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How to Record a Partner Buyout in QuickBooks Desktop and Online?

Contents1 What is a Partner Buyout?2 Why is it

Contents

What is a Partner Buyout?

A partner buyout refers to the process where one partner buys the ownership interest of another partner in a business partnership, leading to a financial transaction that impacts the equity value and financial statements of your company.

This transaction has significant implications on the balance sheet and profit and loss statement of the business. The buyout affects the equity section of the balance sheet, where the buying partner’s ownership interest is increased while the selling partner’s interest is reduced or eliminated. On the profit and loss statement, there may be one-time expenses or gains associated with the buyout.

When you buy out a partner or co-owner of a business, you can treat it as a purchase of a business on your small-business ledger. You should split the actual buyout payment into several categories so that you can properly write off the expenses at the end of the tax year. 

Why is it important to Record a Partner Buyout in QuickBooks?

Recording a partner buyout in QuickBooks is required to maintain accurate and comprehensive financial records, ensuring that the transaction is properly documented through appropriate journal entries, reflecting the impact on the partner’s Equity and the overall business valuation.

This process allows for a clear and transparent representation of the changed company’s ownership structure. By accurately recording the buyout, you can ensure that the partner’s capital contributions are properly adjusted and impact the overall equity allocation within the business. These records are essential for business valuation purposes, providing a deep insight into the company’s financial health and reflecting its assets, liabilities, and equity positions.

Tips for Accurately Recording a Partner Buyout in QuickBooks!

Below are the tips and tricks to accurately record a partner buyout in QuickBooks:

  • You are recommended to focus on detailed financial reporting, proper management of asset disposal, and adherence to financial compliance standards.
  • Updating the balance sheet to reflect the changes in ownership and ensuring that any assets or liabilities related to the buyout are appropriately accounted for. 
  • Also, consider the tax implications of the buyout and make adjustments to the software accordingly.
  • Properly documenting the disposal of assets and the allocation of funds is crucial for maintaining accurate financial records and meeting regulatory requirements. 
  • Streamline the partner buyout process and ensure compliance with financial regulations by staying updated with the latest financial reporting standards and accessing QuickBooks features.

How to create a Journal Entry in QuickBooks?

If you’re planning to start a new company file, as recommended by your accountant, it is important to enter the opening balances for your balance sheet accounts. This process ensures that your financial records accurately reflect the initial state of your business after the partner buyout. Also, if you decide to use the existing subsidiary ledger, you might be able to accomplish this by making a journal entry to transfer the appropriate amounts. 

You can create a journal entry to liquidate the partnership as of 8/31/23. The entry should debit all assets, credit all liabilities, and credit the partner’s equity accounts for their respective balances. It will zero out all account balances and close the partnership. 

Step 1: Add Journal Entry 

Click + New button and then select Make General Journal Entries.

Step 2: Select Opening Balance Equity Account 

Choose the Opening Balance Equity account in the Account field. Then, debit the amount. 

Step 3: Set up Owner’s Retained Earnings/ Equity Account

In the Next section, select the Owner’s retained earnings or Equity account and credit the same amount.

Step 4: Check the Debit and Credit value 

From here, verify the amounts and make sure the Credit and Debit columns must have the same value.

Step 5: Finishing up

Enter the details of why you made the journal entry in the Memo field. Once done, press the 

Save and Close buttons.

After this, go to create an equity account and enter the purchase price paid as the opening balance. It will establish the equity balance for the new sole proprietorship. 

Steps to Record a Partner Buyout in QuickBooks!

Recording a partner buyout in QuickBooks involves different steps, including the transfer of assets, proper documentation, setting up equity accounts, and accurate reporting to ensure accuracy in your financial records or statements.

How to Record a Partner Buyout in QuickBooks

Part 1: Create a New Partner Equity Account

Set up an owner or partner as a vendor

QuickBooks uses vendors as a way to track what you, partners, or co-owners contribute to your business. If you, an owner or partner, want to make a contribution, you need to set up a vendor for every person. Here’s how to set up accounts to track money that your partners or owners invest in or draw from a business.

Step 1: Choose Vendors

Navigate to Expenses and then select Vendors. 

Step 2: New Vendor 

Choose a New Vendor.

Step 3: Finishing up 

Fill out the form and then press Save. 

Set up Equity Accounts

When you’ve set up your owner or partner as a vendor, you need to set up their owner or partner equity account. These accounts allow you to see what someone invests in and draws from a business.

Add an Account to track their investment

If you’re the sole owner, you need to set up just one equity account. Here’s how:

Step 1: Go for the Chart of Accounts 

Hover over Settings, then choose a Chart of Accounts.

Step 2: Mark Equity

Click New and then select Equity from the Account Type dropdown menu. 

Step 3: Choose your Equity type 

Under the Detail Type dropdown, select Owner’s Equity or Partner’s Equity, depending on your situation. 

Step 4: Finishing up 

Press the Save and Close buttons. 

Add Multiple Equity Accounts

Before setting up accounts for more than one partner or owner, you’re required to create one equity account. After this, you can create separate equity accounts for each partner or owner.

If you’re filling out the info on the equity account, just choose Is sub-account and then enter the parent account.

Part 2:  Record the Partner Buyout Transaction in QuickBooks Desktop & Online

In QuickBooks Desktop

Step 1: Prepare the Buyout Details

Decide Buyout Amount: 

Calculate the total amount to be paid to the existing partner.

Payment Agreement: 

Ensure all partners agree on the terms of the buyout.

Signed Documents: 

Have a written agreement signed by all partners.

Step 2: Record the Buyout Payment

  1. Go for Banking:
  • Open QuickBooks Desktop and navigate to Banking from the top menu.
  • Then, select Write Checks. 
  1. Write a Check:
  • Choose the bank account from which the buyout amount will be paid. 
  • Type the name of the existing partner in the Pay to the Order field.
  • After this, enter the buyout amount under the Amount field.
  • From the Account field, select the partner’s equity account.
  • Add a memo for the buyout transaction (e.g., “Partner Buyout”).
  1. Finishing up:
  • Press Save and Close to record the transaction.

Step 3: Adjust Partner’s Equity Accounts

  1. Select Chart of Accounts:
  • Go to Company and then choose a Chart of Accounts.
  • Now, hover over Company once again to create a Journal entry.
  1. Make Journal Entry:
  • Select Make General Journal Entries.
  1. Record the Journal Entry:
  • Type the entry date as of the buyout date.
  • Debit the existing partner’s equity account by the buyout amount.
  • Credit the cash/bank account used to pay the buyout.
  • Add a memo to describe the transaction (e.g., “Partner Buyout Adjustment”).
  1. Finishing up:
  • Hit Save & Close tabs to record the journal entry.

In QuickBooks Online

Step 1: Prepare the Buyout Details

Fix Buyout Amount: 

Calculate the total amount to be paid to the existing partner.

Payment Agreement: 

Make sure all partners agree on the terms of the buyout.

Signed Documents: 

Have a written agreement signed by all partners.

Step 2: Record the Buyout Payment

  1. Mark New:
  • Open QuickBooks Online and then select + New button from the left menu. 
  1. Write a Check:
  • Select Check and then click on the bank account from which the buyout amount will be paid.
  • Enter the name of the existing partner under the Payee field.
  • Type the buyout amount in the Amount field.
  • Choose the partner’s equity account from the  Category Details section. 
  • Add a memo for the buyout transaction (e.g., “Partner Buyout”).
  1. Finishing up:
  • Click Save and close to record the transaction.

Step 3: Adjust Partner’s Equity Accounts

  1. Search and click New:
  • Select + New once again.
  1. Create a Journal Entry:
  • Select Journal Entry.
  1. Record the Journal Entry:
  • Enter the entry date as of the buyout date.
  • Debit the existing partner’s equity account by the buyout amount under the Journal Entry window.
  • Credit the cash/bank account used to pay the buyout.
  • Add a memo to describe the transaction (e.g., “Partner Buyout Adjustment”).
  1. Finishing up:
  • Press Save and Close to record the journal entry.

Part 3: Adjust the Partner’s Equity Accounts in QuickBooks Desktop & Online

For QuickBooks Desktop

Step 1: Identify the Need for Adjustment

Review Financial Statements: 

Check the balance sheet and partners’ equity section to determine the need for adjustments.

Fix Adjustment Amount: 

Calculate the exact amount that needs to be adjusted.

Step 2: Prepare the Adjusting Entry

Gather Documentations: 

Ensure you have all necessary documentation and approval for the adjustment.

Decide the Adjustment Type: 

Agree whether the adjustment is an increase or decrease in the partner’s Equity.

Step 3: Create a Journal Entry

  1. Make Journal Entries:
  • Open the QuickBooks Desktop application and navigate to Company from the top menu.
  • Then, select Make General Journal Entries.
  1. Record the Journal Entry:
  • Date: Enter the date for the adjustment.
  • Debit/Credit: If increasing the partner’s Equity, credit the partner’s equity account and debit the corresponding account (e.g., cash or retained earnings). However, if the partner’s equity is decreased, debit the partner’s equity account and credit the corresponding account.
  • Memo: Add a memo to describe the adjustment (e.g., “Adjustment to Partner A’s Equity”).
  1. Finishing up:
  • Click Save & Close to record the journal entry.

Step 4: Verify the Adjustment

Review the Balance Sheet:

  • Move to Reports from the top menu.
  • Click on Company & Financial and then select Balance Sheet.
  • Make sure the adjustment is correctly reflected in the partners’ equity section.

For QuickBooks Online

Step 1: Determine the Need for Adjustment

Review Financial Statements: 

Verify the balance sheet and partners’ equity section to determine the need for adjustments.

Fix Adjustment Amount: 

Calculate the exact amount that needs to be adjusted.

Step 2: Prepare the Adjusting Entry

Gather Documentations: 

Make sure you have all the necessary documentation and approval for the adjustment.

Decide the Adjustment Type: 

Agree whether the adjustment is an increase or decrease in the partner’s Equity.

Step 3: Create a Journal Entry

  1. Login and Create Journal Entries:
  • Log into your QuickBooks Online account and then Click + New from the left menu. 
  • Then, select Journal Entry from the options.
  1. Record the Journal Entry:
  • Date: Type the date for the adjustment.
  • Debit/Credit: If increasing the partner’s Equity, credit the partner’s equity account and debit the corresponding account (e.g., cash or retained earnings). However, if the partner’s equity is decreased, debit the partner’s equity account and credit the corresponding account.
  • Memo: Add a memo to describe the adjustment (e.g., “Adjustment to Partner A’s Equity”).
  1. Finishing up:
  • Click Save and Close to record the journal entry.

Step 4: Verify the Adjustment

Evaluate the Balance Sheet:

  • Head to Reports from the left menu.
  • Choose a Balance Sheet.
  • Ensure that the adjustment is correctly reflected in the partners’ equity section.

Bottom Line!

A buyout agreement is a legally binding contract stating that when a co-director leaves the business, either voluntarily or involuntarily, the other co-director(s) will be given the option to buy their shares. The opportunity to buy out a partner may be introduced without notice if the partner decides to accept a new job or pursue another business venture. 

Starting a business with a partner can help raise funds faster, spread the financial risk and divide directorial responsibilities. There are many reasons behind a partnership buyout such as partnership split, sole ownership, criminal activity reduction and much more.

By : July 9, 2024
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