I've mentioned how my group deals with treasure and equipment in several other threads, so apologies in advance to those who've heard it before.
My group doesn't distribute treasure. Every time the characters level up, they get to re-select whatever gear they want, up to the standard wealth guidelines for a character of their new level. So, a 2nd-level PC with 900 gp of gear, say, a masterwork greatsword, breastplate, a composite longbow [+2 damage bonus], ammunition, and other adventuring equipment, makes a level. He can select up to 2,700 gp of gear, say, a masterwork spiked chain, full plate armor, a masterwork composite longbow [+1 damage bonus], a
potion of bull's strength, a
potion of cure light wounds, ammunition, and other adventuring equipment.
In addition to cutting down on intra-party squabbling about who gets what, it also saves the DM the hassle of second-guessing what the players want, and placing appropriate treasure in the adventure. It also ensures that the PCs are relatively well-balanced with respect to each other (nobody gets all the good magic items) and with the challenges they are expected to face (they are always equipped with a reasonable amount of gear for their level).
The standard in-game explanation for how the PC's gear improves is that he belongs to an organization that keeps him appropriately equipped. Along the way, our group has developed additional handwaves: some magic items actually improve with the character (a
+1 longsword becomes a
+1 flaming longsword, for example), the character is given a reward, the character gains an inheritance, the character actually finds treasure at the end of the adventure, etc.