Can a partnership be funded any other way apart money?
The reason I am asking is this:
- a partnership was formed, and bank account was set up. Before partners received their bank cards, one of them made some purchases for the business using their personal bank card; now I am thinking how to post purchases into books, are they like business's debt to a partner? a partner's investment into business in a form of "things".. or?
Any advice or a "push" towards right direction is very much appreciated!
You could open Partners' Current Accounts. You would post the cost of items paid for by the Partners through these accounts (dr. expense (or asset), cr. Partner's Current Account) and clear those balances periodically by cheque (dr. Partner's Current Account, cr. Bank).
No reason why you should clear them down at any time if you/ the Partners don't want to. You can keep them running to deal with expenses, drawings, short-term funding or anything else you like.
But it would be wise to have a clear policy governing these things so that profits can be shared equitably and that one Partner does not end up paying for things he shouldn't while the other gets a free ride. A fiver here or there doesn't matter, but if larger payments are involved, it can matter a lot. For example, assume both partners contribute £10,000 capital and agree to share profits in proportion to their capital contributions. Assume also that Partner A buys a £5,000 machine for company use with his own credit card, and that this transaction is processed through his Current Account. As a result, Partner A will be funding the firm to the extent of £15,000 while Partner B is only contributing £10,000. So in all fairness, Partner A should be receiving 60% of the profit while the £5,000 remains due to him, and Partner B should only get 40%. But because the Capital Accounts still both stand at £10,000, profits have to be shared equally.
Check the Partnership Agreement to see if it says anything about this.
Otherwise, you must develop a policy with the Partners dealing with what transactions can be passed over the Current Account - I suggest expenses paid by the Partners, or advances to them to cover known expenditure. It should say how often balances should be cleared - probably monthly/possibly quarterly ... longer than that and there may be reconciliation problems. It should also state whether an overdrawn Current Account is permissible and if so, to what extent - because, in those situations, the firm is funding the overdrawn Partner.
Iain
-- Edited by ilsm on Thursday 23rd of May 2013 03:50:38 PM
