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