Partners' capital and current accounts

Partners’ capital and current accounts

Partners’ Capital Accounts

  • Each partner has a Capital Account in the partnership books, which records their capital contribution.
  • When a partner introduces more capital into the business, the amount is added to their capital account.
  • The figure in the capital account normally stays constant, unless more capital is introduced or part of their share of profits is left in the business.

Current Accounts

  • In addition to a capital account, each partner also has a Current Account.
  • The current account records their share of the partnership’s profits or losses, as well as any drawings.
  • At the end of the accounting period, the profit or loss for the period is distributed to the partners’ current accounts according to the agreed profit-sharing ratio.
  • Drawings made by the partner during the year are deducted from their current account. Drawings are sums of money that the partners take out of the business for their personal use.
  • The balance on the current account at the end of the year shows the net amount owed to the partner, or débit if they drew out more than their share of profits.

Updating Capital and Current Accounts

  • At the end of the financial year, the balance of each partner’s current account is transferred to their capital account.
  • If their current account is in credit (because share of profit > drawings), it adds to the balance on their capital account. If it is a debit (because drawings > share of profit), it reduces the balance on their capital account.
  • Looking at a partner’s capital account can give a snapshot overview of their overall financial standing in the partnership.

Importance of Capital and Current Accounts

  • By maintaining separate capital and current accounts for each partner, the partnership can easily keep track of how much capital each partner has invested in, and therefore owns, in the business.
  • The separate recording of capital contributions and shared profits/losses allows an accurate assessment of a partner’s share of profits, enabling fair distribution of earnings, and providing transparency in the event of a dispute or dissolution of the partnership.