CHAPTER 2

USERS OF
INFORMATION,
TYPES AND
FORMS OF
BUSINESS

BY: KRISTOFFER JEM N. SALVA, MBA

USERS AND THEIR INFORMATION NEEDS

Decision-makers need information. The more important the decision is, the greater is the need for
reliable information. Virtually all business and most individuals keep accounting records to aid
them in making decisions.

Two broad groups of users of accounting information:

INTERNAL USERS

Are that individual who runs, manages and operates the daily activities of the inside area of an
organization.

EXTERNAL USERS

Are individuals and others that have current or potential financial interest in the reporting entity
but are not involved in the daily operations of the entity.
Internal users or Primary users of accounting information include:
 Owners
 Managers
 Employees

External users or Secondary users of accounting information include:

 Investors
 Creditors
 Customers
 auditors
 Tax authorities
 Regulatory agencies
 Labor unions
 Public
FUNDAMENTAL BUSINESS MODEL
Capital Sales
1 4
4
Business
Owner Products
Operating
CASH Asset Use or
Assets
Services
Banks 3
2

Return
2
Cost
TYPES OF BUSINESS

1. Services – selling people’s time

2. Trader – buying and selling products

3. Manufacture – designing products, aggregating components and assembling finished products

4. Raw Materials – growing or extracting raw materials

5. Infrastructure – selling the utilization of infrastructure

6. Financial – receiving deposits, lending and investing money

7. Insurance – Pooling premiums of many to meet claims of a few

FORMS OF BUSINESS ORGANIZATIONS

1. Sole Proprietorship
 has a single owner called the proprietor who generally is also the manager.
 small service-type of business and retail establishments
 the owner receives all profits, absorbs all losses and is solely responsible for all debts of the
business
 from the accounting viewpoint, the sole proprietorship is distinct from its proprietor. The
accounting records of the sole proprietorship do not include the proprietor’s personal financial
records

Advantages of Sole Proprietorship

1. Easy to set-up and discontinue

2. Requires a small amount of capital to start
3. Profits all accrue to the owner
4. Total control on the part of the owner
Disadvantages of Sole Proprietorship
1. Unlimited personal liability
2. Limited management skills
3. Limited access to capital
4. Lacks continuity in case of death or incapacity of owner

2. Partnership
 two or more owners of the business
 each owner is called a partner
 two or more persons may also form a partnership for the exercise of profession

Advantages Over Proprietorships

1.Brings greater financial capability to the business.

2.Combines special skills, expertise and experience of the partners.
3.Offers relative freedom and flexibility of action in decision-making.
Advantages Over Corporations

1.Easier and less expensive to organize.

2.More personal and informal.

Disadvantages

1. Profits are shared

2. Easily dissolvable and thus unstable compared to a corporation.
3. Mutual agency and unlimited liability may create personal obligations to partners.
4. Less effective than a corporation in raising large amounts of capital.
3. Corporation
 is a business entity that is owned by its shareholder(s), who elect a board of directors to
oversee the organization’s activities.
 the corporation is liable for the actions and finances of the business – the shareholders are
not.
 corporations can be for-profit, as businesses are, or not-for-profit, as charitable
organizations typically are.

Advantages of a Corporation

1. Limits liability of the owner to debts or losses

2. Profits and losses belong to the corporation
3. Can be transferred to new owners fairly easily
4. Personal assets cannot be seized to pay for business debts
5. Ability to raise large sums of capital.
Disadvantages of Corporation

1. Corporate operations are costly

2. Establishing a corporation is costly
3. Start a corporate business requires complex paperwork
4. With some exceptions, corporate income is taxed twice