Equity Section In Corporate Accounting: Sole Proprietorship, Partnership, And Corporation

Equity Section for a Sole Proprietor

The sole proprietors is as such not a legal name. It just means that the same is owned by a single person. There is only 1 person which is responsible for the incomes, revenues earned and the dents of the company. This is one of the simplest forms to use. It is very simple to form, includes very menial costs but have problem since the owner is liable to the extent of his personal assets.

Partnership on the other hand includes two or more people who have. These are the people that an equal share in the amounts of the profit and the losses. These partnerships have a different legal consideration altogether. There are many of the different types of partnerships such as the general partnerships, limited partnerships and the joint ventures (Corporate finance institute, 2018).

A corporation or a company is a separate legal entity altogether which is owned by the shareholders. A company is far more complex and also is mainly used for the larger companies. These have a huge amount of administrative costs involved and also are exposed to far more complex tax and legal environment. The company can afford to sell in its ownership through the sale of its stock. There are different forms of companies such as C corps, S corps, closely held company etc.

The section of equity of any enterprise indicates all of the investments that have been made into the company. The equity comes in the form of cash investments along with such other investments. There are many of the asset investments that could include in the personal items such as the office equipment, office future, automobile etc. when these are invested into the business, it becomes very necessary to include in these in the financial statements of the company. And these are reported at their respective market value. These are reported under the “Assets” section of the financial statement of the company (Small business chron, 2018).

The appearance under the apt head shall depend on the legal form of the business. The equity section of one sort of entity is very much different from the equity section of another sort of the entity. The following are the details as desired:

The sole proprietorship comprises of only 1 person and hence, the equity section of this form of entity is very easy to be represented. It consists of only the “Capital” section. The term “Capital” refers to the direct investment which is made into the company. These are the investments that could occur at the initial stages of the formation of the company. But it is also true that the cash or any such other asset can be contributed into the entity at any point of time. It is just important that these be included in the financial statements. The following is the appropriate format of the same:

Liabilities:	Amounts in $
Capital-ABC	xxx
Add: additional investments made during the year	xxx
Add: net profit earned during the year	xxx
Less: total capital withdrawn during the year	xxx
Total Capital	xxx

A partnership is the type of the business which involves two or more owners. The partnership could have 2, 3 or even 70 partners. The equity section of the partnership is very much similar to that of the sole proprietorship. It also has a single capital account but of 2 partners. The term “Capital” refers to the direct investment which is made into the company. These are the investments that could occur at the initial stages of the formation of the company. But it is also true that the cash or any such other asset can be contributed into the entity at any point of time. It is just important that these be included in the financial statements. The following is the appropriate format of the same:

Liabilities:	Amounts in $
	ABC	XYZ
Capital-	xxx	xxx
Add: additional investments made during the year	xxx	xxx
Add: share in the net profit earned during the year	xxx	xxx
Less: total capital withdrawn during the year	xxx	xxx
Total Capital	xxx	xxx
Equity:	Amounts in $
Capital-ABC	xxx
Capital-XYZ	xxx

The equity section of both the sole proprietorship and the partnerships comprise of one single account which the capital account. The stated section of the company does not contain the word “Capital” in the statement. Instead it uses the word shares for the stated purpose. This is done to show in all of the investments that have bene contributed by the owners of the company. The company is also required in by law to distinguish between the investments that has been made in by the company and the earnings that have been earned over the years by the company. Hence, the company uses the account known in as the common shares which are preferred as the preferred shares along with an account known as the retained earnings. These shares shows in the investments that have bene made in by the owners into the company. The retained earnings keeps in the track of all the earnings of the company along with all the dividends that have been paid in to the owners of the company over the years of the life of the company (Business plant hub, 2018).

This section is represented in the following manner in the relevant financial statements:

Shareholders’ equity	Amounts in $
Common shares	xxx
Retained earnings	xxx
Total shareholders’ equity	xxx

Therefore, the main difference between the equity section of all of the above 3 described entities is the mere name and nothing else. There is another difference between these which relates with the control and the risk associated with these 3 entities (Small business chron, 2018).

The section of equity is used for the purposes of determining the amount that the company or these entities owes to the outsiders but in the case of the sole proprietorship, the case is different since each and everything is owned by him only.

Particulars	Amounts in $	Impairment loss	Carrying value
Factory	8,61,700.00	65,462.14	7,96,237.86
Patent	1,98,000.00	15,041.78	1,82,958.22
Building	1,25,000.00	9,496.07	1,15,503.93
Inventory	54,000.00	–	54,000.00
Goodwill	45,000.00	45,000.00	–
Total	12,83,700.00	1,35,000.00	11,48,700.00
Value in use	11,48,700.00
Fair value	8,28,969.00
Recoverable amount shall be the higher of value in use or fair value

Workings:
Factory	8,61,700.00	0.73	7,96,237.86
Patent	1,98,000.00	0.17	1,82,958.22
Building	1,25,000.00	0.11	1,15,503.93
	11,84,700.00		10,94,700.00

Journal entry:
Impairment Loss Dr	1,35,000.00
To Factory		65,462.14
To Patent		15,041.78
To Building		9,496.07
To Goodwill		45,000.00

References:

Businessplanhut.com. (2018). Equity of Proprietors, Partnerships and Corporations on the Balance Sheet | Business Plan Hut. [online] Available at: https://www.businessplanhut.com/equity-proprietors-partnerships-and-corporations-balance-sheet [Accessed 15 Sep. 2018].

Corporate Finance Institute. (2018). Owner’s Equity – Learn How to Calculate Owner’s Equity. [online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/valuation/owners-equity/ [Accessed 15 Sep. 2018].

Smallbusiness.chron.com. (2018). Corporate Vs. Partnership Balance Sheets. [online] Available at: https://smallbusiness.chron.com/corporate-vs-partnership-balance-sheets-41175.html [Accessed 15 Sep. 2018].

Smallbusiness.chron.com. (2018). How to Set Up a Balance Sheet for a Sole Proprietor. [online] Available at: https://smallbusiness.chron.com/set-up-balance-sheet-sole-proprietor-10341.html [Accessed 15 Sep. 2018].