Question

What are the unique financial reporting implications of the Partnership entity in comparison with the Proprietorship and Corporate structures? How does the closing process differ for the Partnership?

Answer 1

Partnerships and sole proprietorships are referred to as pass-through entities. This is because sole proprietors and partners in a partnership report their share of company profits and losses directly on their personal income tax return. Sole proprietorships and partnerships are not required to file business taxes with the Internal Revenue Service.

Corporations are subject to double taxation. This occurs when the corporation pays taxes on the company's profits at the business level, and shareholders pay taxes on income received from the corporation on their personal tax return.

With a sole proprietorship:
1) close all revenues to income summary
2) close all expenses to income summary
3) close income summary to the owner's capital account
4) close drawing to the owner's capital account

With a partnership:
1) close all revenues to income summary
2) close all expenses to income summary
3) close income summary by allocating each partner's share of net income or loss to the individual capital accounts