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15.3 Compute and Allocate Partners' Share of Income and Loss

Allocation Methods​

1. Equal Shares:

  • Each partner gets equal share
  • Simple and common

2. Capital Ratio:

  • Based on capital contributions
  • Proportional to investment

3. Service Ratio:

  • Based on effort/contribution
  • May vary by partner

4. Combination:

  • Mix of factors
  • Defined in agreement

Example: Capital Ratio​

Capital Balances:

  • Partner A: €60,000
  • Partner B: €40,000
  • Total: €100,000

Ratios:

  • Partner A: 60%
  • Partner B: 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

Luxembourg Compliance Note​

Income allocation in Luxembourg:

  • Must follow agreement
  • Must be documented
  • Must use proper accounts
  • Must comply with law

Think It Through​

What are the advantages and disadvantages of different profit allocation methods?