To deal with this, make a transfer from one column to another in the tabulated statement. (b) Changes to the profit-sharing arrangements or changes in partnership personnel part way through the year. You have to divide the profit on a time basis between the periods, then apply the details given to parnership accounting the apportioned profits. Your table then shows the total profit shares for the year calculated for the two periods involved. (c) Change in partnership personnel part way through the year, with an agreement that certain expenses charged in the income statement relate to one part of the year only.

If a partner is contributing (or withdrawing) capital, the relevant amount will be recorded in both the partner’s capital account and the bank account. A contribution will be a credit entry in the capital account and a debit entry in the bank account, and a withdrawal will be a debit entry in the capital account and a credit entry in the bank account. A partner’s total capital is the sum of the balances on their capital account and their current account. Adjustments are made for guaranteed payments, as well as for depreciation and other expenses.

Closing process

On this basis, Partner A’s capital account is credited for $6,000 and Partner B’s is credited for $4,000. Additional investments and allocated net income increase capital accounts of the partners. All kind of allowances, like salary allowances and capital allowances, are treated as withdrawals. The result is capital balances of the partners at the end of the accounting period.

• Most sole proprietors do not have the time or resources to run a successful business alone, and the startup stage can be the most time-consuming.
• The value of each entry is calculated by sharing the value of the goodwill between the partners in the old profit or loss sharing ratio.
• Profits are divided based on each partner’s capital investment, salaries, money borrowed against their ownership stake, and money invested in the business by other people.
• A new partner can be admitted only by agreement among the existing partners.
• The extra $5,000 Partner C paid to each of the partners, represents profit to them, but it has no effect on the partnership’s financial statements.
• This value is credited to the old partners in the old profit or loss sharing ratio – ie 4/7 (or $24,000) to Andrew and 3/7 (or $18,000) to Binta.
• Capital
  accounts are equity accounts for each partner that track
  all activities, such as profit sharing, reductions due to
  distributions, and contributions by partners to the partnership.

Assume that Partner A and Partner B have 50% interest each, and they agreed to admit Partner C and give him an equal share of ownership. Each of the three partners will have 33.3% interest in the partnership. Interests of Partner A and Partner B will be reduced from 50% each to 33.3% each.

Death of a partner

They are there to help you audit your transactions and ensure profits are passed between partners appropriately. When drafting a partnership agreement, an expulsion clause should be included, detailing what events are grounds for expelling a partner. Remember that allocating net income does not mean the partners receive cash. Cash is paid to a partner only when it is withdrawn from the partnership. When a partner retires from the business, the partner’s interest may be purchased directly by one or more of the remaining partners or by an outside party.

This is a variation on (b) above and always causes problems for candidates. What you have to realise is that for the partners not bearing the expense, the profit is that shown by the income statement plus the special expense. You have to split that increased profit among the partners, then deduct the special expense from the partners who are to bear it. Finally, let’s assume that Partner C had been operating his own business, which was then taken over by the new partnership. In this case the balance sheet for the new partner’s business would serve as a basis for preparing the opening entry.