How to Balance Allocated Equally When Dealing With Accounting for Partnerships

Partnerships can allocate tax responsibility and deductions evenly.

Business accounting can be a complex process in and of itself. However, accounting for different types of business entities, such as partnerships, has its own complexities and procedures that must be performed to meet generally accepted accounting principles, or GAAP. The amount that a partner is taxed depends upon the partnership structure that governs the business relationship. Allocations and deductions for partners are governed by Internal Revenue Code Section 704(a).

Instructions

1. Examine the partnership agreement to determine the income or loss allocation for each partner. If there is no specific designation as to what the allocation for each partner should be, the losses or income are to be allocated equally among each partner. Partners are not paid salaries per se but instead have the opportunity to withdraw assets as needed, based on their share of the partnership.

2. Transfer the net income of each partner to his account using closing entries. To do this, simply divide the net income of the entire partnership by the number of partners to determine the individual share of each partner. For instance, if the partnership made $100,000 and there were four partners, the net income for each partner would be $25,000. The entry is placed as a debit of $100,000 in the general journal with an equal credit of $25,000 being recorded for each individual partner.

3. Calculate the balances of each partner's capital account based on his agreed upon salary allowance and interest earnings. This is a second way to account for partnership earnings. When the partners agree to take equal salary and interest distributions, the numbers do not differ from one another. The remainder of the net income not distributed for these purposes is divided equally among the partners and added to their net income.

4. Double-check your work. The total of the allowances for each partner's income and interest should equal the total net income. This should always occur, even if the income distributions and interest are not allocated in equal percentages across the partnership.

References

• McGraw-Hill Publishers: Basic Partnership Accounting
• CliffsNotes: Partnership Accounting
• Florida Gulf Coast University:Study Outline For: Partnership Taxation Module 4C