Question

Using average capital balances as a basis for profit distribution is preferable because it reflects the capital actually available for use by the partnership during the year.

a. True
b. False

Answer 1

True, using average capital balances for profit distribution in a partnership reflects the actual capital available and at risk during the fiscal period, which is a fairer method for calculating profit shares.

Step-by-step explanation:

Using average capital balances as a basis for profit distribution in a partnership is generally considered true because it takes into account the capital contributed by partners throughout the period, thereby reflecting the capital that was actually available for the partnership’s use throughout the year. This is preferable because it aligns earnings with the average amount of capital that was actually at risk during the earning period, which is considered a fairer method of calculating each partner’s share of profits or losses. The use of average capital also helps to smooth out any disparities that may occur from partners contributing or withdrawing capital at different times during the fiscal period.