Meaning of Commission to Partners
There are several ways in which the profits are appropriated among the partners. Like Interest on capital, salary and commission. As a part of appropriation of profits partners may be paid commission out of profits. It is shown in the profit and Loss Appropriation A/c on the debit side. As per provisions in the partnership deed commission can be paid either to one or more partners.
Is it Charge against Profits
It is pertinent to note that the commission to partner is an appropriation of profits and not a charge against profits. So no commission will be paid to any partner in case of loss to the firm during the financial year. Commission to partners will be paid only in case firm earns profits during the year.
However if questions mentions that the commission to partner should be treated as a charge then it should be treated as a charge against profits and should be paid even in case of loss
What happens if there is no partnership deed
If there is no partnership deed or deed is there but no provision relevant to commission exists in it then as per Indian Partnership Act, 1932, no commission will be paid to any partner.
How commission to partners calculated
The commission to partners can be calculated based on any of the following criterion and will be discussed one by one :
- As a %age of sales
- As a %age of Net Profit
- before charging such commission
- after charging such commission
- As a %age of Distributable profits
- before charging such commission
- after charging such commission
As a %age of Net Sales
Example - A,B and C are partners. As per partnership deed A will be paid 5% Commission of Net Sales. Net Sales during the year is Rs 10 Lakhs.
Answer - A's Commission will be = 1000000*5/100 = Rs 50000
As a %age of Net profit before charging such commission
Example - A,B and C are partners. As per partnership deed B will be paid 2% Commission of Net Profits. Net Profit during the year is Rs 2 Lakhs.
Answer - B's Commission will be = 200000*2/100 = Rs 4000
If Questions gives Net Profit before any Charge against profits - In this case first we should calculate the Net profit after all charges. Example - Net profit during the year Rs 2 Lakhs before deducting Interest on loan by partner to firm Rs 20000. Now Net profit after all charges ill be Rs 180000 and Commission to partner should be calculated on this amount.
If Questions gives Net Profit after any appropriation from profits - In this case first we should calculate the Net profit before all appropriations. Example - Net profit during the year Rs 2 Lakhs after salary to partner Rs 30000. Now Net profit before all appropriations will be Rs 230000 and Commission to partner should be calculated on this amount.
As a %age of Net profit after charging such commission
The calculation will be similar to what is done above in Net Profit before charging such commission. Only change will be that while calculating the %age we will not divide by 100 instead we will divide by (100+Commission rate).
Example - A,B and C are partners. As per partnership deed B will be paid 2% Commission of Net Profits after charging such commission. Net Profit during the year is Rs 2 Lakhs.
Answer - B's Commission will be = 200000*2/(100+2) = Rs 3922
Other cases of question giving either Net profit before any charge or Net Profit after any appropriation will remain same.
As a %age of Distributable profit before charging such commission
Meaning of Distributable Profits - Distributable profits means (Net profit + Interest on Drawings) - (Interest on Capital + Salary to partners + Commission to partners + Transfer to Reserves). Distributable Profits is also known as Divisible Profits.
Example - A,B and C are partners. As per partnership deed C will be paid 3% Commission of Distributable Profits. Distributable Profit during the year is Rs 2 Lakhs.
Answer - B's Commission will be = 200000*3/100 = Rs 6000
As a %age of Distributable profit after charging such commission
The calculation will be similar to what is done above in Distributable Profit before charging such commission. Only change will be that while calculating the %age we will not divide by 100 instead we will divide by (100+Commission rate).
Example - A,B and C are partners. As per partnership deed B will be paid 2% Commission of Distributable Profits after charging such commission. Distributable Profit during the year is Rs 2 Lakhs.
Answer - B's Commission will be = 200000*2/(100+2) = Rs 3922
Accounting Treatment
The journal entries for Commission to partners will be as follows :
- Profit and Loss Appropriation A/c Dr..
- To Commission to Partner A/c
- Commission to Partner A/c Dr..
- To Partners Capital A/c
- We can combine the above two entries and pass a single entry as below
- Profit and Loss Appropriation A/c Dr..
- To Partners Capital A/c