The balance of the capital account will always be an advanced credit entry 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 another.

• The stream continually fluctuates up and down as the partnership makes profits which are shared among the partners and each partner draws draws.

• Another difference is that when the partnership agreement 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

Spin accounts serve exactly the same purpose as spin accounts 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 cleared in his checking account.

Current account – Debit

Twist account – Credit

Therefore, the balance sheet of the company will be composed of:

• The capital accounts of each partner.

• The current accounts of each partner, net of transfers.

Accounting Adjustments for Member 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 partners’ 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 member’s checking account if you are an existing member. This is administratively more convenient, especially when the partner does not particularly want interest paid on the loan in cash immediately after maturity. Remember:

• Interest on a partner’s loans is recorded as an expense in the profit and loss account, and not as an appropriation of profits, although the interest is added to the current account of the partners.

• If no interest rate is specified, the partnership law provides that it be paid at 5% per annum on member loans.