A company had three partners with capital accounts of £10,000, £15,000 and £50,000.
The third partner left the partnership due to retirement two years ago, but chose to leave his capital account in the business for the short term. He left on good terms and didn't want thr business to suffer by stripping it's liquid assets.
He now wishes to withdraw £25,000 and leave £25,000 as an official loan to the business.
Am I right in thinking this would be entered as £50,000 drawings from his capital account. £25,000 would then be repaid and the company liabilities would increase by £25,000?
The balance sheet would balance. My only concern is that the drawings would look extremely high on the balance sheet as the capital account would decrease significantly.
A bank loan would be used to repay the £25,000. The business isn't very liquid at the moment due to clients struggling to pay. I presume this is okay.
Replies (12)
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The £25,000 repaid to him is drawings. The other £25,000 is not drawings but a reclassification from capital to loan.
I agree but the point i am concerned about is what is the double entry on the day after he left the partnership and did any partnership agreement make any reference to this
I ignored the question on first reading.
Reasons
1 Use of the word company
2 When the partner left it became a loan at that time
3 the accounts from date of departure have been knowingly misleading which may have been used to support lending and credit arrangements.
To date the accounts suggest there are three partners available for redress when there were really only two
REALLY hope this is DIY and not an accountant, or even a half capable bookkeeper
The entry is obviously Dr partner’s capital account Cr loan from former partner. I don’t see what the partnership agreement has to do with it. It comes down to what the outgoing partner agreed with the continuing partners as to the repayment of his capital.
I suppose it depends on whether outgoing partner still considers that he is a partner.
If I left I would want my name removed and any money owed to me to be clearly shown as a loan.
Well, since putting it in drawings would be incorrect, you may as well go the whole hog and make the adjustment to the opening balance. As far as I know, HMRC do not cross-check opening and py closing balances. You could always leave some white space narrative.
A masterpiece John
I don't see what the partnership agreement has to do with it
Followed by
It comes down to what the outgoing partner..
What does the partnership agreement say? Like Paul and Nick, my expectation would be that it became a debt due to him when he retired from the partnership, unless the partnership agreement said something to the contrary.