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AA-34-Distribution of Partners Salary

My Videos (Accounts Officer ) (673 Points)

03 September 2023

All Respected members,

Please educate me that what would be journal entry for distributing partners salary and also educate that in which account group it would be considered indirect expense or capital account ?

Thanks in advance for your precious time to reply this query.

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13 Replies

RAJA P M ("Do the Right Thing...!!!") (127921 Points)
Replied 03 September 2023

Ledger -> Partner's Salary under indirect Expenses...

If Paid Every month at the time of Booking the Salary Expenses. Then,

Dr. Partner's Salary A/c - XXXXX
Cr. Bank A/c - XXXXX

Incase it will pay later. Then,
Dr. Partner's Salary A/c - XXXXX
Cr. Partner's Current A/c - XXXXX

After that, When You pay, then

Dr. Partner's Current A/c - XXXXX
Cr. Bank A/c - XXXX

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My Videos (Accounts Officer ) (673 Points)
Replied 04 September 2023

Dear Raja PM Sir,

Thanks for your reply.

Please educate me on following:

1-Should partner salary go under indirect expense? I read somewhere that partner salary should be distributed from profit?

2-Please inform that what is the difference between partners capital account and partners current account ?

Radhey Shyam Jha (Student) (1580 Points)
Replied 04 September 2023

Point 1: Yes, Partner Salary should go under Indirect Expenses head. Ultimately, at the end you have to do the profit and loss account as zero by distributing profit sharing through partner salary

Point 2: The Partner's Capital account shows the same balance from year to year unless an additional amount is introduced or withdrawn. The Partner's Current account shows all items relating to the partners; like interest on capital and drawings, share of profit etc.

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RAJA P M ("Do the Right Thing...!!!") (127921 Points)
Replied 04 September 2023

Yes I agreed the above reply.

Well said Mr Radhey Shyam Jha

My Videos (Accounts Officer ) (673 Points)
Replied 04 September 2023

Dear Radhey Shyam Sir,

Thanks for informative reply.

Point 1: I watched some videos on YouTube they informed that partner salary should be paid from profit. 1st we have to calculate profit then we have to distribute it because tax authority did not allow partners salary expense as indirect expense that is why I wanted to know that if we can't take partners salary as indirect expense so what procedure should we follow to pay it ?

Point 2: Please educate what is the difference between partners salary account and partners current account and in which group we have to create partner current account ?

Thanks in advance for your informative reply.

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My Videos (Accounts Officer ) (673 Points)
Replied 05 September 2023

Kind response awaited from Radhey Shyam Sir,

My Videos (Accounts Officer ) (673 Points)
Replied 11 September 2023

Response awaited from respected members.

prasad Nilugal ( GST Practitioner & Accounts ) (14546 Points)
Replied 11 September 2023

Reply to point no 1 -

Partners salary is allowable to the certain extent as an expense as per section 40(b) of the Income tax act to working partner only , if you fulfil all specified conditions a per the income tax Act , so refer section 40(b) of the Income tax act in detail ,

Reply to point no 2 -

In case partnership firm two type of Capital method are used . .

1. Fixed Capital method

In Fixed Capital method , Capital is fixed and you have create Partners Current Account , wherein all adjustments were made for example partners Salary , Interest on Capital , remuneration etc .

2. Fluctuating Capital method

In fluctuating capital method all adjustments above were made in partners Capital itself .

My Videos (Accounts Officer ) (673 Points)
Replied 11 September 2023

Dear Mr. Parsad Nilugal,

Thanks for detailed reply. Please find below my query.

Query on Point no 1:

Suppose if we don't fullfil specified condition mentioned in section 40(b); so, in which account group should we creat partners salary account ?

Query on Point 2:

Thanks to explained well. please confirm if we are using fixed capital matter, in which account group should we create partners current account?

prasad Nilugal ( GST Practitioner & Accounts ) (14546 Points)
Replied 12 September 2023

Reply to point no 1

If you are not fulfil conditions under section 40(b) of the income tax Act, then Salary to working partner will be disallowed .

Reply to point no 2

If you are applying. fixed Capital method , then partner Current A/c under partner Capital only, create sub group under Capital account.

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My Videos (Accounts Officer ) (673 Points)
Replied 13 September 2023

I want to know that does partner salary admissible when we deduct it from gross profit ? or it should be deducted from net profit after payment of tax ?