Understanding Equity on the Partnership Balance Sheet
The equity section of a business’s balance sheet is the most difficult part to understand. We help our clients understand that the accounts that make up this section vary depending on the type of entity in which their business is structured.We’re going to dive into what the equity section looks like for companies that are organized as partnerships.
The Equity Section
As a reminder, the balance sheet has three major sections: assets, liabilities, and equity. The equity section focuses on the investments that the owners have in the business. For partners, it consists of their capital accounts. The section could look like this:
Partners’ Capital
Partner A Capital $25,000
Partner B Capital $25,000
Partner C Capital $50,000
Each partner has their own Capital account within the equity section of the balance sheet. A partnership with 100 partners will have 100 capital accounts in the equity section. Computing the balance for each partner is where the work comes in. A partner’s capital account balance is affected by numerous transactions throughout the year as well as current earnings, which are distributed to the partners based on their ownership percentages. Ownership rules and percentages are spelled out in the partnership agreement.
Items Affecting Partners’ Capital
Here is the basic formula to calculate a Partner’s account:
Balance at beginning of period
Plus Contributions
+/- Partner’s share of net income/loss
Less Withdrawals
= Balance at end of period
Contributions to capital includes money that the partner has given the partnership out of their personal assets. Withdrawals are the opposite: this is money that the partner has taken out of the partnership and used for their personal use.
Net income is a bit more involved, with two more steps.
● First, the sum of the entire partnership’s income and expense accounts must be calculated. This number should be the same number as net profit or loss on the partnership’s income statement, from the beginning of the year to your balance sheet date.
● Second, the net income must be divided up to calculate each partner’s share based on their ownership percentages. These amounts are then rolled into each partner’s capital accounts.
To make sure the partnership equity section is accurate, good record keeping is a MUST for the partnership as well as each of the individual partners. When helping a client with their accounts yesterday we ended up in a RUSH CLEANUP for their partner’s accounts in order to help get the books back on track so all partnering accounts could be reconciled and all contributions to the business were accurately notated. For any concerns or questions about your partner’s account, feel free to connect with us and set up a FREE 30 minute consultation or schedule a 2 hour training session with one of our lead bookkeepers.
