Fundamentals of Accounting-

Business Entities and GAAP

College University Notes: De La Salle University- Manila
Price College Accounting 16th Edition- McGrawhill
John Price, David Haddock, & Michael Farina
 Business Entities and GAAP
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Types of Business Entities

There are three major legal forms of business entity are the sole proprietorship, the
partnership, and the corporation.

1. Sole Proprietorships - it is a business entity owned by one person

- The life of the business ends when the owner is no longer able to or
willing to keep the business going.
- Many small businesses are operated as sole proprietorship
- Debts and taxes are in the responsibility of the sole proprietor’s owner.
(Creditors- people, company, or agencies whom the business owes
money to)
- The owner may have to pay the debts of the business from personal
resources or personal savings.
- It is important to separate business transactions from personal
transactions. This is called separate entity assumption. It is a concept
of keeping the firm’s financial records from personal financial records.

2. Partnerships - it is a business entity owned by two or more persons.

- It is common in business that offer professional services such as law,
accounting, architectural, medical and dental firms.
- At the beginning of the partnership, two or more individuals enter into
a contract that details the right, obligations, and limitations of each
partner.
- This includes the amount of each partner will contribute to the business,
percentage of ownership, share of profits, duties of each partner will
perform, and responsibility of each partner has for the amount owed
by the business to creditors and tax authorities.
- Partners are individually and as a group are responsible for the debts
and taxes of the parentship.

3. Corporation - It is a business entity that is separate from its owners.

- It has a legal right to own property and do business in its own name
- Stocks are issued in the form of stock certificates, represents the
ownership of the corporation
- An owner’s share of the corporation is determined by the number of
shares of stock held by the owner compared to the total number of
shares issued by the corporation
- Corporate owners are called stockholders or shareholders. They are
not personally responsible for the debts of taxes of the corporation

Generally Accepted Accounting Principles

a. The generally accepted accounting principles are to be followed publicly by owned
companies unless they can show that doing so would produce information that is misleading.
b. It is developed by the Financial Accounting Standards board (FASB) which is composed of five
full-time members.
c. Publicly traded companies submit financial statements to the SEC. This if to ensure that the
financial statements are audited by the independent certified public accountant
d. The auditor’s report contains the auditor’s opinion about the fair presentation of the operating
results and financial positions of the business.
e. Managers of a business make sure that the firm’s accounting system produces financial
information that is timely, accurate, and fair
f. Financial statements should be based on the GAAP
g. Each year a publicly traded company must submit financial statements that includes the
auditor’s report to be submitted to the SEC (securities and Exchange Commission)
h. GAAP are changed and are refined as accountants respond to the changing environment