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

New implications of financial reporting for partnership firms that are different from any other type of business entity is related with the payment of taxes, penalties and interests. If the taxes that are paid by the entity are related to the firm, they are accounted as per FASB ASC 740. But if the taxes paid are related to the partners or owners, they are accounted in a transaction with the owners. Whether taxes are paid for the owners or for the firm, should be determined for each tax payment and this determination is done on the basis of certain laws and regulations.

Further, implications of financial reporting for partnership firm is different from implications for the sole proprietorship or corporations as partnership business is different from the two stated business. This involves creation of partnership deed, liabilities of partners are unlimited and in corporations liabilities of the owners are unlimited, profits are shared as per the profit sharing ratio, this business is little unstable.

Closing process of partnership involves creation of the realization account. All the assets are sold or disposed and outside liabilities are paid out first. After the payment of all the outside liabilities, the remaining balance is shared among the partners in their profit distributing ratio. This closing process is different from the closing process of sole proprietorship and corporation, as when a sole proprietorship business is closed owner is required to clear the payment of all the creditors and file a tax return. A corporation is closed when it starts suffering from losses, bankruptcy, death of promoters, etc. A corporation can be closed at the will or consent of the owners, the tribunal or by government itself. Realization account is not prepared and the balance is not shared by the partners as per their ratio in sole proprietorship or corporation.