Question

describe how ratios function and then (give a numbers example) discuss how you would distribute profits and liquidated assets in ratio form.

Answer 1

In a partnership, the profit-sharing ratio is set out in the partnership agreement. This ratio is used to distribute profits as well as losses.
The ratio may be determined by the amount of investment each partner
or
the partnership agreement may specify that.
This ratio will show the amount of the total profits attributable to each partner.

Example -

M & N starts parnership business with contribution of 1lac and 2 lac respectively. In is decided that the profit sharing ratio will be calculated based on contribution.

So, the ratio is calculated as follows = 1:2

Now, at the end of the year, if profit is $10000
Then it will distributed amoung partners as follows-

M = 10000 x 1/3 = $3333 (approx)
N = 10000 x 2/3 = $6667 (approx)

Any gain and loss on sale of any assets is allocated among partners in the ratio agreed in the partnership.
But
Inliquidation of a partnership, when all assets were sold
first, all external debt were paid
and then, remaining surplus is shared among partners in their capital ratio.

Example -
Balance in capital account on the date of liquidation shows $10000 in Partner A and $ 30000 in Partner B account.
The amount of liqudated assets after paying all external liability is $40000.

So, the distrubution of surplus liqudated assets will be in ($10000:$30000) = 1:3 ratio.
and the distrubution will be as follows-
A = $40000 x 1/4 = $10000
B= $40000 x 3/4 = $30000