Salem Data

An important process to be outlined in the operating of the Salem Telephone company subsidiary - Salem Data Services is the manner in which profits and losses are to be divided among the parties. There are several alternative methods of allocating profits and losses.

The division of subsidiary (partnership) income should be based on an analysis of the correlation between the capital and labor committed to the firm by individual partners and the income which is subsequently generated. As a result, profits might be divided in one or more following ways.

1. According to a ratio,

2. According to capital investments of the partners, and/or

3. According to the labor (or services) rendered by the partners.

Profits and Loss Ratios.

Partnership agreements frequently call for the division of profits and losses according to some ratio. Normally the ratio designed for the division of profits is also used for the division of losses, unless a specific provision to the contrary exists. This method obviously provides a simplified way of dividing profits and, if approached properly, may also provide an equitable division. Theoretically, the ratio should attempt to combine into one base the capital and service contributions made by the respective partners. Again, it is also important to note that a partner's interest in profits and losses is often different from the partner's interest in total partnership capital (net assets).

Capital investments of the Partners. The capital investment of the partners, represented by the balances in their respective capital accounts, may be employed as a basis for dividing a portion of the profits. The division is accomplished by imputing interest on the invested capital at some specified rate. This interest is not viewed as a partnership expense, but rater as a means of allocating profits and losses among the partners. Typically, the balance of profits not allocated on the basis of invested capital is allocated according to some profit and loss ratios. When a partner's capital investment is used as the basis for allocating profits, the partnership agreement should specify certain conditions.

1. Whether the respective partners' capital balances are to be determined before or after the partners' year-to-date