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How partners' funds are recorded in the accounts

Simon Gray explains figures relating to GP partners' capital in the annual accounts balance sheet.

Surgery capital represents the partners’ interest in the equity in the surgery building, if they own it (Photograph: NTI)
Surgery capital represents the partners’ interest in the equity in the surgery building, if they own it (Photograph: NTI)

GP principals' investments in their practice are recorded in the annual practice accounts.

In the majority of medical partnerships, the partners' investment can be allocated under three headings:

  • Surgery capital
  • Fixed asset capital
  • Working capital

The section of the annual accounts in which these details are recorded is called the balance sheet.

Surgery capital
Surgery capital represents the partners' interest in the equity (unmortgaged value) in the surgery building, if they own it.

In the example balance sheet (see box), the valuation of the surgery premises is £1 million and there is an outstanding mortgage of £200,000.

How the figures add up
£ £
Surgery premises (as valued)   1,000,000
Fixed assets (at book value)
Current assets    
Stock of dispensing drugs 40,000  
Sundry debtors
Balance at bank 50,000  
Net current assets   180,000
Long-term liabilities    
Bank loan (mortgage on the surgery premises)   (200,000)

Net assets   1,055,000
Financed by:    
Property capital account   800,000
Fixed asset capital account   75,000
Current accounts   180,000

This means there is equity in the property of £800,000. This is reflected in the property capital account, which shows a figure of £800,000.

It will often be the case that not all of the partners in a practice are property-owning partners. For example, there could be four partners who are property owners and two others who have no equity in the building.

So only four partners would have a share in the property capital account.

Fixed asset capital
Fixed asset capital represents the partners' investment in fixed assets that are distinct from the fabric of the surgery building. Fixed assets are fixtures and fittings, medical equipment, computers and so on.

These represent the assets from which the partners earn their general practice income. It is appropriate for the partners to share the value of these in the same proportion as they share the practice profits.

Working capital
Working capital is the money available to run the practice; in effect, it is represented by the net current assets in the practice.

In the example, these assets total £180,000 and comprise the drugs stock (£40,000), sundry debtors (£90,000 owed to the practice) and cash at the bank £50,000).

It is appropriate for partners to own their working capital investment in their profit- sharing ratios. In many practices, the fixed asset capital is considered together with the working capital. In other words, it is common in GP accounts to see one capital account (representing equity in property) and one 'current' account, representing working capital and fixed asset capital.

Incoming partners
It is normal for incoming partners to be asked to contribute capital to the partnership, based on an agreed scale, or to a fixed capital account (see above) and this will be in line with their initial profit-sharing ratio.

It is unusual to expect new partners to contribute this capital before they have at least served their probationary period, when it will be reasonably certain that they will become a profit-sharing partner on a permanent basis.

It is also usual for new partners to buy into the surgery property only when it is clear that they will be staying. In some practices, this is delayed until the partner has reached parity and shares profits in the same ratio as the other partners.

Retiring partners
If retiring partners do not sell their share in the surgery property on retirement, the practice will need to speak to its solicitors about a separate legal agreement dealing with property ownership.

This is because partners who retire from the practice are no longer bound by the partnership agreement. In effect, a tenancy agreement will be needed between the partnership and the property owners (the former partners and the property-owning partners).

If retiring partners eventually want to sell their share in the property and the sale is deferred beyond three years after retirement and the value of their share has risen, they may lose the opportunity to pay a lower rate of capital gains tax.

Current accounts
The confusingly named current account balances are a reflection of the accuracy with which the partners' monthly drawings have been calculated.

Partners' current accounts can be regarded as their 'bank accounts' with the practice. On the one hand, they are credited with their profits and the prior profit allocation items to which they are entitled. On the other, set against this there are items including their drawings and payments made on their behalf, such as NHS pension, NI, reserve to pay income tax (if this is still funded from the practice) and any other personal items paid by the practice.

There are many systems of calculating drawings. Which-ever is used, it is essential for calculations to be accurately made.

  • Simon Gray is a partner with specialist medical accountants Henton & Co LLP, www.hentons.com, an Association of Specialist Accountants member

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