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15.2 Describe How a Partnership Makes Decisions, Allocates Profit and Loss, and Maintains Capital Accounts

Partnership Decisions​

Decision-Making:

  • Usually by majority vote
  • May require unanimous consent for major decisions
  • Defined in partnership agreement

Profit and Loss Allocation​

Methods:

  • Equal shares (simplest, common for equal partners)
  • Based on capital contributions (proportional to investment)
  • Based on service/effort (for active vs. silent partners)
  • Combination of factors (salary allowances + interest on capital + remainder)
  • Fixed ratios (e.g., 60/40, 70/30)

Example - Equal Shares:

  • Net Income: €60,000
  • Two partners: €30,000 each

Journal Entry:

350000 Income Summary             €60,000
301000 Partner A, Capital                      €30,000
302000 Partner B, Capital                      €30,000
To allocate net income equally

Example - Capital Ratio:

  • Partner A Capital: €60,000 (60%)
  • Partner B Capital: €40,000 (40%)
  • Net Income: €50,000
  • Partner A: €50,000 × 60% = €30,000
  • Partner B: €50,000 × 40% = €20,000

Journal Entry:

350000 Income Summary             €50,000
301000 Partner A, Capital                      €30,000
302000 Partner B, Capital                      €20,000
To allocate net income by capital ratio

Example - Salary Allowances + Remainder:

  • Partner A salary allowance: €20,000
  • Partner B salary allowance: €15,000
  • Net Income: €50,000
  • Remainder after salaries: €50,000 - €35,000 = €15,000
  • Remainder split equally: €7,500 each
  • Partner A total: €20,000 + €7,500 = €27,500
  • Partner B total: €15,000 + €7,500 = €22,500

Journal Entry:

350000 Income Summary             €50,000
301000 Partner A, Capital                      €27,500
302000 Partner B, Capital                      €22,500
To allocate net income (salary allowances + remainder)

Capital Accounts​

Capital Account Shows:

  • Initial contribution
  • Share of profits
  • Share of losses
  • Withdrawals (draws)
  • Current balance

Capital Account Format:

Partner A, Capital Account
─────────────────────────────────────
Initial Contribution    €50,000
Add: Share of Profit    €30,000
Less: Withdrawals       (€10,000)
─────────────────────────────────────
Ending Balance          €70,000

Partner Withdrawals (Draws):

  • Partners may withdraw cash or assets
  • Reduces capital account
  • Different from salary (if partnership agreement allows)

Example - Partner Withdrawal:

301000 Partner A, Capital         €10,000
510000 Cash                                   €10,000
To record Partner A's withdrawal

Luxembourg Compliance Note​

Profit allocation in Luxembourg:

  • Must follow partnership agreement
  • Must be fair and reasonable
  • Must use proper accounts
  • Must comply with law
  • Must maintain records

Think It Through​

How should profits be allocated in a partnership? What factors should be considered?