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Accounting For Business Partnerships [Basic]



Changes in Partners

Partnerships can change with the addition or withdrawal of partners. This section discusses how to account for those changes.



New Partner

Partners may agree to add partners in one or two ways. First, the new partner could buy out all or a portion of the interest of an existing partner or partners. Second, the new partner could invest in the partnership resulting in an increase in the number of partners. The partnership accounts for these changes in partners differently.


Buying Out Existing Partner

The capital balances of an existing partnership are:

LDP                                  $  70,000
LRH                                      50,000
Total partnership capital $120,000


If LDP decides to retire and the partners agree to have JPO buy out LDP’s partnership interest, the partnership’s accounting records must simply reflect the change of ownership. As JPO is buying out LDP’s entire interest directly from LDP, the partnership’s entry to record the transaction is as follows:

Mar. 10 20X0

[Debit]. LDP, Capital = 70,000
[Credit]. JPO, Capital = 70,000
(Note: To record buyout of LDP by JPO)

Note: The cash that LDP receives from JPO is not recorded on the partnership’s books as it is an exchange of an investment by individuals with no assets being given to or taken from the partnership. Therefore, it does not matter whether JPO pays $50,000, $70,000, or $100,000 for LDP’s partnership interest, the partnership simply records the change in the partner’s capital accounts using the current balance in the LDP, capital account.


Investment in the Partnership

If JPO joins the existing partnership (becoming a third partner) by investing cash of $30,000 in the partnership, the partnership must record the additional cash and establish a capital account for the new partner. The amount recorded as capital for JPO depends on his ownership interest in the partnership.

If a difference exists between the cash JPO contributes to the partnership and his ownership interest, the difference is allocated to the existing partners. This difference may increase the existing partners’ capital account balances (a bonus to existing partners) or be deducted from the existing partners’ capital account balances (a bonus to the new partner).

If JPO receives a 20% ownership interest in the partnership for his $30,000 investment, the amount of his initial capital account balance is calculated by adding the $30,000 to the total partnership’s capital before his investment and multiplying by 20%, JPO’s ownership interest.

JPO’s capital account would be credited for $30,000 in this case:

Existing Capital

LDP, Capital                 $ 70,000
LRH, Capital                    50,000
Total Existing Capital   120,000
Add: JPO Investment       30,000
New Capital Balance      150,000
JPO Ownership %              × 20%
JPO, Capital                 $ 30,000
The entry to record JPO’s investment into the partnership would be:

Mar. 10 20X0

[Debit]. Cash 30,000
[Credit]. JPO, Capital 30,000
(Note: To record investment in partnership by JPO)


If JPO receives a 30% interest for his $30,000 investment, JPO’s capital account would be credited for $45,000.

Existing Capital

LDP, Capital                     $ 70,000
LRH, Capital                        50,000
Total Existing Capital       120,000
Add: JPO Investment           30,000
New Capital Balance         150,000
JPO Ownership %                 × 30%
JPO, Capital                     $ 45,000


The $15,000 difference between his initial capital balance of $45,000 and his cash investment of $30,000 must be deducted from the existing partners’ capital account balances according to their sharing of gains and losses.

If the current ratio for sharing gains and losses is 60%:40%, the partnership would record JPO’s 30% interest with the following entry:

Mar. 10 20X0

[Debit]. Cash = 30,000
[Debit]. LDP, Capital ($15,000 × 60%) = 9,000
[Debit]. LRH, Capital ($15,000 × 40%) = 6,000
[Credit]. JPO, Capital = 45,000
(Note: To record investment in partnership by JPO)


If JPO receives a 15% interest in the partnership for his $30,000 investment, the partnership’s cash account would be increased (debited) by $30,000 and JPO’s capital account would be increased (credited) by $22,500 (15% × $150,000 new capital balance of partnership).

Existing Capital

LDP, Capital                    $ 70,000
LRH, Capital                       50,000
Total Existing Capital      120,000
Add: JPO Investment          30,000
New Capital Balance         150,000
JPO Ownership %                  ×15%
JPO, Capital                     $ 22,500


The remaining $7,500 would be added (credited) to the two existing partners’ capital account balances based on their 60%:40% ratio for sharing gains and losses. LDP’s capital account balance would increase $4,500 and LRH’s capital account balance would increase $3,000. The entry would look like:

Mar. 10 20X0

[Debit]. Cash = 30,000
[Credit]. LDP, Capital ($7,500 × 60%) = 4,500
[Credit]. LRH, Capital ($7,500 × 40%) = 3,000
[Credit]. JPO, Capital = 22,500
(Note: To record investment in partnership by JPO)


Withdrawal [Retirement] of A Partner

If an existing partner wishes to retire or withdraw from the partnership, the partner may be bought out by an existing partner or may receive assets from the partnership. The accounting treatment for retirements is similar to that discussed under the section “New Partner”.

  • If an existing partner purchases the interest of the retiring partner, the partnership records an entry to close out the capital account balance of the retiring partner and adds the amount to the capital account balance of the partner who purchased the interest.
  • If the partnership gives assets to the retiring partner in the amount of the partner’s capital account balance, an entry is made to reduce the assets and zero out the retiring partner’s capital account balance.
  • If the retiring partner receives more assets or fewer assets than the partner’s capital account balance, the difference is taken from or added to the capital accounts of the remaining partners according to how they share in gains or losses.



Liquidation of A Partnership

If the partnership decides to liquidate, the assets of the partnership are sold, liabilities are paid off, and any remaining cash is distributed to the partners according to their capital account balances. If a partner’s capital account has a deficit balance, that partner should contribute the amount of the deficit to the partnership.



The Statement of Partner’s Capital

The statement of partner’s capital shows the changes in each partner’s capital account for the year or period being reported on. It has the same format as the statement of owner’s equity except that it includes a column for each partner and a total column for the company rather than just one column. The statement starts with the beginning capital balance, followed by the amounts of investments made, share of net income or loss, and withdrawals made during the reporting period to determine the capital balance at the end of the period.


The Lie Dharma Putra
Statement of Partner’s Capital
For the Year ended December 31, 20X0

                                 Lie Dharma Putra,     Patrick Lauw,    Total
                                 CPA                           CPA                  Partnership

Capital balances,      $50,000                    $100,000          $ 150,000
January 1, 20X0
Add: Investments       25,000                        10,000               35,000
Net Income                 40,000                       40,000                80,000
Less: Withdrawals     (45,000)                      (30,000)             (75,000)
Capital balances,      $70,000                    $120,000           $190,000
December 31, 20X0


The $190,000 capital balance for the partnership at December 31, 20X0 would be the amount reported as owners’ equity in The Midland Connection’s balance sheet as of December 31, 20X0.

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  1. Jan 14, 2010 at 3:19 pm

    salam,..are you malay?

  2. carol martin

    Mar 3, 2010 at 4:14 pm

    Putra, I am a CPA working on a Form 1065 where a partner went into personal bankruptcy and the other two took over the debt and land of the partnership with NO money being exchanged. The partnership owns one large piece of land for future development, and is not income producing. What entries do I need to make to remove the third partner, and how do I compute any gain/loss? Sorry! It’s been so many years since I had Intermediate Accounting! Thanks for any help!

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