Accounting: The Language of Business (Part 81)

While it's trendy to outsource your accounting to a third party, once you hit a certain size, it's dangerous.

Brad Feld

 Accounting for Partnerships and Limited Liability Corporations (Part B)

by

Charles Lamson

Equity Reporting for Alternate Entity Forms

The owners of any business are concerned with their proportional ownership and changes in their ownership. This is because the owners' proportional ownership often determines their share of earnings and the value of their ownership interest. As a result, a business reports the ownership equity balances and changes in those balances. In the following sections, such equity reports are Illustrated for each entity form.

Equity Reporting for Proprietorships

Since the proprietorship is a separate entity for accounting purposes. The transactions of the proprietorship must be kept separate from the personal financial affairs of the owner. Only in this way can the financial condition and the results of operations of the proprietorship be accurately measured and reported.

The accounting for a proprietorship was illustrated in an earlier post. This accounting includes the use of a capital account to record investments by the owner in the business. At the end of the period, the net income or net loss is closed to the owner's capital account by using Income Summary. Withdrawals by the owners are recorded in the owner's drawing account. At the end of the period, the drawing account is closed to the owner's capital account, and a statement of owner's equity is prepared.

The statement of owner's equity summarizes changes in owner's capital for a period of time. To illustrate, the statement of owner's equity for a proprietorship, Greene Landscapes, owned by Duncan Greene, is shown below.

Equity Reporting for Corporations

The accounting for a corporation was illustrated in preceding posts. This accounting includes the use of capital stock accounts, such as Common Stock and Preferred Stock, to record investments by the stockholders. Through the closing process (The closing process is a step in the accounting cycle that occurs at the end of the accounting period, after the financial statements are completed. This serves to get everything ready for the next year.), dividends and the net income or net loss are recorded in the retained earnings account.

Significant changes in stockholders' equity should be reported for the period in which they occur. When the only change in stockholders' equity is due to net income or net loss and dividends, a retained earnings statement such as the one illustrated in part 79 is sufficient. However, when a corporation also has changes in stock and other paid-in capital accounts, a statement of stockholders' equity is normally prepared. The statement is often prepared in a columnar format where each column represents a major stockholders' equity classification. Changes in each classification are then described in the left hand column. Exhibit 2 illustrates a statement of stockholders' equity for Telex Inc.

EXHIBIT 2 Statement of Stockholders' Equity

Equity Reporting for Partnerships and Limited Liability Corporations

Reporting changes in partnership capital accounts is similar to that for a proprietorship except that there is no owner's capital account for each partner. The change in the owners' capital accounts for a period of time is reported in a statement of partnership equity. The statement of partnership equity discloses each partner's capital account in the columns and the reasons for the change in capital in the row. Exhibit 3 illustrates the disclosure for Investors Associates, a partnership of Dan Cross and Kelly Baker.

EXHIBIT 3 Statement of Partnership Equity

The equity reporting for an LLC is similar to that of a partnership. Instead of a statement of partnership capital, a statement of members' equity is prepared. The statement of members' equity discloses the changes in member equity for a period. The disclosure would be very similar to Exhibit 3, except that the columns would be the members of the LLC rather than partners. The statement of members' equity for HealthNet, LLC, is illustrated in Exhibit 4.

EXHIBIT 4 Statement of Members' Equity

Accounting for Partnerships and Limited Liability Corporations

Most of the day-to-day accounting for partnership or an LLC is the same as the accounting for any other forms of business organization. The accounting system described in previous posts may, with minimal changes, be used by a partnership or an LLC. However, the formation, division of net income or net loss, dissolution, and liquidation of partnerships and LLCs give rise to unique transactions.

In the next several posts, we will discuss and illustrate these unique transactions for a partnership and an LLC. Since an LLC is treated in the same manner as a partnership, except that the terms "member" and "members equity" are used rather than "partner" or "owners' capital," we show the parallel journal entries for an LLC alongside the partnership entries. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 521-524*

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