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Are you are thinking of starting a general partnership? If so, then you will need to know how to prepare a general partnership financial statement. Moreover, even if you hire someone to do them for you, it is prudent to understand how they are prepared and what should be contained in them.
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What is a General Partnership Financial Statement?
General partnerships are legal structures where two or more partners go into business selling products or services. As a result of business activities, the partnership need to keep track of their finances and thus must create accurate documents to support their financial position. This results in the creation of the partnership financial statements. It is not only used to support their financial position, but to also navigate them towards their financial goals.
Most importantly, the general partnership entity is set up so that all partners are individually liable for expenses and losses to the company. Similarly, income is also appropriated to each partner accordingly. Typically, you'll find that most accounting firms, law firms, and architectural firms are organized as general partnerships. Title designations such as Ltd, Co., and Associates are also commonly associated with these types of business entities.
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Overview: 6 Quick Tips to Preparing General Partnership Financial Statements
Learning how to prepare general partnership financial statements will obviously require more training than what can be explained in this article. However, this article will offer 6 fundamental steps to create the financial statements required for your partnership.
1. Record all income earned for a specified period in your Income Statement. The Income Statement is a report that list all income, expenses, and net profit/losses for a specified period of time. Unlike other income statements, in partnerships, profits or losses are divided amongst each partner according to their ownership percentage. For instance, if Partner Y has 40% ownership and Partner Z has 60% ownership, then they must appropriate the $100,000 net profit accordingly. That is, Partner Y will realize a $40,000 net profit; and similarly Partner Z will realize a $60,00 net profit.
2. Summarize changes in the owner's equity accounts on your Statement of Owner's Equity document. Basically, the Statement of Owner's Equity is reported on the Balance Sheet, and list the amount of equity at the beginning of the period, the changes made during the period, and the final equity amount at the end of the period. However, with partnerships, each partner's equity is appropriated according to each individual's ownership percentages.
3. Calculate assets, liabilities, and owner's equity on your Balance Sheet. The Balance sheet list all assets which are subtracted by all liabilities for a specified period of time. Prepare this statement as you would all other financial statements, until you reach the Statement of Owner's Equity section. (See step 2)
4. Adjust and input all closing entries in your General Journal as you would with all other financial statements. As you probably are aware, the general journal is just composed of a chronological listing of all transactions expressed in terms of debits and credits.
5. Summarize all other remaining permanent accounts by posting and closing on the Trial Balance similar to all other financial statement procedures. This report list all accounts and their corresponding balances, and are used to uncover errors in journalizing or posting.
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Sample General Partnership Financial statements
Typically, partnership financial statements are prepared similarly to other financial statements, with the exception of the Statement of Owner's Equity and the profits/losses that are derived from the Income Statement. Basically, these sections assign each partner their portion of equity and profits/losses as a result of business operations. This is unlike any other financial statement because all equity and profits/losses are assumed by the entity or a sole proprietor.
If you would like to view a sample of the partnership financial statement, please click on the image below: (Sample General Partnership Financial Statements were provided by accountingcrashcourse.com.)
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Preparing a general partnership financial statement can be an intimidating process. However, if you know the essential steps to creating them – with practice – you will have the ability to create them with ease.
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