Partnership Profit Distribution Explained

Partnership Appropriation Account Explained

• The Donut Kings, a fictional donut shop, illustrates how partnership profits are distributed fairly.

Net Profit Calculation

• The Donut Kings had $120,000 in net profit after expenses.
• This is not the final distribution; specific deductions need to be made.

Interest on Capital Investments

• Jake invested $50,000, Maya $30,000, and Ethan $20,000.
• A 10% interest rate was applied to each investment.
• This resulted in interest payments of $5,000 for Jake, $3,000 for Maya, and $2,000 for Ethan.
• Deducting interest, the remaining amount was $110,000.

Partners' Salaries

• Jake, Maya, and Ethan received salaries reflecting their respective work contributions.
• Salaries were $30,000 for Jake, $20,000 for Maya, and $10,000 for Ethan.
• This resulted in a reduced profit pool of $50,000 post-salary deductions.

Profit Sharing Ratio

• The Donut Kings used a 2:2:1 profit-sharing ratio, favouring the higher-investment individuals.

Final Profit Breakdown

• Jake received a total of $55,000 ($5,000 interest + $30,000 salary + $20,000 profit).
• Maya's share amounted to $43,000 ($3,000 interest + $20,000 salary + $20,000 profit).
• Ethan received $22,000 ($2,000 interest + $10,000 salary + $10,000 profit).

Key Takeaway

• Partnership Appropriation Accounts ensure fair profit distribution based on initial investment, salary, and agreed proportions.