The above transactions would appear in the ledger as

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The above transactions would appear in the ledger as follows:- __________ A, Capital ___________ B, Capital _______ 1999 1999 Jan. 1. 400,000 Jan.1. 800,000 _____________________________________________________________________ Accounting for partnership Handout 8
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS ________________________________________________________________________ April 1. 100,000 July 1. 50,000 _________ A, Drawing ______ _ B, Drawing 1999 1999 Jan. Dec. 60,000 Jan. –Dec. 60,000 Income Summary 1999 Dec. 31, 300,000 Equally or in some agreed upon ratio Division of profit and loss equally is rationalized when equal weight is given to partners’ contributions, and in situations where no specific agreement for sharing profits and losses have been made. The net profit of 300,000 Birr for A and B partnership is transferred by closing entry on December 31, 1999 will thus be divided and transferred to the partners’ capital account as follows: Income Summary 300,000 A, Capital 150,000 B, Capital 150,000 To record the division of net income for 1999 The drawing accounts are closed to the partners’ capital accounts on December 31, 1999, as follows: A, Capital 60,000 B, Capital 60,000 A, Drawing 60,000 B, Drawing 60,000 To close drawing accounts If A and B partnership had a net loss of, say, Birr 200,000 instead, during the year ended December 31, 1999, the Income Summary ledger account would have a debit 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 to income summary account for 200,000 Birr. If A & B agreed to share earnings in the ration of 60% to partner A and 40% to partner B and net income was 300,000 Birr, the net income would be divided _____________________________________________________________________ Accounting for partnership Handout 9
HARAMAYA UNIVERSITY, COLLAGE OF BUSINESS AND ECONOMICS ________________________________________________________________________ 180,000 to A and 120,000 Br to B. This agreement would also cause partner A to absorb a larger share of net loss if the partnership operated unprofitably. Some partners agree to share net income and losses using different ratios. In the Ratio of partners’ Capital Account Balances In the Ratio of partners’ Capital Account Balances Dividing the earnings of partnership in the ratio of partners’ capital account balances will be found in partnerships contract, which gives substantial weight to capital investment and where capital is considered to be the dominant factor in the partnership’s operation. To avoid controversy, the partnership agreement must clearly 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 capital balances 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’s contract provides for the division of net income in the ratio of original capital investments. 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 = 100,000 Partner B’s Share = 800,000/1,200,000 X 300,000 = 200,000 Assume that the net income is divided in the ratio of capital account balances at the end of the year (before drawings and the distribution of earnings), the net income of 300,000 Birr for 1999 is divided as follows: Partner A’s Share = 500,000/1,350,000 X 300,000 = 111,111.1 Partner B’s Share = 850,000/1,350,000 X 300,000 = 188,888.9

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