Journal Entry for Distribution of Profit Among Partners
Profit distribution amount partner is the process which businesses share the profit with all partners base on their share ownership.
The company can be found in various types such as private, partnership, and corporate. A private company is a company owned by only one owner. The corporation can be owned by many people who join to create the company. Some corporation even publishes their share to the public.
A partnership is a company formed by two or several partners to operate. The partners own the company base on the ownership which they all agree. All partners have to invest cash, fixed assets, and other assets based on ownership percentage.
When they put money into the business, it will be recorded in separate equity accounts to prevent any confusion. The company profit will be allocated to each account as well. If they want to withdraw cash, they have to decrease their account balance. The partners can take the money out of business based on the agreement.
Journal Entry
When the company is formed, the accountant will record the capital account. However, in the partnership company, the capital account will separate based on the capital contributed by each partner. It also represents the percentage of ownership that each partner has in the company as well.
The journal entry is debiting cash contribution and credit capital to each partner.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Partner A Capital | $$$ | |
| Partner B Capital | $$$ |
At the end of the accounting period, company will determine the amount of profit. The private and corporate entities will record the net income in the retained earnings on the balance sheet. But in the partnership company, the profit will allocate to each partner account. It is based on the ownership percentage of each partner.
The journal entry is debiting net income and credit partner capital account.
| Account | Debit | Credit |
|---|---|---|
| Net Income | $$$ | |
| Partner A Capital | $$$ | |
| Partner B Capital | $$$ |
If any partner wants to withdraw the capital, they have to get approval from all the partners. Most of the time, all the partners will withdraw the cash at the same time base on the agreed amount.
Example
Company ABC is formed by three partners who are Mr. A, Mr. B, and Mr. C. Each partner owns 30% of the company while Mr. C owns 40%.
During the year, the company makes a profit of $ 100,000 and they decide to distribute the profit to each partner. Please prepare a journal entry for profit distribution.
The company has three partners, so the profit must be allocated to three of them based on the percentage ownership.
The profit happens when the revenue is greater than the expense, so the balance on the credit side (revenue) is greater than the debit side balance (expense). For a normal company, this excess balance will remain in the retained earnings.
If the company wants to distribute to the partner, the needs to allocate the profit to each partner account.
The journal entry is debiting a net income $ 100,000 and a credit partner account $ 100,000.
Partner A: $ 100,000 x 30% = $ 30,000
Partner B: $ 100,000 x 30% = $ 30,000
Partner C: $ 100,000 x 40% = $ 40,000
| Account | Debit | Credit |
|---|---|---|
| Net Income | 100,000 | |
| Partner A Capital | 30,000 | |
| Partner B Capital | 30,000 | |
| Partner C Capital | 40,000 |