BIM72250 - Partnerships: Computation & assessment: Examples of Allocation of Profits and Losses

(Allocation of partnership profit: no reallocation required)

Alan, Beatrice and Cassandra are in partnership. The partnership makes a profit of £8,900.Alan and Beatrice are entitled to salaries of £2,200 and the balance of profits are shared equally. The partnership profits are allocated as follows

In this case the commercial profit sharing arrangement produces a straight apportionment of the actual partnership profit and no further adjustment is required.

Example 2 (Allocation of partnership profit: reallocation required)

The facts are the same as in example 1 but Alan and Beatrice are each entitled to a salary of £5,200. The balance of profit is shared equally.

The partnership profits would initially be allocated as follows

In this case the commercial profit sharing arrangement produces a spurious result. The aggregate notional profit allocated to Alan and Beatrice is £9,400, whilst Cassandra has been allocated a notional loss of (£500).

Therefore you must reallocate the actual partnership profits between the profit making partners.

The re-allocation is made in proportion to the notional profit initially allocated to each partner, i.e. in the ratio

(Allocation of partnership loss: reallocation required)

The facts are the same as in example 1 but Alan is entitled to a salary of £4,400, and profits/losses are shared Alan 25%, Beatrice 25% and Cassandra 50%. This time the partnership makes a loss of (£1,600). The partnership loss is initially allocated as follows

In this case the commercial profit sharing arrangement produces a spurious result. A notional profit of £2,900 has been allocated to Alan whilst Beatrice and Cassandra have been allocated an aggregate notional loss of (£4,500). Therefore you must reallocate the actual partnership between the loss making partners. You make the re-allocation in proportion to the notional loss initially allocated to each partner, i.e. in the ratio