Partners (or owners) can invest cash or other assets in their business. They can even transfer a note or mortgage to the business if one is associated with an asset the owner is giving the business. Assets contributed to the business are recorded at the fair market value. Anytime a partner invests in the business the partner receives capital or ownership in the partnership. You will have one capital account and one withdrawal (or drawing) account for each partner.
To illustrate, Sam Sun and Ron Rain decided to form a partnership. Sam contributes $100,000 cash to the partnership. Ron is going to give $25,000 cash and an automobile with a market value of $30,000. Ron is also going to transfer the $20,000 note on the automobile to the business. The journal entries would be:
|S. Sun, Capital||100,000|
|To record cash contribution by owner|
|R. Rain, Capital (25,000 + 30,000 - 20,000)||35,000|
|To record assets and note contributed by owner|
The entries could be separated as illustrated or it could be combined into one entry with a debit to cash for $125,000 ($100,000 from Sam and $25,000 from Ron) and the other debits and credits remaining as illustrated. Either way is acceptable. Since the note will be paid by the partnership, it is recorded as a liability for the partnership and reduces the capital balance of Ron Rain.
Partners can take money out of the business whenever they want. Partners are typically not considered employees of the company and may not get paychecks. When the partners take money out of the business, it is recorded in the Withdrawals or Drawing account. Remember, this is a contra-equity account since the owners are reducing the value of their ownership by taking money out of the company.
To illustrate, Sam Sun wants to go on a beach vacation and decides to take $8,000 out of the business. Ron Rain wants to go to Scotland and will take $15,000 out of the business. The journal entries would be:
|S. Sun, Withdrawal||8,000|
|To record cash withdrawn by owner|
|R. Rain, Withdrawal||15,000|
|To record cash withdrawn by owner|
Just as in the previous example, the entries could also be combined into one entry with the credit to cash $23,000 ($8,000 from Sam + $15,000 from Ron) and the debits as listed above instead.
Once net income is calculated from the income statement (revenues - expenses), net income or loss is allocated or divided between the partners and closed to their individual capital accounts. The partners should agree upon an allocation method when they form the partnership. The partners can divide income or loss anyway they want but the 3 most common ways are:
|Partner A, Capital||37,500|
|Partner B, Capital||32,500|
|To record allocation of $70,000 net income to partners.|
|Partner A, Capital||7,500|
|Partner B, Capital||22,500|
|To record allocation of $30,000 net income to partners.|
|Partner A, Capital||22,500|
|Partner B, Capital||12,500|
|To record allocation of $10,000 net LOSS to partners.|
2.1 Partnership Formation Accounting, Journal Entries, Examples, Question Answers. - Easy Accounting
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