Basics of partnership accounting (Part I)

2. Capital account transactions in partnership accounting

Let’s move on to an example company. Assume that Jerry, Tom, and Bill decide to form an accounting partnership called JTB (a fictitious entity). Jerry contributes office equipment worth $50,000 in exchange for a 50% share of the partnership. Tom contributes office furniture worth $20,000 and $10,000 in cash in exchange for a 30% interest. Bill contributes $20,000 in cash for a 20% interest. The following three entries illustrate these initial contributions -- alternatively, the entries could be combined into one, but we’ll separate them for the sake of clarity.

Account

Debits

Credits

Equipment

50,000

 

     Partner Capital – Jerry

 

50,000

     

Cash

10,000

 

Office Furniture

20,000

 

     Partner Capital – Tom

 

30,000

     

Cash

20,000

 

     Partner Capital – Bill

 

20,000

Anytime a partner contributes more to the partnership after formation, the entry will be identical to those above -- debit an asset account while crediting the partner’s capital account.

When a partner takes cash from the partnership for personal use (i.e., makes a draw) and does not intend to return it (i.e., this is not a loan), we debit a contra equity account that keeps track of all withdrawals for the period. Like capital accounts, each partner has a separate withdrawals account. For example, if Tom withdraws $2,000 from the partnership bank account, the entry would be as follows:

Account Name

Debit

Credit

Partner Withdrawals – Tom

2,000

 

     Cash

 

2,000

At the end of the period, the withdrawal accounts are closed to the capital accounts of respective partners. If Tom withdrew a total of $5,000 throughout the year, the closing entry would be as follows:

Account Name

Debit

Credit

Partner Capital – Tom

5,000

 

     Partner Withdrawals – Tom

 

5,000

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