Notes on Financial Accounting (ACG2021) by User:Joel Vannatta Chapter 1

Different forms of businesses

Sole Proprietorship: A business with a single owner.

• Advantages

1. The owner maintains complete control of the company
2. The owner receives the full benefits of the company's profits

• Disadvantages

1. The owner has full legal liability for covering the debts of the company; the owner's personal assets can be seized by debtors
2. 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

1. There is more investment potential than a sole proprietorship.
2. The owners may have different skills that will benefit the company.

• Disadvantages

1. 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.
2. One owner may be held liable for another's financial decisions; there is still full liability for the company's debts.
3. 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

1. Limited liability: Stockholders are not held liable for the company's debts beyond their initial investment into the company.
2. 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.
3. 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

1. Corporations are taxed more heavily than other companies.
2. 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.