A partnership is an excellent idea for many people and businesses, but there are challenges involved with this business setup. There are business tax returns to manage and individual tax reports for each partner.
If you want to save time and improve your reporting standard, it makes sense to call on a specialist to help.
At Auditox Accountancy, we have helped many firms like yours manage their accounts. We take the stress out of the situation, allowing you to focus on your core strengths.
You might not like the idea of being a sole proprietor, and here are some reasons to consider working in a partnership:
There are some drawbacks to this form of business agreement, but we can minimise some of these issues:
When partners form a business, they require partnership accounting.
One aspect of this business to bear in mind is that it contains unlimited personality liability for the partners. As they can absorb yields in addition to losses, there is a need for a professional accountancy analysis of each partner.
Factors to consider include:
While this form of business is available in any sector or niche, it is common to find partnerships in personal services industries.
At Auditox Accountancy, we understand the importance of accurate and relevant analysis of the partnership of a company. We are pleased to offer a comprehensive partnership account service for our clients.
Key components of accounting for partnerships
There is more than one strand of this style of accounting to be aware of, and we are happy to talk you through the key components of this form of accounting.
Strategic Organization of Fund Contributions
You’ll find that virtually every partnership sees every individual make a form of cash investment. Traditionally, this is a financial investment into the organisation.
With this form of accounting, attention falls on overseeing a stated cash investment that is debited from the cash account of the partner and credited to the specific capital account.
This individual capital account is used to record investment balances and where partner distributions are detailed.
It is best for this type of firm to keep these accounts separate, minimising information mixing across a range of accounts.
Appropriate Organization of Asset Contributions
There will be occasions when an individual in the company invests other than using cash. Examples of this investment include:
If this investment style occurs, the account most closely linked to the asset contribution is debited. At the same time, the partner's capital account in question is credited.
If there isn’t a specific value associated with the investment, the asset's market value is used.
Capital interest refers to interest that provides the partner with a share of proceeds when the owner removes themselves from the partnership, or the association suffers a liquidation event.
Merely holding a right to share in gains and earnings isn’t classed as this form of interest.
Ways in which a partner can increase their capital account include:
Guaranteed payments include salary and interest allowances.
If a partner withdraws cash or property, their capital account decreases.
At Auditox Accountancy, we understand the importance of transparent reporting for a partner’s capital accounts, and the capital balances. Our services ensure partners have all the information they require to fill in tax forms and ascertain their assets' current state.
Often in business, there is a need for discretion. Each partner will receive a separate capital account detailing their performance. Depending on the nature of the agreement, a bookkeeper or accountant will offer a full rundown of the accounts.
A small company might feel no need for such discretion, but alliances come in all shapes and sizes.
The needs and business politics with two partners or three partners will vary from a group with considerable partners. At Auditox Accountancy, we provide a tailored service so that every company has the information they need.
As you would expect from a business, partners involved in this company style can withdraw cash or assets.
For a withdrawal of assets, the partnership accountant will debit the capital account and then credit the account most likely associated with the relevant asset.
A debit is made in the partner's capital account when there is a cash withdrawal. Concurrently, a credit occurs in the cash account of the partner.
Strategic Organization of Profits and Losses
At the end of an accountancy period, the partnership will close its books, which begins allocating surpluses and losses. This is done in a particular account, referred to as the income summary account.
Each partner's profit or loss is allocated as per their capital investment, divided equally based on each partner’s share.
If a net profit is recorded, the allocation for each partner is debited from the income summary account. It is also credited to the capital accounts.
If a loss is recorded, the allocation for each partner is debited from the capital account, and it is also credited to the income summary account.
Company Tax Reporting
The role of partnership accounting also includes tax reporting.
This document details the level of profit or loss that is allocated to every partner. This document aids a partner complete their annual income tax report.
At Auditox Accountancy, we understand the importance of correctly filing annual tax returns. Our work helps partners file on time and without error. Anyone looking to minimise the stress associated with these returns should call on a tax and accountancy specialist.
When the total revenues are more significant than the total expenses in any given period, the excess is referred to as the partnership's net income. Conversely, if costs are higher than revenue, the partnership has a net loss.
Guaranteed payments in the partnership often include:
It stands to reason that if the partners accept high salaries, the net personal income will likely be lower. Of course, this doesn’t matter for tax purposes or change taxable income levels.
Allocated net income, like partner compensation, is viewed as ordinary income. This means a partner doesn’t have to withdraw funds from their capital account to generate income.
As you would expect, the partnership agreement determines how net income or loss is allocated to each partner. When no partnership agreement is in place, all profits or losses are shared equally across two or more partners.
If there is an agreement for profits, partners will share losses on the same basis.
It doesn’t include any gains or losses arising from partnership investment when calculating net income.
When net income is allocated, it must be included in the financial statements, as does the net income impact on capital balances of the partners. The financial statements which are affected are:
The statement of partners equity must also reflect the equity held by each partner and summarise the net income allocation for that year.
There will be times when a company looks to admit a new partner to the organisation. In some cases, the existing partnership will be dissolved, with a new agreement replacing the old partnership, but not always. There are a few ways a new partner can purchase into the business:
Sometimes, a new partner will pay a bonus to enter the partnership. The bonus is recognised as the difference between the partner's equity and the amount they contribute.
A partner can retire, and they can withdraw holdings from the partnership. Depending on the agreement, the retiring partner can remove resources equal to, less than or greater than their partnership interest.
The book value for the partner's interest is stated by the credit balance in their capital account.
If the retiring partner withdraws assets or cash that is the same as the balance of their partner's capital account, there is no impact on the capital of the partners who remain.
When a partner retires, one or more partners can purchase the retiring partners’ interest. It is also possible for an external party to acquire the stake held by the retiring partner.
The equity transfers to the purchasing partner when the existing partner purchases this interest.
When an external buyer purchases equity from a retiring partner, the equity is recorded under a new partner in the capital account.
If a partner dies, the partnership is dissolved.
Accounts are closed on the date of the partner's death, and the net income for the year is allocated to the appropriate capital accounts.
At this time, it is common for an audit and revaluation of the partnerships’ possessions to take place.
A liability account is created for the deceased’s estate, and their account balance is transferred over.
When a partnership liquidates, usually, the assets are sold off, liabilities are paid, and closing entries are carried out.
If there is any cash left over or remaining assets, these will be shared out amongst the partners.
Only the assets, liabilities and equity accounts for the partners remain open.
If the partnership has non-cash assets sold for a higher price than their book value, a gain on the sale is recognised. This gain is then allocated to the partners' capital accounts, as per the partnership agreement.
If these non-cash assets are sold for a price lower than their book value, a loss on the sale is noted. The loss is then allocated to the partners' capital accounts, as per the partnership agreement.
What records does a partnership need to keep?
A partnership must retain sales records, takings and purchases and expenses from the partnership.
This financial information determines the business profit of the partnership and the share of the gains for each partner.
There isn’t a legal need for business unions to prepare accounts, but there is a tax requirement. This is why associations should prepare a balance sheet and a profit and loss account for an accounting year.
These records ensure the partnership completes its tax return correctly.
Partnerships face penalties if they don’t maintain records.
What records does a partnership need to maintain?
While the records a partnership needs to hold depends on their business, they might need:
There should be a nominated partner, the person who is responsible for maintaining business records. The nominated partner must register the partnership, and each partner should be registered for self-assessment purposes. Partners can do this after the registration of the partnership.
How can you get started with partnership accounting?
There are suitable steps to take when starting a partnership, and setting up accounting for these businesses . Please consider the following steps:
The last part is often an afterthought for many firms, but it is vital. You can manually record all transactions, use accounting software, or hire a specialist. At Auditox Accountancy, we are well versed in partnership accounts, and we can manage this on your behalf. We aim to be an asset for your company.
By turning to a specialist in this field, you can focus on the core activities for your business.
Do you need an accountant for a partnership?
As you see from the options above, you have alternatives to using an accountant. Some businesses manage the process themselves, use accountancy software or hire a bookkeeper rather than an accountant. You might even have employees who can manage your asset account on your behalf.
The choice is yours, but given the importance of maintaining these records, it is easy to see why so many alliances hire a specialist for this work.
Here are some of the key reasons to choose us to help manage your accounts: