Partnerships and sole proprietorships have become common in many countries. This is because of the benefits associated with each of them. For instance, partnerships encourage sharing of looses while sole proprietorships do not. They are also easy to start. Though the businesses have become common, most people do not know how the businesses differ in terms of accounting process. Hence, this has made it hard to prepare financial statements for partnerships and sole proprietorships. This has in turn impacted decision making in the organization. This paper analyzes how sole proprietorship and partnerships differ in terms of accounting process.
There are various issues in sole proprietorships and partnerships. First, most people do not know how to prepare financial statements in partnerships and other businesses like corporation and sole proprietorship. This is because they do not understand the difference between the two businesses. In addition, they are not able to choose the right business entity because they are not aware of the advantages and disadvantages of each. Partnerships and sole proprietorships have various advantages and disadvantages that make them unique. For instance, a sole proprietorship is owned by a single person who is responsible for all the losses and profits in the organization. A sole proprietorship is hard to start and manage as the owner makes his or her own decisions. Hence, there are no conflicts (Solita &Fararjdo, 2010).
As a result new learning has occurred in businesses entities like partnerships and sole proprietorships. For instance, the new learning has identified how partnerships and sole proprietorships differ in accounting process as shown below. A partnership is considered an agreement between two or more people who agree to work together so as to achieve a common goal. In most cases, a partnership is formed between two business or more. The partners can decide to partner so as to share profits and looses. Partnerships are easy to establish unlike sole proprietorship business. This is because the partners are able to raise enough capital to start the business. In addition partnerships are good as they enable the partners to share looses and profits. In this case, the business is not able to collapse if the partners do not have enough money. Though partnerships have a lot of advantages, they also have some disadvantages. First, the partners share profit. The partners are supposed to decide on how to share their profits. In addition, partnerships are likely to face conflicts unlike sole proprietorships. Making decisions in a partnership is not easy and this can lead to collapse of the business. This is because people have different views. Moreover, in partnership, the owners are responsible for the actions of the other partners and also their actions. Another disadvantage is unlimited liability. The partners are liable for all the debts incurred in the business. A sole proprietorship is a business that is owned and run by one person. In a sole proprietorship there is no difference between the owner and the business. The owner is responsible for all losses and profits (Solita &Fararjdo, 2010).
A sole proprietorship is different from a partnership in accounting process. The two differ in terms of financial statement and financial reporting. The difference between accounting for partnerships and sole proprietorship is that the earnings in a partnership are allocated according to the number of partners. On the hand, the earning in sole proprietorship is not allocated according to the number of partners as the business is owned by a single person. In partnership the earnings should be allocated according to the fraction stated or ratio of capital investment. It can also be allocated according to the salary or allowances (Solita &Fararjdo, 2010).
In partnership, three financial statements are affected during the allocation of net income to the partners. That is the income statement, statement of owners or partners’ equity and the balance sheet. The statement of partners’ equity shows the equity of each person in the business and the allocation of net income per year. The statement begins by the capital balance at the start of the accounting period and shows other investments that have been made by the partners. It also shows the net income in the business and withdrawals made. All types of allowances in partnership are considered as withdraws. In sole proprietorship, the financial statement does not show the allocation of net income to partners as the business is owned by one person (Solita &Fararjdo, 2010).
A balance sheet in partnership is prepared the same way as in sole proprietorship. For instance, the balance sheet starts with cash and cash equivalents. The two are located at the top followed by assets in the company and liabilities. The assets and liabilities in a partnership are entering the same way as assets and liabilities in a sole proprietorship. The sole proprietorships differ with partnerships in terms of owner’s equity. In partnership, the owners equity are allocated to each partners based on the capital one has invested in the company or earnings. After that one is supposed to calculate the changes made in the owner’s equity financial statement. The calculations are made at the end of the year and they are based on the capital contribution of the partners. Sole proprietorships do not have owner’s equity financial statement as there are no partners in the business (Kimmel, Weygandt &Kieso, 2008).
When selecting either a sole proprietorship or a partnership, one should way the advantages and disadvantages of each. The advantages and disadvantages are stated above. After weighing the disadvantages and advantages one can decided to start a partnership or a sole proprietorship (Kimmel, Weygandt &Kieso, 2008).
The new learning that has occurred in this field can be applied in various areas. First, the new learning can be applied in financial accounting. In this case, the findings from the learning can be used to prepare financial statements for partnerships and also report financial information for partnerships. They cam also be used to prepare financial statements for sole proprietorships and also report their finances. This is because the new learning states clearly the differences between the financial statements or how the accounting process is different like the inclusion of owners’ equity in partnership. It also states how financial balances are written and income statement. Hence, the knowledge can be applied in any company (Kimmel, Weygandt &Kieso, 2008).
Moreover, the new knowledge can be useful when starting up businesses. In this case, one should know the different types of businesses entities so as to be able to select one which suits his or her needs. For instance, he should know how a partnership operates including financial information and reporting so as to make ethical decisions. In addition, one should know how sole proprietors functions so as to make proper decisions (Horngren & Harrison, 2007).
There are various activities that have facilitated learning in class. For instance, the use of case studies has helped students understand the topic stated above well. This is because many students have been able to apply what they have learned in class in case studies. In addition, the lecture has enabled students to build background by helping them link the topic being taught with other topics that are related. This has made it easy for the learners to comprehend the content. Also, the teacher has used a wide range of hands on experiments or scenarios and examples that are related to the topic to help students understand the topic (Horngren & Harrison, 2007).
In conclusion,sole proprietorships and partnerships differ in accounting process. The two differ in terms of preparation of financial statements and also reporting of financial information. The new learning in this field can be applied in many organizations to prepare financial statements for partnerships and sole proprietorships. It can also be used to start new businesses by choosing the best kind of business. In this case, one is able to identify the advantages and disadvantages of each business. Case studies, hand on experiments and building background has helped in understanding this topic.
Horngren, C., & Harrison W. (2007). Accounting. Upper Saddle River, NJ: Pearson Prentice Hall
Kimmel,P.D.,Weygandt,J.J.,&Kieso,D.E.(2008).Accounting. John Wiley and Sons
Solita,F.,&Fararjdo,C.(2010).Elementary Accounting. Goodwill Trading Co., Inc.