AA-34-Distribution of Partners Salary

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

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 ?

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2: The Partner's Capital account shows the same balance from year to year unless an additional amount is introduced or withdrawn.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.

Yes I agreed the above reply.

Well said Mr Radhey Shyam Jha

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.

Kind response awaited from Radhey Shyam Sir,

Response awaited from respected members. 

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   . 

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?

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.

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 ?

Kind response awaited from Parsad Nilugal Sir. 

Parsad Nilugal Sir,

Your response awaited on above guery.