An Introduction to Accounting

Chapter # 1

Resource person: Furqan-ul-haq Siddiqui

References:

Accounting the Basis for Business Decision . By: Meigs, Williams, Haka, Betner (11th/12th edition)

Internet

Business

The purchase and sale of goods in an attempt to make a profit.

An occupation, profession, or trade: A person, partnership, or corporation engaged

in manufacturing, or a service; profit-seeking enterprise or concern.

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Business

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The language of busin

ess

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The language of business

Costs

Prices

Sales Volume

Return

on

Inve

stm

ent

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What is Accounting?

The language of business.A means to communicate financial

information.A way to convey information about a

business to users.It helps in financial decision making.

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Who uses accounting information?

Owners Managers Investors Creditors Government (tax assessment) Regulators Customers Many others

Basic Functions of an Accounting System

Interpret and record business transactions.

Payment

Car

Classify similar transactions into useful reports.

Interpret and record business

transactions.

Summarize and

communicate information to

decision makers.

Classify similar

transactions into useful

reports.

Interpret and record business

transactions.

Accounting information is useful to anyone who makes decisions that have economic results.• Managers want to know if a new product will be

profitable.• Owners want to know which employees are productive.• Investors want to know if a company is a good

investment.• Creditors want to know if they should extend credit, how

much to extend, and for how long.• Government regulators want to know if financial

statements conform to requirements.

Accounting The systematic recording, reporting, and analysis of

financial transactions of a business. The person in charge of accounting is known as an

accountant, and this individual is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles.

Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit.

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The American Accounting Association define accounting as:

“The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information!.

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What is a business transaction?

A business transaction is an economic event, activity or condition that directly changes an entity’s financial condition or directly affects its results of operations.

Accounting information is communicated using “Financial Statements"

A financial statement is a formal record of the financial activities of a business, person, or other entity or A written report which quantitatively describes the financial health of a company.

• There are two main purposes of financial statements:

1. To report on the financial position of an entity.

2. To show how the entity has performed (financially) over a particularly period of time (an "accounting period").

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Primary Financial Statements are;

1. Statement of Financial Position: also referred to as a balance sheet. It shows what your company owns, and what it owes at a given point of time.

2. Income Statement: Reports on a company's income, expenses, and profits over a period of time. These include sale and the various expenses incurred during the processing state.

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3. Statement of Changes in Equity: Explains the changes of the owner’s equity throughout the reporting period

4. Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

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Generally Accepted Generally Accepted Accounting Accounting

Principles (GAAP)Principles (GAAP)

Generally Accepted Generally Accepted Accounting Accounting

Principles (GAAP)Principles (GAAP)The rules that govern how accountants operateThe principles which provide the general frame

work for determining what information is included in financial statements and how this information is to be presented

The Entity Concept- States that an organization is an economic entity that keeps its affairs separate from those of the owner(s)

The Reliability (objectivity) Principle- States that accounting records and statements are based on the most reliable data available and documented by objective evidence.

The Cost Principle- States that acquired assets and services should be recorded at their actual (historical) cost and should maintain that historical cost for as long as they are owned.

The Going-Concern Concept- States that the entity will remain in operation for the foreseeable future

The Stable-Monetary-Unit Concept- States that each dollar has the same purchasing power as any other dollar at any other time

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources The resources owned by a owned by a

businessbusiness

The resources The resources owned by a owned by a

businessbusiness

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business

The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the The rights of the ownersowners

The rights of the The rights of the ownersowners

On November 1, 2005, Chris

Clark begins a business that will

be known as NetSolutions.

a. Chris Clark deposits $25,000 in a bank a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.account in the name of NetSolutions.

a. Chris Clark deposits $25,000 in a bank a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.account in the name of NetSolutions.

Chris Clark, Capital25,000 Investment

by Chris Clark

Cash25,000 a.

Assets Owner’s Equity=

=

b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.

Chris Clark, Capital25,000

Cash + Land 25,000 Bal.

Assets Owner’s Equity=

=b. –20,000 +20,000Bal. 5,000 20,000 25,000

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).

c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).

Owner’s Liabilities + Equity=

Bal. 5,000 20,000 25,000c. + 1,350 + 1,350

Bal. 5,000 1,350 20,000 1,350 25,000

=

d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.

d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.

Bal. 12,500 1,350 20,000 1,350 32,500d. + 7,500 + 7,500

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets Owner’s Liabilities + Equity

Bal. 5,000 1,350 20,000 1,350 25,000Fees earned

=

=

e. – 3,650 –2,125– 800– 450

– 275

Wages

Rent

Util.

Misc.

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

e. NetSolutions paid the following e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.

e. NetSolutions paid the following e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.

Owner’s Liabilities + Equity=

Bal. 12,500 1,350 20,000 1,350 32,500

=

Bal. 8,850 1,350 20,000 1,35028,850

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

f. NetSolutions paid $950 to f. NetSolutions paid $950 to creditors during the month.creditors during the month.

f. NetSolutions paid $950 to f. NetSolutions paid $950 to creditors during the month.creditors during the month.

Owner’s Liabilities + Equity=

Bal. 8,850 1,350 20,000 1,350 28,850f. – 950 – 950

=

Bal. 7,900 1,350 20,000 400 28,850

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.

g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.

Owner’s Liabilities + Equity=

Bal. 7,900 1,350 20,000 400 28,850g. – 800 – 800

=

Bal. 7,900 550 20,000 400 28,050

Supplies expense

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

h. At the end of the month, Chris h. At the end of the month, Chris withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.

h. At the end of the month, Chris h. At the end of the month, Chris withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.

Owner’s Liabilities + Equity

Bal. 7,900 550 20,000 400 28,050h. –2,000 –2,000Bal. 5,900 550 20,000 400 26,050

With-drawal

=

=

Assets = Liabilities + Owner’s Equity

26450 = 400 + 26050

Balance Sheet

A balance sheet or statement of financial position is a summary of the financial balances of a Business.

Assets, liabilities and ownership equity are listed as of a specific date, such as the end of month or year.

A balance sheet is often described as a "snapshot of a company's financial condition".. 36

Vagabond Travel AgencyBalance Sheet

December 31, 2002Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

Statement of Financial Position

Vagabond Travel AgencyBalance Sheet

December 31, 2002Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

Assets

Assets are economic resources

that are owned by the business.

Assets may be viewed as resources owned or controlled by an entity. They include such items as cash, accounts receivable (amounts owed to the company by customers), land, building and equipment, and supplies.

In a balance sheet, assets are written in terms of their liquidity.

The extent to which assets can be converted to cash quickly and at a low transaction cost.

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Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle (whichever is shorter.

Fixed assets are also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use in earning profit in a business. This group includes as an asset land, buildings, machinery, furniture, tools etc.

Tangible assets are those that have a physical substance and can be touched, such as currencies, buildings, real estate, vehicles, inventories, equipment, and precious metals.

Intangible assets lack of physical substance and usually are very hard to evaluate.

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Assets

Cost Principle

Going-ConcernAssumption

Objectivity Principle

Stable-DollarAssumption

These accounting principles support cost as the basis for

asset valuation.

Vagabond Travel AgencyBalance Sheet

December 31, 2002Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

Liabilities

Liabilities are debts that

represent negative future cash flows

for the enterprise.

Liabilities are reported on a balance sheet and are usually divided into two categories: Current liabilities — these liabilities are reasonably

expected to be liquidated within a year. They usually include payables such as wages, accounts, taxes, and accounts payables etc.

Long-term liabilities — these liabilities are reasonably expected not to be liquidated within a year. They usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.

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Vagabond Travel AgencyBalance Sheet

December 31, 2002Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

Owners’ Equity

Owners’ equity represents the

owner’s claim to the assets of the

business.

Owners’ Equity

Changes in Owners’ Equity

•Owners’ Investments

•Business Earnings

•Business Losses

•Withdrawals of cash.

Vagabond Travel AgencyBalance Sheet

December 31, 2002Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' EquityOffice equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

The Accounting Equation Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

Let’s analyze some

transactions for JJ’s Lawn Care

Service.

JJ's Lawn Care ServiceBalance Sheet

May 1, 2003Assets

Cash 8,000$ Capital Stock 8,000$

Total 8,000$ Total 8,000$

Owners' Equity

On May 1, 2003, Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and

received 800 shares of stock.

JJ's Lawn Care ServiceBalance Sheet

May 2, 2003Assets

Cash 5,500$ Capital Stock 8,000$ Tools & Equipment 2,500

Total 8,000$ Total 8,000$

Owners' Equity

On May 2, JJ’s purchased a riding lawn mower for $2,500 cash.

On May 8, JJ’s purchased a $15,000 truck.

JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000.

JJ's Lawn Care ServiceBalance Sheet

May 8, 2003Assets

Cash 3,500$ Liabilities: Tools & Equipment 2,500 Notes Payable 13,000$ Truck 15,000 Owners' Equity:

Capital Stock 8,000

Total 21,000$ Total 21,000$

Liabilities and Owners' Equity

JJ's Lawn Care ServiceBalance SheetMay 11, 2003

AssetsCash 3,500$ Liabilities: Tools & Equipment 2,800 Notes Payable 13,000$ Truck 15,000 Accounts Payable 300

Total Liabilities 13,300$ Owners' Equity:Capital Stock 8,000

Total 21,300$ Total 21,300$

Liabilities and Owners' Equity

On May 11, JJ’s purchased some repair parts for $300 on account.

JJ's Lawn Care ServiceBalance SheetMay 18, 2003

AssetsCash 3,500$ Liabilities: Accounts Receivable 150 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 300 Truck 15,000 Total Liabilities 13,300$

Owners' Equity:Capital Stock 8,000

Total 21,300$ Total 21,300$

Liabilities and Owners' Equity

Jill realized she had purchased more repair parts than needed.

On May 18, JJ’s was able to sell half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 days.

JJ's Lawn Care ServiceBalance SheetMay 25, 2003

AssetsCash 3,575$ Liabilities: Accounts Receivable 75 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 300 Truck 15,000 Total Liabilities 13,300$

Owners' Equity:Capital Stock 8,000

Total 21,300$ Total 21,300$

Liabilities and Owners' Equity

On May 25, ABC Lawns pays JJ’s $75 as a partial settlement of its accounts receivable.

JJ's Lawn Care ServiceBalance SheetMay 28, 2003

AssetsCash 3,425$ Liabilities: Accounts Receivable 75 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150

Owners' Equity:Capital Stock 8,000

Total 21,150$ Total 21,150$

Liabilities and Owners' Equity

On May 28, JJ’s pays $150 of its accounts payable.

JJ's Lawn Care ServiceBalance SheetMay 29, 2003

AssetsCash 4,175$ Liabilities: Accounts Receivable 75 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150

Owners' Equity:Capital Stock 8,000 Retained Earnings 750

Total 21,900$ Total 21,900$

Liabilities and Owners' Equity

On May 29, JJ’s recorded lawn care services provided during May of $750. All clients paid in

cash.

JJ's Lawn Care ServiceBalance SheetMay 31, 2003

AssetsCash 4,125$ Liabilities: Accounts Receivable 75 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150

Owners' Equity:Capital Stock 8,000 Retained Earnings 700

Total 21,850$ Total 21,850$

Liabilities and Owners' Equity

Now, let’s review how JJ’s transactions affected the accounting equation.

On May 31, JJ’s purchased gasoline for the lawn mower and the truck for $50 cash.

Assets = Liabilities +

Cash +Accts. Rec. +

Tools & Equip. + Truck =

Notes Payable +

Accts. Pay. +

Capital Stock +

Retained Earnings

May 1 8,000$ 8,000$ Balances 8,000$ 8,000$

May 2 (2,500) 2,500$ Balances 5,500$ 2,500$ 8,000$

May 8 (2,000) 15,000$ 13,000$ Balances 3,500$ 2,500$ 15,000$ 13,000$ 8,000$

May 11 300 300$ Balances 3,500$ 2,800$ 15,000$ 13,000$ 300$ 8,000$

May 18 150$ (150) Balances 3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$ 8,000$

May 25 75 (75) Balances 3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$ 8,000$

May 28 (150) (150) Balances 3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$

May 29 750 750 Balances 4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 750$

May 31 (50) (50) Balances 4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 700$

Owners' Equity

Assets = Liabilities +

Cash +Accts. Rec. +

Tools & Equip. + Truck =

Notes Payable +

Accts. Pay. +

Capital Stock +

Retained Earnings

May 1 8,000$ 8,000$ Balances 8,000$ 8,000$

May 2 (2,500) 2,500$ Balances 5,500$ 2,500$ 8,000$

May 8 (2,000) 15,000$ 13,000$ Balances 3,500$ 2,500$ 15,000$ 13,000$ 8,000$

May 11 300 300$ Balances 3,500$ 2,800$ 15,000$ 13,000$ 300$ 8,000$

May 18 150$ (150) Balances 3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$ 8,000$

May 25 75 (75) Balances 3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$ 8,000$

May 28 (150) (150) Balances 3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$

May 29 750 750 Balances 4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 750$

May 31 (50) (50) Balances 4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 700$

Owners' Equity

These transactions impact the

Statement of Cash Flows.

These transactions impact the

Statement of Cash Flows.

These transactions impact the Income

Statement.

These transactions impact the Income

Statement.

Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Service for the month ending May 31, 2003.

Income Statement Income statement (also referred as profit and loss

statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement, typically over a fiscal quarter or year that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income/net loss (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). 59

The income statement is important because it shows the profitability of a company during the fiscal period (a period of time) rather than a point in time. The period of time that the statement covers is chosen by the business and will vary. For example, the heading may state:

For the QuarterEnded December 31, 2010 For the Month Ended December 31, 2010 For The Fiscal Year Ended September 30, 2010

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JJ's Lawn Care ServiceIncome Statement

For the Month Ended May 31, 2003

Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net Income 700$

Investments by and payments to the owners are not included on the Income Statement.

Investments by and payments to the owners are not included on the Income Statement.

Cash Flow Statement Cash flow statement shows, how cash was

generated and how it was used during the period. Cash flow Statement provides more detailed

information about the movement of funds during the period. we can determine the amount of cash generated form different sources and the areas on which it is utilized.

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Components of Cash Flow Statement

i. Cash Flow from Operating Activities

ii. Cash Flow from Investing Activities

iii. Cash Flow from Financing Activities

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Operating activities include the cash effects of revenue and expense transactions.

Operating activities include the cash effects of revenue and expense transactions.

Investing activities include the cash effects of purchasing and selling assets.

Investing activities include the cash effects of purchasing and selling assets.

Financing activities include the cash effects of transactions with the owners and

creditors.

Financing activities include the cash effects of transactions with the owners and

creditors.

Examples of cash flows from operating activities are: Cash receipt from sale of goods and rendering of services. Cash receipts from fees, commission and other revenues. Cash payments to suppliers for goods and services. Cash payments to and on behalf of the employees. Cash payments or refunds of income taxes. Examples of cash flows from investing activities are: Cash payments to acquire property plant and equipment.

These also include payments made for self-constructed assets. Cash receipts from sale of property plant and equipment. Cash payments and receipts from acquisition and disposal of

other than long term assets e.g. Shares, debentures, long term loans given etc.

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Examples of cash flows from financing activities are:

Cash received from owners i.e. share issue in case of company and capital invested by sole proprietor or partners.

Cash payments to owners i.e. dividend, drawings etc.

Cash receipts and payments for other long term loans and borrowings.

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JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2003Cash flows from operating activities: Cash received from revenue transactions 750$ Cash paid for expenses (50) Net cash provided by operating activities 700$ Cash flows from investing activities: Purchase of lawn mower (2,500)$ Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners 8,000 Increase in cash for month 4,125$ Cash balance, May 1, 2003 - Cash balance, May 31, 2003 4,125$

Financial Statement Articulation

Cash 4,125$ Notes payable 13,000$ Accounts receivable 75 Accounts payable 150 Tools & equipment 2,650 Truck 15,000 Capital stock 8,000

Retained earnings 700 Total assets 21,850$ Total liabilities & equity 21,850$

Assets Liabilities

Owners' Equity

JJ's Lawn Care ServiceBalance SheetMay 31, 2005

JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2005Cash flows from operating activities: Cash received from revenue transactions 750$ Cash paid for expenses (50) Net cash provided by operating activities 700$ Cash flows from investing activities: Purchase of lawn mower (2,500)$ Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners 8,000 Increase in cash for month 4,125$ Cash balance, May 1, 2005 - Cash balance, May 31, 2005 4,125$

JJ's Lawn Care ServiceIncome Statement

For the Month Ended May 31, 2005

Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net Income 700$

The close relationship that exists among financial statements that are prepared on the bases of the same underlying transaction information

Forms of Business Organizations

Sole Proprietorship

Sole Proprietorship PartnershipPartnership CorporationCorporation

Reporting Ownership Equity in the Balance Sheet

Owner's equity:

Jill Jones, capital 8,000$

Partners' equity Jill Jones, capital 4,000$ Bill Jones, capital 4,000 Total partners' equity 8,000$

Sole Proprietorship

Sole Proprietorship

PartnershipPartnership

Owners' equity Capital stock 7,000$ Retained earnings 1,000 Total stockholders' equity 8,000$

CorporationCorporation

The Use of Financial Statements by Outsiders

Creditors

Investors

Two concerns:

Solvency

Profitability

Two concerns:

Solvency

Profitability