EX 12-9 Partner income and withdrawal journal entries
The notes to the annual report for KPMG LLP (U.K.) indicated the following policies regarding the partners’ capital:
The allocation of profi ts to those who were partners during the fi nancial year occurs following the fi nalization of the annual fi nancial statements. During the year, partners receive monthly drawings and, from time to time, additional profi t distributions. Both the monthly drawings and profi t distributions represent payments on account of current-year profi ts and are reclaimable from partners until profi ts have been allocated.
Assume that the partners draw £40 million per month for 2012 and the net income for the year is £600 million. Journalize the partner capital and partner drawing control accounts in the following requirements:
a. Provide the journal entry for the monthly partner drawing for January.
b. Provide the journal entry to close the income summary account at the end of the year.
c. Provide the journal entry to close the drawing account at the end of the year.
d. Why would partner drawings be considered “reclaimable” until profits have been allocated?
Answer:
a. Jan. 31 Partner, Drawing.................................. 40,000,000 Cash................................................ 40,000,000 b. Dec. 31 Income Summary................................. 600,000,000 Partner, Capital............................... 600,000,000 c. Dec. 31 Partner, Capital.................................... 480,000,000* Partner, Drawing ............................ 480,000,000 *12 months × £40 million
d. Partner drawings are not the same as a salary. The drawings represent a distribution of the profits of the partnership that has been credited to the partners’ capital accounts. In this case, the drawings occur during the year prior to the final accounting for profit distribution. Thus, the drawings could end up greater than the final partner net income. If this were the case, the partner would be liable to the partnership for returning the excess drawings over the income earned for the year.
The allocation of profi ts to those who were partners during the fi nancial year occurs following the fi nalization of the annual fi nancial statements. During the year, partners receive monthly drawings and, from time to time, additional profi t distributions. Both the monthly drawings and profi t distributions represent payments on account of current-year profi ts and are reclaimable from partners until profi ts have been allocated.
Assume that the partners draw £40 million per month for 2012 and the net income for the year is £600 million. Journalize the partner capital and partner drawing control accounts in the following requirements:
a. Provide the journal entry for the monthly partner drawing for January.
b. Provide the journal entry to close the income summary account at the end of the year.
c. Provide the journal entry to close the drawing account at the end of the year.
d. Why would partner drawings be considered “reclaimable” until profits have been allocated?
Answer:
a. Jan. 31 Partner, Drawing.................................. 40,000,000 Cash................................................ 40,000,000 b. Dec. 31 Income Summary................................. 600,000,000 Partner, Capital............................... 600,000,000 c. Dec. 31 Partner, Capital.................................... 480,000,000* Partner, Drawing ............................ 480,000,000 *12 months × £40 million
d. Partner drawings are not the same as a salary. The drawings represent a distribution of the profits of the partnership that has been credited to the partners’ capital accounts. In this case, the drawings occur during the year prior to the final accounting for profit distribution. Thus, the drawings could end up greater than the final partner net income. If this were the case, the partner would be liable to the partnership for returning the excess drawings over the income earned for the year.
