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Explaining the GP practice accounts – Part 3 of 10

by in Accounting

Partner current accounts made simple

An easy way to understand the partner current accounts work is to imagine them as the partners’ mini bank accounts within the practice. As a business, the practice needs working capital to cover the cash-flow for day-to-day expenses such as staff wages. This working capital is invested by the GP partners and is recorded in the partner current accounts.

The balance for each partner current account represents either money they have invested directly into the practice, or profits that have been earned over the years (and been taxed), but not taken out.

All new GP partners need to contribute working capital, but these days new partners are very hard to find and most non-dispensing practices avoid asking for a lump sum on day one of a new partner joining. Instead, most practices now allow their new partners to restrict their drawings for the first few years or so to build up their working capital at a more manageable rate. Other new partners may prefer to borrow money – the interest would be tax deductible – and be able to receive full drawings.

In an ideal world, at the end of each accounting year, practices should look at how much working capital they will need over the coming year and the partners should draw out the excess, leaving the balances in the profit-share ratios stated in the practice agreement. This reduces the risk of large amounts being built up in the partner current accounts that would need to be drawn down if a partner decides to leave the practice.

However, senior partners sometimes restrict their drawings to leave enough funds in the practice for it to run. This is often done to help out younger partners who have bigger financial commitments at this stage in their careers (for example student loans, mortgages, pension contributions). The flip side is that it can lead to large sums accumulating in the partner accounts of the senior doctors which at some point will need to be withdrawn. The solution is to plan ahead to minimise the effects of under or over-drawing and plan for payouts in advance. There is more about managing incoming and outgoing partners in part 10 of this tutorial.

In part four (coming soon) there is an explanation of the different income streams detailed in the practice accounts. You can catch up on part one and part two on the Practice Index blog.

Written by the Association of Independent Specialist Medical Accountants (AISMA)

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AISMA
Explaining the GP practice accounts – Part 2 of 10

January 30, 2020

Explaining the GP practice accounts – Part 1 of 10

January 30, 2020

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