Partnership Formation

The accounting for a partnership is similar to the accounting for any other business organization, with a few exceptions. Transactions that are unique to partnerships include:

  1. Formation: This refers to the process of establishing a partnership and recording the initial investments of each partner in the accounting records. Assets contributed by the partners should be recorded at their fair market value, and the difference between the assets and liabilities should be credited to the partner's capital account.

  2. Income distribution: Partnerships distribute income among the partners according to the terms of the partnership agreement.

  3. Dissolution: This refers to the process of ending a partnership.

  4. Liquidation: This refers to the process of selling off the assets of a partnership and distributing the proceeds among the partners.

Once the partnership has been formed, the accounting for its transactions follows the same steps as any other business organization, including:

  • Journalizing transactions
  • Posting to accounts in the ledger
  • Preparation of a trial balance
  • Preparation of a worksheet
  • Preparation of financial statements
  • Journalizing and posting adjusting entries
  • Journalizing and posting closing entries
  • Preparation of a post-closing trial balance

In partnership accounting, there are three types of accounts for partners: capital accounts, drawing or personal accounts, and accounts for loans to and from partners. A loan from a partner to the partnership is recorded as "Loans Receivable from Partners," while a loan from the partnership to a partner is recorded as "Loans Payable to Partners." Both of these are considered assets and liabilities, respectively.


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