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.
- Contributing partner's tax basis in the property is not relevant for this purpose.
- Liabilities are separately on the balance sheet, adjustments to the capital account is net of any liabilities on the property.
- The character of income does not matter. For example, Tax- Exempt Income is added into the partner's capital accounts.
- 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 Liabilities – On the balance sheet, liabilities are listed separately in the capital accounts.