Essay on Capital Calculation in Different Business Structures

This essay provides a comprehensive analysis of capital calculation methods across various business organizational structures, including sole proprietorships, partnerships, and companies. It begins by defining sole proprietorship and its equity calculation, emphasizing the owner's direct investment and the absence of separate legal entities. The essay then moves on to partnerships, highlighting the use of individual capital accounts for each owner and illustrating how capital changes with additional investments, withdrawals, and profit/loss distributions. Finally, it explores the capital structure of companies, focusing on the role of shares, common stock, retained earnings, and dividends in determining shareholder equity. Through examples and comparisons, the essay clarifies the distinct approaches to capital calculation and the key financial considerations unique to each type of business organization.

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[COMPANY NAME] [Company address]
ACCOUNTING

Contents
Introduction...........................................................................................................................................3
Capital calculation of business organisations........................................................................................3
Conclusion.............................................................................................................................................5
References.............................................................................................................................................7

Introduction
The essay brings out a discussion of equity of several business organisation such as Sole
proprietorship, partnership, and company. Sole proprietorship is a type of business entity
owned and managed by a single person. It does not have separate legislation, which govern
its operations. As far as liability is concerned, there is no separation between the business and
the owner. Whereas, partnership and company has different equity calculation on the basis of
some assumptions which are discussed below in the essay.
Capital calculation of business organisations
The liability of a sole proprietor is not limited. If an owner is not able to pay off business
liabilities, it will ultimately fall on the sole proprietor to pay off all the liabilities from his
personal pocket such as car, house, bank balance, and other properties. Here in this business,
owner is the risk bearer and he is only one who invest in the organisation (Carter, 2018).
To undertake the equity section of a sole proprietor business, it is very simple. It consists of
only one account known as capital. It is referred to as owner`s direct investment in the
organisation (Manigart, and Sapienza, 2017). The investment pattern generally occured at the
initial stages or during the formation of an organisation. Moreover, a business owner
contribute cash and assets to the organisation at any time. For example- Mr Joseph handles a
sole business of stationary. He invested his life savings of $20,000 as cash in the business
(Carter, 2018). The organisation purchases stationary (pen, pencil, eraser, or marker) as its
goods from a supplier and finally sell them to end users and consumers. Mr Joseph registered
the company as a sole firm on 1st Jan 200x and has its operating since its exists. The most
three points stemmed for the assumption are that it is a sole proprietorship business.
Moreover, Mr Joseph invested $20,000 cash in the company at the time of starting the
business. It is assumed that as of now no additional investment is made( Zhang, 2017). So, on
1st Jan 200x, the company`s books of accounts will show a capital balance of $20000. In crux,

Mr Joseph gave $20000 cash to the stationary company so in return, the capital account is
valued at this amount (Potter, and Heckman, 2018). The capital account will change when
any of these events occur such as when additional cash and assets are introduced and invested
in the organisation. Other condition occurs when owner withdraws cash from the
organisation. Moreover, the capital changes if the company makes profits or incur any loss.
A partnership business includes more than one owner. A partnership organisation can
consists of two, three, four, or fifty owners. The equity section of the partnership is very
much similar to sole proprietorship. A partnership uses a capital account to track of
investment of each owner. A partnership generally has a capital account for each owner
(Accounting tools, 2019). For example- a partnership organisation with ten owners will have
ten capital accounts for each owner. Let us continue the previous instance where Mr Joseph
was in sole proprietorship and now Mr Jones is another owner. Let us assume that Jones and
Joseph operate the stationary business in partnership and each partner invest $10000 in the
stationary business. As on year opening, Mr Joseph and Jones has capital of $10,000 each in
the business. Any either owner makes no investment (ACCA, 2018). Further, the partners
will share the losses and profits equally which means 50 percent of the profit or losses will go
to the bill. After some years, if Joseph withdrew $5000 cash from the partnership firm.
Suppose the net profit after tax for the company is 5000. While allocating profit (5000*50%)
that is $2500 to each partner. Let us assume tax to be $2,000 and it will be shared between
both the partners (Stackexchange, 2019). So, ultimately, to calculate the closing capital of
Joseph can be ($10000+$2500-$5,000) whereas, closing capital of Jones ($10000+$2500).
Total (Equity) capital ($7500+$12500). It is important to understand that when the capital
balances changes constantly such as additional investment introduced in the business,
withdrawing the cash and assets from the enterprise and ultimately, net income made by the
organisation (Stackexchange, 2019). Therefore, it is clear from the above example that

partner`s capital at the end of year is the sum of opening capital and net profit by subtracting
drawing from the capital.
As above in sole proprietorship and partnership, it consists of one account named capital.
Whereas, equity of company does not involve any capital account to show the investment
made in the company (Wallstreetmojo, 2018). The company uses “shares” which is a small
proportion of whole investment. This investment is the contributed capital by the owners. A
company has to comply with all the necessary regulations that distinguish between the
company`s investors and organisation`s earning over the years. The company uses account
such as common shares, equity shares, and preference shares with retain earnings. The shares
account for investment made by the shareholders in the company. Retain earning helps to
keep the company`s earning on track and all the dividend paid to shareholders over the
company`s life (Wallstreetmojo, 2018). For example- A company named “Swap corporation
ltd” issues 100 shares of $20 each to its shareholders where joseph buys 40 @20, Jones buys
30@20, and remaining purchased by piu. To calculate the overall capital, a total of all the
shareholder`s holding @20 will be summed up that is ($20*100). The company earned an
amount of $900 in 200X. Let us suppose the company declared a dividend of $500 to its
shareholders. So shareholder`s equity will look like summation of amount of common shares
($2000+$400) which is total shareholders’ equity. Most importantly, dividend paid to the
shareholders will be shown in their personal accounts in partnership or sole proprietor
account (Wallstreetmojo, 2018).
Conclusion
From the above discussion, it can be concluded that each type of business organisation have
different way to calculate the capital. In sole proprietor, the capital is composed of opening
capital and the net profit by subtracting personal drawing. In partnership firm, the capital is
calculated as sum of amount that they have invested by adding their distributed profit by

subtracting their personal withdrawals from the capital. Company`s capital is calculated by
considering the common stock (including all the shares with their face values+ retain
earning).

References
ACCA, (2018). What is a partnership?. Available on:
https://www.accaglobal.com/in/en/student/exam-support-resources/foundation-level-study-
resources/fa2/fa2-technical-articles/accounting-for-partnerships.html [Accessed on 25/01/19]
Accounting tools, (2019). Partnership capital account. Available on:
https://www.accountingtools.com/articles/what-is-the-partnership-capital-account.html
[Accessed on 25/01/19]
Carter, C. (2018) How to Set Up a Balance Sheet for a Sole Proprietor. Available on:
https://smallbusiness.chron.com/set-up-balance-sheet-sole-proprietor-10341.html [Accessed
on: 25/01/19]
Manigart, S. and Sapienza, H., 2017. Venture capital and growth. The Blackwell handbook of
entrepreneurship, pp.240-258.
Potter, D. and Heckman, S.J., 2018. Business Entity Selection: A Human Capital
Approach. Journal of Financial Planning, 31(4).
Stackexchange, (2019) Calculating the total capital of a company?. Available on:
https://money.stackexchange.com/questions/21506/calculating-the-total-capital-of-a-
company [Accessed on 25/01/19]
Wallstreetmojo, (2018) WHAT IS SHARE CAPITAL? Available on:
https://www.wallstreetmojo.com/share-capital/ [Accessed on 25/01/19]
Zhang, X., 2017. What Does China’s Sole Proprietorship Law Mean to Foreign Business
People?. Business Law Review, 38(2), pp.61-63.