At the end of 2026, Singh & Tremblay Landscaping earns a net income of $90,000. Who gets what? Splitting it in half sounds simple, but it ignores two real differences. Singh put in $50,000 of capital and Tremblay only $30,000, so Singh has more money at risk. Tremblay works full-time on the business while Singh also runs a separate consulting job, so Tremblay contributes more labour. A fair division plan rewards each of those things separately: a salary allowance for work, interest for capital invested, and then a fixed ratio for whatever is left. The partnership agreement sets the plan, and the accountant applies it with a division table that must add up to exactly the net income.
The bases for dividing income
- Fixed ratio (income ratio): income is shared in an agreed ratio such as 1:1, 3:2 or 60%:40%. The ratio can reflect capital, effort, experience or anything else the partners agree on.
- Capital ratio: income is shared in proportion to each partner's capital balance (at the beginning of the year, the end of the year, or a weighted average, as the agreement states). This rewards money invested but ignores effort.
- Salary allowances and remainder by ratio: each partner is credited with an agreed salary allowance for services, and the rest is shared in a fixed ratio. This rewards effort.
- Interest on capital, salary allowances and remainder by ratio: the most complete plan. Interest at an agreed rate on each partner's capital rewards investment, salaries reward work, and the remainder is shared in the income ratio.
- No agreement: provincial partnership legislation generally requires equal sharing.
With a fixed ratio of 3:2, Singh's share of $90,000 is three-fifths and Tremblay's is two-fifths: $54,000 and $36,000. With the ratio of the capital each partner invested at formation (Jan. 2, 2026), $50,000 to $30,000 (that is, 5:3, out of a total of $80,000), the shares are:
Salaries, interest, then the remainder
Singh & Tremblay's agreement uses the complete plan: salary allowances of $30,000 to Singh and $36,000 to Tremblay; interest of 10% on the capital each partner invested at formation (Jan. 2, 2026); and any remainder shared 3:2. The steps always go in the same order. First allocate the salary allowances. Second allocate interest on capital. Third take what is left of net income after those allowances (the remainder) and share it in the income ratio. Every allowance is given in full even when net income is not big enough, because the agreement promises it; any shortfall shows up as a negative remainder in the third step.
| Division of 2026 net income | P. Singh | L. Tremblay | Total |
|---|---|---|---|
| Net income to be divided | $90,000 | ||
| Salary allowances | $30,000 | $36,000 | $66,000 |
| Remaining after salaries | $24,000 | ||
| Interest on capital invested at formation (10%) | $5,000 | $3,000 | $8,000 |
| Remainder after interest | $16,000 | ||
| Remainder shared 3:2 | $9,600 | $6,400 | $16,000 |
| Amount left to divide | $0 | ||
| Share of net income | $44,600 | $45,400 | $90,000 |
When allowances exceed net income
Suppose 2026 net income had been only $60,000. The salaries ($66,000) and interest ($8,000) still total $74,000, because the agreement promises them regardless of how the year went. That leaves a deficit of The deficit is shared in the income ratio, exactly like a positive remainder: Singh absorbs three-fifths ($8,400) and Tremblay two-fifths ($5,600). Negative amounts are shown in brackets.
| Division with lower net income | P. Singh | L. Tremblay | Total |
|---|---|---|---|
| Net income to be divided | $60,000 | ||
| Salary allowances | $30,000 | $36,000 | $66,000 |
| Interest on capital invested at formation (10%) | $5,000 | $3,000 | $8,000 |
| Total allowances | $35,000 | $39,000 | $74,000 |
| Deficit after allowances | ($14,000) | ||
| Deficit shared 3:2 | ($8,400) | ($5,600) | ($14,000) |
| Share of net income | $26,600 | $33,400 | $60,000 |
A net loss is handled the same way, unless the agreement says otherwise. With a $10,000 net loss, the allowances are still $74,000, so the amount to share is Singh absorbs $50,400 and Tremblay absorbs $33,600. Singh's share is and Tremblay's is Together they equal the $10,000 loss. It is possible for one partner's capital to go up in a loss year: Tremblay's larger salary allowance more than covers his share of the deficit.
Closing Income Summary to the partners' capital accounts
Revenues and expenses are closed to Income Summary just as for a sole proprietorship. The difference is the last two steps: Income Summary is closed to each partner's capital account using the shares from the division table, and each partner's drawings account is closed to that partner's own capital. In 2026 Singh withdrew $24,600 and Tremblay withdrew $25,400.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec. 31, 2026 | Income Summary | $90,000 | |
| P. Singh, Capital | $44,600 | ||
| L. Tremblay, Capital | $45,400 | ||
| To divide net income as per the partnership agreement | |||
| Dec. 31, 2026 | P. Singh, Capital | $24,600 | |
| L. Tremblay, Capital | $25,400 | ||
| P. Singh, Drawings | $24,600 | ||
| L. Tremblay, Drawings | $25,400 | ||
| To close the partners' drawings accounts |