Ac 211 Chapter 1 Notes:

Three primary ways businesses can be organized:

1. Sole proprietorship-owned and usually operated by one person. It is easiest
form of business to start-just need a business license. All profits or losses
become part of the taxable income of the owner, and he is personally liable
for all debts of a business.
2. Partnership-similar to sole prop., just two or more owners. Slightly more
expensive due to getting a lawyer to talk about splitting things. More
resources with this type of business means bigger business growth.
3. Corporation-separate entity from both a legal and accounting perspective.
Corporation is responsible for its own taxes and debts. Thus owners
(stockholders) cant lose more than their investment. Legal fees and taxes
can be high, however.
LLC-combination of partnership and corporation.
Share of a corporations ownership-indicated on a legal document called a stock
certificate.
Accounting-information system designed by an organization to capture (analyze,
record, and summarize) the activities affecting its financial condition and
performance and then report the results to decision makers, both inside and outside
the organization.
Managerial accounting reports-include detailed financial plans and continually
updated reports about the operating performance of the company.
Financial accounting reports (financial statements)-prepared periodically to provide
information to people not employed by the business.
External user groups:
1. Creditors-anyone to whom money is owed.
a. Banks
b. Suppliers
2. Investors-ex: stockholders. Look for financial statements to see if company is
financially secure and likely to be a profitable investment.
3. Certain customers
4. Various local, state, and federal governments
**What a company owns must equal what a company owes to its creditors and
stockholders-Basic accounting equation:
Assets = Liabilities + Stockholders Equity

AKA

Resources owned by the company = (resources owed) to creditors + to stockholders

Resources owed to a creditor is a liability. Furthermore, these are measurable
amounts that the company owes to creditors, including note payables, account
payables, wages payable, and taxes payable.

Resources owned is called an asset. Furthermore, it is an economic resource

presently controlled by the company; it has measurable value and is expected to
benefit the company by producing cash inflows or reducing cash outflows.
Separate entity assumption-a businesss financial reports include only the activities
of the business and not those of its stockholders.
Accounting systems separately track the two components of profit:
1. Revenues-earned by selling goods or services to customers.
2. Expenses-all costs of doing business that are necessary to earn revenues.
Net income (profit) - revenues minus expenses. By generating net income, a
company increase its stockholders equity.
Dividends-a distribution of earnings through a companys profits; dividends are not
an expense incurred to generate earnings.
Financial statements-four accounting reports:
1.
2.
3.
4.

Income statement
Statement of retained earnings
Balance Sheet
Statement of Cash Flows