Explain and demonstrate how capital transactions are accounted for in a partnership - Essay Example

Accounting for Capital Transactions in Partnership Accounting for Capital Transactions in Partnership Companies and Corporations are faced with challenges and diverse risks in their undertakings. In taming these challenges, managers have established various methods which include issuances of stocks. Investors are awarded ownership rights in the company. In larger corporations Initial Public Offer (IPO) to raise its financial status. This is where bankers are hired to value the stock for sale after which investors are allowed to buy stocks and trade them directly either between themselves or with secondary market.

There are various categories of stocks. The most fundamental classification of stocks is common stock and preferred stock. These two categories majorly differ in the rights they bestow upon their owners. Common stockCommon stock is simply the partial ownership of company where an investor buys stocks traded by the company through public offer. Investors may trade these stocks amongst themselves on the secondary market. The primary goal of buying these stocks is to earn dividends should the company make profit.

Every common stock is a representation of a certain proportion of ownership in a company. for example if a company has 500,000 shares of common stock and an investor owns 5 of them, then we can say that he or she owns 5/500,000th of the company and same percentage of profit share.Preferred stockPreferred stock just like common stock represents partial ownership in a company. However, preferred stock shareholders do not enjoy other privileges like the voting rights. In this category investors are paid a fixed dividend not based on the number of shares owned.

However the company may fail to pay dividends due to the financial challenge. In such cases, dividends of the preferred shareholders are always paid off first before common shareholders.Similarities between Common Stock and Preferred stockInvestors whether common or preferred have the ownership right of the company. A stockholder has a say in the running of the company. The most significant thing about stocks is that it is a high return investment. Stocks whether preferred or common have better return.

Both kinds of stock pay dividends. Stocks generally can be a kind of dangerous investment. This is true for both preferred and common stock. Investors can lose all the money if the company runs at a significant loss.DifferenceOne major difference between common stock and the preferred stock is that shareholders with common stock are paid dividends proportional to the number of stock owned by an individual. However preferred stock shareholders are paid fixed dividend. It is beneficial to own preferred stock.

This is because as a shareholder one has a greater claim on the company’s assets than common shareholders. Furthermore, in the event that the company goes bankrupt, preferred shareholders are given the first priority in the payment of dividends. Corporations issue stocks when there is need to raise money for expansion of the business. In some cases a debt financing may prompt a company to issue stocks. Corporations may also want to make a transition from private market to the public market.

In this case, stocks are issued in an Initial Public Offer (IPO).ReferencesALBRECHT, W. S. (2011). Accounting, concepts & applications: what, why, how of accounting. Mason, OH, South-Western/Cengage Learning.SMITH, EPHRAIM P., HARMELINK, PHILIP J., & HASSELBACK, JAMES R. (2008). Federal Taxation: Comprehensive Topics 2009. C C H Inc.