Capital Account Components and Effects
A partner’s contributions of cash or property increase his capital account. Conversely, a partnership’s distribution of cash or property to the partner decreases his capital account. The ending balance of a partner’s capital account represents that partner’s current equity in the partnership. The partnership agreement typically sets forth how profits, losses, and distributions will be allocated to the partners’ capital accounts.
A partner’s basis is decreased by the partner’s items of loss and deductions and by distributions the partner receives from the partnership. A decrease in debt allocated to the partner also reduces a partner’s basis.
Calculating and Adjusting the Capital Account
A partner’s opening capital account balance equals his contribution to the partnership – cash plus property value. The ending capital account balance represents the partner’s equity in the partnership. The agreement sets how profits, losses, and distributions allocate to partners’ capital accounts.
How to modify the capital account:
- Go to the Feedback tab.
- Choose Balance Sheet, M-1, M-2 and select Sch M-2 (Capital Account).
- Scroll down to the Distributions section.
- Enter -1 in capital letters [Override].
Definition and Purpose of the Capital Account
Partners’ capital accounts are accounts that show the partners’ equity in the partnership. The partners’ capital accounts include contributions made to the partnership by the partners, either in the form of cash or property, increase the capital accounts.