Accounting for Partnerships
A partnership is a business run by two or more persons who agree to contribute assets to the business and share in the profits and losses.
Accounting for assets and liabilities in a partnership is much similar to accounting in any other form of business. The main difference exist in accounting for equity. Since there are two or more owners, separate capital accounts are maintained for each owner and special journal entries are required to account for withdrawals, distribution of income, introduction of new partners, and retirement of partners and liquidation of the partnership.
Following is a summary of transactions that we are expected to deal with in partnership:
- A partnership is formed by debiting assets and crediting each partner account by the value of their contributed assets.
- Net income is distributed by debiting income summary account and crediting capital accounts with salary, interest on capital balance and each partner's respective share in the residual net income.
- When a new partner is introduced he or she contributes new assets or purchases share from existing owners. When a partner leaves a partnership either his share is purchased by other partners or he withdraws assets from the partnership.
- Liquidation of partnership involves selling partnership assets and crediting/debiting each partner's respective share in the net gain/loss on the sale to each partner's capital account. When any partner has a final deficit balance (negative capital balance) he either contributes personal assets to cover the deficit or it is charged as loss to other partners.
Written by Obaidullah Jan, ACA, CFA