Chapter 1A: Accounting Foundations & Business Activities

Accounting

The process of identifying, measuring, recording, and communicating financial information about a company's business activities so decision-makers can make informed decisions.

Who uses accounting information?

Owners, managers, employees, investors, lenders, and governments.

Sole Proprietorship

A business owned by one person.

Main characteristics of a sole proprietorship

Easy to form or dissolve, usually small, has limited financial resources, and the owner is personally responsible for the business.

Unlimited Liability

The owner's personal assets can be at risk if the business cannot pay its debts.

Partnership

A business owned jointly by two or more individuals.

How are partnerships taxed?

The partnership itself does not pay income taxes; the individual partners pay taxes on their share.

General Partner

A partner who has unlimited liability for the business.

Limited Liability Partner

A partner whose liability is limited to the amount invested in the business.

Corporation

A business organized under the laws of a particular state and owned by stockholders.

Stockholders

The owners of a corporation.

Stock

Shares that represent ownership interests in a corporation.

Limited Liability

The debts of the corporation are separate from the personal debts/assets of the stockholders.

Double Taxation

A corporation may pay corporate income tax, and its owners may also pay individual taxes on distributions they receive.

Financing Activities

Activities used to obtain the funds necessary to begin and operate a business.

Two major sources of financing

• Issuing stock

• Borrowing money

Creditor

A person or company that lends money to a business.

Liability

A monetary debt or obligation owed by the business.

Assets

Economic resources owned or controlled by a company.

Stockholders' Equity

The residual interest in a corporation's assets after deducting its liabilities.
Think:
Assets − Liabilities = Stockholders' Equity

Investing Activities

Activities involving the purchase of assets/resources that allow the business to operate.
Examples: Machinery, land, buildings.

Operating Activities

Activities involved in generating revenue for the business.

Revenue

An increase in assets resulting from selling products or services.

Expenses

Costs incurred or resources used to generate revenue.

Net Income

Occurs when revenues are greater than expenses.

Formula:
Net Income = Revenues − Expenses

Net Loss

Occurs when expenses are greater than revenues.