 In this presentation, we will allocate the net income in accordance with the partnership agreement. We will have a situation where we get to the end of the calculation where we will have to allocate negative amounts to the capital accounts. And that's something we want to watch out for and be careful of when we set up the partnership agreement. In other words, we're going to have the income split be based on one, just an allocation of salary type allocation to based on a capital investment. And then we'll allocate the rest in an even way. And when we do that final allocation, it's possible that we have over allocated based on these first two items and don't have enough income to cover that and then have to allocate basically a negative amount in that final position. And so that's what we want to be aware of and that's what we'll look at here. We'll do it in a table format and then we'll do the same thing with journal entries here and post that to the trial balance. So we will have our three partners, we're going to have CX and S are going to be our partners. We're going to say the net income, we'll take this from the trial balance over here if we scroll down is 50,000 in this case. That 50,000 calculated as revenue minus expenses is what we will then need to allocate to the partners. If we scroll back up, our trial balance consists of assets in green. We've got the liabilities in orange, then the capital accounts here in the light blue and the income and expense, the income statement accounts in the darker blue. Our goal here in essence to close out, it's kind of like the closing process, this 50,000 to the capital accounts in accordance with the profit sharing agreement. So if we scroll back over then we're going to say that the net income is that 50,000. I'm going to start over with the total being here and we're going to decrease this total by whatever the profit sharing agreement says to get to the allocation base at the end. So we're going to say 50,000 is the amount we're going to allocate of net income. Now the easiest way to allocate that to the partners would just have some kind of profit sharing agreement. If it was just a one-third, one-third, one-third, then that would be very simple. We can just allocate it one-third, one-third, one-third and we would be done. Many partnerships however are much more complicated or can be and that's one of the advantages of the partnership because it may be that one partner does a lot more for the business or another partner put a lot more money into the business and therefore it would seem logical to give a higher return on investments to those individuals and we have the flexibility to do that in a partnership. Many times when we teach partnerships a lot of people think that no matter what it should be a one-third distribution because all partners are equal and it should all be fair one-third but clearly there's going to be circumstances when everything isn't equal in terms of contributions who put in more money into the partnership and in terms of time who's spending more time in the partnership and that's okay. If someone spends more time than another partner that's okay then all we need to do is make sure that everybody's happy by balancing that out with whatever the partnership agreement is in terms of who gets most of the revenue and as long as everybody's happy with those two negotiations some person can put in more money another person could put in more time and we can allocate in accordance with what we believe is fair to all partners and hopefully everybody can be happy even though everything is not entirely equal in terms of distribution equal in terms in a way it's equal in terms of what's right in terms of the distribution in accordance with the partnership agreement in any case. We're going to have a salary distribution it's often called a salary distribution note that the salary distribution is not having anything to do with payroll it's just a fixed distribution of this 50,000 because it's fixed it's kind of like a salary so we're just going to take that out of this $50,000 amount the salary amount. This is usually used in book problems the salary type contribution for someone that works more in the company someone spends more time in the company we might say okay we're going to give you a guaranteed amount of the distribution of net income because of your time spent there and that's often the rationale and the reason for like just this this fixed amount that we would allocate before the rest of net income so we're just going to say that CX and S according to the partnership agreement had 4,000, 3,000 and 8,000 respectively for that allocation amount we add those up then that adds up to 15,000 so let's do that here in F6 we're going to say equals SUM double click the sum function highlight the 4, 3 and 8 to give us that 15,000 so we're then going to do the subtraction problem see how much we have left this is our first allocation base we had 50,000 before we allocated out 15 so the difference equals the 50,000 minus the 15,000 or 35,000 so then the 35,000 is what we have now we're also going to say that the capital account we're going to allocate an amount to the owners in accordance with their capital account at the beginning of the time period at 10% of their capital account and this is another thing that's pretty common a way that we can try to give more benefit to people that put more money into the partnership in other words if we need money of course in the partnership to get going especially in those beginning years and in order to incentivize the partners to put more money in and leave it into the partnership rather than take it out and put in investments or something like that we can give a return on the initial investment we will get these amounts from the capital account so if we scroll back over here and we pick up these capital accounts this is usually what the capital account was at the beginning of the time period because any withdrawals we had we recorded in a separate withdrawals account so it could be possible that someone put more money in and we would have to check that with on the general ledger to see if this is not indeed the beginning balance what we don't want to have happen is for a partner to try to put money in at the end of the partnership and then and then get more distribution just because they put money in the partnership at the end of the year so words and when the partnership agreement was at the beginning of the year but I normally this capital account if there was no investment is the partnership amount as of the beginning of the year so we're going to use that for our allocation percent so for see then we're going to say this equals the 144,000 times point one or ten percent for x we're going to say that this equals 216,000 times point one or ten percent and then for s we're going to say this equals 120 I know I'm just picking these up over here thousand times point one or ten percent so it's an allocate it's it's a distribution that we just came up with within the partnership agreement which is agreed that we're going to pay 10% based on the beginning capital accounts of net income now note that that adds up to 48,000 and we only had 35,000 to allocate of net income remaining so if we add this up with some function in F8 equals SUM of these three fourteen four twenty one six and twelve thousand we get 48,000 now if we subtract these out we only had 35 left so we're going to end up with a negative number that's the problem so we're going to say this equals the 35,000 minus the 48,000 now we have a negative 13,000 because we overallocate it we overallocated the money the net income we only have 15 and we allocated more than 15 by 13,000 more than the 15 so now we're going to have to allocate the rest in accordance with what we say the profit sharing agreement is at the end which we're saying it's going to be an even allocation so that means that we're going to have to take this 13 and allocate it evenly which could really be a consequence that would be unusual to the partnership I mean the partnership may not have expected that so we want to make sure that the partners understand that if we don't clear whatever the balance is to cover these two restrictions then the remaining amount will be distributed evenly between the partnership which could be kind of counter productive in some ways because when we allocate the net income in this format we're trying to allocate the people that put more money in so for example this this guy this KX's capital account went we allocated 21,602 X because X put more money in and therefore help the business supposedly more by having more capital investment so we allocate more of the net income earned by the company to X but then if we have to allocate this loss evenly then we're losing kind of that that distribution that we tried to make proportional to the contribution of the partners so we just got to be careful that when we have a loss we want to note what we're going to do in that case we could put some other kind of clause into our partnership agreement like what happens when a case like this happens or what happens when the company has has a loss what are we going to do in those cases but something to be aware of so we're just going to take this and we're going to have to allocate it on a one-third by one-third basis which is going to reduce the capital accounts so we'll do that by just saying this equals to 13,000 divided by 3 tab do the same thing here this equals 13,000 divided by 3 tab and one more time this equals 13,000 divided by 3 tab and then we'll just sum this up equals the sum of these three and there we have it now it should bring us down to zero so now we're just going to add these up the 4,000 plus the 14,4 plus the 4 minus the 4,333 4C should give us the amount of the original 50,000 we're going to allocate to C of net income so we'll go ahead and equals SUM double-click the sum function and highlight all those 4,000 plus 14,4 minus 4,333 gives 14,067 we'll do the same for X equals SUM double-click the sum function highlight that entire column and tab 20,267 allocated to X and then S equals the SUM we'll double-click the sum function and add that up giving 15,667 if we add these up it should come out to 50,000 so equals the SUM of these three there's our 50,000 so now we've allocated this 50,000 out between CX and S 14,067 20,267 15,067 respectively now we'll do the same thing we'll allocate that out in terms of our journals and we won't do the same thing we've got the calculation now now we're going to allocate that with journal entries to our trial balance so we've got the net income here and we're going to close this out now this is really just kind of a closing process that we will go through here and then allocate this out so we want to go to the normal closing process we would see with any type of business whether it be a sole proprietor or a corporation or a partnership and then the last component of it will be that allocation and that's what will differ between the three types of businesses so let's start this out the part that would be the same for a partnership or a sole proprietorship or a corporation would be we'll close out the sales or the revenue and then the expenses so sales has 120,000 in it we're gonna do the opposite thing to it to make it go down which will be a debit so we'll copy the sales right click and copy we'll put that up top in h5 right click and paste 1 2 3 the amount will be this 120,000 we're gonna credit something for that same 120,000 I'm gonna do that with a negative of this number we could just type in negative 120,000 but I like to use that little formula and then we're gonna put that to the income summary that's gonna be our temporary account it's a holding account used just in the closing process so we'll copy that right click and copy gonna put that in h6 right click and paste 1 2 3 then we'll indent that going to the home tab alignment increase indenting and then we can post this so we've got these sales up top it's gonna go to these sales down here we're gonna put that in in 16 where we will say equals and point to that 120 bringing the balance from 120 down by 120 to 0 then we have the income summary which will be posted to the income summary on the trial balance and in 15 where we say equals point to the 120 credit bringing the balance from 0 up by 120 to 120 next we're gonna close out the expenses in another journal entry cost of goods sold and wages are the only two that we're gonna have here in the example so we're just gonna copy these two these are debits so we're gonna do the opposite thing to them and credit them so we'll highlight those right click and copy scroll up and put this in H we'll skip a line we'll put them on the bottom in H9 right click and paste 1 2 3 I'm gonna indent that as well home tab alignment increase indenting and then we'll put the credits in J9 so we're gonna have just what's in there so 60,000 credit of 60,000 and then we had 10,000 in wages so we're gonna have a credit of 10,000 then we'll sum those up on the debit side and that'll give us our debit so we'll say negative SUM using kind of like a plug formula you could move this out of the way or go from the bottom of the top so you could just move this if you want to highlight these and then enter so of course the 60 and the 10 equals the 70 debit that we need now that's gonna go to the income summary account the clearing account again so we'll right click and copy put that up top in H8 right click and paste 1 2 3 and there we have that now we'll post this one so the income summary has something in it so we'll double click on it go to the end of it say plus and point to that 70,000 and enter and then in cell in 417 we're gonna say equals and point to that 60,000 bringing the 60,000 down by 60,000 to zero and then in in 18 we'll say equals and point to that 10,000 bringing the 10,000 down balance down by 10,000 to zero so now the income statement accounts are zero net income is now zero and the income summary has net income in it we need to do it's important to do that process I think because a lot of problems if you're looking at book problems we'll just start at the income summary they'll just say that income summary has $50,000 in it and now we need to allocate that out and we need to understand that that means that net income is an income summary and we're gonna allocate that out so it's helpful to go through the the closing process and actually see a trial balance to see what net income is and how the net income is now in the income summary now we're gonna take that and allocate that out to the partners this is kind of like just the end of the closing process very easy to do if it's a partnership or a corporation because we just allocated to the one capital accounts or the one retained earnings account but for a partnership we got to allocate it in accordance with profit sharing agreement which we came up with over here so we've already got our numbers now we're just gonna allocate this out so we're gonna debit the income summary we're gonna right click and copy that put that up top in h12 right click and paste 123 that will be for 50,000 and then we'll credit the capital accounts and now I'm gonna I'm gonna highlight them all at the same time I'm gonna put my cursor on C on L 9 C's capital hold down control and click the other capital account X's capital in L 11 and then the last capital in L 13 so they're all highlighted these are non-adjacent cells that are highlighted so we can do that at the same time let go of control then right click and copy and we don't have to do this this way we can copy and paste them one at a time too but it's a little bit faster and then we can right click and paste 123 so again it doesn't matter if we use formulas or if we copy and paste we could type it in here that would be just as well but that's useful to pick that up or it could be a little bit faster so now we're just gonna pick up these numbers the 14 67 the 20,000 267 and the 15 667 into J 13 14 and 15 we want to flip the sign however so instead of just saying equals I'm gonna put a negative instead of equals and put that 14,067 and enter and then for the next one we're just gonna say negative instead of equals the 20,000 267 and enter and then in the next one we're gonna say negative instead of equals this 15,067 and enter so now the 14 67 the 20,000 267 the 15 667 add up to the 50,000 the debits minus the credits add up to zero debits then equal the credits now we'll just post this out so the income summary is here on the journal entry it is here on the trial balance we're gonna be in the middle in in 15 double-click go to the end of it plus that 50,000 and enter that brings the balance down here here's C's capital we're gonna go up to C's capital up top will be in in nine equals and then we'll point to that 14,067 and enter and then we're gonna go to X capital which will be here in in 11 where we will say equals point to that 20,067 and enter and then we're in S's capital here's S's capital where we will say equals point to the 15 6667 and enter okay so now we're just left with the draws so that's really the last part of the closing process which we may as well finish up here so the draws were 18 38 and 24 respectively for C X and S so we're gonna do the same thing and just close those out so we're gonna close them out to the capital accounts and so all we're gonna if we net these two out we can see what it is it's it's 140 67 in other words we're gonna get rid of the 18 and include that 18 into the 158 67 resulting in a balance of 140,067 we'll do that for all the capital accounts so I'm gonna do the same little trick I'm gonna highlight C's capital hold down control X capital hold down control and S capital let go of control and then right click on those cells and copy and we'll put that in H 17 right click and paste 123 then we'll pick up the withholding's putting our cursor on the C's withholding hold down control X withholding hold down control and S withholding let go of control right click on the selected cells and copy and then we'll put that underneath in H 20 right click and paste 123 then I'm gonna indent that going to the home tab alignment and the increase indenting so that's gonna be our journal and it looks kind of intimidating looking journal entry but and we could do this one at a time like we could have just closed out the draws here to the capital account and then the draws and made three different journal entries but usually we will see this in one journal entry to close out draws and that that's an alignment with our closing process which basically is close out sales the four step process at least close out sales close out the expenses then close out the income summary then close out draws so we typically learn the closing process oftentimes with four steps with four journal entries when I go ahead and increase the indenting here to just keep it in format the home tab alignment increase indenting then we're just going to put the amounts so it's 18,000 for C 18,000 and 38,000 for X 38,000 and 24,000 for S now the capital accounts are going to be debited because it's going to bring those accounts down their normal credit balances we need to do the opposite thing to it to bring them down and then the withdrawals have debit balances we need to bring them to zero down to zero so we're going to do the opposite thing to them so I'm going to do that by just saying negative of this number negative of this number and negative of this number so we're just putting a negative or a credit for the same amounts for the related capital withdrawals accounts now let's post that out and we'll see if it does what we wanted to do what do we want it to do we want all these draws accounts to go to zero and we want these capital accounts to go down by those draws accounts and of course remain in balance once we're done so here's the capital account sees capital account here it is on the trial balance we're going to be in cell in nine double click go to the end of it plus point to that C capital account that 18,000 and enter so we'll do the same for maybe well we'll do the same for X here here's X's capital account here's X's capital account the trial balance we want to post it to in 11 something's in it we'll double click on it go to the end of it plus point to that 38,000 that'll bring this capital accounts down by the 38 then we'll go to SS capital account here here's SS capital account on the trial balance we want to be in the middle and in 13 double click go to the end of it plus and then point to that 27,000 bringing that balance down okay so now we'll post the other side to all the withdrawals which should make them go away so we're going to go to the withdrawals account for C and in 10 say equals point to that 18,000 bringing the 18,000 debit down in the credit direction to zero and then we're in in 12 where we will say equals point to that 38,000 bringing the 38,000 down balance down by 38 to zero and then we're in in 14 where we will say equals point to the 24,000 bringing the 24,000 balance down by 24,000 to zero so that's the result here we've got all income statement accounts now zero all temporary accounts also zero temporary accounts including the draws accounts which have been zeroed out we're left with a post closing trial balance for a partnership which means that we only have balance sheet accounts we've got the asset accounts the liabilities assets minus liabilities is 450,000 in this case that will equal equity the capital accounts which add up here to 450,000 the tricky part for a partnership as compared to a sole proprietor or corporation is that we got to break out this equity section by how much is owed to the partners