Friday, June 24, 2011

Basic Capital Accounting Rules for Partnerships

Basic Capital Accounting Rules for Partnerships

Several basic transactions that occur in the everyday operations of partnerships will affect capital accounts. The same principles can be applied to the operations of an LLC. The follow are the most important:


Partnership Contributions - A partner's capital account is increased by the amount of money plus the FMV of any property (net of liabilities) contributed by that partner.

  1. Contributing partner's tax basis in the property is not relevant for this purpose. 
  2. Liabilities are separately on the balance sheet, adjustments to the capital account is net of any liabilities on the property. 
Partnership Operations- A partner's capital account is increased by their share of the partnership's total income for the year, and is decreased by the partner's share of the partnership's losses for the year.

  1. The character of income does not matter.  For example, Tax- Exempt Income is added into the partner's capital accounts. 
  2. Each year, the amount of book depreciation reduces both the book value of the depreciable asset and the balance in the partners' capital accounts. 
Partnership Distributions -A partner's capital account is decreased by the amount of money plus the FMV of any property (minus liabilities) distributed to that partner.

Partnership Liabilities – On the balance sheet, liabilities are listed separately in the capital accounts.

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