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James and Keith are partners since 1 Sept 2002, sharing profits and losses in the ratio 3:2, after allocating a salry of £6000 to James.
In y/e 31 Aug 2020, the partnership makes a loss of £30,000.
My doubt is, if the partnership makes a loss in the accounting period, then how is salary allocated to James when there is no profit?
The profit sharing agreement (PSA) is simply a way by which either the profits OR losses of a partnership are divided between the partners – there are no actual salaries or interest paid to the partners.
If therefore the partnership has made a loss and either salaries or interest on capital form a part of the PSA then these amounts would be credited to each partner which would then INCREASE the amount of loss to be split in the PSR.
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