Question

ark for once is happy with what you have done and recalls that it looks a bit like the work some of his friends did in Small Business Accounting. (Mark doesn’t get see those friends anymore as they refused to continue doing all the group work while Mark tried to claim the credit and the marks for no effort). However, Randy is irate and swears you and Mark are trying to rip him off. He says he should have got the nearly $50,000 increase in capital and not Mark. He says that anyone who can count could add up his $15,000 interest and his half of the profits, and then he muttered something about how he needed to get out of the music industry because it just didn’t understand him and that he had the X Factor and that music was going in the wrong direction. He has told Mark that he wants you to redo the Income Statement properly with all the expenses included, particularly Mark’s salary which is obviously in the wrong place.    

Required

Explain to Randy what he actually agreed to when he signed the partnership agreement, why you have not included Mark’s salary and what salary in a Partnership actually means.

Answer 1

As per partnership agreement, the interest payment and fix salary to the partners is a part of dividend which is earned by the partner's capital invested in the Partnership business.

The salary and interest paid to partners as per Partnership agreement are not the revenue nature of expense and not treated as expense above the line. On the other hand, these are the capital nature of expense and are appropriated among the partners below the line of Net Income.

Thus, Randy has to actually understand that Salary and interest paid to partners should not be included in expenses while calculating the Net Income. These Salary and Interest are a part of fix dividend payment towards the capital contributed by the partners.

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