Financial Accounting

(PGDM- 2015-16)

Session -17: Accounting for Equity

Sriranga Vishnu
Faculty (F&A Area)

Types of Businesses
Sole Proprietorship - Business entity is
owned by an individual for selling of goods or
ones services

Simplest kind of business entity

No incorporation fee; no report to be submitted
Profits are subjected to I-Tax , not Corporate Tax
Difficult to raise large amount of capital
Cant issue shares
Unlimited liability of the proprietor
Debt repayment from business assets as well as
personal assets

Types of Businesses
Joint Partnership - Business entity is owned
by two or more persons called partners
Unlimited liability of each partner
Action of each partner affects all other partners
To recover debt, personal assets can also be
attached
Income is taxed on the basis of share in the
business
In case of limiter partnership, General Partner
functions on behalf of Sleeping partners
While taxation is as per the share, liability is
limited

Types of Businesses
Corporation - Business entity created by a statute
Perpetual Existence, Limited liability
Business entity is an artificial person
Taxation on the net income of the entity, not the
owners
Subject to regulations, fee payments, double taxation
Activities are limited to those in the Articles of
Association
Easy to raise large amount of capital
Ownership can be liquidated transfer of title
Public company Shares are traded on stock exchange
Private company Shares are closely held among few
individuals

Accounting for Proprietors

Equity
All entries related to the infused capital are
recorded in an account
Annual Income derived from operations are
added to the capital account
Drawings by the proprietor are deducted from
the capital account to arrive at net equity
Drawings A/c can be maintained separately as
well

Accounting for Partnership

Equity
In partnership, there is separate account for
each partner
In the infused capital, individual income (as
agreed) for the year is added. Can be equally
distributed as well
Individual withdrawals are deducted from the
Partners account to derive net equity
Salaries and Interest Payments are treated as
Drawings

Types of Ownership in
Corporations
Preference Stocks Cumulative and noncumulative
Common Stocks Book Value (capital +
retained Earnings)
Additional Paid-in Capital
Issuance Costs

Treasury Stocks- repurchased stocks

Not treated as an asset; Can be reissued
Gain/loss is adjusted with Retained Earnings; Not
in Income Statement; Not treated for Income Tax

Types of Ownership in
Corporations
Retained Earnings
Reserves
Dividends Cash or Stock Dividends
Stock Splits- Shareholders proportional
interest remains same
Spin offs Shares of other Companies
are distributed

Types of Ownership in
Corporations
Warrants Negotiable instruments can
be bought and sold
Stock Options - ESOPs
EPS
Diluted EPS