Anyone in a successful relationship will tell you the secret is trust, respect, and separate accounts. Okay. Maybe not that last part. However, when your relationship is a business partnership, then tracking each partner’s contributions and distributions separately is necessary for maintaining accurate books. Let’s take a look at some of the different transactions that need to be accounted for when in a partnership:
- Contribution of funds. Any time a partner invests money or assets into the business, it needs to be recorded. To avoid confusion of who contributed what, there should be a separate capital account for each partner.
- Distribution of funds or assets. If you record it when it goes in, it needs to be recorded when it comes out. This can be funds or assets. Again, using a separate capital account is necessary to track partner distributions.
- Allocating profit or loss. Whether your business made money or lost money, it is necessary to allocate the profit or loss between the partners. This usually happens at the end of an accounting period using an income summary. You should have a partnership agreement to determine the percentage for each partner.
Keeping an accurate, separate accounting of each partner’s contributions and distributions will save major headaches. Knowing which account to debit and which to credit can get confusing. This is why hiring an accountant may be in your best interest. At IOOGO, our accounting team is ready to help manage your partnership financials giving you more time to focus on your business. Contact us today!