Partnership accounting

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.

Partnership Accounting

Advantages of this agreement

You might not like the idea of being a sole proprietor, and here are some reasons to consider working in a partnership:

  • You will find this style of business is simple to follow and manage
  • Raising capital is easier when more people are involved
  • The cost of running the organisation is shared
  • More people bring expertise, skills and connections to a business
Advantages of this agreement

Disadvantages of this agreement

There are some drawbacks to this form of business agreement, but we can minimise some of these issues:

  • Partners hold and joint and several liability for the organisation
  • Much like a sole trader set-up, partners have unlimited liability, although you can use a limited liability partnership
  • You will be taxed under Class 4 NIC and on business profits
  • When two or more individuals are involved, it is harder for one person to gain control
Disadvantages of this agreement

What is partnership accounting?

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:

  • The distribution of shares within the partnership
  • Investments made by each partner
  • Shares in the profit or loss of each individual

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:

  • A skill that the person carries which is of benefit to the company
  • Vehicles that the organisation uses
  • Machinery which the organisation uses
  • Human resources which bring benefit to the company

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.

What is partnership accounting?

Book a free consultation

We're available for queries and quotes 7 days a week, get in touch.

Capital interest

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.

Capital interest

Capital accounts

Ways in which a partner can increase their capital account include:

  • An individual makes more investments into the partnership
  • An individual made guaranteed payments to the company
  • Profits were earned and a share was allocated to the partner

Guaranteed payments include salary and interest allowances.

Withdrawing from a capital account

If a partner withdraws cash or property, their capital account decreases.

Partner's capital account

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.

Will partners receive a separate capital account?

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.

Capital accounts

Handling Withdrawals

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.

Handling Withdrawals

Allocating net income

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:

  • Management fees
  • Salary for the people involved
  • Interest allowances

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.

We help you manage net income

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.

 Statements for partnerships

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 income statement
  • The balance sheet
  • The statement of partners equity

The statement of partners equity must also reflect the equity held by each partner and summarise the net income allocation for that year.

Allocating net income

Admitting a new partner

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:

  1. The new partner can buy an interest directly from partners
  2. The new partner can invest in the business
  3. The new partner can provide assets individually or from an existing 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.

Admitting a new partner

Withdrawal of a partner

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.

Withdrawal of a partner

Purchasing of partner's interest

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.

Purchasing of partner's interest

When a partner dies

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 partner dies

Liquidation of a partnership

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.

Gains and losses to capital accounts

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.

We help you deal with taxes

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:

  • Cashbooks
  • Bank account
  • Details of anything taken out of the business for personal use
  • Electronic sales records or till rolls
  • Inventory of stock on hand
  • Invoices and receipts
  • Payroll records
  • Rent books

Who is your nominated partner?

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:

  1. Choose the partners who are right for your business, considering aspects such as their skills, strengths, knowledge, credibility and what they can invest
  2. Determine the type of partnership that is best for you, and you can choose from a limited partnership, a general partnership, a limited liability partnership or a LLC partnership
  3. Name your partnership
  4. Register the partnership
  5. Determine the tax obligations, which includes naming a nominated partner to be responsible for tax affairs
  6. Create your partnership agreement
  7. Obtain all or any relevant licences and permits
  8. Open or manage a business partnership bank account
  9. Select your accounting option

We are a real asset for firms

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.

Liquidation of a partnership

Reasons to choose Auditox Accountancy

Here are some of the key reasons to choose us to help manage your accounts:

  • Partners capital balances will be managed on your behalf
  • We help you stay in control of business expenses
  • We help you determine the market value of your business
  • A tailored service, especially for your business
  • Flexibility to meet your needs, whether you have one, two or three partners, or many more
  • We will provide you with reminders of looming deadlines, including tax year updates
  • We can file records on your behalf at the end of the appropriate accounting period
  • We help business owners manage their money flow, and the cost of their work
  • We'll ensure you are VAT registeredFor peace of mind, our services are a business expense that delivers a return every tax year. Take the stress out of managing your accounting period by calling on us.
Reasons to choose Auditox Accountancy

Why choose our accountancy services?



Accounting for small business

Year end accounts

Vat return services

Business start up services

Accounting for contractors

Business plans

Accounting for landlords

Accounting for freelancers

Partnership accounting FAQs

What do you mean by partnership accounting?

How do you account for a partnership?

What is accounting for partnership firm?

What are the 4 types of partnership?

Partnership accounting FAQs

What do you mean by partnership accounting?

How do you account for a partnership?

What is accounting for partnership firm?

What are the 4 types of partnership?

Contact us
Copyright © 2023 auditox-accountancy.uk
Privacy policy
Terms and conditions
Legal information and disclaimer