Research examples of different methods that partnerships can use to allocate net income to the partners, and research the topics of partnership dissolution or partnership liquidation
When you’ve completed your research, provide at least one example of how income may be allocated among partners. Next, include the journal entries you believe would be needed to allocate the partnership income to each partner’s capital account.
Finally, summarize what you have found regarding how to account for the dissolution or liquidation of a partnership.
First of all let us understand the meaning of partnership. It is an association of two or more persons who own and manage a business for profit.
Partners have co-ownership of partnership property. It is Mutual agency, Net income and net loss are distributed among the partners according to their agreement.
Income distribution of partnership
In the partnership after salaries and interest on capital accounts have been charged, the remaining partnership profit is called as partnership income and it is distributed to the partners in their respective profit sharing ratios as mention in the agreement
Example
Suppose partnership has the net income of $ 6000,000 then following entry will be passed.
| Net income | 6,000,000 | |
| Partner A Capital Account | 2,400,000 | |
| Partner B Capital Account | 1,800,000 | |
| Partner C Capital Account | 1,800,000 |
Liquidation
Let us get the idea about liquidation of Partnership. When a partnership goes out of business, it usually sells the assets, pays the creditors, and distributes the remaining cash or other assets to the partners. This winding up process is called the liquidation of the partnership. Although liquidating refers to the payment of liabilities, it often includes the entire winding-up process.
The sale of the assets is called realization. As cash is realized, it is used to pay the claims of creditors. After all liabilities have been paid, the remaining cash is distributed to the partners based on the balances in their capital accounts.
Following entry would be pass at the time of realization of Gain on liquidation
| Number | Description | Debit $ | Credit $ |
| 1 | Gain On Realisation | Xxxx | |
| To Partner A | Xxx | ||
| To Partner B | xxx | ||
| To Partner c | xxx |
Following entry would be pass at the time of realization of loss on liquidation
| Number | Description | Debit $ | Credit $ |
| 2 | Partner A | Xxx | |
| Partner A | Xxx | ||
| Partner A | Xxx | ||
| To Loss on realization | xxxxx |
Example
On April 1 after discontinuing At the time of closing the business following are the balance
Cash 11,000
Noncash Assets 64,000
Liabilities 9,000
Partner A, Capital 22,000
Partner B, Capital 22,000
Partner C, Capital 22,000
Total 75,000 75,000
To illustrate, assume that Partner A,B, and C share income and losses in a ratio of 5:3:2 (5/10, 3/10, 2/10). On Between April 10 and April 30 of the current year, Farley, Greene, and Hall sell all noncash assets for $72,000. Thus, a gain of $8,000 ($72,000 $64,000) is realized. The gain is divided among the capital accounts in the income-sharing ratio of 5:3:2. The liabilities are paid, and the remaining cash is distributed to the partners. The cash is distributed to the partners based on the balances in their capital accounts. A statement of partnership liquidation, which summarizes the liquidation process
Following entries to record the steps in the liquidating process are :
| Number | Description | Debit $ | Credit $ |
| 1 | Cash | 72000 | |
| To Non CAsh Assets | 64000 | ||
| To Gain on Realisation | 8000 | ||
| 2 | Gain on Realisation | 80000 | |
| To A | 4000 | ||
| T | To B | 2400 | |
| To C | 1600 | ||
| 3 | Liabelity | 9000 | |
| To Cash | 9000 | ||
| 4 | A | 26000 | |
| B | 24400 | ||
| C | 23600 | ||
| TO CAsh | 74000 | ||
| (distribution Of CAsh To partner |
