BAT4mBAT4mUnit 1: Review of Grade Unit 1: Review of Grade

11 Accounting11 AccountingSeptember 8 2014

A business can be formed in three different ways:Proprietorship – one ownerPartnership – two or more ownersCorporation – Many owners

Forms of Business OrganizationForms of Business Organization

In the early chapters of this text, we focus mostly on sole proprietorship.

Partnership and corporation will be discussed in Unit 4.

Until Unit 4, you do not need to know the details of how accounting method is different in each form of business.

Accounting Equation Distinction by Accounting Equation Distinction by Type of Business OrganizationType of Business Organization

The main distinction between the forms of organization is found in The terminology for owner’s equity

section The accounting of the owner’s

investments and withdrawls In a proprietorship, the company is

owned by one person and the equity is termed owner’s equity.

Accounting Equation Distinction by Accounting Equation Distinction by Type of Business OrganizationType of Business Organization

In partnership, the equity is termed “partners’ equity”.

In corporation, the owners are shareholders and the equity is called, “shareholders’ equity”

In Income Trust, owner’s equity is called, “unit holders’ equity”

Accounting Equation Distinction by Accounting Equation Distinction by Type of Business OrganizationType of Business Organization

PartnershipPartners’ Equity

Park, Capital $50,000Michael, Capital $50,000

Total Partner’s Equity $100,000

Accounting for partnershipAccounting for partnership

CorporationShareholders’ equity:

Share capital$800,000Retained earnings$300,000

Total Shareholders’ equity $1100,000

Accounting for corporationAccounting for corporation

In corporation, when owners want to invest their own money, they have to buy shares of the corporation.

These investments are grouped together and called share capital. These are usually the first item in SE section.

The second item in SE section is usually “Retained Earning”.

Accounting for corporationAccounting for corporation

RE are accumulated earning of the company which have been retained. (i.e. not paid out to shareholders as dividends)

Remember dividends? Similar to what?Interest income for bankers.Dividends are for shareholders.

When corporations want to give some portion of their net income, they will declare dividends such as $1 per share.

Accounting for corporationAccounting for corporation

Dividends are similar to drawing of owners in sole proprietorship business.

Dividends reduce the SE as drawings reduce OE in in sole proprietorship.

Accounting for corporationAccounting for corporation

What are 4 ways of changing OE or SE?1. Drawings (declaring and paying out dividends)2. Investment (issuing and selling more shares) 3. Revenue activity – as revenue account closes

to income summary account4. Expense activity – as expense account closes

to income summary account.

Quick ReviwQuick Reviw

On September 1, Facebook corporation issued and sold 10,000 shares at $50 per share. How will they record this transaction?

On October 1, If FB declared and paid out 50 cents dividend per share, how would they record this transaction? (50,000 shares outstanding)

Issuing SharesIssuing Shares

P31 BE1-9 P41 P1-1b, p1-2b, p1-3B

HomeworkHomework