22208 Chap.4 Business Structures: Partnerships and Companies
Business Structures: Partnerships and Companies
Week 4 compares the three main business structures: sole traders, partnerships and companies. Most transactions are recorded identically; the difference lies in equity. Partners each have a capital account credited with the net assets they contribute, measured at fair value, and profits and losses are shared under the partnership agreement, or equally if it is silent.
Companies record share issues, in full or by instalment, cash and share dividends, and share buybacks.
Partnership questions centre on two calculations: opening each partner’s capital account from the assets and liabilities contributed, and dividing profit or loss through the tiers of the agreement.
Company questions are mostly journal entries tied to dates: application, allotment and call money, the declaration and payment of cash dividends, share dividends valued at market price, and share buybacks. Short written questions ask you to weigh liability, fundraising and regulation when choosing a structure.
What this chapter covers
- 01
Sole trader, partnership and company compared
- 02
Equity sections under each structure
- 03
Partner capital at fair value of net assets
- 04
Tiered profit and loss sharing
- 05
Share issues in full and by instalment
- 06
Cash dividends, share dividends and buybacks
- 07
Choosing a structure: liability, funds and regulation
Worked example · free
Recording a share issue by instalments
- 1Application money received: Dr Cash trust 20,000, Cr Application 20,000.
- 1On allotment the shares are issued for the first two instalments: Dr Application 20,000 and Dr Allotment 30,000, Cr Ordinary share capital 50,000.
- 1Release the trust money: Dr Cash 20,000, Cr Cash trust 20,000.
- 1Allotment money received: Dr Cash 30,000, Cr Allotment 30,000.
Key terms
- Partnership agreement
- The partners’ contract setting out how capital is contributed and how profits and losses are shared.
- Mutual agency
- The power of any partner to bind the whole partnership to a contract.
- Share dividend
- A distribution of additional shares to existing shareholders, valued at the market price and paid without cash.
- Share buyback
- A company’s purchase of its own shares, which reduces share capital and cash.
- Date of record
- The date that fixes which shareholders receive a declared dividend; it needs no journal entry.
- Unlimited liability
- Personal responsibility of an owner for all of the business’s debts, which applies to sole traders and partners.
Business Structures: Partnerships and Companies FAQ
How are profits shared if the partnership agreement says nothing?
Equally. The module practice set treats a silent agreement as an equal split, and the same applies to losses. That is why the lecture urges partners to state exactly how both profits and losses are to be divided.
Why is a partner’s contributed equipment recorded at fair value?
The capital account must reflect what each partner actually brings to the new business. The equipment’s original cost and depreciation belong to the partner’s past records; the partnership records what the asset is worth on the day it is contributed.
When does a dividend become a liability?
On the date of declaration, when the board’s declaration creates a legal obligation to pay. Retained earnings are debited and dividend payable credited then; payment later clears the liability, and the record date has no accounting effect.
How is a share dividend valued?
In the lecture example the new shares are valued at the market price per share at the time, so the dividend equals the number of new shares multiplied by that price. Retained earnings are debited and share capital credited, and no cash leaves the company.
What rights does an ordinary shareholder have?
The lecture lists four: the right to vote, the right to dividends in proportion to ownership, a residual claim on the company’s assets if it is wound up, and a pre-emptive right to keep the same proportion of ownership when new shares are issued.
Exam move
Build a one-page comparison of the three structures, then drill partnership allocations tier by tier, checking that the partners’ shares add back to the profit. For companies, rehearse each dividend date with its entry and the instalment sequence until you can write it without notes.
For written questions on structures, practise a three-sentence answer: the owner’s goal, the structure that serves it, and the main drawback that structure brings.
Rework the module practice set’s contribution and profit-sharing questions with fresh numbers of your own, and for every dividend question write the date beside each entry so that the declaration, record and payment steps stay in the right order under exam pressure.
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