| LO4 – Account for a partnership’s profits and losses and prepare a statement of partner’s capital. |
Recall that individual revenue and expense accounts are closed to the Income Summary general ledger account at the end of each fiscal year. In a partnership, and similar to a proprietorship, the Income Summary is then closed directly to each partner’s capital account in the general ledger at the fiscal year-end in accordance with an agreedupon formula. For example, if a partnership earned $15,000 and the partnership agreement states that profits and losses are to be split evenly between partner A and partner B, the closing entry would be:
Profits and losses are allocated according to a formula. This is usually specified in the partnership agreement. The formula may consider three factors: a return to each partner for the amount of capital invested in the partnership, a payment to each partner for services rendered, and a further division of any remaining profit (or loss) according to a specified profit and loss sharing ratio.
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