Question

Section 5: Profit and Loss Allocations The net profits of the partnership shall be apportioned equally between the partners and the net losses shall be borne equally by them, with each partner receiving fifty percent (50%) of the net profits of the partnership, and fifty percent (50%) of the net losses. A separate income account shall be maintained for each partner. Partnership profits and losses shall be charged or credited to the separate income account of each partner. If a partner has no credit balance in his income account, losses shall be charged to his capital account.

Interest on Capital Contributions No interest shall be paid on any capital contributions to the partnership, including initial capital contributions made upon execution of this agreement, and subsequent capital contributions made after execution of this agreement.

1. Explain the provisions of General Partnership, Section 5 (“Profit and Loss Allocations)
2. Explain the provisions of General Partnership, Section 4 (“Interest on Capital Contributions.”)

Answer 1

A. Provisions of General Partnership, Section 5 (“Profit and Loss Allocations):

For General Partnerships, Net Income is distributed Equally to all the partners, be it Profit or Loss. If there are 2 partners, it will be 50%:50%, if there are 4 partners, each will have 25% and likewise. A seperate Income Account is prepared for each partner, in which profit or loss is distributed. In any year, if there is loss, and any partner does'nt have Credit Balance in his Income account, then his capital account will be debited. Thus, Income account of partners will never have Negative Balance.

B. Provisions of General Partnership, Section 4 (“Interest on Capital Contributions.”)

For General Partnerships, no Interest is paid to any partner for capital irrespective of time, the capital is contributed. Thus , no interest on Initial or Subsequent Capital to any partner will be paid.