A capital interest is an interest that would give the holder a share of the proceeds in either of the following situations: The mere right to share in earnings and profits is not a capital interest in the partnership.
If expenses exceed revenues of the period, the excess is a net loss of the partnership for the period.
Management fees, salary and interest allowances are guaranteed payments.
If a certain amount of money is owed for the asset, the partnership may assume liability.
In that case an asset account is debited, and the partner's capital account is credited for the difference between the market value of the asset invested and liabilities assumed.
Capital account of each partner represents his equity in the partnership.
Capital account of a partner is increased in the following situations: The increase in the capital will record in credit side of the capital account.
The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his distributive share of the partnership's other ordinary income.
If total revenues exceed total expenses of the period, the excess is the net income of the partnership for the period.
Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income.
Compensation for services and capital are guaranteed payments.
The important features of and accounting procedures for partnerships are discussed and illustrated below.