 Hello, in this presentation, we'll take a look at the allocation of net income to partners within a partnership agreement. We're going to have the information over here on the left hand side within the problem. We will then enter that information into a worksheet to determine what the allocation should be between the three partners. We will then record the journal entry in the blue area over here and post that information to the trial balance so that we can see the context of what would happen within the context of a trial balance looking at our balancing equations and seeing what is really happening when we do this allocation. So if we take a look at the trial balance here, what do we have? We got assets and we have liabilities, equity, income and expense. The assets are in green. The capital account, this is where we're going to spend most of our time because we are allocating the net income to the capital account. Notice we have a large section here because these are the three partners. So we got C partnership, C partner and then the withdrawals, X capital accounts for that partner and then X's withdrawals. As capital account for that partner, S's withdrawals. Then we have the income summary account here that will be in the closing process. We're going to go through the closing process when allocating the net income. Then we've got the sales, which is our revenue account, revenue income sales, all the same thing. It's represented with a credit. Then the two debits of expenses being cost of goods sold and wages income. We can see that we are in balance by the fact that the debits represented without brackets positive numbers for Excel minus the credits represented with brackets, negative numbers for Excel means that the debits minus the credits equals zero. So this is a quick worksheet to show that balancing here. Give us some context. It also shows us net income in a very fast way. So we're saying that net income will be the 150,000 credits minus the two debits means that we have net income of 80,000. That 80,000 is what we want to close out in the closing process. But of course, now we have the added problem of we need to allocate it to these partners in whatever agreement that those partnerships have agreed on to. And so that's going to be the allocation that we will work on. We also have our accounting equation up here, of course, where we have the assets equal the liabilities, we don't have any in this one because it's a simplified problem. And we have the equity. So there's the equity and we are in balance in that way as well as we can see here. So let's see what the problem says. We have a CX and S form a partnership. So they're the partners allocate net income based on the following partnership agreement. All right, so we're going to we're going to have this agreement between the partnerships rather than just saying we're going to allocate it evenly between the partners, the flexibility of a partnership is that we can have any type of allocation that we want. And that can be really beneficial. It can also be a little bit more confusing. So these are some of the common allocation methods that will be in there. We're going to put them all into one problem so we can kind of see how these three types of allocation methods can be implemented into a distribution agreement for various reasons. One, we're going to have the salary allocation. So we're going to say we're just going to give this net salary, no matter what net income is. Now we happen to know that net income is 80,000 in this particular problem because that's what net income is right there. So we're going to start with this 80,000. We need to allocate that out. The agreement says that no matter what the net income is, it could have been anything. We're going to allocate out the four to C, three to X, and eight to S. That's going to be the agreement no matter what the income is over here. So we're going to have the salary allowance and that would be the 4,000 just based on the agreement 3,000 to X and 8,000 to S. If we sum that up, I'm just going to add these up here with the equals SUM function double-click it on the sum. The four plus three plus the eight equals the 15,000. So note we have 15,000. It's going to be that case no matter what net income is. Even by the way, even if we made less than 15,000, we would still allocate 15,000 based on this agreement unless it said otherwise. So then we're going to have to subtract this out and see what we have left over to allocate because of course this agreement here was made before we made the net income. We didn't know what net income was going to be. We made the agreement to have 15,000 allocated in this way no matter what net income is. And so we'll subtract that out. We're going to have to allocate the rest in some other fashion. So we're going to say this equals the 80,000 minus the 15,000. And that means that we have 65,000 left over to allocate at this point. Now the other type of allocation method that we could have would be the interest of capital investment. And we're going to see the trial balance to see what those beginning balances are. So this would be a common way to allocate if for example one partner puts in a lot more money than another partner. We can say okay well then we're going to give a guaranteed return on investment based on the initial investment as of the beginning of the year. Now when we look at that we can often get that from the capital accounts here. So we're going to say hey C partner as of the beginning of the year you put in 144,000 therefore we're going to give you 10% of that initial investment that you had in as of the beginning of the year. Now note that this when we look at the trial balance the amount in the capital account is usually the beginning balance of the investment. Because the activity remember is down here the draws are here. So unless the partner invested more money and we're going to assume they did not in this case then the amounts in the capital accounts on the trial balance represent the beginning balances. So this is what the C capital partner started with at the beginning of the year. We're going to say since you had that in the beginning of the year we're going to give you a return on that as part of our agreement. Obviously we want to point out as well that we should check the general ledger in practice. We're going to assume in this problem that that is the beginning balance in practice. We would check the general ledger and make sure that there was no added investments throughout the activity of the year that would add to that account. So we're going to say that C put in 144,000 that's what the capital investment was at the beginning of the year. We're going to give a 10% return on that. Therefore we're going to take this item here. We're going to say this equals the 144,000 times 0.1 10%. And tab we're going to go to do the same thing for X. So X put in as of the beginning of the year. X had to 16,000 in the amount as of the beginning of the year. Therefore we're going to say this equals 216,000 times 0.1 10%. And tab that's going to be how much we're going to allocate to X. And then of course we have S at 120. So we're going to say this equals 120,000 times 0.1 and tab that will be the allocation based on the beginning capital balances. And again this would seem kind of fair if we had people that put in different amounts of investments and they want to get a return on their initial investment and they work somewhat the same. Notice the allowance method would be fair if we had partners that had different amount of work that they did within the partnership. And we wanted to make sure that we're going to allocate a certain amount for the work that was done if the work was basically uneven. That would be one way to account for it. So we're going to sum this up. Equals the sum of the 14 for the 216 to 12 and enter. We're at the 48. So we had 65 left to allocate. We're going to allocate 48 in this fashion. Therefore we'll subtract that out and see what else we still have to allocate between partner C, X and S. So this equals the 65 we still had left to allocate minus the 48. Means that we still have 17 to allocate. Now the third part of the agreement said that we're going to allocate the balance is going to be shared equally. So that means that this 17 we're just going to say even one-third, one-third, one-third across the board. So whatever this is we're going to allocate it evenly. So we're just going to do that. I'm going to do that with an equation. I'll say this equals the 17 divided by three partners. We're going to say this equals the 17 divided by three partners. And this of course equals the 17 divided by three partners. Now notice that I rounded this number. This number doesn't look like it might not be even at that. So if I went to the home tab here and I put the decimals it's really this. So notice just keep in mind if something is off by like a dollar or so, probably rounding and you could account for that by seeing what the decimals are doing there. So I'm going to sum this up. Equals SUM of the five, six, six, seven and so on. Those three we're going to enter that. We get the 17 there. Then of course if we subtract that out we would get zero. I'm going to sum them up in this fashion now. I'm going to sum up these columns. So this equals the SUM of the four plus the 14, four plus the five, six, six, seven. So C would get under this agreement 24, 67. And then X. So let's see what X would get equals the SUM of. We would get a 3000 salary allocation plus the 21, six for the interest allocation plus the even balance allocation of five, six, six, seven. So we're a total of 30,267. Then we'll go to the S here and we're going to say this equals the SUM of we've got the eight for the salary allocation that's 12 for the interest and the five, six, six, seven remaining. If we add these three up it should add up to of course hopefully the 80,000. So let's check that out because that's what we want to eventually allocate is the 80,000 through this whole thing. So this equals the SUM of the amount allocated to C the amount to X out to S and enter there's the 80,000. So we're going to allocate the 80,000 based on 24, 67 to C 30,267 to X and 25, 667 to S because we agreed on the salary, the interest on the beginning capital count and then and then allocating the rest evenly. All right, so let's go ahead and post this out. We're going to do a closing process now. So we're just going to do the close out the income statement to the income summary and then the income summary to the capital counts. So we usually do a four step process to do that. So we have the sales here. Sales has a credit in it. We need to make it go down to zero to close it out. How do we do that? We do the opposite thing to it, which in this