It is correct. An illustration might help. Before you set up your partnership, say you and X each invest 10,000. Your basis in the partnership is now 10,000. In year one, the partnership earns 30,000, and you split that 50/50. Your basis has grown to 25,000 each, provided you keep the earnings in the Partnership. Distributing the earnings consequently lowers the basis again.
So now let's say each of you, because of other income you receive, decided to keep those earnings in the partnership (you pay the tax of the earnings on the personal return); and now in year two, the business had a bad year and suffers a $10,000 loss. Each of you will reduce your basis $5000 (lost money) and claim a 5,000 loss on your personal returns.
Because things were so bad, you each needed a bit of money and each took 10,000 out of the business. That money is now not taxed, and you each have 10,000 of basis still left in the business.
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