Partnership accounting is similar in many respects to the bookkeeping done for other types of businesses. However, there are some differences when it comes to recording specific transactions and how partnership interests are valued. Common items covered in partnership accounting include profit and losses, equity, owner contributions and liquidations.
Partnership profits and losses are distributed equally among partners, unless their partnership agreement clearly states a different percentage distribution. This is separate from other types of payments that partners may receive from the partnership. Also, profit and losses are distributed in the same proportion, unless the partnership agreement states otherwise. The ultimate amount each partner receives is based on how many partners there are in a company.
Each partner has a capital account where partnership profits and losses are recorded. Other transactions impacting a partner’s ownership interest, such as withdrawals, also affect the balance in capital accounts. These accounts are maintained for recordkeeping purposes and are different from each partner’s adjusted basis in a partnership. Capital accounts are important for tracking each owner’s interest in a partnership. Without these accounts, owners would have a hard time determining the value of their partnership interest.
When a partnership is formed, each partner contributes cash or other forms of property, which are added to their capital accounts. These contributions are recorded at their fair market value. If additional cash or property is contributed by a partner after the business has started, it’s added to their capital account along with the corresponding asset account on the balance sheet. Contributions directly increase a partner's equity in the partnership.
The liquidation of a partnership requires special accounting and planning, because it often is a complicated process. That is why a cash pre-distribution plan is created in the event of a liquidation. It helps to distribute assets or losses to owners in a fair and accurate way, even though the liquidation process can involve many different transactions. The reasons for liquidating a partnership vary depending on the relationship between the existing partners, the financial position of the company and economic conditions.