Partnership: Bookkeeping

Partnership bookkeeping applies the general double-entry procedures described under Bookkeeping Fundamentals, but differs from corporate bookkeeping principally in the equity section. A partnership has no share capital and no retained earnings; instead, a separate capital account and a separate drawings account are maintained for each partner. Net income is not retained in the entity but is allocated to the partners' capital accounts at the end of each period in accordance with the partnership agreement. Because the partnership does not pay income tax, no income tax expense or liability is recorded in its accounts.

PARTNER EQUITY ACCOUNTS

• Capital account (one per partner): credited with contributions of cash and property and with the partner's share of net income; debited with the partner's share of net losses and the closing balance of the drawings account.

• Drawings account (one per partner): a temporary account debited with withdrawals of cash or other assets for personal use during the period; closed to the capital account at year-end.

• Loans from or to a partner: recorded as liabilities or receivables, separate from capital, where the partnership agreement treats an advance as a loan bearing interest.

• Limited partnerships: capital accounts for the general partner and for each limited partner (or class of limited partners), with records of contributions agreed but not yet paid, which determine the limit of each limited partner's liability.

FORMATION ENTRIES

• Cash contributed: Dr Cash; Cr Partner Capital.

• Non-cash assets contributed: Dr the asset at fair value at the date of contribution, as agreed by all partners; Cr Partner Capital.

• Liabilities assumed by the partnership on a partner's contributed business: Dr assets at fair value; Cr liabilities assumed; Cr Partner Capital for the net amount.

• The agreed fair values form the accounting cost of the assets to the partnership. The tax cost may differ where an election under subsection 97(2) of the Income Tax Act is filed.

ALLOCATION OF NET INCOME OR LOSS

Net income is allocated as directed by the partnership agreement; in its absence, partnership statutes provide for equal sharing. The principal allocation methods are:

• Fixed ratio: income is divided in a stated proportion.

• Ratio of capital balances: income is divided in proportion to opening, closing, or weighted-average capital balances.

• Salary allowances and interest on capital, followed by a fixed ratio for the remainder: salary allowances recognise differing contributions of service, and interest allowances recognise differing capital investment.

• Where salary and interest allowances exceed net income, or where there is a net loss, the residual deficiency is allocated in the remainder ratio, reducing each partner's total share.

• Salary and interest allowances to partners are allocations of income, not expenses of the partnership; they are not deducted in arriving at partnership net income and are not subject to payroll deductions.

CLOSING ENTRIES

1. Close revenue and expense accounts to Income Summary.

2. Close Income Summary to each partner's capital account in accordance with the income allocation.

3. Close each partner's drawings account to that partner's capital account.

ADMISSION OF A NEW PARTNER

• Purchase of an interest from an existing partner: a personal transaction between the partners. Total partnership assets and capital are unchanged; the entry transfers capital from the selling partner's account to the new partner's account at book value, irrespective of the price paid.

• Investment of assets in the partnership: total assets and capital increase. Where the new partner's capital credit equals the amount invested, no bonus arises.

• Bonus to existing partners: where the new partner invests more than the capital credit received, the excess is allocated to the existing partners in their income-sharing ratio.

• Bonus to the new partner: where the new partner receives a capital credit greater than the amount invested, the difference is charged to the existing partners' capital accounts in their income-sharing ratio.

• Revaluation of assets: before admission, assets may be revalued to fair value, with the adjustment allocated to the existing partners in their income-sharing ratio. Recognition of internally generated goodwill is not permitted under ASPE.

• Legally, admission of a new partner dissolves the old partnership and creates a new one unless the agreement provides for continuity.

WITHDRAWAL OR DEATH OF A PARTNER

• Payment by the remaining partners personally: capital is transferred from the withdrawing partner to the remaining partners; partnership assets are unaffected.

• Payment from partnership assets equal to capital balance: Dr Withdrawing Partner Capital; Cr Cash.

• Payment in excess of capital (bonus to the withdrawing partner): the excess is charged to the remaining partners' capital accounts in their income-sharing ratio.

• Payment less than capital (bonus to the remaining partners): the difference is credited to the remaining partners.

• On death, the accounts are closed to the date of death, income is allocated to that date, and the deceased partner's capital is transferred to a liability to the estate pending settlement under the agreement.

LIQUIDATION

1. Sale of non-cash assets for cash (realisation).

2. Allocation of the gain or loss on realisation to the partners' capital accounts in the income-sharing ratio.

3. Payment of partnership liabilities to outside creditors.

4. Distribution of remaining cash to partners in accordance with their capital balances.

5. Where a partner has a capital deficiency (a debit balance), the partner is legally required to contribute the deficiency. If the partner is unable to pay, the deficiency is absorbed by the remaining partners in their relative income-sharing ratio, and they retain a claim against the deficient partner.

FINANCIAL STATEMENTS

• Balance sheet with an equity section presenting each partner's capital (or total partners' capital with a supporting schedule).

• Income statement, followed by a schedule of the allocation of net income to the partners.

• Statement of partners' capital, reconciling opening capital, contributions, allocated income or loss, drawings, and closing capital for each partner.

• Cash flow statement and notes. ASPE applies to most private partnerships.

• For tax reporting, partnerships required to file a T5013 report financial information using GIFI codes (Schedules 100 and 125), and partners' adjusted cost base must be tracked separately from accounting capital.

PROVINCIAL AND TERRITORIAL CONSIDERATIONS

• Quebec: partnerships with Quebec members or operations file the Partnership Information Return (TP-600) with Revenu Québec, together with RL-15 slips for partners, in addition to the federal T5013.

• Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador: a single HST account records sales tax collected and input tax credits.

• British Columbia, Saskatchewan, and Manitoba: separate accounts are maintained for GST and for provincial sales tax, which is filed with the provincial ministry.

• Quebec: separate GST and QST accounts, with both returns filed with Revenu Québec.

• Alberta, Yukon, the Northwest Territories, and Nunavut: GST only.

• Provincial payroll taxes and workers' compensation premiums apply to employees of the partnership but not to partners themselves, since partners are not employees of their own firm.

SOURCES

• CPA Canada Handbook, Accounting, Part II (ASPE).

• Canada Revenue Agency, Guide T4068 Guide for the Partnership Information Return (T5013 Forms).

• Revenu Québec, Partnership Information Return (TP-600).

• Partnerships Act, R.S.O. 1990, c. P.5, ss. 24 and 44; Income Tax Act, s. 97(2).