Partnership Capital AccountDefined with Examples & More

Written By:
Adiste Mae

What is a Partnership Capital Account? 

A Partnership Capital Account is an account shown in the Balance Sheet of a company under the Equity section and could be a single account for all the partners, or separate accounts for each partner.

When the business maintains a single partnership account, bookkeepers will need to record a separate schedule as a supporting document.

However, it will be easier to have separate accounts for all the partners in case of liquidation. 

Types of transactions reported and analyzed in a partnership capital account

Partnership accounts will contain the following information:

• Contributions made by partners – both initial and subsequent contributions – in the form of cash or other assets. 
• The profits and losses earned by the business and allocated to each partner based on their partnership agreement. 
• Distributions to each partner. 

The balance of the Partner Capital Account is the undistributed amount as of the reporting date. 

Example of a Partnership Capital Account

Partners Jane and John opened a business as partners and have agreed to contribute $300,000 each as capital.

At the end of the business year, they made a profit of $50,000. $10,000 was subsequently distributed to Jane. 

Their separate accounts will show the following balances:

Jane = $315,000 ($300,000 + 25,000 – $10,000)

John = $325,000 ($300,000 + 25,000)

The above balances are computed as:

Initial Contribution + Profit Allocation – Distribution

One Partnership Capital Account vs. More Than One

Businesses, depending on their best practices, can decide to have one Partnership Capital Account or a separate account for each partner.

If they decide to only have one account, a supporting schedule will have to be prepared to track the transactions of each partner – contribution, allocated income or loss, payments, and distributions.

Over time, it is easier to maintain separate accounts for each partner for clarity and convenience if the company is liquidated. 

Analysis of Partner’s Capital Accounts: Form 1065 Schedule M-2

The IRS uses Form 1065 Schedule M-2 to verify and analyze whether the tax reporting is done accurately.

Companies report changes in the partnership using Form 1065 Schedule M2 because the data reported in the form should match that of a company’s Income Statement and Balance Sheet reports. 

However, some instances will not require companies to complete the form provided the following conditions are met:

• Total receipts for the year are less than $250,000.
• Total assets that the company holds at the end of the taxable year are less than $1,000,000. 
• The company is not required to file for M-3.
• The tax return is filed along with Schedule K-1 and is provided to the partners on or before its due date.