Are you confused by the complexities of capital and current accounts or are you considering taking the leap to become a partner at your practice? Our medical team explore the difference in accounts and discuss some of the financial considerations of a partnership structure.
Capital and Current Accounts
When meeting clients with their year-end accounts, the Capital or current accounts are always a key area that the partners like to discuss. Depending on how the Practice Manager and the Partners like to operate the accounts, it can often mean an additional payout from the surgery at the year-end.
What is the difference between capital and current accounts ?
In one sense there is no difference. A partner’s total capital is the sum of the balances on their capital account and their current account. In practice, however it is convenient to separate the amount invested by the partner (the capital account) from the amount they have earned through the trading activities of the partnership (the current account). Therefore, the capital account is usually a fixed amount and may often be an amount agreed by the practice manager and partners e.g. a partner has 6 sessions therefore has £6,000 in their capital account.
It can be big decision for new partners to join a practice and potentially the biggest thought is moving from being a salaried GP to relying on varying monthly profits from the partnership as their income.
Assuming there is no property to be considered, a partner may not need to contribute financially to the surgery on day 1. However, most will expect the new partner to make a contribution to their capital account perhaps in the form of their £5,000 Golden Hello.
Thereafter, partners will receive a monthly amount in the form of drawings from the surgery which are recorded in their current accounts. These amounts are not taxable but merely a partner receiving their share of the profit. In addition, the surgery will pay the partners superannuation, perhaps also their tax liability and these amounts are all recorded as drawings as the surgery is paying for these on behalf of the partner.
Profits from the surgery at the end of the year are then allocated to the partners on their profit sharing ratios and it is this amount that is taxable on the individual partners. Assuming the profit is greater than the amounts withdrawn throughout the year there can often be a square up at the end of the 12-month period.
The following tables illustrate an example set of accounts. Assuming there were capital accounts, the full balances on the 31st March 2014 may be paid out to each of the partners.
On the 17th November we will be covering topics such as this at our seminar in Dundee; ‘Unravel the Complexities of Partnership Accounting’. If you would like to join us, please email email@example.com or call us on 01382 224 606 and speak to one of the medical team
Graham Parker A.C.C.A. Client Manager