Different forms of businesses[]
Sole Proprietorship: A business with a single owner.
- Advantages
- The owner maintains complete control of the company
- The owner receives the full benefits of the company's profits
- Disadvantages
- The owner has full legal liability for covering the debts of the company; the owner's personal assets can be seized by debtors
- There is limited investment capital and talent that may be required to make the company successful
Partnership: A business with 2 or more owners, but is not publically traded.
- Advantages
- There is more investment potential than a sole proprietorship.
- The owners may have different skills that will benefit the company.
- Disadvantages
- In order to leave the partnership, one partner must convince the other purchase his share, or find another investor to do so; it is more difficult than selling stocks.
- One owner may be held liable for another's financial decisions; there is still full liability for the company's debts.
- Control over the business is split between the different owners.
Corporation: A business that is recognized as a legal entity and is owned by stockholders.
- Advantages
- Limited liability: Stockholders are not held liable for the company's debts beyond their initial investment into the company.
- It is easy to transfer ownership of the company through buying or selling stocks. This also makes it far easier for the company to raise funds.
- It is easier to find people with skills that will benefit the company because corporations generally have more chances for advancement than sole proprietorships or partnerships.
- Disadvantages
- Corporations are taxed more heavily than other companies.
- Publically traded corporations always have the risk of being bought out by their competitors, especially if they are smaller companies.
Internal users: individuals who use a company's accounting information from within the company. They include marketing managers, production suptervisors, and company officers.
External users: individuals who use a company's accounting information from outside of the company. They include investors, creditors, and the IRS.
Key terms:[]
Assets: Resources owned by a business. Example are cash, equipment, and money owed to the company.
Liabilities: A company's debts and obligations. Examples are money owed by the company, company services that have been paid for but not yet provided, and bank loans.
Common stock: The total amount of money paid by the stockholders for the shares that they purchased.
Dividends: A portion of a company's profits that are paid to the shareholders based on the number of shares that they own. The frequency of dividend payments vary from company to company.
Revenue: Money earned by the company through selling of goods or services.
Expenses: Money spent by the company to purchase goods or services
Examples of Assets:[]
Cash: Money that is not currently being used by the company
Accounts receivable: Money that has been earned, but not received
Notes receivable: Money owed with payment agreed to be made at a later time, usually with interest
Property, plant, and equipment: Objects such as land, buildings, and vehicles used by the company
Examples of Liabilities:[]
Accounts payable: Money owed, but not yet paid
Notes payable: Money owed with payment agreed to be made at a later time, usually with interest
Unearned revenue: Money that has been paid to the company, but the goods or services have not yet been provided
Salaries payable: Salaries owed to employees that have not yet been paid
Examples of Revenues:[]
Sales revenue: Revenue earned from the sale of goods
Service revenue: Revenue earned from providing services
Interest revenue: Revenue earned from collecting interest
Examples of Expenses:[]
Cost of Goods Sold: The cost purchasing or producing inventory that has been sold (i.e. the cost of ingredients for a cake sold in a bakery)
Marketing expensed: Includes the cost of advertising
Income taxes: Usually a percentage of a company's income after all other expenses
Financial Statements[]
There are 4 main types of financial statements used in financial accounting:
Balance Sheet: provides a statement of all of the asses, liabilities, and owner's equity for a single point of time.
Income Statement: provides a record of revenues and expenses for a period of time (month, quarter, year, etc).
Retained Earnings Statement: records the amount of revenue remaining after expense and dividends have been paid, for a period of time.
Statement of Cash Flows: records how the company obtained cast, and how that cash was used, for a period of time.
Balance Sheet[]
Example
ABC Corporation
Balance Sheet
December 31, 2010
Assets
|
Cash |
$15,200 |
|
Accounts receivable |
200 |
|
Advertising supplies |
1,000 |
|
Prepaid insurance |
550 |
|
Property, Plant, and Equipment |
4,960 |
|
Total Assets |
$21,910 |
Liabilities and Stockholders' Equity
| Liabilities | ||
| Notes Payable | $5,000 | |
| Accounts Payable | 2,500 | |
| Salaries Payable | 1,200 | |
| Unearned Revenue | 800 | |
| Interest Payable | 50 | |
| Total Liabilities | $9,550 | |
| Stockholders' Equity | ||
| Common Stock | $10,000 | |
| Retained Earnings | 2,360 | |
| Total Stockholders' Equity | 12,360 | |
| Total Liabilities and Stockholders' Equity | $21,910 |
The purpose of a balance sheet is to show the balance between assets and liabilities: for every dollar in assets (owned by the company), there is a corresponding dollar in either liabilities (owed by the company) or Stockholder's Equity (owned by the stockholders). This gives the equation, Assets = Liabilities + Stockholders' Equity. At any point in time, one should be able to enter these amounts and arrive at a balance.
