There are certain transactions that are entered into by partnership and their partners which are unique to this form of business structure. We will review the bookkeeping for some of these.
Contribution of Property
When a partnership is set up, the partners typically contribute property ñ including cash - to the partnership to establish its operations. (A partner need not contribute property. A partner may contribute services, including services to be provided in the future.)
From an accounting perspective, the contribution of property to a partnership by partner must be accounted for twice: it represents a disposition of the property by the partner and an acquisition of the property by the partnership. There are general principles which underlie the accounting for these transactions:
Withdrawal of Property
A partnership cannot pay a salary or wage to a partner. When a partner withdraws cash or other property from a partnership, the partnership records the withdrawal as a disposition of that property and a debit to the partner's draw account.
Typically, a partner draws cash. Where a draw is funded in kind, the partnership accounts for a disposition of the property at fair value. Sales taxes must be accounted for if they are otherwise due.
Disposition of an Interest
An interest in a partnership is a capital property, much like a share in a corporation, and it can be bought and sold separately. A purchase and sale of a partnership interest is a transaction solely between the partners involved and does not affect in any way the accounts of the partnership.
Excerpted from Advanced Bookkeeping for a Selection of Business Profiles, one of the courses that comprise the Certified Bookkeeping Specialist program.