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!
Replies (39)
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In a partnership profit is added to partners capital and money paid out is deducted as drawings.
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.
LLPs don't have directors.
LLPs are an area a lot of accountants are uncomfortable with. Possibly pass this to someone else?
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.
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.
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
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.
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)
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.
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.
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.
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.
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
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
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.
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?
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.
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.
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?
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.
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.
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.
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?
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.
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.