A partnership firm is established to maximize profits by two or more individuals with the same.
Objective. It is not complicated like companies and is easy to commence and organize. The members join hands through a partnership deed and then register the deed for firm approval under the Indian Partnership Act.
The balance sheet of the partnership firm is maintained to provide an overview of the overall financial health of the company.
What is the balance sheet of a Partnership firm?
The balance sheet is a kind of financial report which provides information about the financial condition of a firm on a given date and time. A balance sheet of a partnership firm is used to analyze the performance of the business and its financial stability.
- It is a report of the balance sheet equation where total assets are equal to total liability added with shareholder’s capital/equity.
- Assets = liability + capital
- The balance sheet of a partnership firm is generally used by investors and creditors to calculate the resource productivity of an entity.
- Helps in assessing the value of a company’s investment.
- The balance sheet of the partnership firm has a debit and credit entry where both are balanced in the end.
The three important elements are:
- Asset: a company owns it with value and can be “current” and “noncurrent.” It includes every type of real estate, cash, inventory, investment, expenses, receivable accounts, intangible assets, and other assets with value.
- Liability: This means the debt of a company or how much it is yet to pay. It can be “current” and “noncurrent.” It includes loan interest, accounts payable, and delayed tax liability.
- Capital: The difference between the company’s assets and its liabilities is the shareholder’s capital or equity. It is also known as a net asset, and in the case of a sole proprietorship, it’s called “owners’ equity.”
What are the benefits of the balance sheet of a partnership firm?
The balance sheet of a partnership firm can show the records and reveal the financial condition of a company.
The importance is as follows:
- Investors, creditors, and stakeholders use the balance sheet of a partnership firm to understand and assess the financial health of a company.
- The balance sheets from different respective years can be used to measure the growth of an entity in a given period.
- A balance sheet of a partnership firm is a crucial document that can be utilized to take business loans from investors and banks.
- The liquidity and performance of a company are assessed by stakeholders through the balance sheet of the partnership firm.
- It helps in deciding on investment and any sudden expenditure.
- The percentage of profit or loss borne can be calculated and processed to take better actions.
- The balance sheet of the partnership firm enables every partner with a transparent overview of the company’s position in the market.
Tips on how to prepare a balance sheet for a partnership firm
The following points can help in making the balance sheet of a partnership firm
- Make a fixed reporting date: this will help in organizing it effectively as the time will give an insight into the stability obtained.
- Prepare the balance sheet of partnership firm at regular intervals: it can help keep track of any changes and compare with previous records.
- List the assets in the division of current and noncurrent
- List the liabilities in the division of current and noncurrent: it will help assess the transactions and categorize them in the balance sheet of the partnership firm. Check if the balance sheet of the partnership firm balances and calculate the equity/capital of shareholders to avoid errors.
- Use an example or a ready template on the balance sheet of the partnership firm for trials. It will help in writing the format.
Other records that a Partnership Firm needs to maintain
There is no such requirement to prepare an account, but it is needed for tax purposes. A balance sheet of the partnership firm and accounts of profit/loss will be maintained for each accounting year.
There are options for online partnership firm registration, and also, the documents can be submitted online along with the records for taxation. The process nowadays is easier as the entity can submit and share every document online after proper correction.
- The tax returns can be accurate only if the records are properly maintained because otherwise, a penalty has to be paid.
- According to the Indian partnership act 1932, each partner must maintain a record to avoid future complications.
After online partnership firm registration, different types of businesses may need different records according to the type of organization they are commencing like:
- Invoices and receipts
- Any sale record and rent books
- Inventory of stock on hand record
- Details about withdrawal for personal use.
Are there any retained earnings in a partnership?
The earnings which are held in the business account of the company and not taken out for personal use at the end of any given financial year are called retained earnings.
Positives of retained earnings in a partnership:
- The partners may choose to retain the profit to increase the cash flow of the business.
- To invest in any future projects with the help of such retained funds.
- It may be used as security for a loan application from any bank, investor, or third party.
The owners are usually taxed on their earnings considering the individual income tax rates as per law. This does not depend on their withdrawals or retained funds so there are no tax-related litigations for retained earnings. Taking a legal consultation before forming a balance sheet of a partnership firm will help in solving the queries and making the process prompter.
A balance sheet of a partnership firm provides an insight into the firm’s financial spot and gives an overview of what is the profit and how much debt is left to pay.
For tax, regulatory and legal purposes, the company books and records must be made, which will help an individual personally monitor assets and liabilities and form a balance sheet which is crucial for every small or big business owner. It is a part of financial statements which are linked together, and a legal consultation may help business owners to understand the format in a more elaborated way.