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There are three types ofbusiness organizations Proprietorship Partnership Corporation
A proprietorship Advantagesis owned by one • Ease in organizing individual. • Low cost of organizing Disadvantage Joe’s • Limited source of financial resources • Unlimited liability
AdvantagesA partnership is • More financialowned by two or resources than amore individuals. proprietorship. • Additional management skills. Joe and Marty’s Disadvantage • Unlimited liability.
A corporation isorganized under state Advantageor federal statutes as a • The ability to obtain separate legal entity. large amounts of resources by issuing stocks. J & M, Inc. Disadvantage • Double taxation.
Business StrategiesA business strategy is an integratedset of plans and actions designed to enable the business to gain anadvantage over its competitors, andin doing so, to maximize its profits.
Business Strategies Under a low-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors. Under a differential strategy, a business designs and produces products or services that possess unique attributes orcharacteristics which customers are willing to pay a premium price.
Business Stakeholders A business stakeholder is a person or entity having an interest in theeconomic performance of the business.
The Process of Providing Information STAKEHOLDERS Internal: External: Identify Owners, Customers,1 stake- holders. managers, creditors, government employees Assess stakeholders’ 2 informational needs.
The Process of Providing Information Design the Record accounting economic Accounting4 data about business Information System 3 information system to meet stakeholders’ activities needs. and events.
The Process of Providing Information STAKEHOLDERS Internal: External: Owners, Customers, managers, creditors, employees government Prepare accounting5 reports for stakeholders. Accounting Information System
Profession of AccountingAccountants employed by a business firm or a not-for-profit organization are said to be engaged in private accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.
Generally Accepted AccountingPrinciples (GAAP)
The business entity conceptlimits the economic data in the accounting system to data related directly to the activities of the business. The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.
The objectivity conceptrequires that the accountingrecords and reports be based upon objective evidence. The unit-of-measure concept requires that economic data be recorded in dollars.
The Accounting Equation Assets = Liabilities + Owners’ EquityThe resources owned by a business
The Accounting EquationAssets = Liabilities + Owners’ Equity The rights of the creditors, which represent debts of the business
The Accounting EquationAssets = Liabilities + Owners’ Equity The rights of the owners
What is a business transaction? A business transaction is an economic event orcondition that directly changes an entity’s financialcondition or directly affects its results of operations.
On June 2011, Toby Bryant organized acorporation thatwill be known asQuorum Group of Companies.
a. Toby Bryant deposits $25,000 in a bank account in the name of Quorum Group of Companies in return for shares of stock in the corporation. Assets = Owners’ Equity Cash Capital Stock =a. 25,000 25,000 Investment by stockholder
b. Quorum Group of Companies exchanged $20,000 for land. Assets = Owners’ Equity Cash + Land Capital StockBal. 25,000 = 25,000b. –20,000 +20,000Bal. 5,000 20,000 25,000
c. During the month, Quorum Group of Companies purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). Owners’ Assets = Liabilities + Equity Accounts Capital Cash + Supplies + Land Payable Stock =Bal. 5,000 20,000 25,000c. + 1,350 + 1,350Bal. 5,000 1,350 20,000 1,350 25,000
d. Quorum Group of Companies provided services to customers, earning fees of $7,500 and received the amount in cash. Owners’ Assets = Liab . + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + EarningsBal. 5,000 1,350 20,000 = 1,350 25,000d. + 7,500 + 7,500Bal. 12,500 1,350 20,000 1,350 25,000 7,500 Fees earned
e. Quorum Group of Companies paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Owners’ Assets = Liab . + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + EarningsBal. 12,500 1,350 20,000 1,350 25,000 7,500e. – 3,650 –2,125 = Expenses – 800 – 450 – 275Bal. 8,850 1,350 20,000 1,350 25,000 3,850
f. NetSolutions paid $950 to creditors during the month. Owners’ Assets = Liab . + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + EarningsBal. 8,850 1,350 20,000 = 1,350 25,000 3,850f. – 950 – 950Bal. 7,900 1,350 20,000 400 25,000 3,850
g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. Owners’ Assets = Liab . + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + EarningsBal. 7,900 1,350 20,000 = 400 25,000 3,850g. – 800 Supplies – 800 ExpenseBal. 7,900 550 20,000 400 25,000 3,050
h. At the end of the month, NetSolutions pays $2,000 to stockholders. Owners’ Assets = Liab . + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + EarningsBal. 7,900 550 20,000 = 400 25,000 3,050h. –2,000 Dividends –2,000Bal. 5,900 550 20,000 400 25,000 1,050
Effects of Transactions on Owners’ Equity Capital Stock Increased by Stockholders’ investments +
Effects of Transactions on Owners’ Equity Retained Earnings Decreased by Decreased byIncreased by Revenues Expenses Dividends + – –
Accounting reports, called financial statements, provide summarized information to the users.
Financial Statements• Income statement—A summary of the revenue and expenses for a specific period of time.• Retained earnings statement—A summary of the earnings retained in the corporation for a specific period of time.• Balance sheet—A list of the assets, liabilities, and stockholders’ equity as of a specific date.• Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.
Quorum Group of Companies Income Statement For the Month Ended June 30, 2011Fees earned $7 500 00Operating expenses: Wages expense $2 125 00 Rent expense 800 00 Supplies expense 800 00 Utilities expense 450 00 Miscellaneous expense 275 00 Total operating expenses Transfer this 4 450 00Net income amount to the $3 050 00 retained earnings statement.
Quorum Group of Companies Retained Earnings Statement For the Month June 30, 2011 From the incomeNet income for November $3 050 00 statementLess dividends 2 000 00 Transferred to theRetained earnings, November 30, 2005 $1 050 00 balance sheet
Quorum Group of Companies Balance Sheet June 30, 2011 From the Assets Liabilities earnings retainedCash $ 5 900 00 Accounts Payable statement 400 00 $Supplies 550 00 Stockholders’ EquityLand 20 000 00 Capital Stock $25,000 Ret. Earnings l,050 26 050 00 Total liabilities andTotal assets $26 450 00 stockholder’s equity $26 450 00 This balance sheet presented using the account form
Quorum Group of Companies Statement of Cash Flows For the Month Ended June 30, 2011Cash flows from operating activities: Cash received from customers $ 7 500 00 Deduct cash payments for expenses and payments to creditors 4 600 00 Net cash flow from operating activities 2 900 00Cash flows from investing activities: Cash payment for acquisition of land (20 000 00 )Cash flows from financing activities: Cash received as owner’s investment $25 000 00 Deduct cash withdrawal by owner 2 000 00 Net cash flow from financing activities 23 000 00Net cash flow and Nov. 30, on thecash bal. sheet Should match Cash 2005 balance $ 5 900 00
Statement of Cash FlowsCash Flows from Operating Activities—Thissection reports a summary of cash receipts andcash payments from operations.Cash Flows from Investing Activities—This sectionreports the cash transactions for the acquisition andsale of relatively permanent assets.Cash Flows from Financing Activities—Thissection reports the cash transactions related to cashinvestments by the owner, borrowings, and cashwithdrawals by the owner.