 In this discussion, we will discuss the discussion question of discuss how corporate financial statements differ from a partnership. So if we see a discussion question like this, we're really focusing in on those things that will differ between the financial statements of different types of business entities. And whenever we do that, remember that there's a lot of things that will be the same. A lot of things are the same. We have the same financial statements, the same assets equal liabilities plus equity. We have a balance sheet income statement, statement of equity, whether it be owner's equity or stockholder's equity or partner's equity, still statement of equity. So much the same. So whenever we go to these entities, it's often the case where we start to think that, man, these things are completely different. No, we're focusing on the areas that are different because those are the interesting areas. Those are the things that we need to learn as we move from entity type to entity type. What will differ on the financial statements, the equity section, because the type of owner for the financial statements will differ from say a partnership to a corporation. So remember that in total, the equity section is going to be the same. You can think of it the same for any type of business entity. It is the accounting equation, assets equal liabilities plus equity. So you can see the liabilities and equity in that format are on the same side representing basically what the assets are owed to, who has claimed to the assets, either a third party liability or the owner. The owners would be either sole proprietor, partnership or stockholder. The only difference is we need to break out those owners if there's more than one in some way. We can also think of the accounting equation as assets minus liabilities equals equity, meaning that the equity section represents the book value of the corporation, assets minus liabilities. So if we liquidated the corporation in essence in theory, we would get that amount going to the owners. For any type of entity, the owners would then theoretically get the equity section amount upon liquidation. The only question then is how do we divvy up that between if there's more than one owners for say like a partnership versus a corporation. So when we look at the financial statements then that major difference is going to be in the equity section, not in total the differences in the equity section in terms of the detail. A partnership equity section, we're just going to represent this by saying we're going to have to track each individual partner, which is very cumbersome. I mean, if we have like a hundred partners in a partnership, we have to track each partner and how much is owed to each partner. What is their capital account value? What is their share of the book value of the partnership? If there was a liquidation and we sold assets paid off liabilities, how much in theory if we would go to these individual partners? So very cumbersome process. For a corporation, it's a lot easier on at least the financial statement side because we don't have to track and divide out compared to each individual partner. All the stocks are the same. So a corporation is going to be broken out by stockholder. So therefore the equity section, I don't need to say this is Mr. Smith owns this and you know, Jones owns this much. We don't need to do that. The stocks themselves can be traded all over they want. All we need to do on the financial statements then is to represent, we typically break it out then between the investment portion and the retained earnings, meaning we want to track how many stocks are out there and we do that by recording the initial investment in terms of the common stock purchased. Just as we would for a partnership, except for the partnership, we just put it into the capital account for that partner, whoever put in the initial investment might be a little bit more complicated than that but in essence we say the partner put in money, we're going to increase cash and the partnership and increase their capital account for their investment. For a corporation, we're going to say that they put in money, that they purchase stock so we debit cash and we don't credit this guy or gal that put in the money, we credit the common stock. That's similar to the initial investment. So when we pay back money, then it's going to be in the form of dividends based on whoever has the stocks at the point of time that we declare the dividend, again we don't really need to know to track individual people, we just need to track the stocks. So we're going to say how many stocks are out there and then we're typically going to have a par value to the stock and that's just an arbitrary number. So the stock is going to go on the books at this arbitrary amount. Why? Because it makes it very standardized. So if the common stock par value, it'll be on the books for a very standardized amount. Then we'll have another amount which will be additional paid in capital which represents any kind of investment, any kind of money that we got for the initial sell off stock over and above the par value. So really the two accounts called common stock and additional paid in capital for the common stock will represent how much we sold the stock for and be similar to an initial investment for a partnership which would go into the capital account. Then any kind of accumulation of earnings for a partnership, like the closing process if we earned revenue and paid expense and had expenses, net income then would be closed out to the partner capital accounts in accordance with their profit sharing agreements. So that's how we would close it out. On a corporation however, the revenue minus expenses, the net income for a corporation is going to be closed out not to individuals because they're all the same. We don't have to break it out by the partnership agreement because we're just going to give an equal amount to however many shares are out there. Not an equal amount to every shareholder because every shareholder may have different number of shares being held, but an equal amount per share. So all we have to do then is very easy. The closing process is close it out to what we call retained earnings. So retained earnings is just going to be the part of the equity section representing the accumulation of earnings, less any distributions as opposed to the part of the equity section for a corporation representing the initial investment, the common stock and the paid in capital. So that's going to be the major difference between the two, the partnership and the corporation partnership, whether it be the initial investment or the allocation of net income or the distribution of draws. We're going to have to record all those things in individual capital accounts to track individual ownership, the amount owned, the amount of equity applied to each partner. In a corporation, we don't have to do that, major difference. We're just going to track it by the initial investment, how much was actually invested, which will be common stock and additional paid in capital, as opposed to the accumulation of revenue over and above the initial investment. You know, the revenue that was generated over time and less any of the dividends that were given out. Those will be the major differences. Now, there's a couple of things with a corporation that are confusing. We might have preferred stock, which is going to be a different format of stock, which is basically doesn't have the voting rights, but has priority for things like dividends and things like if there's a liquidation, they typically get paid first. So that's going to be another component that could be in the equity section. And then we have treasury stock, which is another kind of weird thing that again, you don't want to get overthinking on these type of things because you want to get the major differences down. And that's common stock by far is what we think of as the normal kind of ownership type of stock for a corporation. Treasury stock would be the owner, the corporation purchases back their own stock, they distributed stock in the market, it's trading in the market, then they purchase back their own stock. And so we would credit cash and debit treasury stock, treasury stock in the equity section, being a contra equity account, bringing total equity down. So those are going to be the major differences between the financial statements for a partnership and a corporation. They basically lie in the balance sheet or in the statement of stockholders' equity in tracking the equity. In a partnership, we have a statement of partnerships equity. In a corporation, we have a statement of owner's equity or a statement of retained earnings. And the equity portion is of course what we'll do for the major tracking of the income statement. But it's the same, we're going to have revenue minus expenses. It's only a matter of how are we going to allocate that equity in the closing process to the owners, the partners, or the shareholders.