What is capital allocation
What is the partnership capital account?
The partnership capital account is an equity account in the accounting records of a partnership. It contains the following types of transactions:
- Initial and subsequent contributions by partners to the partnership, in the form of either cash or the market value of other types of assets
- Profits and losses earned by the business, and allocated to the partners based on the provisions of the partnership agreement
- Distributions to the partners
The ending balance in the account is the undistributed balance to the partners as of the current date.
For example, if Partner Smith originally contributed $50,000 to a partnership, was allocated $35,000 of its subsequent profits, and has previously received a distribution of $20,000, the ending balance in his account is $65,000, calculated as:
$50,000 initial contribution + $35,000 profit allocation - $20,000 distribution
A partnership can maintain a single partnership capital account
for all partners, with a supporting schedule that breaks down the capital account for each partner. However, it is easier over the long term to instead maintain separate capital accounts within the accounting system for each partner; by doing so, it is easier to determine the amount to be distributed to each partner in the event of a liquidation of the business or the departure of a partner, which in turn reduces the amount of discussion over payments and liabilities amongst the partners.
The amount of liquidating payment that a partner may eventually receive upon the termination of the business does not necessarily equate to the balance in the partnership capital account prior to the liquidation of the business. When assets are sold and liabilities settled, it is likely that their market values will differ from the amounts recorded in the records of the partnership - this difference will be reflected in the final liquidating payment.
Related TopicsSource: www.accountingtools.com