accounts reflect the ownership of the property accurately?
It is becoming increasingly common that only a few of the
partners within a partnership will own a share of the practice
property. Therefore, if not all the partners have
a share in the property, it is important that the accounts
clearly reflect who does own it. Otherwise it can
cause financial implications for the partnership as a whole.
We were approached by a GP whose partnership split on 31st
March 2004. He has a lot of money left in the practice
and is concerned as to how he will be paid this money due
to the fact that the practice bank account is overdrawn.
The only assets the practice has are the fixtures and fittings
which have a very small value and the property. He
does not own a share of the property, as this is owned by
only three of the five partners in the practice.
The first problem was that, looking at the partnership
accounts, it was not clear who actually owned the property.
The reason for this was that as profits had been shared
in profit sharing ratios with no prior allocations, both
the non property owning partners had actually received a
share of cost rent income and had also been charged with
a share of mortgage interest even though they did not own
the property. Because of this, it could be argued that they
did, in fact, also own a share of the property.
Practices who own their property will receive either cost
rent or notional rent income. This income is used
towards paying the cost of the mortgage on the property.
It is normal accounting practice to allocate this
income between the property owning partners together with
the related mortgage interest. Even if all partners
in the practice own the property, they may own it in different
shares to their profit sharing ratios so it should be prior
allocated before the balance of profits is split in the
profit sharing ratios.
Another problem for this practice was that the accounts
do not separately identify each partner's capital that related
to their investment in the property and the capital which
related to their investment in the working capital of the
If a practice owns their surgery premises and the property
is included in the accounts with the related mortgage, there
should be separate capital accounts which show each partner
investment in the net equity of the property. This
also clarifies which partners own the property and their
share of it.
Each partner's investment in the working capital is normally
shown as a "current account", this would be a
partner's share of profits less drawings. Current
account values are increased by profits earned and decreased
by drawings. A partner is only entitled to draw their
share of profits from the practice. A partner's current
account balance would increase if their drawings were less
than their profits or decrease if their drawings were more
than their profits.
If a partner left, they would be entitled to their current
account balance, if this was overdrawn then they would have
to repay this to the practice as this means they have taken
more money from the practice than they are entitled to.
A partner would only be entitled to their capital account
balance if they sold their share of the property.
The implication for this practice of not separating out
the capital which relates to the net equity, means that
the practice could not identify the partners' profits which
had not been drawn out. Therefore they would not know if
any partner had actually taken more drawings than their
share of profits.
For this GP's partnership, once the net equity had been
separated out from the balances on the capital accounts,
it showed that two of the property owning partners had actually
taken more drawings from the practice than they were entitled
to. These partners owed the practice nearly £20,000
each which had accumulated over several years of overdrawing.
As the practice had dissolved, these partners would
need to repay this money into the practice so that the other
partners, who had left money in the practice would be able
to be repaid what was owed to them.
One of the reason's why the partners' current accounts
showed that they had taken more drawings than profits was
due to the non property owing partners receiving a share
of cost rent income which they were not entitled to. The
allocation of profit had not followed the intentions of
the partners. This income should have only been allocated
to the property owing partners. If all partners agreed they
could put an adjustment through the dissolution accounts
to correctly amend this. However as all the previous accounts
had been signed and agreed by all partners, the non property
owing partners could argue that the accounts be left as
It is important to ensure that your accounts correctly
reflect the ownership of the property and to ensure profits
have been correctly allocated. If for this practice,
the net equity had been shown separately, this practice
would have been able to clearly identify each partner's
profits which had not yet been drawn and could ensure that
no partner drew more than they were entitled to. This
would avoid the problem of asking leaving partners to repay
money back to the practice, which could be large sums of