How do you account for partnerships?
Partnership accounting is the same as accounting for proprietorship apart from having a different capital and drawings account for each partner. The fundamental accounting equation remains the same that is Assets= Liabilities + owners’ equity. Still, there will be a difference in the owner’s equity, which is all the partners’ capital.
As ownership rights in a partnership are divided among two or more partners, separate capital and drawing accounts are maintained for each partner.
A balance sheet that operates as a partnership has the same basic outline as the balance sheet. Both types have three sections: assets, liabilities, and equity. By definition, both types must balance. The support must equal the liabilities plus the equity.
Financial statements are prepared the same way as they are for limited liability companies.
In a business, partners can split their profits according to the agreement they make within themselves. Also, they can receive a basic salary and split the remaining profit accordingly.
Partnership accounting
How to Account for a Partnership
The accounting for a partnership is essentially the same as a sole proprietorship, except that there are more owners. Effectively, a separate account tracks each partner’s investment, distributions, and share of gains and losses.
Accounting for a Partnership
Several separate transactions are associated with a partnership, but the other businesses do not have one. These transactions are:
Contribution of funds.
When a partner invests funds in a partnership, the marketing involves a debit to the cash account and a credit to a separate capital account. A capital account records the balance of the investments and distributions to a partner. It is better to have a different capital account for each partner to avoid a breach of trust.
Contribution of other than funds.
When a partner invests some other asset in a partnership, the transaction involves a debit to whatever asset account most closely reflects the nature of the contribution and a credit to the partner’s capital account. The valuation assigned to this transaction is the market value of the contributed asset.
Withdrawal of assets.
When a partner extracts assets besides cash from a business, the asset account needs credit and a debit to the partner’s capital account.
Allocation of profit or loss.
When a partnership closes its books for an accounting period, the net profit or loss is set in a temporary equity account called the income summary account. The gain or loss then put in the capital accounts of each partner is based on their proportional ownership interests in the business.
For example, if there is a profit in the income summary account, the allocation is a debit to the income summary account and a credit to each capital account. Conversely, if there is a loss in the income summary account, credit the allocation to the income summary account and debit to each capital account.