Understanding Equity on the Partnership Balance Sheet
The equity section of a business’s balance sheet is the most difficult part to understand. The accounts that make up that section vary depending on the type of entity in which the business is structured. In this article, let’s take a look at a partnership balance sheet and what the equity section looks like for those companies.
Balance Sheet for Partnership Business
As a reminder, the balance sheet has three major sections: assets, liabilities, and equity. The equity section focuses on the investments that the owners have in the business. For partners, it consists of their capital accounts. The section for a partnership balance sheet could look like this:
Partners’ Capital Accounts
Partner A Capital $25,000
Partner B Capital $25,000
Partner C Capital $50,000
Each partner has their own Capital account within the equity section of the balance sheet for a partnership business. A partnership with 100 partners will have 100 capital accounts in the equity section. Computing the balance for each partner is where the work comes in.
A partner’s capital account balance is affected by numerous transactions throughout the year as well as current earnings, which are distributed to the partners based on their ownership percentages. Ownership rules and percentages are spelled out in the partnership agreement and partner equity is then reflected on the balance sheet.
Items Affecting Partners’ Capital Account
To compute a partner’s capital account balance, here is the basic balance sheet equity formula:
Balance at beginning of period
Plus Contributions
+/- Partner’s share of net income/loss
Less Withdrawals
= Balance at end of period
Contributions to capital includes money that the partner has given the partnership out of their personal assets. Withdrawals are the opposite: this is money that the partner has taken out of the partnership and used for their personal use.
Net income on a partnership balance sheet is a bit more involved, with two more steps. First, the sum of the entire partnership’s income and expense accounts must be calculated. This number should be the same number as net profit or loss on the partnership’s income statement, from the beginning of the year to your balance sheet date. Second, the net income must be divided up to calculate each partner’s share based on their ownership percentages. These amounts are then rolled into each partner’s capital accounts.
To make sure the equity section of a partnership balance sheet is accurate, good recordkeeping is a must for the partnership as well as each of the individual partners. If we can help you understand more about your partnership, partners capital accounts, a partnership balance sheet and more, please reach out any time.
More about understanding equity: Understanding Equity on the Balance Sheet for a Sole Proprietor
