Capital and current accounts
The partnership agreement provides for a fixed amount of capital to be contributed by each partner, it is preferable that the amounts therefore be paid to the capital accounts of the respective partners, and for drafts, salaries, interest on capital and participation in partner profits. to deal with the current account.
This allows a clear distinction to be made in the accounts between fixed capital and undrawn profits.
Partner Loan Accounts
When a partner makes an advance to the business other than capital, the amount must be credited to a separate loan account and not to the partners’ capital account.
Interest on a partner’s advance or loan at the agreed rate or, in the absence of an agreement, at 5% per annum must be credited to your checking account and charged to the profit and loss account as a business expense to arrive at profit. net.
Allocation of company profits
The formula for the distribution of partnership profits among the partners will generally be set out in the partnership agreement. The formula may take into account some or all of the following settings:
• Interest on capital
• Interest in drawings
• Salaries of partners
• Profit sharing ratios
interest on principal
By making a fictitious charge against profits for this expense at a fair commercial rate on the capital employed in a business, it can be seen whether the remaining profit balance is sufficient to satisfy the continuation of the business with unlimited liability, since the interest charged It may be approximately the income that the partners would have obtained for the participation of their capital in securities of little or no risk. However, apart from this, when there are two or more partners with unequal capitals, the charging of interest on the capital has the effect of adjusting the rights of the partners to each other in terms of capital, giving each a reasonable return on their capital. before dividing the capital. balance of profits in the agreed proportions.
interest in drawings
When charged, it is generally calculated at a fixed annual rate from the date of each withdrawal to the date the accounts are closed and is factored into the net income allocation statement in a similar manner to interest on principal. .
partner salaries
In the absence of an agreement, no partner has the right before reaching the amount of the divisible profits to the remuneration of his services to the company.
When the contract provides for the payment of salaries to the partners, it should be noted that such payments, although the designated salaries, have, like the previous expenses, merely the character of preferred shares of the divisible profit. Therefore, the amounts of said salaries must be taken into account in the net profit allocation statement.
