Accounting Chap 1

Sole Proprietorship

• A business owned by one person

• simple to establish

• owner controlled

• tax advantages

Partnership

• A business owned by two or more people who share profits and liabilities

• often formed because one individual does not have enough economic resources or unique skills or resources to initiate or expand the business

• simple to establish

• shared control

• tax advantages

Corporation

• A legal entity that is separate from its owners (stockholders)

• Investors in a corporation receive shares of stock to indicate their ownership claim

• easier to transfer ownership

• easier to raise funds

• no personal liability

Hybrid business forms

• Business structures that combine elements of both partnerships and corporations. They offer the benefits of limited liability while allowing for personal taxation.

• Examples include limited liability companies (LLCs) and S corporations.

Accounting

The information system that identifies, records, and communicates the economic events of an organization to interested users.

Internal Users

• managers who plan, organize and run a business

• marketing managers, production supervisors, finance directors, company officers

External Users

• individuals and organizations outside the business that use financial information to make decisions

• investors —> use accounting info to make decisions to buy, hold, or sell stock.

• creditors —> (eg suppliers, bankers) use accounting info to evaluate the risks of selling on credit or lending money

Sarbanes-Oxley Act (SOX)

A U.S. law enacted in 2002 aimed at protecting investors by improving the accuracy and reliability of corporate disclosures and financial reporting. Penalties for fraudulent financial activity are much more severe.

Financing

• activities that involve raising money from outside sources

• debt financing —> borrowing money

• equity financing —> issuing shares of stock in exchange for cash

Liabilities

• amounts owed to creditors - in the form of debt and other obligations

• note payable —> a written promise to pay a specific amount in the future

• bonds payable —> debt securities representing money borrowed that needs to be repaid at a future date.

Common Stock

the total amount paid in by stockholders for the shares they purchase

dividends

cash payments to stockholders

Investing activities

• involve the purchase of the resources a company needs in order to operate

Assets

• resources owned by a business

• eg computers, delivery trucks, furniture, buildings

• cash is one of the more important assets

• fixed assets —> property, plant, and equipment

• supplies —> assets used in day-to-day operations rather than sold to customers

Operating Activities

the day-to-day actions taken by a company to produce and sell a product, or provide a service

revenue

the increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services

Account receivable

the right to receive money in the future

expenses

the cost of assets consumed or services used in the process of generating revenues

accounts payable

the obligations to pay for goods and services from a companies suppliers and vendors received on credit

Financial statement: Income statement

shows how successfully your business performed during a period of time

(expenses) - (revenues)

Financial statement: Retained earnings statement

Indicates how much of previous income was distributed to owners of your business in the form of dividends, and how much was retained in the business to allow for future growth.

Financial statement: Balance sheet

presents a picture at a point in time of what your business owns (its assets) and what it owes (its liabilities)

Financial statement: Statement of cash flows

shows where your business obtained cash during a period of time and how that cash was used