3

Based on the micro-balance sheet below - please help explain the following scenarios:

  1. 1st year we lost money - how will the capital account look at the end of the year?
  2. 1st year we break even - how will the capital account look at the end of the year?
  3. 1st year we made money - how ...?

Balance Sheet as of 1/1/2013

  • ASSETS
    • Bank Account 1 - Balance 100K
  • EQUITY
    • Partner 1 Capital Account Balance 50K
    • Partner 2 Capital Account Balance 50K

3

You increase the capital account by the additional contributions and retained earnings and decrease the capital account by the distributions of return of capital and/or losses. Distributing gains doesn't change the capital account.

So in your case it would be:

1st year we lost money

Assuming you lost 20K, and the interests are even, it will look like this:

ASSETS
    Bank Account 1 - Balance 80K  // -20K loss
EQUITY
    Partner 1 Capital Account Balance 40K // -10K - 50% of the loss
    Partner 2 Capital Account Balance 40K // -10K - 50% of the loss

1st year we break even

Nothing changes - you break even, means the balance sheet doesn't change (in this example).

1st year we made money

Assume you gained 20K and kept it:

ASSETS
    Bank Account 1 - Balance 120K          // retained 20K
EQUITY
    Partner 1 Capital Account Balance 60K  // +10K, 50% of the retained earnings
    Partner 2 Capital Account Balance 60K  // +10K, 50% of the retained earnings

If you didn't retain the earnings, it would look the same as case 2 - no change.

Note that this is only the financial accounting, tax accounting might look differently. For example, in the US Partnerships (or LLCs taxed as) are pass-through entities, on in case 3 while you retained the earnings, the partners will still be taxed.

I'm of course neither CPA nor a licensed tax adviser. I suggest you get a consultation with one. Only a CPA can provide a reliable accounting advice or sign official financial statements, reviews and audits. Only a EA, CPA or an Attorney specializing in tax law can provide a tax advice.

  • +1 for excellent accounting... I would question why the obsession with maintaining separate capital accounts for the partners, though? If you're really 50/50 (or X/X) owners in the entity, usually you would simply record any increase/decrease in Assets as income/losses against the Equity account and call it good. If partners are owning 50% but contributing unequal amounts, I have usually seen that treated as a loan to the corporation. – THEAO Oct 6 '13 at 20:50
  • @THEAO Geo is doing a RE partnership, they need to track it – littleadv Oct 6 '13 at 21:00
  • There are more than 2 partners. And a CPA is involved, I just want the answers faster than what he is able to provide them at the moment. Thanks @littleadv for the explanation. That makes sense. I was confused by the fact that you can still have 100K in the 2 capital accounts, but 20K in expenses, and not sure at what point the 20K in expenses will hit the 2 capital accounts. The asset account is hit immediately. – Geo Oct 6 '13 at 21:16
  • 1
    How'd you know that, littleadv?! Very impressed. – THEAO Oct 6 '13 at 21:25

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