Understanding Basic concepts! How to deal with capital and distributions in partnersh

[ubros]

I am new to accounting! I am having difficulty understanding the basic principal of accounting.. consider the following scenario. Two partners A and B have decided to start a business and they both have contributed 500000 USD each as startup capital. So total is 1 million to start with.. now once the business is started it will have expenses such as rent, salaries, equipment purchases that they will be paying from the 1 million and eventually they will sell the service/product that will generate income... The question is how do they pay each other at the end of the year! My understanding is that they should split the profit that is usually revenue - expense but the expenses are from the capital so do they have to pay back and settle the capital first and then distribute! like if they have take 500000 as expenses from the capital and profit is 700000 so they settle the capital and share 100000 each!. I have gone thru investopedia and read about balance sheet, cash flow, income statements but all these pieces are not fitting together for me! Any clarification is plain language is highly appreciated on how this should be done realistically?

 

[Counterofbeans]

What does the partnership agreement say?

 

[Triest123]

I am new to accounting! I am having difficulty understanding the basic ! Any clarification is plain language is highly appreciated on how this should be done realistically?

=> Only the profit earned (i.e. Revenue minus Expenses) by the Partnership can be distributed (i.e. paid) to the partners, which is based on the profit sharing ratio as stated on the partnership agreement.
The capital injected by the partnership is non-distributable unless the partnership is dissolved. It is usually placed on the capital account of the Partnership.

 

[Samir]

And if partners do take some of the originally invested capital back out of the business, it is a capital draw, not income.