Accounting & Partnership Agreement

Partnership agreements should contain information about accounting information to avoid confusion.

Partnership agreements clarify business issues, responsibilities and accounting details. Partnerships can involve complicated agreements when business interests differ from one partner to another, depending on their investment levels and their level of commitment to the business.

Accounting for the Firm

Certain financial issues, such as the basis to be used for accounting, should be spelled out in the partnership agreement to avoid confusion. For example, on a long-term project, the firm could recognize income as money comes in, or it could recognize the entire amount as income when a contract is signed.

Accounting for Partners

In a partnership agreement, it is important to be upfront as to how income and expenses will be allocated to each partner. Maybe one partner is a working partner, taking a bigger share than the silent partners. In accounting, each partner has a capital account so ownership interests are separated.

Considerations

When a partnership is created, a pass-through entity is created as far as the IRS is concerned. At year end each partner gets a form K-1 with information on partnership income or losses. Each partner pays his share of personal taxes based on the income allocation.

References

• Financial Web: Partnerships