Question

Reflect on this week's lecture and assignments. In your own words (150-200), summarize the key differences in accounting for partnerships versus accounting for corporations.

Answer 1

Answer: The basic steps are same in partnership accounting and accounting for corporations but the only difference between the two is, "Income tax and equity account".

Key differences in accounting for partnerships versus accounting for corporations:

(1): Income tax- Internal revenue service considers corporations as separate legal entity and independent tax entity. They should compute federal income tax on earnings. When a corporation distributes funds or profits, the individuals who are receiving these distributions are liable for personal income tax, so there is double-taxation (If it is a C corporation).

IRS considers partnership as Pass through entity. A partnership is not subject to federal income tax on profits, partners report their distributions on their personal income tax, they have to file the return. In partnership, there is no dual taxation. Accounting for partnership requires maintaining separate account for each partner so as to record the earnings, loans or drawings against earning.

(2): Equity Accounts- Corporation do not make equity account separately, equity is recorded as a whole under the head of Stockholder's equity section, amount that is not distributed as dividend, is recorded as "Retained earnings",

Partnerships do not use stockholder's equity account, they do not show dividend and retained earnings. Partnership does not pay dividend to shareholders. Each partner has two equity accounts, on for recording capital and other for recording withdrawals.