Partnership Income Allocation Journal Entry
A business partnership is a formal arrangement between two or more individuals who agree to operate a business together. The partners share the profits and losses of the business, and each partner is individually responsible for the debts and obligations of the partnership.
Partnerships can be either limited or unlimited, depending on the structure of the business and the partners involved. In a limited partnership, some partners have limited liability, meaning they are only responsible for the debts and obligations of the business up to the amount they have invested.
In an unlimited partnership, all partners have unlimited liability, meaning they are each jointly and severally liable for the debts and obligations of the business. Business partnerships are regulated by state and federal laws, as well as by contract law. Partnerships must be registered with the state in which they are formed, and Partners must enter into a written partnership agreement that sets forth their rights and duties.
The equity accounts of the partnership company will be separated based on the number of partnerships. It represents the capital of each partner based on the initial investment plus the profit during the year. The profit will be shared with each partner base on the ownership percentage.
Journal Entry for Income Allocation in Partnership
All partners are the owners of the company. It is similar to shareholders in the corporate as well. The partners have less number of people if compare to shareholders. The company partners may be more than two people but not as many as the shareholders.
The accountant usually creates each chart of accounts to represent the fund of each partner. They can use the subaccount as well if there are many partners.
The profit of the year will be transferred to each partner account base on the percentage of ownership.
The net income of the company will be accumulated in the partners’ account which is similar to the retained earnings. They are the accounts in the equity section of the balance sheet.
The journal entry is debiting income summary and credits each partner account.
| Account | Debit | Credit |
|---|---|---|
| Net Income | XXX | |
| Partner A | XXX | |
| Partner B | XXX |
The transaction will reverse the income summary to the partner account. The income summary is just the temporary account which represents the amount of revenue over expense for the period.
The partner’s accounts are the equity section of the company. It accumulates all the profit and loss of the company and adjusts with capital injection or withdrawal.
Example
Company ABC owns by three partners who is Mr. John, Leon, and Davide. They have owned the company with a percentage of 30%, 30% and 40% respectively. During the month, the company made profit of $ 100,000. Please prepare journal entry to allocate the profit to all partners.
The company has to allocate the profit to all the partners based on the ownership percentage. We have to calculate the amount of allocation as following:
- John own 30% = $ 100,000 * 30% = $ 30,000
- Leon own 30% = $ 100,000 * 30% = $ 30,000
- Davide own 40% = $ 100,000 * 40% = $ 40,000
ABC need to record the journal entry of profit allocation as following:
| Account | Debit | Credit |
|---|---|---|
| Net Income | 100,000 | |
| Partner John | 30,000 | |
| Partner Leon | 30,000 | |
| Partner Davide | 40,000 |