In a business set up as a limited partnership, each partner has a capital account, which appears in the company's books. This account tracks each partner's equity -- or ownership stake. Both the company's general partners and its limited partners have capital accounts.
Elements of the Account
A partner's capital account can be summarized by the formula "Contributions plus Allocations minus Distributions." Contributions are direct investments in the company, such as cash or equipment. Allocations are the partner's share of the company profits. The partnership agreement describes how profits should be allocated among the partners. Distributions -- or "draws" -- are cash amounts that the partner has taken from the company for personal use.
Say you buy a 15 percent stake in a partnership with a $25,000 investment. That's a contribution, so your capital account starts out with $25,000. In the first year, the company posts a profit of $50,000, and 15 percent of that ($7,500) is allocated to you. Even if the entire profit gets reinvested in the company, $7,500 of that profit still "belongs" to you, so your capital account rises to $32,500. Finally, you need some extra money, so you take $1,000 from the company (with the other partners' permission). That's a distribution, so your capital account shrinks to $31,500.
Limited and General Partners
Limited partners are protected from personal liability from the firm's debts, unlike the general partners, who are fully liable for all company debts. Because the general partners are assuming greater risk, the partnership agreement may give them a disproportionately larger allocation of profits than limited partners get. But the accounting for general partners' and limited partners' capital accounts works the same way: contributions plus allocations, minus distributions.