The balance for the capital account will always be a brought forward credit entry in the partnership accounts, because the capital contributed by proprietors is a liability of the business.
When a partnership is formed, each partner puts in 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 capital account, each partner normally has:
- A current account.
- A drawing account.
A current account is used to record the profits retained in the business by the partner.
The main differences between the capital and current account in accounting for partnerships are as follows.
- The balance on the capital account remains static from year to year.
- The current is continually fluctuating up and down, as the partnership makes profits which are shared out between the partners, and as each partner takes out drawings.
- A further difference is that when the partnership agreement provides for interest on capital, partners receive interest on the balance in their capital account, but not on the balance in their current account.
The drawings accounts serve exactly the same purpose as the drawings account for a sole trader. Each partner’s drawings are recorded in a separate account. At the end of an accounting period, each partner’s drawings are cleared to his current account.
Current account – Debit
Drawings account – Credit
The partnership balance sheet will therefore consist of:
- The capital accounts of each partner.
- The current accounts of each partner, net of drawings.