Don't overlook these!
Updated for 2012
Three common ways to take money out of a partnership are:
1) Distributions of Income:
Methods Used to Allocate Partnership Net Income Include:
You can even use a combination of the above allocation methods.
The most common method used to allocate partnership net income relative capital investments.
For example, partnership A and B each contribute 50% of the capital. Each partner will receive 50% of net income.
The partnership agreement may stipulate that an unequal percentage of profits is to be distributed to a partner regardless of the amount of his/her capital contribution.
For example, partner A and B each make capital investments of 50% each and agree to pay 40% of net income to partner A and 60% to partner B.
Note that S corporation shareholders are not permitted to make distributions that are disproportionate to their relative investments. Distributions to S corporation shareholders must be made in accordance with each shareholder's percentage of stock ownership (if you own 30% of the stock, you get 30% of the profits and losses).
Accounting for Partnership Distributions:
How a partnership distribution is classified for accounting purposes and recorded in the partnership books depends on the type of distribution being made.
Distributions to partners are not recorded in the books as expenses; they do not enter into the computation of partnership net income or loss.
Partners' Drawing Accounts:
In addition to each partner having his/her own Capital account, each partner also has his/her own Drawings account.
Net income is credited to each partner's capital account and net losses are debited to each partner's capital account, according to each partner's percentage allocation of net income or net loss.
Distributions of net income to partners are debited to each partner's Drawings account.
Recording the distribution of net income:
The entries consist of the following-
The entries would look like the following:
To record Jack Jones and Jenny Smith drawings for December 31, 2008
To determine each partner's ending capital:
Jack Jones' ending capital:
You do the same computation for every partner. Adding together each partner's ending capital equals total Partnership capital.
Draws Used for Personal and Business Purposes:
If you take cash out of the business and use part of it for personal expenses and part of it for business-related items, be sure to get receipts for the business-related expenses.
You'll need to make bookkeeping entries in the appropriate accounts based on the amounts on the receipts.
In addition, you'll need them to audit proof your deductions.
2) Loans to Partners:
Partners may borrow from the partnership.
A Notes Receivable account should be set up to record loans to partners from the partnership. A promissory note should be prepared and signed by the partner. The note should contain the terms of the loan.
For example, the amount to be financed (the principal), interest rate, repayment date(s), installment payment amounts, etc.
3) Returns of Capital:
You can take money out of a partnership by getting back part or all of your capital investment.
A return of your capital is not taxable. For example, if you liquidate the partnership and receive more than your capital investment, the excess is a capital gain. If you receive less than your investment, you will have a capita loss.
Partnerships: Advantages of a Partnership
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