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Re: Profits Allocation
The partners' contribution may sometimes go beyond assets and liabilities, as explained by Heintz and Parry (2016). Heintz and Parry (2016) note that the intangible contributions may be as valuable to a partnership as fixed assets and cash. When allocating business profits in partnerships, two main methods can be used, especially where intangible assets are involved; the goodwill method and the bonus method. Heintz and Parry (2016) explain that these methods are equally valuable in achieving equal account balances. Before the utilization of these methods, however, Heintz and Parry (2016) suggest that the partners should achieve an understanding at the beginning of the business regarding operations and which method best suits them.
The bonus method, as described by Hoyle, Schaefer, and Doupnik (2017), is best suited with assets that are materially transferable to a company such as inventory, cash, patents, among others. These contributions define the over-all partnership capital as Hoyle, Schaefer, and Doupnik (2017) explain. However, the precise capital balances are regarded as a self-regulating progression constructed in the partners' agreement. Therefore, all the partners will receive equal capital balances through what each partner's involvement has resulted in accumulating. Each partner, therefore, receives a bonus for their contribution.
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The goodwill method is centered on the hypothesis that worth can be considered arithmetically and verified for any immaterial input made by the other half (Hoyle, Schaefer, and Doupnik, 2017). In this case, all the partners will get a certain percentage that will reflect the apparent value that mirrors the figure for the intangible contribution. Both methods accomplish the resolutions of the partnership arrangement of recording equivalent capital balances regardless of variance in cash contribution. However, Hoyle, Schaefer, and Doupnik (2017) explain that the bonus method allocates the profits based on the percentage selected by the partners’ while the goodwill technique allocates profits centered on the inherent value of the partner’s intangible contributions.
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References
Heintz, J., & Parry, R. (2016). College Accounting (22 nd Edition). Cengage Learning. ISBN-13: 978-1305666160
Hoyle, J., Schaefer, T., & Doupnik, T. (2017). Advanced Accounting (Thirteenth Edition). McGrawHill Education. ISBN 978-1-259-44495-1
