Chapter 3
The Accounting Framework
61
Partnerships are private enterprises. A part-
nership, like a proprietorship, is not legally
separated from its owners. Depending on the
type of partnership, partners may be subject to
unlimited liability, which means that the part-
ners are jointly responsible for all the debts
of the partnership. In a partnership,
mutual
agency
exists. Mutual agency means that each
partner is able to speak for the other partners
and bind them to business contracts. In other
words, each partner is bound by the business
actions of the other partners.
There are three types of partnerships that can
be created.
1.
A
general partnership
is a partnership in which all partners are subject to unlimited liability.
All partners are considered to be general partners. Unless special provisions are made (as
described below), all partnerships are general partnerships.
2.
A
limited partnership
includes at least one general partner who accepts unlimited liability
and one or more limited partners with liability limited to the amount they invested. All
partnerships must have at least one general partner. The limited partners are sometimes
referred to as silent partners, because they are not allowed to provide management input for
the business.
3.
A
limited liability partnership
(LLP) allows partners to have limited liability regarding the
misconduct or negligence of the other partners. For example, if a partner in a law firm that
is an LLP is sued for misconduct, only the partner in question will be responsible for paying
damages. However, all partners remain personally liable for all other debts of the business.
Corporation
A
corporation
is a business that is registered with the provin-
cial or federal government as a separate legal entity from its
owners, the shareholders. As a separate legal entity, the corpo-
ration has all the rights of a person and is responsible for its
own activities and is liable for its own debts. It can enter into
contracts and buy and sell products or assets. It can also sue
others and be sued.
A
shareholder
is an owner of the business through ownership
of
shares
. Each share provides partial ownership of the business. For example, if a person owns
one share and there are 100 shares available, the person owns 1/100
th
of the corporation. If a
shareholder owns more than 50% of all the shares of a corporation, they can control the business.
Shareholders are legally distinct from the business and their financial risk is limited to the
FIGURE 3.2
INCOME STATEMENT
NET INCOME (LOSS)
EXPENSES
2
ASSETS
BALANCE SHEET
LIABILITIES
CASH
ACCOUNTS
RECEIVABLE
PROPERTY, PLANT
& EQUIPMENT
PREPAID
EXPENSES
OFFICE
SUPPLIES
ACCOUNTS
PAYABLE
UNEARNED
REVENUE
LOANS
PAYABLE
REVENUE
OWNER’S EQUITY
PARTNER’S
A CAPITAL
PARTNER’S
B CAPITAL
TRAVEL
INSURANCE
DEPRECIATION
INTEREST
MAINTENANCE
SALARIES
RENT
UTILITIES
