Bookkeeping for partnerships

business.gov.au describes a partnership as made up of people who manage the business and share any income or losses. Because more than one person owns the business, its books serve every partner at once. Each of them needs to be able to see what the business has earned, what it owes and where they personally stand.

business.gov.au also describes limited partnerships, in which a limited partner is a passive investor who doesn't manage the day-to-day business. Whatever the type, a clear record of what each partner has contributed belongs in the books.

business.gov.au says a written partnership agreement makes expectations clear and can head off disputes between partners, and it suggests having a lawyer review it. Confirm the requirements for your type of partnership before relying on an informal arrangement. Several of the things it suggests including decide how the books are kept:

• Ownership and contributions: how much each partner puts in, and what share of the business each owns.
• Profit and loss sharing: how profit and losses are split between the partners.
• Making decisions: who can make which decisions, which tells the bookkeeper who may approve spending.
• Adding or removing partners: what happens when someone joins, leaves or dies.
• Ending the partnership: how the remaining assets will be divided.

If there is no agreement, or it doesn't cover a question the books raise, ask your accountant how to record the item and raise the gap with the other partners.

A common set-up is a capital account and a drawings account for each partner, rather than one shared owner's account. The capital account records what that partner has contributed and, at the end of each year, their share of the profit or loss. The drawings account records what they have taken out for personal use during the year.

Each partner's balance can move differently even when profit is shared equally, because contributions and drawings rarely match. At year end the profit or loss is shared across the partners' accounts in the proportions the agreement sets, and your accountant can confirm the entries.

• Record every contribution against the partner who made it, with the date and the amount.
• If a partner contributes equipment, a vehicle or stock rather than cash, keep a note of the value the partners agreed, and ask your accountant how it should be recorded.
• If a partner lends money to the partnership instead of contributing it, record that it is a loan and keep the terms in writing. Your accountant can say which account fits.

Note on each entry when the other party is a partner or a partner's family, so those dealings are easy to find later.

Money a partner takes for personal use goes to that partner's drawings account, whether it is a transfer to their own bank account or a personal bill paid from the partnership's account. Recording it against the right partner every time is what lets the year-end balances be worked out without argument.

If partners draw regular amounts, set those transfers up on fixed dates with a clear description, so they are easy to recognise on the bank statement. If a partner pays for a partnership purchase personally, keep the receipt and record the purchase in the appropriate account, with the amount owed to that partner. Ask your accountant whether it is an expense, an asset or another item. A later reimbursement clears the amount owed; if the partners agree to treat it as a contribution instead, confirm that entry with your accountant.

Give the partnership a bank account of its own. Run every partnership receipt and payment through it, and keep each partner's personal spending off it, so the books show only the partnership's own transactions.

Send each partner the same reports each month: the profit and loss statement, the balance sheet and a summary of each partner's capital and drawings balances. When every partner reads the same figures, a disagreement shows up as a question about an entry, not a surprise at year end.

Where the agreement names who approves payments, have those partners sign them off. The ATO says the owner of a business remains accountable for its records even when someone else keeps them, and in a partnership the owners are the partners.

1. Check what the agreement says about admitting a partner or a partner leaving.
2. Bring the books fully up to date at the date of the change and reconcile every account to that date.
3. Work out the profit or loss to that date, so each partner's share up to the change is clear.
4. Record a new partner's contribution against their own new capital account.
5. Record what a departing partner is owed or paid as the agreement provides, and ask your accountant to confirm the entries.

If the partnership ends, business.gov.au suggests the agreement say how the remaining assets will be divided. Up-to-date partner accounts are the starting point for that division.