10.2.3.b: Note on Capital Accounts

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Abstract

The mechanics of partnership accounting involve the creation of an animal called the "capital account," a bookkeeping entry established for each partner and maintained in accordance with very precise rules established by Treasury Regulations.[1] In this case, the tax treatment and sound economic and accounting principles are generally in agreement.[2] The initial credit to the capital account is the amount of money (or the fair market value of property) contributed by the partner to the capital of the partnership. Realized profits and losses are run through the partner's capital account, meaning that, as of the end of each accounting period, the partnership's books are closed and profits or losses realized since the last closing are allocated to the capital accounts of the partners in accordance with the allocation formula then in effect. Distributions decrease the capital account of the partner to whom the distribution is made...