Capital accounts represent the equity ownership of each partner in a partnership. They track initial contributions, additional investments, allocated profits/losses, and withdrawals by partners.
5 Must Know Facts For Your Next Test
Each partner has an individual capital account that reflects their investment and share of income or loss.
Capital accounts can be increased by additional contributions from partners or by allocation of profits.
Withdrawals by partners decrease their respective capital accounts.
The method used to allocate income or loss among partners must be agreed upon in the partnership agreement.
Upon dissolution of the partnership, the remaining balance in each partner's capital account is distributed back to them.
Review Questions
What are the components that affect a partner's capital account?
How does a partnership agreement influence capital accounts?
What happens to a partner's capital account upon withdrawal from the partnership?
Related terms
Partnership Agreement: A legal document outlining the rights and responsibilities of each partner, including how income and losses are allocated.
Profit and Loss Allocation: The method by which net profit or net loss is divided among partners as per the partnership agreement.
Withdrawal: The act of a partner taking funds out of their capital account, reducing its balance.