To allocate profit, divide it according to the partnership agreement: add up the parts in the ratio, find the value of one part, then multiply. This appears in almost every partnership question, usually as the last step after salaries and interest.
It is the first lesson in partnership accounting, and every later lesson feeds into this step.
What is a profit-sharing ratio?
A partnership agreement states how profit is shared. A ratio such as 5:3 splits the profit into 5 + 3 = 8 equal parts, with 5 parts to one partner and 3 to the other.
Sharing by ratio is not the same as sharing by capital. The agreement may reward effort, skill or risk, so a partner with less capital can still hold a larger share. Always use the ratio the question supplies.
How to allocate profit, step by step
- Write down the amount to be shared. In this lesson it is the net profit.
- Add the parts of the ratio to find the total number of parts.
- Divide the profit by the total parts to find one part.
- Multiply one part by each partner’s number of parts.
- Add the shares back together and confirm they equal the amount you started with.
Worked example
Hana and Dev run a print studio. Net profit for the year is RM48,000, shared in the ratio Hana 5 : Dev 3. There are no other terms.
Step 1: the amount to share is RM48,000.
Step 2: parts = 5 + 3 = 8.
Step 3: one part = RM48,000 ÷ 8 = RM6,000.
Step 4: Hana = 5 × RM6,000 = RM30,000. Dev = 3 × RM6,000 = RM18,000.
Step 5, check: RM30,000 + RM18,000 = RM48,000.
In the books, the appropriation account shows these two amounts as the distribution of profit, and each is credited to the partner’s current account.
A loss is shared the same way
Suppose the studio made a loss of RM16,000 in a poorer year. One part is RM16,000 ÷ 8 = RM2,000, so Hana bears RM10,000 and Dev bears RM6,000. Check: RM10,000 + RM6,000 = RM16,000.
The shares are debited to the partners’ current accounts instead of credited, because each partner’s balance falls.
The mistake to watch for
A common slip is to treat the ratio as a fraction of the whole, such as taking 5/3 or 3/5 of the profit.
Mistaken answer: Hana = RM48,000 × 5/3 = RM80,000.
The student multiplied by the ratio numbers instead of dividing the profit into parts first. Hana’s share ends up bigger than the whole profit.
The correction is to ask “how many equal parts are there in total?” before multiplying. A quick check that every share is smaller than the profit, and that the shares add up to it, catches this immediately.
Check yourself
Work these on paper first, then open each answer.
1. Net profit of RM90,000 is shared by Alya, Bruno and Chai in the ratio 4:3:2. Find each share.
Show answer
Parts = 4 + 3 + 2 = 9. One part = RM90,000 ÷ 9 = RM10,000.
Alya RM40,000, Bruno RM30,000, Chai RM20,000. Check: 40,000 + 30,000 + 20,000 = 90,000.
2. A loss of RM21,000 is shared by Aiman and Bee in the ratio 4:3. How much does each bear?
Show answer
Parts = 7. One part = RM21,000 ÷ 7 = RM3,000.
Aiman RM12,000, Bee RM9,000. Check: 12,000 + 9,000 = 21,000.
3. Three partners share a profit of RM36,000 as fractions: 1/2, 1/3 and 1/6. Find each share.
Show answer
1/2 of 36,000 = 18,000. 1/3 of 36,000 = 12,000. 1/6 of 36,000 = 6,000.
RM18,000, RM12,000 and RM6,000. Check: 18,000 + 12,000 + 6,000 = 36,000, and 1/2 + 1/3 + 1/6 = 1.
Where this leads next
Next, see capital and current accounts to learn where each partner’s share is recorded. The percentage-base explorer helps with any percentage step, and the cash versus profit bridge shows why a profit share is not cash received.
When you can allocate profit cleanly but lose marks on longer questions, our teachers can look at your working in online one-to-one Accounting tuition.