Identifying the Forms of Business Organization and the Uses of

Accounting Information
SOLE PROPRIETORSHIP

Advantages
Simple to establish
 Have control of everything, can make your own decisions
 Tax advantages
 Better tax rates than bigger companies
 Share all the profits
Disadvantages
 Harder to get financing
 Don't claim as much as they earn/over expense
 Tax returns
 Are start-up companies so don’t have a lot of money
 Owner is liable for all debts/other
If you get sued, you're liable personally and they can take your house/car
away etc.
 Transfer of ownership is difficult
Hard to sell sole proprietorship
 Share all the losses

PARTNERSHIP

Advantages
 Simple to establish
 Shared control
Dual control and dual resources
Two brains, three pools of money, more
Broader skills and resources
Tax advantages
Disadvantages
 Taxed down to the individual partners
 You're responsible for all liabilities, they can go after you personally if you get
sued
 Difficult to transfer ownership

CORPORATION
Advantages
 Easier to transfer ownership
Can buy and sell stocks in a few seconds
 Easier to raise funds
Go to the bank and get financing or sell stock
 Have more opportunities
 No personal liability (biggest advantage)
 Can't attack personal assets of owner
Disadvantages

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  Not easy to start a corporation
 High tax rates
 Double taxation

Users and Uses of Financial Information

Accounting system identifies, records, and communicates financial data. Who wants this
information? People inside and outside of the company.

Internal Users use accounting/financial data to answer these questions

 Finance
Do we have enough money, should we sell more stock, etc.
 Marketing
What price should this be to maximize the company's net income
 Management
 Human Resources

External Users use accounting/financial data to answer these question.

Investors
 Look at financial statements to see if they should invest or keep a stock
Creditors
 Example will ABC Ltd be able to pay its debts as they come due?

ETHICAL ISSUES IN ACCOUNTING

 Top management must certify the accuracy of financial information.
 Penalties for fraudulent activity increased.
 Independence of auditors.
 Effective financial reporting depends on sound ethical behavior

Solving an Ethical Dilemma

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 Recognize an ethical situation and the ethical issues involved
 Use your personal ethics to identify ethical situations and issues.
 Some businesses and professional organizations provide written codes of ethics
for guidance in some business situations.
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 Identify and analyze the principal elements in the situation.
 Identify the stakeholders—persons or groups who may be harmed or benefited.
 2. Ask the question: What are the responsibilities and obligations of the parties
involved?
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 Identify the alternatives, and weigh the impact of each alternative on various
stakeholders.

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  Select the most ethical alternative, considering all the consequences.
 2. Some situations involve more than one right solution; these situations require you
to evaluate each alternative and select the best on

Accounting in Business
• Accounting is the “language of business.”
• It is an information and measurement system that identifies, records and
communicates relevant, reliable and comparable information about business
activities in economic terms.
• Three major accounting activities are identifying, recording, and communicating.
• Users of accounting include external users and internal users. You should be able
to provide examples of both.
• Opportunities in accounting are abundant but can generally be categorized into
financial, managerial, taxation, and other accounting related jobs.
• Ethics in accounting have been in the spotlight lately.
• GAAP – Generally Accepted Accounting Principles are the rules that we will
follow throughout the semester. FASB sets both broad and specific principles.
SEC establishes reporting requirements for publicly held companies. The IASB
identifies preferred accounting practices for international issues.
• The accounting equation - see separate section below.
• Transaction analysis

Accounting Principles that you should familiarize yourself with:

• The cost principle – Accounting information should be based on actual cost,
which is measure on a cash or equal to cash basis.
• The revenue recognition principle – provides guidance on when a company
should recognize or record revenue.
• Accrual principle- provides guidance on when transaction should be recorded in
the books.
• Matching principle – A company must record its expenses incurred to generate
revenue in the same period.
• Full disclosure principle – Details must be reported so that user’s decisions can be
informed.
• Prudence/ Conservatism principle – provides guidance on the reasons for
recording transactions in a prudent manner
• Consistency principle- provides guidance on the need for consistency in the
manner in which accounting information is recorded.

Accounting Assumptions that you should familiarize yourself

with:

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 • Monetary unit assumption – money is the common denominator in business and
transactions should be expressed in monetary units.
• Time period assumption – the life of a company can be divided into time periods
and useful reports should be generated for that time period.
• Business entity assumption – a business is accounted for separately and apart
from other entities including it’s owner. A business entity can take one of three
legal forms - a sole proprietorship, a partnership, or a corporation.

Fundamental Accounting Equation

Assets = Liabilities + Equity/Capital

Things of Value Debt Owner’s Claims
Resources owned by a Company Creditors’ Claims on Assets Net Assets
Yield future benefits Payables Residual Equity
Owed to others Assets - Liabilities

Examples: Examples: Eamples:

Cash Accounts Payable/creditors Contributed Capital
Accounts Receivable/Debtors Wages Payable Common Stock
Prepaids Notes Payable Retained Earnings
Property and Equipment Taxes Payable Net Income
Dividends

Expanded Equation
Equity

Assets = Liabilities + Contributed Capital + Retained Earnings

= Common Stock + Net Income - Dividends
= + Revenues - Expenses