Partnership capital account definition
/What is a Partnership Capital Account?
A partnership capital account is an equity account in the accounting records of a partnership that is designed to track the equity stakes of its partners. It contains the following types of transactions:
Initial and subsequent contributions by partners to the partnership, in the form of either cash or the market value of other types of assets. These contributions increase a partner’s stake in a partnership.
Profits and losses earned by the business, and allocated to the partners based on the provisions of the partnership agreement. Profits increase a partner’s stake in a partnership, while a loss reduces it.
Distributions to the partners. A distribution to a partner reduces that person’s stake in a partnership.
The ending balance in the account is the undistributed balance to the partners as of the current date. The amount of liquidating payment that a partner may eventually receive upon the termination of the business does not necessarily equate to the balance in the partnership capital account prior to the liquidation of the business. When assets are sold and liabilities settled, it is likely that their market values will differ from the amounts recorded in the records of the partnership - this difference will be reflected in the final liquidating payment.
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Partnership Capital Account Best Practices
A partnership can maintain a single partnership capital account for all partners, with a supporting schedule that breaks down the capital account for each partner. However, it is easier over the long term to instead maintain separate capital accounts within the accounting system for each partner; by doing so, it is easier to determine the amount to be distributed to each partner in the event of a liquidation of the business or the departure of a partner, which in turn reduces the amount of discussion over payments and liabilities amongst the partners.
Example of a Partnership Capital Account
As an example of a partnership capital account, if Partner Smith originally contributed $50,000 to a partnership, was allocated $35,000 of its subsequent profits, and has previously received a distribution of $20,000, the ending balance in his account is $65,000, calculated as:
$50,000 initial contribution + $35,000 profit allocation - $20,000 distribution = $65,000 ending balance