Investment in Partnership Journal Entry
A partnership in business is a legal agreement between two or more people who agree to finance, manage, and operate a specific enterprise. Partnerships allow business owners to share the workload and resources of an organization while allowing the flexibility to delegate duties between each partner.
Moreover, partners are able to share profits and losses proportionally among each partner. This type of collaboration underscores the importance of dedication among members of a team. For business owners starting on an entrepreneurial journey, forming a partnership can provide additional support and resources that may not be attainable alone.
A good business structure allows all partners to have clear expectations when investing in the business. Understanding and agreement on ownership percentages between all partners involved is a key element of that structure.
By assigning ownership percentages, all parties can be sure there is a fair approach for each person’s commitment and investment in the business. It provides a transparent plan for how much each partner will be investing and how profits will be divided based on their respective levels of ownership. Consistent adherence to this plan ensures fairness across the board and ensures that each partner feels secure and valued within the venture.
Journal entry for investment in Partnership
The business partner invests in the company to start the operation as the company does not have any resources at the beginning. The company may require new resources as well when the operation is not doing well.
Each partner will require to invest based on the ownership percentage within the company. All the partners may invest with cash, fixed assets, or other types of assets which is essential for the company.
The journal entry is debiting cash and credit share capital account of each partner.
| Account | Debit | Credit |
|---|---|---|
| Cash | ||
| Partner’s Share Capital |
The cash or assets will be recorded on the balance sheet base on their classification. The share capital is separated for each partner which is easy to control. It is the equity account that is similar to the normal company.
If any partner wishes to withdraw the cash from the business, it will impact the share capital account of each partner. It may change the ownership amount of all the partnerships.
The journal entry is debiting the partner’s share capital and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Partner Share Capital | 000 | |
| Cash | 000 |
Example
Company ABC is owned by three partners which is Mr. John, Mr. Jack, and Janny. Jack and John own 30% while Janny owns 40% in the company. To start the operation, all partners agree to invest $ 100,000 in total. Please prepare journal entry for partnership investment.
The company needs to raise capital $ 100,000 from all partners. We have to calculate the amount of cash that each partner needs to invest.
- John = $ 100,000 * 30% = $ 30,000
- Jack = $ 100,000 * 30% = $ 30,000
- Janny = $ 100,000 * 40% = $ 40,000
The journal entry is:
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| John’s Share Capital | 30,000 | |
| Jack’s Share Capital | 30,000 | |
| Janny’s Share Capital | 40,000 |
Advantage of Partnership
Partnering in business can unlock a world of opportunities and provide the foundation for success. Partnerships offer increased access to resources, enabling businesses to expand outside of their own limits.
Many partnerships also come with shared financial responsibilities, presenting valuable cost-sharing opportunities that help protect businesses during times of economic difficulty.
With access to different experiences and backgrounds, partners can bring innovative solutions to the table and advance forward-thinking strategies that would otherwise not be possible in a single-entity operation.
Communication is an essential component for success, and when paired with trust it allows teams to maximize their fullest potential. Whether formal or informal, partnerships can open up indirect channels, diversify revenue sources, and uncover incredible resources which if used wisely will lead to steady growth.
Disadvantage of Partnership
Starting a business as a partnership can be a risky venture. Partners have equal ownership and decisions are made collaboratively, so communication is key to success.
Poorly communicated decisions can lead to feelings of frustration and resentment among partners, making it difficult to effectively collaborate.
Additionally, if one partner decides to pass away or cease their involvement in the business, the remaining partner may not have the means or skills needed to transition smoothly into full ownership of the business.
Furthermore, both partners must be held accountable for any legal matters that could arise against the business. Partnership in business may not be ideal for those who value autonomy and self-sufficiency as they will need to work with someone else’s opinion and actions on a daily basis.