Basics of partnership accounting (Part I)

Many of the accounting principles on this website apply to any type of company. In this series of articles, we focus on the basics of accounting for partnerships, a business entity formed by two or more owners that is less structured than a corporation.

1. Fundamental concepts of partnership accounting

For the second part of this article series, refer to Basics of partnership accounting, part II.

The equity section of a corporationís balance sheet can be a complicated labyrinth to navigate. Large companies might have accounts for multiple classes of common stock, an account for preferred stock, an additional paid-in capital account, and a retained earnings account.† Partnerships, on the other hand, have a single capital account for each owner. Those capital accounts are the main focus of this article series.

Another difference between corporations and partnerships involves ownership rights. A corporate stockholder cannot take funds directly from the corporation to liquidate his investment (he could, on the other hand, sell his stock). By contrast, a partner can withdraw money for personal use unless such actions are restricted by the partnership agreement.

The rest of the differences between a partnership and a corporation are mainly cosmetic or legal in nature. You should know that partnerships are less rigidly organized - the partnership agreement generally trumps most laws when it comes to disagreements between partners. You should also be aware that partners can be held responsible for partnership liabilities, although certain kinds of partnerships offer the protection of limited liability.

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