How to Calculate Accounting Ratios for Partnership Income

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Partners divide their income according to their work and investment in the partnership.
Partners divide their income according to their work and investment in the partnership. (Image: Jupiterimages/BananaStock/Getty Images)

There are three main business structures available to companies: proprietorships, partnerships and corporations. Corporations form a separate legal entity to its owners, while partnerships are similar to proprietorships with the exception that partnerships have more than one owner. Since the partners in a partnership share ownership, you must use partnership accounting to divide the income available to each partner according to the partnership agreement. Usually partnerships assign accounting ratios to calculate the interest each partner can withdraw from the partnership's assets. These are not salaries, but are often categorized as salary allowances for the services provided to the partnership. However, if these ratios are not not specified in the partnership's statutes, the law determines income and losses must be divided equally.

Write down on separate columns the value of the assets contributed to the partnership by each partner. Include both tangible assets, such as tools and vehicles, and intangible assets, such as unpaid work or the goodwill in a portfolio of clients.

Add the total assets contributed to the partnership by each partner at the bottom of their columns. Deduct from the total any liabilities or debts covered by the partnership. This provides a net asset contribution for each partner.

Add the total contributions of each partner in a separate column. This is your company asset value.

Divide the net assets contributed by each partner by the total partnership's assets. This is the accountant ratio for income sharing. For instance, if the total assets of a company are $100,000 and the contribution of one partner is $10,000, the accounting ratio for this partner would be 0.1.

Multiply the total income the partnership decides to share out to partners by the accounting ratio of each worker. For instance, if the total income to be shared out is set at $100,000 and you have an accounting ratio of 0.1, or 10 percent, your profit share would be $10,000.

Tips & Warnings

  • This is only one method to calculate the accounting ratios for profit sharing in a partnership based on the work and investment placed in a company. However, the partners can agree to set ratios using whatever method they see fit.

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