How to account for LLP profits on Balance sheet

Need help with distributed profits for LLP please. Please see my sample spreadsheet

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Hi

I have a small LLP which simply owns one property and rents it out.

Initially this was financed by a directors loan, but the rental income has now paid this all back, so we're actually distributing profits to the members.

Sadly, I just don't know how to account for these distributed profits in the balance sheet. Can you help?

The yellow cells (in the attached simple spreadsheet) are the entries that I'm not sure of.

Previously the "net assets" on the balance sheet went up by the annual PnL, but I don't know how to carry on doing that. Something has to go up by the profit - I just don't know what I need below the "net assets" in order to keep it growing.

Can anyone help please?

Many thanks in advance!

 

Fileexample_llp.xlsx

Replies (39)

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Scalloway Castle
By scalloway
14th Mar 2021 20:45

In a partnership profit is added to partners capital and money paid out is deducted as drawings.

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Replying to scalloway:
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By iclamp
14th Mar 2021 22:10

Thanks very much.
So would I add partners drawings below the profit on the PnL - to give a “change in net assets” that would then balance with the change in net assets on the balance sheet?
Or do I add something below on the balance sheet (as a kind of capital-asset item, called partners drawings) in order to have an increasing number at the bottom of my balance sheet?
I really need to know what to call the yellow cells, if that’s correct.
Thanks again for your help!

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Replying to iclamp:
Scalloway Castle
By scalloway
16th Mar 2021 10:15

For some reason this reply has only been released just now! I answered further down but for simplicity I've pasted my response here.

1. The partners put in £100,000. In a partnership this is Capital, not directors' loan
2. They spent £100,000 buying the building
3. Each year the partnership makes £50,000 profit
4. Each year the partners draw out £50,000 profit
5. So at the end of each year the Balance Sheet is

Assets £100,000
Capital (£100,000)

Please note the further comments about the presentation of LLP accounts. My reply is a very simplistic one.

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Replying to iclamp:
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By iclamp
16th Mar 2021 13:20

So sorry- I'll paste below.
Simply, the business makes 50k/year (say) and generally I've just recorded my "net assets" on the balance sheet. I need to add the two(?) rows below, though - something like drawings/dist'd earns, and PnL to date, in order to keep the balance sheet appreciating by the 50k profit.

------------------BALANCE SHEET------------------------
Assets 2020 2019 2018 2017 2016

Rental Building 100,000 100,000 100,000 100,000 100,000

Liabilites

Directors loan 0 0 0 -50,000 -100,000

Net Assets 100,000 100,000 100,000 50,000 0

Distrit'd Earns? 100,000 50,000 0

Profit to Date? 200,000 150,000 100,000 50,000 0

Just want to know the correct way to account for these drawings. My business is really simple (just one rental) and so I don't want to employ an accountant if I can just solve this problem! :-)

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Replying to iclamp:
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By iclamp
16th Mar 2021 13:22

oops didn't mean to post reply twice

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By sanjay100
14th Mar 2021 22:09

Oh boy I think the wild dogs have been just released from their cages

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Stepurhan
By stepurhan
14th Mar 2021 21:54

LLPs don't have directors.

LLPs are an area a lot of accountants are uncomfortable with. Possibly pass this to someone else?

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Replying to stepurhan:
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By Paul Crowley
15th Mar 2021 23:16

We dislike them as following the proper standards gives very odd results on the balance sheet.
I accept that only the institutes care about getting these right, no one else cares.

I have yet to look one up on companies house and think that looks correct. But then I only look up if needed to and that is rare
I was the agent for one partner in a DIY LLP ( the not dealing with stuff partner )
The accounts date at companies house different to the date used for HMRC.
Utter bobbins. The tax deducted by contractor was a partnership asset
4 attempts at filing HMRC partnership return all failed, loads of penalties
No longer involved.

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Replying to Paul Crowley:
Stepurhan
By stepurhan
16th Mar 2021 09:11

Even done properly, LLP accounts look weird. I think it because they are an amalgam or ordinary partnership and company accounts that has not necessarily been thought through by the powers that be.

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Replying to stepurhan:
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By Paul Crowley
17th Mar 2021 18:23

Concur odd
But the standard setters HATED micro accounts because they are too easy.
LLPs should be the same, but no the CCAB bodies just must pointlessly interfere

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By DaveyJonesLocker
14th Mar 2021 22:23

You think you can attach spreadsheets on here?! NURSE

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Replying to DaveyJonesLocker:
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By Hugo Fair
14th Mar 2021 22:35

All the Nurses are busy, but SECURITY here at your service sir.

OP appears to have successfully attached spreadsheet - although I'm disinclined to touch it with a socially-distanced barge pole (let alone download it)!

Move along please, nothing (and I mean absolutely nothing) to see here.

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Scalloway Castle
By scalloway
14th Mar 2021 22:43

I shall try to explain this in simple terms

1. The partners put in £100,000. In a partnership this is Capital, not directors' loan
2. They spent £100,000 buying the building
3. Each year the partnership makes £50,000 profit
4. Each year the partners draw out £50,000 profit
5. So at the end of each year the Balance Sheet is

Assets £100,000
Capital (£100,000)

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Replying to scalloway:
paddle steamer
By DJKL
14th Mar 2021 23:41

It may or may not be in an LLP, capital is not just what they put in, it is quite possible to have both capital and a loan.

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paddle steamer
By DJKL
14th Mar 2021 23:32

When you set up the partnership you effectively had

Dr Property
Cr Loan
Cr Capital (whatever the agreed amount was)

When you started earning rents , you had

Dr Bank
Cr Rents (profits)

You say the cash received was used to repay the initial loan so

Dr Loan
Cr Cash

Irrespective of this at end of year one you had a profit that needed allocated to the partners, this would be done via an appropriation account by

Dr Partnership profits
Cr Current account partner A
Cr Current account partner B
etc

Notwithstanding the partners did not remove any money (it was used to repay the loan) they each get credited with their share of the profits (Losses are different within LLPs so we will ignore these here)

Once they start drawing profits (taking the money) their drawings get posted

Dr Current account partner A
Dr Current account partner B
etc
Cr Bank account

Excepting re disclosures this is the same as pretty much any partnership, partnerships are generally the part taught in basic accounting after sole traders and before companies.

LLPs have some oddities re how their balance sheets are presented, where current accounts get shown within same and statutory disclosures required, accordingly if you do not know the basics of General Partnership Accounting undertaking it for an LLP is probably not a good idea.

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John Toon
By John Toon
15th Mar 2021 10:04

What does the LLP agreement say on the treatment of capital and revenue profits/losses? Before you even consider the accounting entries you need to understand what the terms of the LLP agreement mean and the impact on the potential accounting entries. If there is no LLP agreement, that's a shame, and you revert back to the basic legal principles and SORP guidance.

No one can advise you on the entries required until you answer the above.

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By Duggimon
15th Mar 2021 13:02

The "director's loan", distributed earnings and profit to date on your spreadsheet are typically all part of partners' capital accounts.

Capital introduced, share of profit, and drawings would be the typical names for these entries.

As DJKL says, a loan from the partner(s) is possible but given the mistakes in terminology I'm going to assume this is just money put in at the start without being formally called anything.

How have you ended up doing four years of accounts for an LLP without knowing how partnerships work? Don't let the LL in LLP fool you, they're much more like partnerships than companies.

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Replying to Duggimon:
John Toon
By John Toon
16th Mar 2021 09:41

I tend to disagree with the last point...

LLP's are more like companies with partnership terminology and the problem is that most treat them like partnerships and then wonder why technicians pick them apart.

For partnerships - money in = capital, money out = drawings, profit/loss = straight to capital. Yes, you can make it a bit more complicated by talking about current and capital accounts but they're essentially the same thing.

For LLPs - money in = capital, loan or equity, money out - drawings, salary, loan repayments, profit/loss = equity, capital, salary or all 3

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Replying to johnt27:
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By iclamp
16th Mar 2021 10:02

This is brilliant, thanks.
In my example spreadsheet could you possibly tell me what I should call the yellow cells then?
“Drawings to date” and “ cumulative profits to date?”
I think the net assets should stay at 100k in my example, but I guess I need to put these two rows in as capital account items in order to make it balance with the 50k PnL?
Thanks in advance! Iain

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Replying to iclamp:
John Toon
By John Toon
16th Mar 2021 10:41

It's impossible to answer that question Iain as you haven't answered my question on what the LLP agreement says regarding the treatment of capital and sharing of profits/losses.

I could provide you a whole variety of differing answers/scenarios

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Replying to johnt27:
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By iclamp
16th Mar 2021 10:51

Hmm.
So in my accounts (as per the example) I initially introduced the money as a directors loan, and then paid this back from profits.
I'm equally happy to account for this as capital introduced and drawings if that is better. Let's assume we do directors loan, for simplicity.
There is only one other member in the LLP who is essentially dormant, and not entitled to any profits, so the 50k profit should be assigned to me -I assume as drawings.
I really appreciate your help with this.
As you can probably tell I have some very limited experience with company accounts, but not LLP capital accounts or balance sheets. Thanks!

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Replying to iclamp:
John Toon
By John Toon
16th Mar 2021 11:22

It's not a matter of what is better - it's a matter of what the LLP agreement says... Feel like I'm repeating myself here but you must have one to have established the other partner is not entitled to the profits!

There is no directors loan - there is money you introduced (as a partner), which you may or may not be entitled to withdraw depending on it's accounting treatment and what the LLP agreement says.

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Replying to iclamp:
paddle steamer
By DJKL
16th Mar 2021 12:23

Simple starting point, who set up the LLP, was someone paid to do this, what was their brief?

When they set it up was an agreement amongst the members also drawn up regarding designated/non designated members, capital contributions, profits, losses, drawings?

If it was, what does it say?

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Replying to DJKL:
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By iclamp
16th Mar 2021 12:47

Originally the members we me, and a dormant Ltd co owned by me. The accountant seemed pretty savvy.
Since then I've added my wife - as it's better to assign the profits to her.
I think I probably should get an LLP agreement - I've been looking at some online - but obviously it's never really been an issue so far.
Can you help by telling me what I should call the yellow cells on my accounts please?

Thanks (0)
Replying to iclamp:
paddle steamer
By DJKL
16th Mar 2021 12:58

I explained the generic debits and credits further up the page, afraid I am not happy to open an online file so cannot give you your particular double entries.

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Replying to DJKL:
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By iclamp
16th Mar 2021 13:24

So sorry- I'll paste below.
Simply, the business makes 50k/year (say) and generally I've just recorded my "net assets" on the balance sheet. I need to add the two(?) rows below, though - something like drawings/dist'd earns, and PnL to date, in order to keep the balance sheet appreciating by the 50k profit.

------------------BALANCE SHEET------------------------
Assets 2020 2019 2018 2017 2016

Rental Building 100,000 100,000 100,000 100,000 100,000

Liabilites

Directors loan 0 0 0 -50,000 -100,000

Net Assets 100,000 100,000 100,000 50,000 0

Distrit'd Earns? 100,000 50,000 0 0 0

Profit to Date? 200,000 150,000 100,000 50,000 0

Just want to know the correct way to account for these drawings. My business is really simple (just one rental) and so I don't want to employ an accountant if I can just solve this problem! :-)
Really sorry I can't format better- this app removes all the spaces! Supposed to be 5 years, for example

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Replying to iclamp:
By Duggimon
16th Mar 2021 13:43

You think your business is simple because there's not a lot of transactions, but you have an LLP between you, your wife and a company owned by you. It is a complex structure and you have issues to consider beyond the correct accounting treatment for the figures you keep on asking about.

As has been explained numerous times already, the money in is capital introduced, the money out is drawings from the capital account, the profit each year also goes to the capital account.

I think your issue is that you're treating the drawings and the profits as the same thing when they're opposite entries to the capital account, making it look like they go nowhere when in fact they go into the capital account and then are taken back out of the capital account.

Regardless of how simple the answer to your repeated question is, you have a complex business structure and I really strongly advise you to seek an accountant, if only to help unwind it into something you can manage yourself.

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Replying to iclamp:
paddle steamer
By DJKL
16th Mar 2021 14:02

The profits each year, 50,000, are each year allocated to current accounts in name of each of the individual partners, it is simpler if you look at two sides initially, the total net assets as one side and the total capital and current accounts of the partners as the other, the two always balance. (though for LLP accounts this is likely not how you present the actual accounts)

Your figures do not have the bank balance, where is this?

So you start

Invest property DR 100k
Loan from a partner CR £100k (if that is actually what it is)
Net assets £nil

Capital and current account balances of partners
£nil

At year two your assets are:

Investment Property DR £100k
Cash (before paying loan )DR £50k
Loan from partnerCR £100k
Net assets £50k

Represented by capital and current accounts of partners
CR £50K

If you use the £50k in the bank to repay the loan you get to
Investment property DR £100k
Bank Nil
Loan from partnersCR £50k (100-50)
Net assets £50k

Represented by

Partner capital and current accounts still CR £50k

You continue this in later years.

Once you clear the loan and wish to start paying drawings these payments just reduce the partner current accounts, the profits credit to these the drawings debit.

So:
Dr Invest Prop£100k
Dr bank £50k
Loan £nil
Net assets £150k

Represented by
Current and capital Cr £150k

After the drawings of £50k is

Dr Invest Prop £100k
Bank Nil
Loan Nil
Net Assets £100k

Represented by capital and current accounts £100k (£150k earnings less the £50k drawings)

As an aside what have you done re declaring the profits for tax purposes and paying the tax on these each year, have the partners paid from their private resources or were there drawings to pay the tax each year?

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Replying to iclamp:
John Toon
By John Toon
16th Mar 2021 13:53

iclamp wrote:

Originally the members we me, and a dormant Ltd co owned by me. The accountant seemed pretty savvy.
Since then I've added my wife - as it's better to assign the profits to her.
I think I probably should get an LLP agreement - I've been looking at some online - but obviously it's never really been an issue so far.
Can you help by telling me what I should call the yellow cells on my accounts please?

Well hopefully your savvy accountant mentioned that in the abscence of an LLP agreement all LLP members are treated equally and would share in the capital/profits on an equal basis. In addition the profits earned are treated as remuneration in the P&L as the LLP has no right to withhold the profits earned and so the P&L would show a net profit of £Nil each year.

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Replying to johnt27:
John Toon
By John Toon
16th Mar 2021 16:01

There's little wonder this is confusing. Unfortunately DJKL has given you a balance sheet for a normal partnership not a LLP on the basis of the very litle info we have to go on. Although you can opt for some alternate presentation options under the SORP.

Your LLP P&L will show £Nil on the bottom line and net assets each year will also be £Nil, for the reasons previously noted. That's the very nature of a LLP without members agreement - your capital isn't really capital (whatever it means in this context) but is simply a loan to the LLP and all other interactions with the LLP will go through the members' loan accounts.

Now's the time to get both a good accountant and good lawyer to properly deal with this.

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Replying to johnt27:
paddle steamer
By DJKL
17th Mar 2021 09:52

I would point out that in my post I did mention that the numbers were presented differently within the accounts, when you are talking to someone who does not appear to understand anything about partnerships keeping the debits and credits really simple tends to be advisable.

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Replying to DJKL:
John Toon
By John Toon
17th Mar 2021 10:26

I agree with you that simplicity is key but LLPs are rarely simple :)

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Scalloway Castle
By scalloway
16th Mar 2021 14:14

I've done it as a picture

https://i.imgur.com/u7k3Z86.jpg

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By Tax Dragon
16th Mar 2021 16:05

I bet you wish you'd just bought the property personally.

In fact, why didn't you? What advantage did you think this structure would give you?

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By iclamp
17th Mar 2021 18:06

Thankyou everyone for your advice and comments. I agree an LLP is not ideal but I don’t want to unwind it or take on an accountant yet.
Just to return to the problem, can anyone write a really simple balance sheet for me to illustrate how an LLP profit is captured? Start with nothing at all (zero assets, liabilities and £1 capital introduced, say), then account for 50k income in year one, paid out to the 1 member (yes I know it needs more than 1 member but I’m simplifying)
Would this be:
Balance sheet
Assets= £1 (cash), liabs = 0, net assets = £1
Represented by Capital account:
Initial capital =£1
Profits = £50k
Drawings = (£50k)
Partnership Capital carried forward = £1?

Many thanks in advance :-)

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Replying to iclamp:
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By Paul Crowley
17th Mar 2021 18:30

The comment that you do not want an accountant has probably made this one of the last three posts
You have had good advice from all.
So clearly we are wasting our time

Most regulars here are accountants, tax advisors, or tax legal types.

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Replying to iclamp:
Scalloway Castle
By scalloway
17th Mar 2021 19:10

This is my amendment to your spreadsheet.

https://imgur.com/u7k3Z86

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Replying to scalloway:
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By iclamp
17th Mar 2021 20:10

That’s absolutely perfect- thanks!
I guess I don’t especially need “profit to date”. Maybe I should just delete that row?
It’s only because Companies House expect me to balance something.
Really appreciate your help..

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Replying to iclamp:
Stepurhan
By stepurhan
17th Mar 2021 20:05

iclamp wrote:
I agree an LLP is not ideal but I don’t want to unwind it or take on an accountant yet.

If you had taken on an accountant at the start, you might not have ended up in this mess.

False economy.

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