Expert: Paul Sid, CPA CFA - 1/15/2012

Question
I have been asked by a small LLC company (in the US) to help clean up their books.  In the Chart of Accounts (QBPro), there are accounts for Partner Equity; Partner Draw; and Partner Loan.  This is the current process.  At the end of the fiscal year (12/31)a check is written to distribute the balance in the working checkbook to zero.  At the beginning of the new year, the money is then "loaned" back to the company by the partners and is recorded as "Partner Loan".  During the year, money is "paid back" to the partners and additional loans are made throughout the year, but at year end the balance in the Partner Loan account is zero.  How would you code the money that is paid out to the partners at the end of year?

I think that there should not be a "Partner Loan" in the chart of accounts, but that the Partner Equity and Partner Draw accounts would handle these transactions.  Money they put in the company would go to Partner Equity and money they take out would go to Partner Draw.  Is this correct?

This has got me baffled.  Can you please help sort it out???

Chris

Answer
Hi Chris,

Thanks for your question.

Using the current procedure of "partnership loan accounts" is the correct approach.

Your situation.  The true working capital for the partnership is insufficient.  The partners provide a temporary infusion of money during the year, bringing the cash balance to -0- at 12/31, and replacing the cash on Jan 1st.  

For example if the outstanding partnership loan at 12/31 was $15,000 and the cash balance was $10,000.  The partners will then repay themselves $10,000 with a remaining outstanding loans payable balance of $5,000.

Once working capital becomes positive at a future date, the partners expect to be fully reimbursed and the partnership loan accounts would be -0-.  When that point has been reached, the cash balance will be positive and there will no longer be a need for year-end transactions between cash and the partnership loan accounts.

Partnership Draw.  In partnership accounting the draw represents a permanent distribution of earnings, unrelated to temporary loans.  Let's say that on Jan 1st, the partnership expects to realize net income of $120k for the year.  They would then would schedule draws of $10k/month rather than taking a W-2 salary of $10k/month.

I hope that my explanation helps.

Regards,
Paul Sid, CPA