The net income or net loss from a partnership represents a return on the equity the partners invested in the business. Return on equity states a company’s net profit or net loss as a percentage of equity. To compute it, divide net income by equity. Partners may invest different amounts of equity, so each partner’s return may be different.

INSTRUCTIONS

Use the beginning balances in the T accounts for Putman and Gill on page 792 to complete these tasks.

1. If total net income is $24,000, calculate the return on total partnership equity.

2. Using an equal split of net income, calculate the return on each partner’s equity.

3. Which partner earned the better return? Explain why. Why is this percentage different than the return on total equity?