Question

In a partnership, a partner can contribute an initial investment, have a drawing account, and have loans to the partnership. Describe the accounting and reporting implications of each of these partner transactions on the formation and reporting of the partnership. Is providing a loan to a partnership on the same level as the initial investment and ongoing profits and losses by a partner? Why or why not?

Answer 1

if a patner invests in the business the receives capital or ownership in the partnership and if partnership firm get liquidated then partners get ther respective sahre ownership. A partner can invest in cash and assets to attain ownership. Firm records it as follows:

		Debit	Credit
1.	Cash	$xxxxxx
	Partner's Capital		xxxx
2	Cash	xxxxx
	Machinery	xxxxx
	Partner's Capital		xxxxx

Partners can take money out of the business whenever they want. Partners are typically not considered employees of the company and may not get paychecks. When the partners take money out of the business, it is recorded in the Withdrawals or Drawing account. This is a contra-equity account since the owners are reducing the value of their ownership by taking money out of the company.

	Debit	Credit
Partner's Capital	xxxx
Cash		xxxx
(To record cash withdrawn by owner or partner)

A loan is not part of the partner’s capital, and the loan is treated is the same way as a loan from a third party. The liability of the partnership will be recorded by the creation of a liability, resulting in a credit balance for the amount of the loan. The debit entry will depend on how the loan was made. If the partner deposited cash in the bank account, the debit entry will be in the bank account. If the loan was created by converting a proportion of the partner’s capital into a loan, the debit entry will be in the capital account.

The interest on the loan will be a business expense and should therefore be debited to the income statement.