Question

How should corporate "other income and deductions" be allocated in a firm?

Answer 1

A firm reports net income based on the revenue earned and expenses incurred for a period of time.

Revenue - Expenses = Net income

If the total revenue exceeds total expenses of the period the excess is the net income of the partnership for the period. If the expenses exceed revenues of the period the excess is the net loss of the partnership for the period.

Management fees, salaries and interest allowances are guranteed payments. The partnership generally deducts these payments as business expenses

Partners compensation and allocated net income are considered ordinary income for tax purposes for the partnership firm. It does not matter if the partners withdraw any money from his capital account. It is net income allocated to the partner and his compensation from the partnership are taxed and not the amount withdrawn.

The allocation of net income on the income statement would be reported as below:

Net income $100,000 Particulars Partner A Partner B Total Net income of partnership 100,000 Salary allowances 30000 20000 50000 Management fees 10000 5000 15000 Interest allowances 10000 5000 15000 Remaining income 20000 Remaining income shares 10000 10000 20000 Allocated shares 60000 40000 100000 At the end of accounting period, each partners allocated share is closed to his capital account. The closing entry would be: Income summary $100000 Partner A Capital $60000 Partner B Capital $40000