Do your 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
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 they are.
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 money.