The balance of the capital account will always be an advance entry of credit in the accounts of the company, because the capital contributed by the owners is a liability of the company.
When a partnership is formed, each partner contributes some capital to the business. These initial capital contributions are recorded in a series of capital accounts, one for each partner. Partners do not have to put in the same amount.
In addition to the capital account, each partner normally has:
• A current account.
• A drawing account.
current account
It is used to record the profits retained in the business by the partner.
The main differences between the capital and this account in the accounting of companies are the following.
• The balance of the capital account remains static from one year to the next.
• The current fluctuates continuously up and down, since the society obtains profits that are distributed among the partners and each partner draws drawings.
• Another difference is that when the partnership contract provides for interest on the capital, the partners receive interest on the balance of their capital account, but not on the balance of their current account.
drawing account
Draft accounts serve exactly the same purpose as a draft account for a sole trader. Each partner’s draws are recorded in a separate account. At the end of an accounting period, each partner’s drafts are posted to his checking account.
Current account – Debit
Draft account – Credit
Therefore, the balance sheet of the company will be composed of:
• The capital accounts of each partner.
• The checking accounts of each partner, net of transfers.
Accounting Adjustments for Partner Loans
In addition, it is sometimes the case that an existing or former partner makes a loan to the partnership, in which case they become a creditor of the partnership. On the balance sheet, such a loan is not included as partner funds, but is shown separately as a long-term liability. This is the case whether or not the loan holder is an existing partner.
However, interest on such loans will be credited to the members checking account if you are an existing member. This is administratively more convenient, especially when the partner does not particularly want to be paid interest on the loan in cash immediately after it is due. Remember:
• Interest on a partner’s loans is recorded as an expense in the profit and loss account and not as a profit appropriation, although the interest is added to the partners’ checking account.
• If an interest rate is not specified, the partnership law provides that it be paid at 5% per year on the partners’ loans.
