Accounting for Partnership Equity
The accounting for partnership equity is quite similar to that for a sole proprietorship, but taken one step further. Now you have more than one owner, so you have more than one capital account. All profits and losses must be divided among you and your partners in whatever proportion you've all agreed upon. The division doesn't have to be equal among the partners, and it also doesn't have to match up with respective ownership shares. In fact, a single partner can have different percentages for his profit and loss shares; for example, a partner could get a 30 percent profit allocation and a 40 percent loss allocation. Whatever you all agree on and put in writing will control how profits and losses are divvied up.
Once you and your partners have settled on share percentages, the accounting part is pretty easy. As soon as you have the final profit or loss figures for the period, you simply apply each partner's percentage to that bottom-line number to figure out her share in dollars. Then, during your closing entries, instead of making one big entry into a single capital account, you allocate each partner's share to her individual equity account. For example, if the company's total profit comes to $6,000, to be divided evenly among three partners, each partner's capital account gets a $2,000 credit entry.
In the absence of a formal partnership agreement, partnership profits and losses must be divided in proportion to each partner's current capital stake. For example, if you own 50 percent of the company, you get 50 percent of all profits or losses. With a formal agreement, though, you can split up the earnings any way you want.
When it comes to withdrawals and contributions, there's no math to do. Each partner gets an equity credit for her contributions and a debit for any withdrawals. Your contributions and withdrawals won't hit your partner's equity accounts directly in any way. However, if either contributions or withdrawals throw your equity proportions out of whack, you may need to address that when it comes time to divide profits.