Designing a Fairer Partnership Profit-Sharing Scheme

Accounting for Partnerships

Skill: Create

Stimulus

Question

Aminah and Farid are both dissatisfied with the current equal profit split. Propose a fairer profit-sharing scheme that reflects the real contributions of Aminah and Farid. Draft the proposed Profit and Loss Appropriation Account (show your figures) and explain how your proposal addresses the concerns of both partners.

Thinking steps

1. Identify each partner's real contribution: Aminah gives large capital but is part-time; Farid gives small capital but works full-time and manages the business.
2. Recognise that the equal split ignores the differences in capital and effort. This is the source of both partners' dissatisfaction.
3. Choose suitable appropriation mechanisms: interest on capital to reward capital, and a partner salary to reward effort/management.
4. Set reasonable rates and amounts, then compute each component (interest on capital and salary).
5. Distribute the residual profit and prepare the proposed Profit and Loss Appropriation Account.
6. Justify the proposal by linking each reward to a contribution, and check the total appropriated equals net profit.

Model answer

A proposed fairer sharing scheme (one reasonable answer):

1) Interest on capital at 10% p.a.: Aminah = 10% x RM90,000 = RM9,000; Farid = 10% x RM30,000 = RM3,000 (total RM12,000). This rewards Aminah for her larger capital contribution.

2) Partner salary to Farid = RM18,000 because he works full-time and manages the daily business. This rewards Farid's effort and management responsibility.

3) Remaining profit shared equally: RM60,000 - RM12,000 - RM18,000 = RM30,000, i.e. RM15,000 each.

Profit and Loss Appropriation Account (proposed):

Net profit RM60,000

(-) Interest on capital: Aminah RM9,000, Farid RM3,000

(-) Salary: Farid RM18,000

Balance shared equally: Aminah RM15,000, Farid RM15,000

Total to Aminah = RM9,000 + RM15,000 = RM24,000

Total to Farid = RM3,000 + RM18,000 + RM15,000 = RM36,000

Check: RM24,000 + RM36,000 = RM60,000 = net profit (balanced).

Justification: The current equal split ignores the real difference in contribution: Aminah supplies three times the capital but does not manage the business, while Farid supplies labour and management expertise. This scheme matches reward to the type of contribution: interest on capital for Aminah's investment and a salary for Farid's work, before the residual is shared equally as joint owners. It is therefore fairer because each reward component is linked to a specific contribution.

(Note: other schemes are accepted if reasonable and consistent, e.g. interest on capital plus a 3:1 residual ratio by capital, as long as the total appropriated equals net profit and each choice is justified.)