Question

When a profit and loss sharing agreement provides for salary and interest allowances to the partners, these allowances should be deducted from revenues in arriving at the firm's net profit.

a. True
b. False

Answer 1

Allowances for salary and interest to partners are not deducted from revenues but are allocated from net profit according to the profit and loss sharing agreement.

Step-by-step explanation:

The question asks whether allowances for salary and interest to partners should be deducted from revenues when computing a firm's net profit under a profit and loss sharing agreement. The response to this question is false. These allowances are not deductions from revenues; instead, they are typically treated as distribution of profits before arriving at the net profit figure. In accounting, revenues minus expenses give the net income or profit. Then, this net profit is allocated according to the partnership agreement, which may include salary and interest allowances to the partners. These allowances are considered part of the profit-sharing mechanism rather than expenses that reduce the revenue.