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Difference between Firm’s Debt and Private Debt

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Debt is a liability that necessitates one party, the debtor, to pay another party, the lender, money or other consented value. Debt is a delayed payout, or set of payments, as opposed to an instant rebate. It is an important concept in the context of business finance and accounting. The separate entity accounting concept states that the business unit and the owners are two distinct parties, and hence, a distinction should be made while recording their respective transactions. In a partnership form of business organization, this concept calls for Firm’s Debt and Private Debt to maintain a separation between the amounts borrowed by the firm and those borrowed by the partners individually. 

Difference between Firm's Debt and Private Debt

 

What is Firm’s Debt?

The total amount of liabilities owed by a firm to outsiders is referred to as the firm’s debt. In other words, any loan taken out by the firm with the consent of all its partners is referred to as the firm’s debt. These debts are the firm’s liabilities and will be paid by the firm in the future. Such debt is secured with the intention of investing in certain projects of the firm, which would have a common impact on all the partners of the firm. 

What is Private Debt?

The total amount of liabilities owed by the partner to third parties is referred to as private debt. It is referred to as any loan taken out by any partner(s) without the consent of the other partners and secured by their own personal assets. These debts are the responsibility of the concerned partner and will be paid in the future.

Difference between Firm’s Debt and Private Debt

Basis

Firm’s Debt

Private Debt

Meaning This includes all the amounts owed by the partnership firm to the outside parties. This includes the total amount owed by an individual partner to the outside parties in his personal scope.
Liability The liability of firm’s debt falls upon all the partners jointly in the proportion of their profit-sharing ratio. The individual partner is to be held responsible for his private debt and not other parties.
Application of Firm’s Property Firm’s property shall be applied first towards the payment of firm’s debts.  Firm’s property can be applied towards the settlement of partners’ private debts if and only if there is a surplus of the concerned partner’s share in excess of firm’s property over firm’s debts.
Application of Private Property Private property of partners can be applied towards the settlement of firms’ debts if and only if there is a surplus of such property over the private debts. Partners’ private property shall be applied first towards the payment of private debts. 

Last Updated : 24 Jul, 2023
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