Example Two partners establish a partnership. Peter contributes $40,000, Mark $60,000. As a result, Peter will receive 40 percent of the income or losses, Mark 60 percent. The firm generates $100,000 in profit the next year. Peter's capital account increases by $40,000, which is his share of the profits; Mark's increases by $60,000.

Once net income is allocated to the partners, it is transferred to the individual partners' capital accounts through closing entries. For example, assume Dee's Consultants, Inc., a partnership, earned $60,000 and their agreement is that all profits are shared equally. Each of the three partners would be allocated $20,000 ($60,000 ÷ 3).