CHAPTER 6 FORMS OF BUSINESS ORGANIZATION FORMS OF

CHAPTER 6 FORMS OF BUSINESS ORGANIZATION

FORMS OF ORGANIZATION • Sole proprietorship • Partnership • Corporation

SOLE PROPRIETORSHIP A sole proprietorship is an unincorporated business that is owned by one individual. CHARACTERISTICS Ease of formation No tax for business Business assets belongs to owner Unlimited liability

ACCOUNTING PRACTICE • Total owner’s Equity is represented by owner’s capital account. • Withdrawal from owner are termed as owner’s drawings and will reduce owner’s capital. • Loss determined in income statement will also decrease the owner’s capital. • Profit computed in income statement will increase the owner’s capital.

ACCOUNTING PRACTICE • Accounting for Drawings (closing entry) Debit Owner’s capital account Credit Owner’s Drawing • Accounting for Loss (closing entry) Debit Owner’s capital account Credit Income statement (loss)

ACCOUNTING PRACTICE • Accounting for Profit (closing entry) Debit Income statement (profit) Credit Owner’s capital account Company Name Statement of Owner’s Equity For the year ended …… Beginning balance Add: Net Income Additional investment $ 320, 000 60, 000 Subtotal 400, 000 Less: Drawings (40, 000) Ending Balance 360, 000

PARTNERSHIP • A partnership is an unincorporated business owned by two or more partners. CHARACTERISTICS Partnership assets Life time of partnership Contractual obligation Liabilities

TYPES OF PARTNERSHIPS • GENERAL PARTNERSHIP A general partnership is a voluntary organization of two or more individual who combine their capital, skills and efforts to increase their profits. • LIMITED PARTNERSHIP A limited partnership has one or more general partners and one or more limited partners.

ACCOUNTING PRACTICE • Same as Sole proprietorship Company Name Statement of Owner’s Equity For the year ended …… Partner A Beginning balance Partner B Total $160, 000 $ 320, 000 10, 000 20, 000 30, 000 60, 000 Subtotal 200, 000 400, 000 Less: Drawings (24, 000) (16, 000) (40, 000) Ending Balance 176, 000 184, 000 360, 000 Add: Net Income Additional investment

CORPORATION A corporation is a legal entity, having an existence separate and distinct from that of its owners. CHARACTERISTICS Separate legal entity Double taxation Limited liability of stockholders Transferable ownership rights Continues life

FORMS OF ORGANIZATIONS CHARACTERISTICS SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION Legal Status Not a separate legal entity Separate legal entity Owner’s Liability Unlimited Limited Accounting status Separate entity Tax Status Owner’s personal tax return Corporation’s tax return Management Owner Partners Hire professionals Continuity of the business Dependent & limited Continues

ACCOUNTING PRACTICE CORPORATION EQUITY • Capital stock • Retained earning • Dividends

ACCOUNTING PRACTICE • Accounting for Income Tax Debit Income tax Expense Credit Income tax Payable • Accounting for Income tax (Closing entry) Debit Income Summary Credit Income tax Expense

ACCOUNTING PRACTICE • Accounting for Dividend (declared) Debit Dividend Credit Dividend Payable • Accounting for Dividend (distributed) Debit Dividend Payable Credit Cash

ACCOUNTING PRACTICE • Accounting for Income Debit Income Statement Credit Retained Earnings • Accounting for Dividend Debit Retained Earnings Credit Dividends

ACCOUNTING PRACTICE Company Name Statement of Retained Earnings For the period ended …. Beginning retained earnings Add: Income from current period $ 80, 000 60, 000 Subtotal 140, 000 Less: Dividends (20, 000) Ending retained earnings 120, 000