How FreeAgent handles the year end for a partnership or LLP
At the end of an accounting year, a business’s profit and loss accounts are ‘cleared down’ to retained profits (code 968 in FreeAgent) so that the business can measure profit and loss for the following year. FreeAgent clears the accounts down automatically for you.
If you have a partnership or LLP account and have set up the profit share, the profits will be divided between the partners at the end of the business’s accounting year.
Below are the steps that FreeAgent takes for the year-end process for a partnership or LLP.
1. Individual categories in the profit and loss account are cleared
If an account in the profit and loss account has a credit balance, for example ‘Sales’, FreeAgent adds an equal debit entry to bring the account balance back to zero and adds a corresponding credit entry in the retained profit account.
If an account in the profit and loss account has a debit balance, for example a cost account, FreeAgent adds an equal credit entry to bring the account balance back to zero and adds a corresponding debit entry in the retained profit account.
2. Profit or loss for the accounting year is calculated
This means that the retained profit account (code 968 in FreeAgent) will have some credit and some debit entries. If the total of the credit entries in the retained profit account is higher than the total of the debit entries, the partnership has made a profit for the year. If the total of the debit entries in the retained profit account is higher than the credit entries, the partnership has made a loss for the year.
3. Profit is moved to the partners' capital accounts
FreeAgent then divides up the profit or loss for the accounting year between the partners according to the partnership profit share that’s been set up.
Each partner’s share of the profit or loss from the retained profit account (code 968 in FreeAgent) is added to their capital account (code 901 in FreeAgent). This is because the partnership doesn’t pay tax in its own right as partners pay Income Tax and Class 4 National Insurance on their share of the business's profit.
This means that the retained profit account (code 968 in FreeAgent) will have a zero balance at the year end as it's the partners, rather than the business, who are due to pay tax on the profits.
Below is an example of how profits are divided between partners in FreeAgent.
If a partnership has made a profit of £7,320 for the accounting year before the partners took any drawings out, the profit figure can be found by navigating to the Profit & Loss report. Please note that it’s the operating profit figure we’re using.
If the partnership has two partners who have equal profit shares, FreeAgent will divide the profit equally between them so that they’ll get £3,660 each.
Both partners can view their capital account (code 901 in FreeAgent) by navigating to the Show Transactions report in FreeAgent. If a partner owes the partnership £550 as at the end of the accounting year, for example, this will be before the profit share is allocated to them.
FreeAgent will allocate their £3,660 profit to their capital account (code 901 in FreeAgent) ‘overnight’ at the end of the accounting year. Therefore, the brought forward figure at the start of the next accounting year will change to £3,110 ( -£550 + £3,660).