and now we will learn the theory and the practice of distributing partnership income in order to do
that let's just quickly review the closing entries we learned in a previous video that
all income accounts become zero at the end of the fiscal period and the balance is transferred to
this temporary account income summary the balance of all the expense accounts also get transferred
to this temporary account income summary leaving the income and expense accounts at zero an income
summary winds up having the actual net income of the company once you determine the net income you
then should make income summary becomes zero and transfer that net income to the actual
owner and put the balance of net income in the owners capital account where the income belongs
because that income actually belongs to that owner when you have two owners in the previous
example where Gary and Holden or partners and hold and get sixty percent of the profit according to
the partnership agreement and Gary only gets forty percent of the profit according to the partnership
agreement that means after you closed income and expense to income summary you would still have the
same net income as you had before in our previous example the only difference in this case is 60% of
the income would be taken from income summary and brought to hold his capital and the other
forty percent of the net income that sitting in income summary would be brought to Gary's capital
this way income summary would begin at zero for the next period because it's a temporary account
and the partners would have their share of the income put into their capital account so each
partner respectively would know how much owner's equity he or she has in the company we also learn
the last step of the closing is to transfer that owners withdrawals account to that owners capital
account so that the computer can finally calculate the ending owner's equity of each partner and
withdrawals income summary income and expenses begin the next period with zero and the partners
have in their capital accounts a number that reflects their entire share of the owner's equity
now that's the way it was done in accounting theory however in practice I advised three equity
accounts for each partner number one owners capital owners withdrawals and a new one that
I made up owner's income share and that should be the account that the net income from income
summary is transferred to owners capital should specifically be for the amount the owner invests
of money or any other asset into the business owners withdrawals should be only you should only
record withdrawals for amounts that the owner took cash or other asset out of the business and the
owners income share equity account which I made up should show the amount of accumulated net income
that that specific partner is entitled to you see by separating them you'll always know these three
separate amounts instead of closing them together so let's go back to our prior example where Gary
gets 40% of the net income and hold and get 60% according to the partnership agreement well in
theory it's very simple if you use my accounts called income share instead of closing the income
summary to the to capital accounts you would simply close income summary to the to income
share accounts this way you would be able to make a clear distinction between how much hold and
invested how much Holden was drew and how much did hold and earn as his share of the income and the
same thing for Gary according to this partnership agreement in this example Holden gets 60% of each
quarters net income Gary gets 40 percent of each quarters net income and that the income
according to this Agreement is distributed quarterly you must make journal entries to
distribute the income and the entry must be done on the first day of the new quarter not the last
day of the old quarter now we're going to circle back to that last point because that's going to
make a difference when you run the report now I have this example set up here in this QuickBooks
file if we open the profit and loss for the first quarter January 1 to March 31 of the year that I'm
recording this in 2017 you can see the service income is 20,000 because we have not done the
closing the expenses are exactly as they were in the two previous examples and if you look at the
trial balance you can see that holding straws and Holden's equity are the numbers from the previous
example before the closing and that Gary's equity in Gary's drawers or drawing withdrawals whatever
are the same as they were in the previous example and of course Kara here in the income and expense
accounts now we do have an account in the chart of accounts called income summary right now that's 0
balance and it's an equity account it begins with 0 and it ends with 0 and we use it to be able to
distribute the income to the partners and clean out the income and expense accounts so they do not
um they do not overflow into the next quarter now when we attempt to distribute the income remember
the dates of the journal entries should be April 1 not March 31 and here are the steps credit the
expenses for the ending balance to make them zero and debit income summary well that's pretty easy
the we only have two expenses delivery expense and repair expense so we're going to credit these to
make them zero and we'll debit income summary to make a journal entry you click company make
journal entry remember the date should be April 1 and not March 31 hoops now the first account
that we credit will be delivery expense the ending balance of delivery expenses 6000 so we're going
to credit for the ending balance and that'll make it zero computer thinks we're going to make
a balancing entry but what we're really going to do is put 4000 credit to the ending balance of the
other expense repair expense so now we have we're going to credit both of these because their debit
balances and we're going to make them zero and the balancing entry of 10000 should go to our friend
that helps us close income summary an income summary should be ten thousand because we're going
to debit income summary for the total expenses now when we click Save and close we see we achieved
some of our goal we made the expenses zero so they do not accumulate into the next quarter and right
now before the next step income summary is holding the total expenses for the company now we're going
to debit the income for its ending balance just to make it zero and then credit income summary
well we remember the service income had a twenty thousand credit balance so we need to make a
journal entry remember the journal entry has to be dated April on to debit the income for the ending
balance 20,000 and that's the service income and of course the balancing credit goes to our good
friend income summary now when we click Save close we notice service income has also become zero like
the other two expenses and income summary is now holding the net income $10,000 and now let's
distribute the income exactly the way we discussed earlier we're going to debit income summary for
6000 and then credit Holdings income share because he's entitled to 60% of the net income that is in
income summary we're also going to debit income summary for the remaining 4000 and credit Gary's
income share this will bring income summary down to 0 and give each owner their respective share
of the income we make a journal entry by clicking company mate journal entry and of course holdings
it oaks our holdings income share we're going to credit 6000 Gary's income share we're going to
credit 4000 and of course the balancing debit of 10,000 goes to our good friend income summary so
if income summary had a credit balance of 10,000 we can wipe it out by making a debit of 10,000
and that will also distribute the income to the partners now that we saved it income summary is
0 the way it should be and Gary's income share it's 4,000 and Holdings income share is 6000
now these procedures help determine the final amount of each partners equity and if we look
at a balance sheet we can see look at Gary's gary invested 20,000 Gary's income share income share
was 4,000 so Gary really is entitled to 24,000 of owner's equity but Gary took out three thousand
dollars of cash or other assets that means Gary's net equity is 21,000 and holden's is just as easy
to calculate Holdens investment was thirty thousand Holdings income share was thirty-six
it was six thousand so that means he's entitled to 36,000 of owner's equity but Holden took out
seven thousand dollars worth of cash or assets so that means that Holden's net equity is twenty nine
thousand so if they liquidated the business sold the assets and they wanted to pay off the partners
Gary would be entitled to twenty one thousand and Holden would be entitled to twenty nine thousand