Introduction
The ability to select one form of business from the others is a task that is difficult among many entrepreneurs as they venture into the business world. This is because of the mare reason that different organizations operate differently and each would require different levels of capabilities to operate. The differences come in during the formation process, the number of members to run the organization, the dissolution process, financial procedures, and legal matters among others. However, the financial procedures differ greatly with the different types of the business organization since this is usually the core function of any enterprise.
Even though there are standard accounting rules and principles to be adopted by any business enterprise, there are some certain principles that are assignable differently. A sole proprietorship, for example, will have fewer accounting procedures due to the fact that the proprietor owns all the assets of the enterprise. In addition, his or her payable business taxes can be consolidated with individual tax returns. On the other hand, business enterprises like partnerships and corporations are made up of partners and shareholders respectively who in the end expect to know how the enterprise is performing from the prepared financial statements. This paper critically analyses how partnerships and corporations differ in their accounting procedures by looking at the different financial statements and books of accounts kept by each. The different characteristics and benefits of each which are gauges used in selection will also be discussed.
The financial statements of a partnership
A partnership is a form of business enterprise that involves two or more people running it. Its formation is easy because legal procedures are no longer as compared to those of a corporation (Needles et al, 2007, p.16). During partnership formation, an agreement must be drawn up to indicate each partner’s income contribution to the enterprise. This is so because; the gains and losses of the business are usually allocated in terms of the contribution ratio. In this case, each partner possesses a capital account in which the contributions and either profit gains or losses are posted onto. As a result, each partner’s financial status can be easily depicted from this account. Another account prepared by a partnership is the withdrawals account for each partner. Unlike the capital account, the withdrawal account is temporary and runs for a short period of time, let us say one year. After which it is closed and the balancing figure deducted from the owner’s capital account. Apart from the mentioned accounts, the remaining financial analysis is usually carried out using the major financial statements which include the balance sheet, cash book, and the income statement among others.
The financial statements of a corporation
A corporation on the other hand is a business organization that is formed by shareholders. The incorporation of a business corporation is usually done at the state level hence the complication in its accounting procedures. There are several financial statements prepared by a corporation but the specifics include; a revenue account in which revenue income is reported. A company earns revenue income through the sale of goods or provision of services. The income generated therein is credited to the revenue account. Some of the revenue items are gains from the company’s investment or sales which at the end of the financial period are transferred to the income statement. The expense account is another important financial statement prepared separately and its contents are later transferred to the income statement at the end of the year (Needles et al, 2007, p.16). This account is responsible for all the company’s expenses including; interest expenses, commissions, losses on investments, and cost of goods sold just to mention but a few.
In addition to the aforementioned accounts, a corporation also prepares an assets account since the assets belong to the company and not individuals as it is in the case of partnerships. The assets have to be monitored in terms of their depreciation or amortization. Whether long term or short term the assets are usually recorded at their current values. In the end, the figures derived are transferred to the company’s balance sheet at a specific date. Other than the assets account, a corporation is also entitled to have a liability account since the shareholders have limited liability to the company (Madura, 2006, p.165). This means that the company is responsible for its liabilities, unlike a partnership where the partners share the liabilities and settle them. This account is important to the company as it shows the debts that are due such that the company settles them promptly. The liabilities may either be short-term for example salaries or long-term like deferred tax. The balancing figure arrived at is then transferred to the balance sheet of the company.
Differences in the accounting process and reporting
The parameters used to account for partnerships are usually direct and easy to get by unlike those of a corporation. For example, when accounting for a partnership, elements such as production overheads, direct labor, and direct materials are used. However, when accounting for a corporation you look at accounts payables and receivables, payrolls among others. A distinct difference accounting process between the two is that of accounting for tax. Since a partnership is not a separate entity, it is the partners who are taxed on their income. The case is different for corporations as the company is first taxed since it is a separate taxable entity. Thereafter, the shareholders are taxed on their dividends or any earnings. This, therefore, becomes double taxation as the same amount is taxed twice.
Another difference comes in during the reporting of owner’s equity in the balance sheet. The owner’s equity of a partnership is made up of each partner’s capital account while that of a corporation is complicated consisting of retained earnings, capital stock, shareholders equity. The financial statements of a corporation are usually prepared as a requirement by the law for the general public and the shareholders. It is for this reason that every corporation is mandated to publish its financial statements after a financial year. This does not apply to partnerships; hence the financial statements are prepared for the management of the partnership and any other willing partner.
Benefits of corporations
Corporations have many benefits to the owners or their shareholders. Some of the benefits enjoyed by members include the following;
First and foremost the corporation’s formation as required by the law is its legal entity. This implies that for any liabilities incurred by the business, the members are not liable. In this case, unlike other business entities, the personal assets owned by the proprietors’ cannot be seized to recover for debts incurred by the business. The business is responsible for its debts and no legal action can be taken in case of the corporation’s insolvency. This category of the business entity according to the law also enjoys untaxed benefits. The corporation pays its taxes separate from the shareholders thereby relieving them heavy taxes paid by their counterparts in sole proprietors and other entities (Madura, 2006, p.164). Their insurance, transport, health, and retirement plans are also subsidized depending on the country’s legal system.
Another benefit of Corporations is that they have a large number of sources for their capital. They can raise their capital in many ways such as selling stocks. It has also been noted that financial institutions are also more lenient to lend money to corporations than other business types. In addition to this, the corporation being a separate legal entity in accordance with the law its existence is not dependent on the shareholders. If a shareholder resigns from the corporation or ownership of the corporation changes the business is not dissolved unlike in a partnership where it is dissolved.
Incorporations a shareholder can transfer his or her shares easily. The transfer of shares does not have many formalities as the shareholder endorses on the back of the share certificate in the new owner’s favor. The change is then recorded in the corporation’s records and the transfer is complete.
Benefits of partnerships
Unlike corporations and other business entities to start a partnership, there are few legal formalities required. As for the partners, the most important thing is an agreement form to be filled in case of future misunderstanding. This will guide the partners in settling their differences. Just like corporations partnerships also have a wide range of sources of capital. They can even get loans from financial institutions by guaranteeing them with their own personal property and assets. Some banks also find it easier to give loans to partnerships than corporations even to an extent of offering them unsecured personal loans.
A partnership is flexible since the partners of the business are the managers hence decision making and management of the business is easy. This is because the partners don’t need to have a meeting like in corporations where all shareholders have to meet in order to make decisions. In this case, the partners can make decisions without having to arrange for meetings while in other cases one partner can make the decision all by himself.
Last but not least the rules and regulations governing partnership businesses are similar in most parts of the world (Needles et al, 2007, p.16). Unlike corporations whose, rules and laws differ from state to state. This makes the running and operation of partnerships very easy especially where the partnership business is an international organization.
Conclusion
Given the aforementioned differences between a partnership and a corporation in terms of its formation, operation and dissolution, there is a clear distinction between the two. Therefore when selecting either of the two, one should be able to consider the pros and cons of each before settling on one. None of the two can be said to be preferable to the other because both are business enterprises aimed at generating profits. Thus, different individuals have their own choice of the two given their intuition as well as other personal factors.
Having looked at the difference in accounting procedures of the two business forms, it can be depicted that accounting for a corporation is a little more tiresome and involving as compared to accounting for a partnership. Again, the unlimited liability in a partnership disadvantages the partners as they have to bear all the liabilities of the enterprise unlike in a corporation where the company is responsible for its own liabilities and expenses if any.
Reference List
Madura, J. (2006). Introduction to business. Cengage Learning
Needles, B. Powers, M. And Crosson, S. (2007) Financial and Managerial Accounting. Cengage Learning