What account are debited and credited to record the division of net income among partners at the end of the accounting year ?
What account are debited and credited to record the division of net income among partners at the end of the accounting year ?
The correct option is C Profit and Loss account Dr. and Partner's Capital account Cr.
When two or more individuals engage in an enterprise as co-owners, the organization is known as a partnership. Allocation of net income
{\displaystyle Revenues-expenses=netincome}
If total revenues exceed total expenses of the period, the excess is the net income of the partnership for the period. If expenses exceed revenues of the period, the excess is a net loss of the partnership for the period.
Management fees, salary and interest allowances are guaranteed payments. The partnership generally deducts guaranteed payments on line 10 of Form 1065 as business expenses.
If partners pay themselves high salaries, net income will be low, but it does not matter for tax purposes. Partner compensation and allocated net income are considered ordinary income for tax purposes and as such are reported on the form 1040. It does not matter whether or not a partner withdrew any amount of money from his capital account. It's the net income, allocated to the partner, and his compensation from the partnership that are taxed, not the amount withdrawn.
Net income or loss is allocated to the partners in accordance with the partnership agreement. In the absence of any agreement between partners, profits and losses must be shared equally regardless of the ratio of the partners' investments. If the partnership agreement specifies how profits are to be shared, losses must be shared on the same basis as profits. Net income does not includes gains or losses from the partnership investment.
Profit and loss account
Partners find out the net income or net loss they prepare the profit and loss account during the year.
Journal entry for allocation or division of net income among partners is :
Profit and loss A/c Dr.
To Partner's capital A/c (individually)
When two or more individuals engage in an enterprise as co-owners, the organization is known as a partnership.
Allocation of net income
{\displaystyle Revenues-expenses=netincome}
If total revenues exceed total expenses of the period, the excess is the net income of the partnership for the period. If expenses exceed revenues of the period, the excess is a net loss of the partnership for the period.
Management fees, salary and interest allowances are guaranteed payments. The partnership generally deducts guaranteed payments on line 10 of Form 1065 as business expenses.
If partners pay themselves high salaries, net income will be low, but it does not matter for tax purposes. Partner compensation and allocated net income are considered ordinary income for tax purposes and as such are reported on the form 1040. It does not matter whether or not a partner withdrew any amount of money from his capital account. It's the net income, allocated to the partner, and his compensation from the partnership that are taxed, not the amount withdrawn.
Net income or loss is allocated to the partners in accordance with the partnership agreement. In the absence of any agreement between partners, profits and losses must be shared equally regardless of the ratio of the partners' investments. If the partnership agreement specifies how profits are to be shared, losses must be shared on the same basis as profits. Net income does not includes gains or losses from the partnership investment.
Profit and loss account
Partners find out the net income or net loss they prepare the profit and loss account during the year.
Journal entry for allocation or division of net income among partners is :
Profit and loss A/c Dr.
To Partner's capital A/c (individually)
