sole trade to partrnship: what happens with capital account

Monsoon

I have a sole trader who has become a partnership.

The closing sole trader accounts shows capital introduced of, say £30,000 and a loss of £20,000 with a balance sheet total of £10,000 (negative).

He has got the benefit of the loss on his tax return to carry forwards.

What happens with his capital account when it becomes a partnership?

I don't want him to lose the money that he is owed by the business, but the net on his capial account is £10k and he is owed £30k.

What are the accounting entries?

Apologies if this is a newbie question but I havent come across this before and I also hate partnership accounts!

Tiger

The sole trader business closes and all assets liabilities are passed to the sole trader.

He then chooses to set up a new entity as a partnership and can 'introduce' any tangible assets at WDV and maybe goodwill too into the new business thereby giving him a figure owed to him as an individual by the partnership.

When he closes the sole trader bank account its balance (cr or dr) also passes to him personally.

The partnership agreement should clarify the arrangement with regards to introducing an overdrawn bank balance (if applicable) ie 50/50 to each partners capital ac or other.

Hope that helps.... my opinion I expect you'll get others!

Monsoon

Thanks.

I've transfered the closing sole trade balance sheet over to the partnership accounts.

So if I want his capital account to be £30k instead of £10k then I need to show £20k goodwill I guess? Is that right?

Also, I don't want £20k goodwill as that will give rise to CGT.

Maybe he is stuck with a lower value on the capital account.

Edit: I know goodwill is a value and I can't jsut choose the one I want! Am not sure there is £20k goodwill there anyway.

paulstafford

If the new partner is joining an existing business, why do you need to make any journal entries to the existing partners capital account?

edit: posted above before monsoon replied.

ps

you can't capitalise internally generated goodwill.

Monsoon

So am I stuck with a balance of £10k on his capital account then? *still confused*

Tiger

No he is ultimately not going to recoup his full 30k back and I agree you cannot raise 20k goodwill just to get his capital account where he wants it.

Presumably there is some goodwill you can transfer, ie business name reputation etc whilst staying inside the CGT limit, possibly (?) you would have had to raise it in the sole trader accounts before cessation?

Paul I don't think you can go from sole trader to partnership without transferring the balance sheet via journals etc. Its different if its already a partnership and your just adding a further partner......

Maybe I'm wrong?

EDIT : Sorry monsoon not actually very much help!

Monsoon

A sole tradership is arguably a partnership of one, so "becoming a partnership" can also be "adding one partner".

However, that is far too complicated for my tiny brain and so I have transferred the closing BS in the ST to the opening balance in the P'ship.

Hang on, if we are bringing in the assets and the liabilities of the ST business (which is correct as it's an ongoing business which the new partner is joining), then instead of just showing the bottom half of the BS as £10k capital, we can expand that to show £30k capital less £20k loss b/f). Can't we?

Either way the net is £10k, it just depends whether it is split out or not.

Or not?

paulstafford

looks like the easy solution to me

PGM

Monsoon wrote: »

Either way the net is £10k, it just depends whether it is split out or not.

Or not?

Yes the company has lost 20k so in effect his capital is down to 10k.

You'll need to work out if the new partner is just buying a % of the business as it stands, or introducing capital, or a combination of the two.