The allocation of profits to those who were partners during the financial year occurs following the finalization of the annual financial statements. During the year, partners receive monthly drawings and, from time to time, additional profit distributions. Both the monthly drawings and profit distributions represent payments on account of current-year profits and are reclaimable from partners until profits have been allocated.
Assume that the partners draw £50 million per month for 2014 and the net income for the year is £740 million. Journalize the partner capital and partner drawing control accounts in the following requirements:
a. Provide the journal entry for the monthly partner drawing for January.
b. Provide the journal entry to close the income summary account at the end of the year.
c. Provide the journal entry to close the drawing account at the end of the year.
d. Why would partner drawings be considered “reclaimable” until profits have been allocated?
Answer:
a. Jan. 31 Partner, Drawing 50,000,000
Cash 50,000,000
b.
Dec. 31 Income Summary 740,000,000
Partner, Capital 740,000,000
c. Dec. 31 Partner, Capital* 600,000,000
Partner, Drawing 600,000,000
* 12 months × ₤50 million
d. Partner drawings are not the same as a salary. The drawings represent a distribution of the profits of the partnership that has been credited to the partners’ capital accounts. In this case, the drawings occur during the year prior to the final accounting for profit distribution. Thus, the drawings could end up greater than the final partner net income. If this were the case, the partner would be liable to the partnership for returning the excess drawings over the income earned for the year.