________________________________________________________________________April 1. 100,000July 1. 50,000_________ A, Drawing_______B, Drawing19991999Jan. Dec. 60,000 Jan. –Dec. 60,000Income Summary 1999Dec. 31, 300,000Equally or in some agreed upon ratioDivision of profit and loss equally is rationalized when equal weight is given topartners’ contributions, and in situations where no specific agreement for sharingprofits and losses have been made. The net profit of 300,000 Birr for A and Bpartnership is transferred by closing entry on December 31, 1999 will thus bedivided and transferred to the partners’ capital account as follows:Income Summary300,000A, Capital 150,000B, Capital150,000To record the division of net income for 1999The drawing accounts are closed to the partners’ capital accounts on December31, 1999, as follows:A, Capital 60,000B, Capital 60,000A, Drawing 60,000B, Drawing 60,000To close drawing accountsIf A and B partnership had a net loss of, say, Birr 200,000 instead, during the yearended December 31, 1999, the Income Summary ledger account would have adebit balance of 200,000 Birr. This loss would be transferred to the partners’capital accounts by a debit to each capital account for 100,000 Birr and a credit toincome summary account for 200,000 Birr. If A & B agreed to share earnings in the ration of 60% to partner A and 40% topartner B and net income was 300,000 Birr, the net income would be divided_____________________________________________________________________Accounting for partnership Handout9
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS________________________________________________________________________180,000 to A and 120,000 Br to B. This agreement would also cause partner A toabsorb a larger share of net loss if the partnership operated unprofitably. Somepartners agree to share net income and losses using different ratios. In the Ratio of partners’ Capital Account BalancesIn the Ratio of partners’ Capital Account BalancesDividing the earnings of partnership in the ratio of partners’ capital accountbalances will be found in partnerships contract, which gives substantial weight tocapital investment and where capital is considered to be the dominant factor in thepartnership’s operation. To avoid controversy, the partnership agreement mustclearly specify whether the ratio is to be on: (1) the original capital investments,(2) the capital account balances at the beginning of each year, (3) the capitalbalances at the end of each year (before the distribution of net income or loss), or(4) the average capital balances during each year.Continuing the illustration of A and B Partnership, assume that the partnership’scontract provides for the division of net income in the ratio of original capitalinvestments. Then the net income of 300,000 Birr for 1999 is divided as follows. Partner A’s Share = 400,000/1,200,000 X 300,000 = 100,000Partner B’s Share = 800,000/1,200,000 X 300,000 = 200,000Assume that the net income is divided in the ratio of capital account balances atthe end of the year (before drawings and the distribution of earnings), the netincome of 300,000 Birr for 1999 is divided as follows: Partner A’s Share = 500,000/1,350,000 X 300,000 = 111,111.1Partner B’s Share = 850,000/1,350,000 X 300,000 = 188,888.9