Salary and Interest on Capital before Dividing the Balance

In many firms a partner does more than simply supply capital, or the partners agree to reward capital separately from effort. Two adjustments are commonly made to the profit before the balance is shared in the profit-sharing ratio:

• Salary (or commission) to a working partner — a fixed amount, often quoted per month, paid to the partner who runs the business, in recognition of their labour.
• Interest on capital — a percentage return allowed to each partner on the capital they contributed, so that a partner who supplied more money is compensated for it separately from the profit split.

The order of operations is always the same:

1. Start with the total profit of the firm.
2. Set aside each partner's interest on capital — using simple interest, $\text{Interest} = \dfrac{P \times R \times T}{100}$ for principal $P$, rate $R\%$ per annum and time $T$ years — and any salary due to a working partner.
3. Subtract all of these appropriations from the total profit; what remains is the residual (divisible) profit.
4. Share the residual profit among the partners in the agreed profit-sharing ratio, which may be the capital ratio, an equal split, or any ratio the partners have agreed.
5. Each partner's total earning is their interest on capital, plus their salary (if any), plus their share of the residual profit. …