Partnership Accounting: - Partner Capital Accounts

Partnership Accounting
- Partner Capital Accounts -
Fred B. Monroe, J.D., M.B.A. (Finance)

http://www.jmdlaw.com/attorneys/fred-b-monroe/
Capital Accounts
• A partnership keeps track of each

partner’s economic investment in the
partnership through a financial record
called a capital account.

Capital Accounts
• A partner’s opening capital account
balance generally equals the value of his
contribution to the partnership – (i.e. cash
plus the net value of any contributed
property).

Capital Accounts
• Example: Partner A contributes $100 and
a truck with a FMV of $50 to form the AB
partnership.
• Therefore, Partner A’s capital account
balance will be $150. ($100 Cash + $50
Truck (FMV)

Capital Accounts
• As the partnership continues in existence,
the capital account increases or decreases
to reflect a partner’s share of partnership
income or loss and withdrawals.

Capital Accounts
• Increase in Capital Account
Generally,
1. Income
2. Gains
3. Capital Contributions
increase a partner’s capital account.

Capital Accounts
• Decrease in Capital Account
Generally,
1. Losses
2. Capital Distributions
decrease a partner’s capital account.

Capital Accounts
• Example 1:
A and B form the AB partnership.
A contributes: $100 cash (+)
$ 50 truck (+)
$100 cash to purchase inventory
for partnership.
B contributes: $200 cash (+)

$ 50 equipment.
Capital Accounts
• Upon Formation, the AB Balance Sheet is as
follows:
Assets Equity
Cash $ 400 A&B $ 500
Equipment $ 50
Truck $ 50
Total Assets $ 500 Total L & E $ 500

Capital Accounts
• A & B’s Capital Accounts are as follows:
Partner A Partner B
Cash $ 200 Cash $ 200
Truck $ 50 Equipment $ 50
Balance $ 250 Balance $ 250

Capital Accounts
• Both Partners A and
B’s capital account $250
balances are $250 $200

each respectively.
$150
Partner A
$100 Partner B
• Upon formation each
partner owns a 50% $50
interest in the $0
Year 1
partnership.
Capital Accounts
Partnership Ownership % - Year 1
50%
Partner A
Partner B
50%

Capital Accounts
Example 2:
• Assume in Year 2 that the AB Partnership
has $100 of income, and makes a $60
cash distribution to Partner A.

Capital Accounts
• A & B’s Capital Accounts are shown as follows:
Partner A Partner B
Beginning Balance $ 250 Beginning Balance $ 250
Income (+) $ 50 Income (+) $ 50
Distribution (-) $ 60
Ending Balance $ 240 Ending Balance $ 300

•
Capital
Partners A and B have
Accounts
different ending capital
account balances.
$300
• Upon formation, each partner $250

owned a 50% interest in the
partnership. $200
$150 Partner A
• At the end of Year 2, Partners Partner B
A and B’s ending capital $100
account balances are $240 $50
and $300 respectively.
$0
Year 2
• Partner A’s ownership
percentage in the AB
partnership decreased as a
direct result of her distribution Fred B. Monroe, J.D., M.B.A. (Finance)
from the partnership. http://www.jmdlaw.com/attorneys/fred-b-monroe/
Capital Accounts
55.6%
Partner A
Partner B
44.4%

Capital Accounts
Example 3:
• Assume in Year 3 that the AB Partnership
has a $100 loss and Partner B makes a
$100 cash contribution to the AB
Partnership.

Capital Accounts
• A & B’s Capital Accounts are shown as
follows:
Partner A Partner B
Beginning Balance $ 240 Beginning Balance $ 300
Loss (-) $ 44 Loss (-) $ 56
Contribution (+) $ 100
Ending Balance $ 196 Ending Balance $ 344

Capital Accounts
• At the end of Year 3, Partner A
owns a 36.3% interest and
Partner B owns a 63.7% $350
interest in the AB Partnership.
$300
• Both Partners A and B’s $250

ending capital account $200
balances are $194 and $344 Partner A
respectively. $150 Partner B
$100
• Both partners’ ownership $50
percentage in the AB
partnership changes as a $0
Year 2
direct result of Partner B’s
cash contribution to the
partnership. Fred B. Monroe, J.D., M.B.A. (Finance)
Capital Accounts
63.7
Partner A
Partner B
36.3%

TIRE & AUTO SERVICE
100
80
Ownership %
as reflected 60
on Partner's Partner A
tax returns, 40 Partner B
Form K-1.
20
0
1991 1994 1997 2000 2003 2006
Year

Capital Accounts
• Summary
• Partnership capital accounts reflect a partner’s
economic investment
• The value of a partnership interest can be
determined assuming a hypothetical sale of the
partnership assets at their fair-market value
• A partner who contributes more, generally owns
more of the partnership interest than the partner
who contributes less.


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Partnership Accounting

- Partner Capital Accounts -

Fred B. Monroe, J.D., M.B.A. (Finance)

• A partnership keeps track of each

Fred B. Monroe, J.D., M.B.A. (Finance)

Fred B. Monroe, J.D., M.B.A. (Finance)

Fred B. Monroe, J.D., M.B.A. (Finance)

Fred B. Monroe, J.D., M.B.A. (Finance)

increase a partner’s capital account.

Fred B. Monroe, J.D., M.B.A. (Finance)

decrease a partner’s capital account.

Fred B. Monroe, J.D., M.B.A. (Finance)

B contributes: $200 cash (+)

Total Assets $ 500 Total L & E $ 500

Balance $ 250 Balance $ 250

Fred B. Monroe, J.D., M.B.A. (Finance)

balances are $250 $200

Fred B. Monroe, J.D., M.B.A. (Finance)

Fred B. Monroe, J.D., M.B.A. (Finance)

Ending Balance $ 240 Ending Balance $ 300

Fred B. Monroe, J.D., M.B.A. (Finance)

• Upon formation, each partner $250

Fred B. Monroe, J.D., M.B.A. (Finance)

Fred B. Monroe, J.D., M.B.A. (Finance)

Ending Balance $ 196 Ending Balance $ 344

Fred B. Monroe, J.D., M.B.A. (Finance)

• Both Partners A and B’s $250

Fred B. Monroe, J.D., M.B.A. (Finance)

Fred B. Monroe, J.D., M.B.A. (Finance)

Fred B. Monroe, J.D., M.B.A. (Finance)

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