Sole Proprietorship - Business owned by
one person, not a legal entity separate from
its owner, but the accountant treats the
business as a separate accounting entity.
Owner manages the business
Partnership - Business owned by two or
more individuals. Each owner is called a
partner, personally responsible for the debts
of the partnership. The accountant treats
the partners and the business as separate
accounting entities. There is a managing
partner
Corporation - Legal entity incorporated in a
particular state. Ownership is evidenced by
shares of stock. A corporation is considered
to be separate and distinct from the
stockholders. The stockholders risk only
their investment; they are not responsible
for the debts of the corporation.
Management is vested in the board of
directors
Accounting for these business entities
are of the same, except for the owner’s
equity section of the statement of
financial position.
Sole proprietorship - Owner’s capital
account
Partnership - Capital account of each
partner
Corporation - Common stock + Retained
Earnings
Primary Goal of Managers
 A manager’s primary goal is to
maximize the value of his or her
firm’s stock
or
 Shareholders’ wealth maximization
Annual Report
 Report Issued by corporations to its
stockholders.  obligations
o Discussion of operations
o Basic financial statements
Financial Statements
 Provide a basis to examine how a
firm is doing, its current resources,
and its financial policies
 Reports that summarize important
financial accounting information
about the business.
 Statement of Financial Position
 Income Statement
 Statement of Cash Flow
 Statement of stockholders’ equity
Statement of Financial Position
 Balance Sheet
 A statement of a firm’s position at a
specific point of time.
o Consists of:
 Assets
 Liabilities
 Stockholders’ Equity
Accounting Equation:
Assets = Liabilities + Stockholders’ Equity
Assets
 Resources owned by a company.
 Probable future economic benefits
obtained or controlled by an entity as
a result of past transactions or
events.
 It can be physical/tangible or
intangible
 Divided into 2 categories
o Current Assets
o Non-current assets/Fixed
Assets/Long term assets
Current vs Non-current Assets
Current Assets
 Assets that are expected to be
converted to cash within a year.
 Listed in order of liquidity
 Important to businesses because
they are used to fund the daily
operations and pay short term
Non-current Assets
 Fixed/Long-term Assets
 Not expected to be converted into
cash in one year and are used to
support the firms’ operations.
  These assets are important to a 1. Land 
company because these illiquid 2. Buildings
investments can help a company to 3. Machinery and Equipment
generate profits 4. Furniture
b. Depreciation - Deduction from the
Current Assets original value of the fixed assets.
1. Cash and cash equivalents - Cash c. Intangible Assets - Assets that do
is physical currency. Cash not physically exist.
equivalents are short-term a. Trademarks
investments that can be easily b. Patents
converted into cash. c. Copyrights
2. Marketable Securities - d. Goodwill
Characterized by their marketability e. Franchise
at a readily determinable market
price Accumulated Depreciation
3. Accounts receivables - Money Depreciation is the process of allocating
owed to a company by customers for the cost of buildings and machinery over the
products or services provided on periods benefited. 
credit. Depreciation Expense is accumulated in a
4. Inventories - Balance of goods on separate account.
hand. Includes raw materials, work Accumulated Depreciation is subtracted
in process, finished goods available from the cost of a plant and equipment. 
for sale, and supplies. Three Factors to consider when computing
5. Prepaids - Expenditure made in depreciation
advance of the use of the service or a. Asset cost
goods.  b. Length of the life of the asset
c. Salvage value when retired from
Notes: service
Cash - Most liquid asset. Negotiable
Checks, and unrestricted balances in Liabilities
checking accounts, as well as cash on  Probable future sacrifices of
hand. Savings account = Cash economic benefits arising from
Marketable Securities = Firm holds these present obligations of an entity to
securities to earn a return on near cash transfer assets or provide services to
resources. Must convert to cash during the other entity in the future as a result
current period to be classified as Marketable of past transactions.
Securities.  Something a person or company
A/R = Due on accounts that arise from sales owes, usually a sum of money.
or services rendered to customers. These  Divided into 2 parts
are shown net of allowances (bad debts) to o Current Liabilities
reflect their realizable value. A/R is o Non-current/Long term
expected to be collected. Otherwise, labeled Liabilities
as uncollectible amount or bad debts.
Prepaids - Represents future benefits that Current vs Non-current Liabilities
have resulted from past transations. Current Liabilities
 Liabilities that must be repaid in one
Non-current Assets/Fixed Assets
year.
1. Tangible Assets - Held for business
o Payables
use to generate income and not
 Accounts Payable
expected to be converted to cash in
 Wages Payable
a year.
  Taxes Payable Note: Stockholders’ equity is the residual
o Unearned Income ownership interest in the assets of an entity
o Other Current Liabilities that remains after deducting its liabilities
Paid-In Capital The first type of paid-in
Non-current Liabilities capital account is capital stock. Two basic
 Obligations due more than one year types of capital stock are preferred and
into the future. common. 
o Long-term debts
o Long-term accrued liabilities
Note: Unearned Income = Deferred Income
Payments collected in advance of the
performance of service are termed
unearned. They include rent income and
subscription income. Rather than cash, a
future service or good is due the customer. 

An accrued liability is an expense that a

business has incurred but has not yet paid.
A company can accrue liabilities for any
number of obligations, and the accruals can
be recorded as either short-term or long-
term liabilities on a company's balance
sheet.

Stockholders’ Equity
 Represents a company’s net worth. 
 Difference between the value of all
assets and all liabilities.
 2 major parts:
o Contributed Capital -
received from shareholders
for stock.
 Common Stock -
shares in all
stockholders’ rights
and represents
ownership that has
voting and liquidation
rights.
 Preferred Stock -
have higher claim to
dividends or asset
distribution than
common stockholders
o Retained earnings -
Companies retrain net
income after distributing
dividends to shareholders.