operating and liquidating distributionsb.Balance Sheet1.)Assets = Liabilities + Net Worth2.)Historical Cost- book value of an asset, which is how partnership assets are recorded3.)Capital Account- represents a partner’s equity in a firm. It generally identifies what each partner would be entitled to receive upon liquidation of his or her interest in the partnership.a.)Begins with any money and the FMV of any property contributed to the partnershipb.)Because these FMV amounts must be recorded at the time of contribution, they normally donot take into account the appreciation or decline in value of the partnership property until a gain or loss has been recognized.c.)However, adjustments to the capital account are made:-Increased- by the partner’s share of profits of the firm-Decreased- by the partner’s share of partnership losses and the amount of cash and the FMV of any property distributed to the partner.c.Distributive Share- a partner’s share of profits or losses.1.)Absent a partnership agreement, profits will be shared equally, but under the partnership agreement, the partners may agree to any other arrangement2.)Once the partnership has net profit, that profit will be divided among the partners according to the partnership agreement, and their capital accounts and basis will be adjusted accordingly.a.)As soon as the profit is accounted for, both the capital account and their basis will increase by their share of the profitb.)Their accounts will decrease if they thereafter take any money (or property) out of the partnership.d.Partnership Liabilities- if the partnership borrows money, the partners’ capital accounts are unaffected by the loan, but the bank’s right to repayment takes priority over any return of capital to the partners.e.Distributions- the timing and method of distribution is determined by the partnership agreement*If the partnership sells contributed property that was pregnant with gain, then the pregnant gain will be allocated to the contributing partner. However, that portion of the pregnant gain will adjust the contributing partner’s capital account (because the gain has already been reflected in the partner’s capital account when the property was recorded at FMV). However, any further gain (i.e.- any gain in excess of the pregnant gain) will be allocated evenly among the partners, and that gain will be recorded as adjustments to each partner’s capital account.f.Book Up Event- the partners may wish to adjust their capital account to reflect the current economiccondition of the partnership (such as when a new partner wishes to enter). Thus, the partnership property will be re-recorded at FMV on the partnership book value, and each partner’s capital account will be increased by his share of the unrealized post contribution appreciation inherent in the property.