To record allocation of $70,000 net income to partners. The journal entries to close net income or loss and allocate to the partners for each of the scenarios presented in the video would be ( remember, revenues and expenses are closed into income summary first and then net income or loss is closed into the capital accounts): Account To use this in calculations, you will add the numbers presented together (3 + 1 = 4) and divide each number of the sharing ratio by this total to get a percentage. Note: The video shows a sharing ratio of 3:1. This is by far the most confusing so a video example would be helpful. In this method, we start with net income and give salaries out to the partners, then we calculate an interest amount based on their investment in the business, and any remainder is allocated using set percentages. Salaries, Interest, Agreed upon percent: Since owners are not employees and typically do not get paychecks, they should still be compensated for work they do for the business.To allocate income, the percent of capital is multiplied by the net income or loss for the period. Using Sam and Ron, Sam has capital of $100,000 and Ron has capital of $35,000 for a total partnership capital of $135,000 (100,000 + 35,000). Percentage of capital: Each partner receives a percentage of capital calculated as Partner Capital / Total capital for all partners.To allocate income, net income or loss is multiplied by the percent agreed upon. For example, Sam Sun will get 60% and Ron Rain will get 40%. Agreed upon percentages: Each partner receives a previously agreed upon percentage.Ron Rain wants to go to Scotland and will take $15,000 out of the business. To illustrate, Sam Sun wants to go on a beach vacation and decides to take $8,000 out of the business.
Remember, this is a contra-equity account since the owners are reducing the value of their ownership by taking money out of the company. When the partners take money out of the business, it is recorded in the Withdrawals or Drawing account. Partners are typically not considered employees of the company and may not get paychecks. Partners can take money out of the business whenever they want.
Since the note will be paid by the partnership, it is recorded as a liability for the partnership and reduces the capital balance of Ron Rain. The entries could be separated as illustrated or it could be combined into one entry with a debit to cash for $125,000 ($100,000 from Sam and $25,000 from Ron) and the other debits and credits remaining as illustrated. To record assets and note contributed by owner
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