FORMS OF BUSINESS ORGANIZATION
CHAPTER 6
FORMS OF ORGANIZATION• Sole proprietorship• Partnership• Corporation
SOLE PROPRIETORSHIPA 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 NameStatement of Owner’s Equity
For the year ended ……
Beginning balance $ 320,000
Add: Net Income 20,000
Additional investment 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 PARTNERSHIPA general partnership is a voluntary organization of two or more individual who combine their capital, skills and efforts to increase their profits.
• LIMITED PARTNERSHIPA limited partnership has one or more general partners and one or more limited partners.
ACCOUNTING PRACTICE• Same as Sole proprietorship
Company NameStatement of Owner’s Equity
For the year ended ……Partner A Partner B Total
Beginning balance $160,000 $160,000 $ 320,000
Add: Net Income 10,000 10,000 20,000
Additional investment 30,000 30,000 60,000
Subtotal 200,000 200,000 400,000
Less: Drawings (24,000) (16,000) (40,000)
Ending Balance 176,000 184,000 360,000
CORPORATIONA 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 ORGANIZATIONSCHARACTERISTICS SOLE
PROPRIETORSHIPPARTNERSHIP CORPORATION
Legal Status Not a separate legal entity
Not a separate legal entity
Separate legal entity
Owner’s Liability Unlimited Unlimited Limited
Accounting status Separate entity Separate entity Separate entity
Tax Status Owner’s personal tax return
Owner’s personal tax return
Corporation’s tax return
Management Owner Partners Hire professionals
Continuity of the business
Dependent & limited
Dependent & limited
Continues
ACCOUNTING PRACTICECORPORATION EQUITY• Capital stock• Retained earning• Dividends
ACCOUNTING PRACTICE• Accounting for Income Tax
Debit Income tax ExpenseCredit Income tax Payable
• Accounting for Income tax (Closing entry)Debit Income Summary
Credit Income tax Expense
ACCOUNTING PRACTICE• Accounting for Dividend (declared)
Debit DividendCredit Dividend Payable
• Accounting for Dividend (distributed)Debit Dividend Payable
Credit Cash
ACCOUNTING PRACTICE• Accounting for Income
Debit Income StatementCredit Retained Earnings
• Accounting for DividendDebit Retained Earnings
Credit Dividends
ACCOUNTING PRACTICECompany Name
Statement of Retained EarningsFor the period ended ….
Beginning retained earnings $ 80,000
Add: Income from current period 60,000
Subtotal 140,000
Less: Dividends (20,000)
Ending retained earnings 120,000