In this method of profit & loss distribution, we do not touch capital accounts of partners. Instead, separate current accounts are opened against for each partner to record transactions of drawings, interest on capital, commission, partner’s salaries. Capital accounts in this method remain fixed unless fresh investment is injected by the partners in the firm and the current account is used to distribute profit or loss in the business. At the end of the reporting period, the current accounts of the partners either show a debit balance or credit balance which will be presented either on the assets or liabilities side of the balance sheet.
Journal Entries
In case of distribution of net profit, the entry would be as follows:
| Description | Debit | Credit |
| Profit & loss account | xxx | |
| Adam’s current account | xxx | |
| Boon’scurrent account | xxx |
In case of distribution of net loss, the entry would be as follows:
| Description | Debit | Credit |
| Adam’s current account | xxx | |
| Boon’scurrent account | xxx | |
| Profit & loss account | xxx |
Example
Adam, Bevan & Charlie are running a partnership business. As on 1st January, 2009 their capital balances in the business were $ 120,000, $ 100,000 and $ 80,000. The partnership signed among them has the following terms and conditions for the distribution of net income:
Each partner will be allowed a monthly salary of $ 2,000
Bevan and Charlie are allowed a commission of $ 3,000 monthly
The partners are entitled to receive profit @ 10 % on opening balance of capital.
The remaining profit or loss, if any, will be shared equally among them.
Profit for the period ended 31st December, 2016 net profit of the business is $ 198,000
Requirement
- Prepare an income distribution summary clearly showing the distribution of net income to each partner
- Pass on journal entries for the distribution of net income to each partner in the partnership using fixed capital method.
Solution
- Profit distribution table
| Adam | Bevan | Charlie | Total | |
Net profit Salaries Commission 10 % Profit on Capital Remaining net income Distribution of remaining income | 24,000 – 12,000 36,000 8,000 | 24,000 36,000 10,000 70,000 8,000 | 24,000 36,000 8,000 68,000 8,000 | 198,000 (174,000) 24,000 (24,000) |
| 44,000 | 78,000 | 76,000 | Nil |
- General Journal Entries
| Particulars | Debit | Credit |
Profit & loss account Adam’s current account Bevan’s current account Charlie’s current account | 198,000 | 44,000 78,000 76,000 |