Accounting

Accounting Treatment for Partner’s Salary and Commission

Accounting Treatment for Partner’s Salary and Commission

Accounting Treatment for Partner’s Salary and Commission

It is well known to all that no partner can entertain any salary or commission unless it is provided by the partnership deed. In accordance with the provisions of the partnership deed, the profits and losses made by the firm are distributed among the partners. The salary or commission to a partner could be allowed to her/him if she/he does the most of the work of the firm according to the agreement among the partners. However, sharing of profit and losses is equal among the partners, if the partnership deed is silent. The salaries or commission is paid to the partners for the sake of sacrificing their time and labor to the firm as an emolument.

The commission may be allowed to a partner as a percentage of net profit before charging such commission or after charging such commission. However, certain adjustments such as interest on drawings & capital, salary, and commission to partners are required to be made. If it to be allowed as a percentage of net profit before charging such commission, it is calculated as:
Commission= Net profit before commission X Rate of commission/100.

If it is to be allowed as a percentage of net profit after charging such commission, it is computed as follows:
Net profit before commission X Rate of commission/100+Rate of commission

The salaries or commission to partners is an appropriation of profit rather than charge so it is debited to profit and loss appropriation account and shall be credited to respective partners’ capital accounts if capitals are fluctuating and to be credited to partners current account if capitals are fixed in nature. For this purpose, it is customary to prepare a Profit and Loss Appropriation Account of the firm.

Salary/Commission ………………………Dr.

To Partners’ capital/current A/c

Profit and loss appropriation A/C…………………..Dr.

To Salary/Commission.

The final figure of profit and loss to be distributed among the partners is ascertained by Profit and Loss Appropriation Account.