Each partners initial investment in a partnership should be recorded at book value

How to Account for a Partnership

The accounting for a partnership is essentially the same as is used for a sole proprietorship, except that there are more owners. In essence, a separate account tracks each partner's investment, distributions, and share of gains and losses.

Overview of the Partnership Structure

A partnership is a type of business organizational structure where the owners have unlimited personal liability for the business. The owners share in the profits (and losses) generated by the business. There may also be limited partners in the business who do not engage in day-to-day decision making, and whose losses are limited to the amount of their investments in it; in this case, a general partner runs the business on a day-to-day basis.

Partnerships are a common form of organizational structure in businesses that are oriented toward personal services, such as law firms, auditors, and landscaping.

Accounting for a Partnership

There are several distinct transactions associated with a partnership that are not found in other types of business organization. These transactions are noted below.

Contribution of Funds

When a partner invests funds in a partnership, the transaction involves a debit to the cash account and a credit to a separate capital account. A capital account records the balance of the investments from and distributions to a partner. To avoid the commingling of information, it is customary to have a separate capital account for each partner.

Contribution of Other than Funds

When a partner invests some other asset in a partnership, the transaction involves a debit to whatever asset account most closely reflects the nature of the contribution, and a credit to the partner's capital account. The valuation assigned to this transaction is the market value of the contributed asset.

Distribution of Funds

Distributions to partners may be extracted directly from their capital accounts, or they may first be recorded in a drawing account, which is a temporary account whose balance is later shifted into the capital account. The net effect is the same, whether a drawing account is used or not.

Withdrawal of Funds

When a partner extracts funds from a business, it involves a credit to the cash account and a debit to the partner's capital account.

Withdrawal of Assets

When a partner extracts assets other than cash from a business, it involves a credit to the account in which the asset was recorded, and a debit to the partner's capital account.

Allocation of Profit or Loss

When a partnership closes its books for an accounting period, the net profit or loss for the period is summarized in a temporary equity account called the income summary account. This profit or loss is then allocated to the capital accounts of each partner based on their proportional ownership interests in the business. For example, if there is a profit in the income summary account, then the allocation is a debit to the income summary account and a credit to each capital account. Conversely, if there is a loss in the income summary account, then the allocation is a credit to the income summary account and a debit to each capital account.

Tax Reporting

In the United States, a partnership must issue a Schedule K-1 to each of its partners at the end of its tax year. This schedule contains the amount of profit or loss allocated to each partner, and which the partners use in their reporting of personal income earned.

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Publication date: 30 Jun 2022   

us Equity method of accounting guide 1.3

In accordance with ASC 323-30-25-1, investors in partnerships, unincorporated joint ventures, and limited liability companies (LLCs) should generally account for their investment using the equity method of accounting by analogy if the investor has the ability to exercise significant influence over the investee. However, there may be situations when significant influence does not exist but the equity method of accounting applies.

1.3.1 Investments in general partnerships

A general partnership interest in assets, liabilities, earnings, and losses accrues directly to the individual partners. No “corporate veil” exists between the partners and the related investment. General partners in a general partnership usually have the inherent right, absent agreements in partnership articles to the contrary, to influence the operating and financial policies of a partnership.

An interest in a general partnership usually provides an investor with the ability to exercise significant influence over the operating and financial policies of the investee. As such, assuming an investor does not hold a controlling financial interest, a general partnership interest is generally accounted for under the equity method of accounting.

1.3.2 Limited partnerships and unincorporated joint ventures

Generally, interests in a limited partnership or unincorporated joint venture when the investor does not have a controlling financial interest would be accounted for under the equity method of accounting by analogy. ASC 323-30-S99-1 describes the SEC staff’s view on the application of the equity method to investments in limited partnerships.

This guidance requires a limited partner to apply the equity method of accounting to its investment unless the limited partner’s interest is so minor that the limited partner has virtually no influence over the operating and financial policies of the partnership.

An ownership interest greater than 3-5% in limited partnerships is presumed to provide an investor with the ability to influence the operating and financial policies of the investee. This differs from the threshold of 20% of outstanding voting securities presumed to create influence for an investment in common stock or in-substance common stock of a corporation. See EM 2.1 for further discussion.

See EM 1.3.3 for guidance on whether a limited liability company should be viewed as a limited partnership or a corporation for purposes of determining whether the equity method of accounting is appropriate.

1.3.3 Investments in limited liability companies

Limited liability companies frequently have characteristics of both corporations and partnerships. Investors must determine whether a limited liability company should be viewed as similar to a corporation or a partnership for purposes of determining whether its investment should be accounted for under the equity method of accounting.

Per ASC 323-30-35-3, a noncontrolling investment in a limited liability company that maintains a specific ownership account (similar to a partnership capital account structure) for each investor should be viewed similarly to an investment in a limited partnership when determining whether the investment provides the investor with the ability to influence the operating and financial policies of the investee.

An investment in a limited liability company that does not maintain specific ownership accounts for each investor should be viewed similar to an investment in a corporation when determining whether to apply the equity method of accounting.

1.3.4 Investments in joint ventures

ASC Master Glossary

Joint venture: An entity owned and operated by a small group of businesses (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a joint venture frequently is to share risks and rewards in developing a new market, product, or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a joint venture. The ownership of a joint venture seldom changes, and its equity interests usually are not traded publicly. A minority public ownership, however, does not preclude an entity from being a joint venture. As distinguished from a corporate joint venture, a joint venture is not limited to corporate entities.

Joint ventures are often used to create alliances to enter new markets or expand business operations while sharing risks and expertise with other investors. Joint ventures are not limited by the type or legal form of the entity and can be formed as corporations, partnerships, and limited liability companies. The most distinctive characteristic of a joint venture is the concept of joint control. Refer to EM 6 for discussion around identifying and accounting for a joint venture.

1.3.5 Trusts that maintain specific ownership accounts

Other entities, such as trusts, can take a variety of forms, and may maintain specific ownership accounts. When evaluating investments in these entities, it is often appropriate to analogize to the guidance for limited liability companies (EM 1.3.3) to determine what level of ownership requires the use of the equity method of accounting. Investors should consider all relevant facts and circumstances.

1.3.6 Investments in low-income housing tax credit partnerships

Companies, particularly financial institutions, may invest in limited partnerships or limited liability companies that operate qualified affordable housing projects or invest in entities that operate qualified affordable housing projects. These investors earn federal tax credits as the principal return for providing capital to facilitate the development, construction, and rehabilitation of low-income rental property. Per ASC 323-740, investors in these entities may be eligible, subject to meeting a number of criteria, to elect to apply the proportional amortization method rather than the equity method of accounting. Under the proportional amortization method, investors amortize the cost of their investment as a component of income taxes in the income statement. See TX 3.3.6 for additional information.

In order to be eligible for the election, one of the criteria is that the investor cannot have the ability to exercise significant influence over the operating and financial policies of the entity. This is evaluated using the indicators of significant influence for determining eligibility for the equity method of accounting (see EM 2.2). The guidance in EM 2.1 includes certain ownership levels at which it is presumed that the equity method should be applied to limited partnerships and similar entities. That guidance should not be considered when determining if significant influence exists for the purpose of this analysis. Therefore, care should be taken when evaluating the existence of significant influence for these entities.

Investors that do not qualify for the proportional amortization method (or do not elect to apply it) would account for their investments in these partnerships under the equity method if the investor has a more than minor interest in the investee. When accounting for investments in low-income housing tax credit partnerships under the equity method, the hypothetical liquidation at book value model would typically be used. See EM 4.1.4.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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What is partnership book value?

How should the partner's contributed be recorded in the partnership books?

What is initial investments by partners?

What value will cash contributions of a partner be recorded in the partnership books?