10. Proprietorships
What are some advantages?
– total undivided authority
– no restrictions on type of business – must
be legal
What are some disadvantages?
– unlimited liability
– limitation on size – fund raising power
12. better credit standing – possibly
– more brain power, but consultation with
partners required
What are some disadvantages?
– unlimited personal liability for general
partners
– need for written partnership agreement
13. Corporations
What are some advantages?
– separate legal existence
– limited liability of stockholders
– transferability of ownership relatively easy
What are some disadvantages?
– taxes – possible double taxation
– extensive governmental regulation
15. To provide information useful
for making investment and
lending decisions
Generally Accepted
Accounting Principles
What is the primary objective of financial
reporting?
16. The Entity Concept Example
Assume that John decides to open up a gas
station and coffee shop.
The gas station made $250,000 in profits,
while the coffee shop lost $50,000.
17. The Entity Concept Example
How much money did John make?
At a first glance, we would assume that
John made $200,000.
However, by applying the entity concept we
realize that the gas station made $250,000
while the coffee shop lost $50,000.
18. Information must
be reasonably
accurate.
Information must
be free from bias.
Information must
report what
actually
happened.
Individuals would
arrive at similar
conclusions using
same data.
The Reliability (Objectivity)
Principle
24. Assets
What is an asset?
It is something a company owns which has
future economic value.
– land
– building
– equipment
– goodwill
25. Liability
What is a liability?
It is something a company owes.
– money
– service – legal retainers
– product – magazines
26. Owner’s Equity
What is owner’s equity?
It is what’s left of the assets after liabilities
have been deducted.
– the same as net assets
– the owner’s claim on the entity’s assets
27. Transactions that Affect
Owner’s Equity
OWNER’S
EQUITY
INCREASES
OWNER’S EQUITY
DECREASES
Owner Investments
in the Business
Revenues Expenses
Owner Withdrawals
from the Business
Owner’s Equity
28. Revenues
What are revenues?
They are amounts received or to be
received from customers for sales of
products or services.
– sales
– performance of services
– rent
– interest
29. Expenses
What are expenses?
They are amounts that have been paid or
will be paid later for costs that have been
incurred to earn revenue.
– salaries and wages
– utilities
– supplies used
– advertising
32. Accounting for Business
Transactions
1 Gay Gillen invests $30,000 to begin Gay
Gillen eTravel.
2 Gillen purchases an office location, paying
$20,000 in cash.
3 She buys office supplies, agreeing to pay
$500 in 30 days.
4 She earns and collects $5,500 revenues.
33. Accounting for Business
Transactions
5 Gillen performs services, and the client
agrees to pay $3,000 within one month.
6 During the month, she pays $3,300 for
expenses incurred.
7 Gillen pays $300 to the store from which
she purchased $500 worth of supplies.
What is the effect of these transactions on
the accounting equation?
35. Accounting for Business
Transactions
Notice that the equation always stays in
balance.
Each transaction affects at least two
accounts, sometimes more.
Some transactions affect only one side of
the equation; some affect both sides.
36. Accounting for Business
Transactions
Other transactions that took place were as
follows:
The business collected $1,000 from the
client.
She sold some land at cost for $9,000.
She withdrew $2,000 from the business.
41. Relationships Among the Statements:
Income Statement
Revenue:
Fees earned $8,500
Expenses:
Salary expense $1,200
Utilities and telephone expense 400
Equipment rental expense 600
Office rent expense 1,100 3,300
Net income $5,200
42. G. Gillen, capital, April 1, 20xx $ 0
Contribution of capital 30,000
Net income $ 5,200
Cash distributions – 2,000
G. Gillen, capital, April 30, 20xx $33,200
Relationships Among the Statements:
Statement of Owner’s Equity
43. Relationships Among the Statements:
Balance Sheet
Assets
Cash $19,900
Accounts receivable 2,000
Supplies 500
Land 11,000
Total assets $ 33,400
Liabilities
Accounts payable $ 200
Owner’s equity,
G. Gillen, capital 33,200
Total liabilities and
owner’s equity $33,400
44. Relationships Among the Statements:
Statement Of Cash Flows
Cash flows from operating activities:
Cash receipts from services rendered $6,500
Cash payments:
Supplies $ 300
Operating expenses 3,300 3,600
Net cash flows from
Operating activities $2,900
Cash flows from investing activities
Purchase and sale of land ($11,000)
45. Cash Flows from Financing Activities:
Investment by Owner $30,000
Withdrawals 2,000
Net Cash Flows from
Financing Activities $28,000
Cash at Beginning of Year 0
Cash at End of the Year $19,900
Relationships Among the Statements:
Statement Of Cash Flows
