communication partner
Drawing accounts
Partners use Drawing accounts to accumulate periodic withdrawals of cash. These accounts are contra accounts to capital accounts. Upon end of a fiscal period, drawings are closed to the capital accounts.
(it is* acceptable to debit drawings directly from the capital accounts, however, it is better accounting practice to maintain a separate drawing account for each partner.
Separate drawing accounts are created for each manager. This helps bring attention to drawings in excess of agreed amounts and on frequent drawings that indicate contravention of a partnership agreement.
Loan accounts
Loans from the partners are not the same as capital contributions. If the partnership were to be dissolved, the liquidated assets of the firm would be applied first to the creditors, second to the partners’ loans, and last to the partners’ equity.
It is also important to make a distinction between loans to partners and drawings by partners. Loans are repayable however, drawings reduce the owner´s equity.
Capital Accounts (Partnership)
Cash........................................................... 10.000
Land........................................................... 20.000
capital I (Partner).................................. 10.000
capital II (Partner)................................. 20.000
Income Summary .......................................75.000
capital I (Partner - 45%)..................................33.750
capital II (Partner 55%)...................................41.250
Distribution of Profits may be done in a number of ways; however, the accountant can not decide. It is pre-determined in a lawful contract:
- Capital ratio at beginning of year
- Capital ratio at end of year
- Average Capital taken as a ratio at end of year multiplied by income
- Interest on capital balances
- Based on salaries or contratual provisions
- Some other basis agreed to by all partners having rights to distribution of profits
Financial statement users should be aware of the accounting done differently for partnerships. Decisions, such as the differences in the treatment of “salaries” paid to shareholder-managers versus partner-managers who receive salaries may have an effect on calculations such as product or service pricing, break-even analysis, and return on investment.
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DATA TABLE |
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Partner I |
Partner II |
Totals |
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Capital account balances: January 1, 2012 |
€ 60.000 |
€ 30.000 |
€ 90.000 |
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Salaries |
36.000 |
56.000 |
92.000 |
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Interest on beginning capital balances |
5% |
5% |
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Bonus rate |
25% |
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Residual profit or loss allocation |
60% |
40% |
100% |
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Net partnership profit in 2012 |
€ 180.000 |
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DoMO Co. |
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Schedule of partnership profit distribution |
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year ended December 31, 2012 |
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Partner I |
Partner II |
Totals |
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Salaries |
€ 36.000 |
€ 56.000 |
€ 92.000 |
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Interest on beginning capital balances |
3.000 |
1.500 |
4.500 |
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Bonus |
17.600 |
17.600 |
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Residual profit (loss) |
39.540 |
26.360 |
65.900 |
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Net income from partnership |
€ 96.140 |
€ 83.860 |
€ 180.000 |
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Percentage of total partnership profit |
0,51% |
0,49% |
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Bonus = Net Partnership Profit - Salaries - Other Bonus Paid Out ( x Bonus rate) |
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Bonus´s are paid out with a debit to the cash account and credit to the partner´s capital account.