Businesses are two types, sole proprietorship, and partnership. A sole proprietorship is a business which has only one owner. There is only one person who invests all the money and only he is liable to it. He’s the only one who enjoys the profit and has to bear the loss.
The business in which there is more than one owner. There is more than one person who invests in the business. Partnership is further divided into two categories
1. General partnership:
More than one owner invests or provides capital for the business. In general partnership, every partner is liable for the money he invests. Each of the people enjoys the profit of the amount he has invested. Everyone is responsible or liable in the case of loss. The personal assets of the owners are at risk. If any problem occurs, the firm can attack their personal assets. They have this right.
2. limited partnership:
Limited partnership also called as limited liability is totally opposite to the general partnership. In this type of partnership, owners are liable only for the money that they invest. They enjoy profit and their personal assets are not at risk.
The partnership financial statements are made in the same way as other financial statements. There are some differences also. They contain each partner’s contribution or capital. The duties and responsibilities of each partner are clearly written down. The statements also show the amount of the profit or losses they will get. If you have all this information, you can easily prepare financial statements for partnership business.
Statement of Partnership:
The ending capital of prior accounting period is recorded as the starting capital of next accounting period. It is recorded as credit because it is liable of the business. The other investments during the time as also noted down as credit. The net income and salaries of the investors or owners are recorded as the debt. If any owner withdraws some money it is recorded as the credit. The debits are subtracted from credit and the remaining money is each partner’s share.
Income statement contains the information about expenses, revenue and tells the profit or Loss Company has generated.
Owner Equity statement:
These financial statements contain net capital invested from every owner. The profit or loss generated and calculated from the income statement and the withdrawals. The profit is added to the capital and withdrawal is being subtracted. The remaining money is the partner’s equity.
Balance sheet contains assets, liabilities and owner’s equity. As there is a partnership business so owner’s equity will be partner’s equity. Assets are the total things a company has. It includes cash and cash equivalents, equipment, account receivables and vehicles etc. Liabilities are the responsibilities of the business. Loans, debts, account payables, unearned revenue etc. is included in it.
The equation for checking balance in partnership’s equity is
Partnership’s equity= Total assets – Total liabilities
The partner’s equity is not same for every owner. The owner who invests more gets more profit. For example, there are two owners A and B. A invests 10,000$ and B invests 20,000$. The total net income generated is 80,000$. The partner A, as he has invested less will get less profit that is 40 percent of the total profit whereas, the owner B will get 60 percent of the total profit.
Total profit is calculated by subtracting total capital from total income. 80,000$ (total income) minus 30,000$(total investment) will be equal to 50,000$. The owner A will get 40 percent that is (50,000 * 40/100) or 20,000$ and the owner B will get 60 percent of the total profit (50,000 * 60/100) or 30,000$.