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Accounting for limited liability partnerships - a brief guide

Introduction
The accounting and reporting requirements for small LLP's are governed by the Companies Act 2006 (as applied to LLP's by subsequent regulations), FRS 102 and the Statement of Recommended Practice (SORP) "Accounting by Limited Liability Partnerships"..

Many of the reporting requirements for LLP's are identical to that for companies. The major difference (and complexity) is the way that members' capital and other amounts due to/from members (collectively known as members' interests) are accounted for and reported. Also, automatic divisions of profit are deducted on the face of the profit and loss account under the heading Members remuneration charged as an expense.

See also
LLP double entry examples

Members' interests
Accounting for partners' interests in an unincorporated partnership, at least in VT, is very simple. All the amounts due to a partner are included in a single capital account and a note shows the movement on the account broken down into profit share (including notional salaries), capital introduced and drawings. It is more complicated for an LLP. In an LLP, credit balances with members must be divided between Loans and other debts due to members (eg debt) and Members' other interests (eg equity). Each of these must be further analysed as follows:

  Loans and other debts due to members £
  Members' capital classified as a liability X
  Loans from members X
  Amounts due to members in respect of profits X
  Other amounts X
   
X
     
  Members' other interests £
  Members' capital classified as equity X
  Revaluation reserve X
  Other reserves (typically unallocated profit) X
   
X

The distinction between financial liability (debt) and equity
Members' capital is considered to be a liability and not equity if there is a contractual obligation for the LLP to repay it to the members, even if that obligation is conditional - for instance on retirement. Many LLP's may therefore have no equity capital at all.

Profit and loss account
The profit and loss account for an LLP is similar to that of a company, except that taxation is usually is the personal liability of members and hence not shown. The SORP also adds a new category at the end of the profit and loss account, Members remuneration charged as an expense. Hence the last three lines show the following:

  Profit for the financial year before members' remuneration and profit shares X
  Members remuneration charged as an expense (X)
  Profit for the financial year available for discretionary division between members
X

Profit share
In an LLP, there is a distinction between the automatic division of profits and profits available for discretionary division. Profits are available for discretionary division only if the LLP has an unconditional right to refuse payment of the profits of a particular year unless and until the members agree to divide them (albeit in pre-agreed ratios).

Profits that are automatically divided are deducted under the heading Members remuneration charged as an expense at the bottom of the profit and loss account. For many LLP's, all divisions of profit will be deemed to be automatic and the net figure at the bottom of the profit and loss account will always be zero. This contrasts with an unincorporated partnership, at least in VT, where neither partners 'salaries' nor profit share are shown on the face of the profit and loss account.

The double entry for the two types of profit share are as follows:

  Automatic division of profits £ £
  Debit: Members remuneration charged as an expense at the bottom of the face of the profit and loss account X  
  Credit: Amounts due to members in respect of profits in the balance sheet   X
       
  Discretionary division of profits £ £
  Year -end transfer of net profit (automatic in VT)    
  Credit: Other reserves in the balance sheet   X
       
    £ £
  Upon allocation to members    
  Debit: Other reserves in the balance sheet X  
  Credit: Amounts due to members in respect of profits in the balance sheet   X

Losses
There are no specific provisions in the SORP regarding losses. Losses should normally be debited to Other reserves in the same way that profits available for discretionary division are credited. This is done automatically by both VT Final Accounts and VT Transaction+.

If profits are normally automatically divided, there is an argument for showing losses as negative membersí remuneration and debiting the members. However, in this case the accounts would show the members as being liable for the loss.

Disclosure of members' interests by member
There is no requirement to disclose membersí interests by member and this information is not included in the LLP templates in VT Final Accounts.

If the LLP chart of accounts in VT Transaction+ is used for the bookkeeping for the LLP, the Display>Account Balances By List report shows the movements and balances on the various categories of membersí interests with a column for each member. This report could be appended to the accounts printed from VT Final Accounts, or copied and pasted into an additional sheet in the accounts workbook.