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Accounting: The Language of Business

Business and Accounting Section Objectives 4.Compare and contrast the three types of business entities. 5.Describe the process used to develop generally accepted accounting principles.

Types of Business Entities Page 9

Objective 4 Compare and contrast the three types of business entities. Page 9

Three major legal forms of business entity: Sole Proprietorship Partnership Corporation Page 9

9 All three forms of business operate under the separate entity assumption.

QUESTION: What is the separate entity assumption? Page 9 ANSWER: The separate entity assumption is the concept of keeping a firm’s financial records separate from the owner’s personal financial records.

QUESTION: What is a sole proprietorship? ANSWER: A sole proprietorship is a business entity owned by one person who is legally responsible for the debts and taxes of the business. Page 9

Partnership Sole Proprietorship Corporation Ownership 1 owner Ends when owner: is unable to carry on, dies, or closes the firm Life Responsibility for business debts if firm is unable to pay Owner Page 12

QUESTION: What is a partnership? A partnership is a business entity owned by two or more people who are legally responsible for the debts and taxes of the business. ANSWER: Page 9

Partnership Sole Proprietorship Corporation Ownership 1 owner Ends when owner: is unable to carry on, dies, or closes the firm Life Responsibility for business debts if firm is unable to pay Owner 2 or more Ends when partner(s): withdraws, dies, or close the firm Partners individually and jointly Page 12

Typical partnerships Professional services such as: Accounting Firms Architectural Firms Dental Practices Medical Practices Law Firms Page 9

Partners must agree upon: Amount each partner will contribute Percentage of ownership of each partner Share of profits of each partner Duties each partner will perform Debts - the responsibility each partner has for the partnership’s debts Page 10

QUESTION: What is a corporation? Page 11 ANSWER: A corporation is a publicly or privately owned business entity that is separate from its owners and has a legal right to own property and do business in its own name; stockholders are not responsible for the debts or taxes of the business.

Partnership Sole Proprietorship Corporation Ownership 1 owner Ends when owner: is unable to carry on, dies, or closes the firm Life Responsibility for business debts if firm is unable to pay Owner 2 or more Ends when partner(s): dies, close the firm withdraws Partners individually and jointly Can be thousands Continues indefinitely; ends when: business goes bankrupt stockholders vote to liquidate Page 12 Stockholders can lose only the amount invested

QUESTION: What is stock? Page 11 ANSWER: Stock is issued in the form of stock certificates and represents ownership of the corporation.

Corporate Ownership Corporate ownership is determined by the number of shares held compared to the number of shares issued by the corporation. Shares held: 250 Shares issued: 1,000 Corporate ownership: 1,000 = 0.25 = 25% Corporations can have new owners daily if their shares are actively traded on stock exchanges. 250 Page 11

Stockholders Stockholders (owners of a corporation) have voting rights for certain corporate decisions, one per share. Stockholders can lose only up to the amount of their investment (cost of stock) if the business is unable to pay its debts. Page 12

Important distinction For accounting purposes, all forms of business entities are considered separate entities. However, the corporation is the only form of business that is a separate legal entity. Page 12

Generally Accepted Accounting Principles Page 12

Objective 5 Describe the process used to develop generally accepted accounting principles. Page 12

QUESTION: What are generally accepted accounting principles (GAAP)? Page 12 ANSWER: Generally accepted accounting principles (GAAP) are accounting standards developed and applied by professional accountants.

Publicly owned companies must follow GAAP. The only exception is if following GAAP would produce misleading financial statements. Page 12

Development of GAAP SEC FASB Governmental Agency Accounting Profession Delegates to… Has final say Develops GAAP Page 12

QUESTION: What is an auditor’s report? Page 13 ANSWER: An auditor’s report is an independent accountant’s review of a firm’s financial statements.

REVIEWREVIEW The __________ __________ is an independent accountant’s review of a firm’s financial statements. Accounting standards developed and applied by professional accountants are known as ________. The business entity that can continue indefinitely is the ___________. corporation GAAP Complete the following sentences: auditor’s report

REVIEWREVIEW The business entity that is commonly used in businesses that offer professional services is the ___________. Keeping the firm’s financial records separate from the owner’s personal financial records is known as the ________ _____ ___________. In a partnership, partners must agree upon each partner’s ____________ of ownership. percentage separate entity assumption partnership Complete the following sentences:

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