FORMS OF BUSINESS ORGANIZATIONS

Forms of Business Ownership

a. Sole proprietorship
b. Partnership
c. Corporation

SOLE PROPRIETORSHIP
• Businesses owned and operated by one individual; the most common form of business organization in the United
States

Advantages of Sole Proprietorship

• Ease and cost of formation
• Secrecy
• Distribution and use of profits
• Flexibility and control of the business
• Government regulation
• Taxation
Disadvantages of Sole Proprietorship
• Unlimited liability
• Limited sources of funds
• Limited skills
• Lack of continuity
• Lack of Qualified Employees
• Taxation

PARTNERSHIP
• A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons
who carry on as co-owners of a business for profit”

a. General partnership - A partnership that involves a complete sharing in both the management and the liability
of the business
b. Limited partnership - A business organization that has at least one general partner, who assumes unlimited
liability, and at least one limited partner whose liability is limited to his or her investment in the business.

Articles of Partnership - Legal documents that set forth the basic agreement between partners.
1. Name, purpose, location
2. Duration of the agreement
3. Authority and responsibility of each partner
4. Character of partners (i.e., general or limited, active or silent)
5. Amount of contribution from each partner
6. Division of profits or losses
7. Salaries of each partner
8. How much each partner is allowed to withdraw
9. Death of partner
10. Sale of partnership interest
11. Arbitration of disputes
12. Required and prohibited actions
13. Absence and disability
14. Restrictive covenants
15. Buying and selling agreements

Partnerships Advantages & Disadvantages

Advantages Disadvantages
• Ease of organization • Unlimited liability
• Capital & credit • Business responsibility
• Knowledge & skills • Life of the partnership
• Decision making • Distribution of profits
• Regulatory controls • Limited sources of
funds
• Taxation of partnerships
Keys to Success in Business Partnerships
1. Keep profit sharing and ownership at 50-50
2. Partners should have different & complementary skill sets
3. Honest is critical
4. Maintain face-to-face communications
5. Transparency – sharing information
6. Awareness of funding constraints and limited resources
7. To be successful, you need experience
8. Family is priority; limit associated problems
9. Do not become too infatuated with “the idea” think implementation
10. Couple optimism with realism in sales and growth expectations

CORPORATION
• Legal entities created by the state whose assets and liabilities are separate from its owners.
• Typically owned by many individuals and/or organizations who own shares of the business – stock (shareholders
or stockholders)

Stock – shares of a corporation that may be bought or sold

Dividends – profits of a corporation that are distributed in the form of cash payments to stockholders.
• A Corporation is created (incorporated) under the laws of the state in which it incorporates. The individuals
creating the corporation are called incorporators.

Articles of Incorporation - Legal documents filed with basic information about the business with the appropriate state
office (often the secretary of state).

Types of Corporation
• Private corporation – a corporation owned by just one or a few people who are closely involved in managing the
business
• Corporations
• Public Corporation– a corporation whose stock anyone may buy, sell, or trade.
• Corporations
• Initial Public Offering (IPO) – A private corporation who wishes to go “public” to raise additional capital and
expand. The IPO is selling a corporation’s stock on public markets for the first time.
• Quasi-public corporation – Corporation owned and operated by the federal, state, or local government
• Non-profit corporation – focuses on providing a service rather than earning a profit but are not owned by a
government entity

Board of Directors – a group of individuals elected by the stockholders to oversee the general operation of the
corporation who set the corporation’s long-range objectives.
• Inside Directors – individuals who serve on the board and are employed by the corporation (usually executives
of the corporation).
• Outside Directors – individuals who serve on the board who are not directly affiliated with the corporation
(usually Executives of other corporations).

Types of Stocks
 Preferred stock – a special type of stock whose owners, though not generally having a say in running the
company, have a claim to profits before other stockholders do.
• Common Stock – stock whose owners have voting rights in the corporation, yet do not receive preferential
treatment regarding dividends.
 Types of Business According to Activities
A. Service Business
This type of business offers professional skills, advice and consultations.
B. Merchandising Business
This type of business buys at wholesale and later sells the products at retail. They make a profit by selling prices
that are higher than their purchase costs. This type of business is also known as "buy and sell".
C. Manufacturing Business
This type of business buys raw materials and uses them in making a new product, therefore combining raw
materials, labor and expenses into a product for sale later on.
D. Hybrid Business
These are businesses that may be classified under more than one type of business.

Accounting Concepts and Principles

• Accounting is referred to as “the language of business” because it communicates the financial condition and
performance of a business to interested users.
• In order to become effective in carrying out the accounting procedure, as well as in communication, there is a
widely accepted set of rules, concepts and principles that governs the application of the accounting. These
concepts and principles are referred to as the Generally Accepted Accounting Principles or GAAP.

Guidelines on Basic Accounting Principles and Concepts

• GAAP, is the framework and guidelines of the accounting profession. Its purpose is to standardise the accounting
concepts, principles and procedures.

1. Business Entity
• A business is considered a separate entity from the owner(s) and should be treated separately. Any personal
transactions of its owner should not be recorded in the business accounting book unless the owner’s personal
transaction involves adding and/or withdrawing resources from the business.

2. Going Concern
• It assumes that an entity will continue to operate indefinitely. In this basis, generally, assets are recorded based on
their original cost and not on market value. Assets are assumed to be held and used for an indefinite period of time or
during its estimated useful life. And that assets are not intended to be sold immediately or liquidated.

3. Monetary Unit
• The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian
Dollar, Euro, etc. Thus, any non-financial or non-monetary information that cannot be measured in a monetary unit are
not recorded in the accounting books, but instead, a memorandum will be used.
• amounts are stated into a single monetary unit

4. Historical cost/Cost principle

• All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of
acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process
of closure and liquidation.

5. Matching Principle
• This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense
recorded, in order to show the true profit of the business.

6. Time period principle

• This principle entails a business to complete the whole accounting process over a specific operating time period.
• financial statements are to be divided into specific time intervals.
• Accounting period may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or
Fiscal Year.

7. Materiality principle
• Business transactions that will affect the decision of a user are considered important or material, thus, must be
reported properly. This principle states that errors or mistakes in accounting procedures, that which involves immaterial
or small amount, may not need attention or correction.
8. Objectivity Principle
• This principle states that the recorded amount should have some form of impartial supporting evidence or
documentation. It also states that recording should be performed with independence, that’s free from bias and
prejudice.

9. Accrual Accounting Principle

• This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is
received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred,
regardless of the time that cash is paid. This is to show the true picture of the business financial performance.

10.Disclosure principle
 All relevant and material information should be reported.

11.Conservatism principle
 Also known as prudence. In case of doubt, assets and income should not be overstated while liabilities and expenses
should not be understated.

12.Consistency
• This principle ensures similar and consistent accounting procedures is used by the business, year after year, unless
change is necessary.
• Consistency allows reliable comparison of the financial information between two accounting periods.

TYPES OF MAJOR ACCOUNTS

1. Assets are the resources owned and controlled by the firm.
2. Liabilities are obligations of the firm arising from past events which are to be settled in the future.
3. Equity or Owner’s Equity are the owner’s claims in the business. It is the residual interest in the assets of the
enterprise after deducting all its liabilities
4. Income is the increase in economic benefits during the accounting period in the form of inflows of cash or other
assets or decreases of liabilities that result in increase in equity. Income includes revenue and gains.
5. Expenses are decreases in economic benefits during the accounting period in the form of outflows of assets or
incidences of liabilities that result in decreases in equity.

ASSETS
• Current Assets are assets that can be realized (collected, sold, used up) one year after year-end date. Examples
include Cash, Accounts Receivable, Merchandise Inventory, Prepaid Expense, etc.
• Non-current Assets are assets that cannot be realized (collected, sold, used up) one year after year-end date.
Examples include Property, Plant and Equipment (equipment, furniture, building, land), long term investments, etc.
• Tangible Assets are physical assets such as cash, supplies, and furniture and fixtures.
• Intangible Assets are non-physical assets such as patents and trademarks

Current Assets
• Cash is money on hand, or in banks, and other items considered as medium of exchange in business transactions.
• Accounts Receivable are amounts due from customers arising from credit sales or credit services.
• Notes Receivable are amounts due from clients supported by promissory notes.
• Inventories are assets held for resale
• Supplies are items purchased by an enterprise which are unused as of the reporting date.
• Prepaid Expenses are expenses paid in advance. They are assets at the time of payment and become expenses
through the passage of time.
• Accrued Income is revenue earned but not yet collected
• Short term investments are the investments made by the company that are intended to be sold immediately

Non-Current Assets
• Property, Plant and Equipment are long-lived assets which have been acquired for use in operations.
• Long term Investments are the investments made by the company for long-term purposes
• Intangible Assets are assets without a physical substance. Examples include franchise and copyright.

LIABILITIES
Current Liabilities. Liabilities that fall due (paid, recognized as revenue) within one year after year-end date. Examples
include Accounts Payable, Utilities Payable and Unearned Income.
Non-current Liabilities are liabilities that do not fall due (paid, recognized as revenue) within one year after year-end
date. Examples include Notes Payable, Loans Payable, Mortgage Payable, etc.

Current Liabilities
 Accounts Payable are amounts due, or payable to, suppliers for goods purchased on account or for services
received on account.
 Notes Payable are amounts due to third parties supported by promissory notes.
 Accrued Expenses are expenses that are incurred but not yet paid (examples: salaries payable, taxes payable)
 Unearned Income is cash collected in advance; the liability is the services to be performed or goods to be
delivered in the future.

Non-Current Liabilities
 Loans Payable
 Mortgage Payable

OWNER’S EQUITY
.
Capital is the value of cash and other assets invested in the business by the owner of the business.
Drawing is an account debited for assets withdrawn by the owner for personal use from the business.

INCOME
Service revenue for service entities, Sales for merchandising and manufacturing companies
Income increases the equity in the accounting equation

EXPENSE
Salaries Expense, Interest Expense, Utilities Expense
Expenses decreases Equity in the accounting equation

Chart of Accounts.
• A chart of accounts is a listing of the accounts used by companies in their financial records.
• The chart of accounts helps to identify where the money is coming from and where it is going.
• The chart of accounts is the foundation of the financial statements.

The following are the steps in the preparation of a basic chart of accounts:
1. Create two columns.
2. Prepare the assets first, then liabilities, then equity, then revenue and expenses.
3. List all assets, liabilities, equity, revenue and expenses account in the first column.
4. On the second column, choose an account code (discretion of the company).
5. On the third column, write the description for each account on when to use it.

Books of Accounts
A. Journal
B. Ledger

Journal
Ø the “book of original entry” where you can find the initial record of the transactions of a firm
Ø used in recording transactions and events in chronological order.
Ø clearly shows the debit and credit effects on specific accounts in every transaction.

Types of Accounting Journal

1. General Journal
2. Special Journal

General Journal
Ø The general journal is the most basic journal. It is composed of spaces for dates, account titles and explanations,
references, and two columns for the amount.

Here are its significant contributions in the recording process.

• It imparts the complete effects of a transaction in one place.
• It presents a chronological record of transactions.
• It helps to avoid or notice errors in a way that the debit and the credit amounts for each entry can be easily
compared.
Journalizing Process
• Entering transaction data in the journal is known as “journalizing”. Businesses make separate journal entries for
each transaction. The Date, Account Title and Explanation, P.R., Debit and Credit.
• The date of the transaction is entered in the Date column.
• The debit account title or the account to be debited is entered at the extreme left margin of the Account Titles and
Explanation column, and the amount of debit to be recorded is written in the Debit column.
• The credit account title or the account to be credited is entered in the next row in the column of Account Titles and
Explanation. The amount of the credit is recorded in the Credit column.
• A short explanation of the transaction appears on the line below the credit account title (a space is left between
journal entries to separate individual journal entries and to make the reading of the journal easy).
• The column titled P.R. known as posting reference is left blank when the journal entry is made. (This column will
be used when the journal entries are transferred to the ledger accounts.)

Special Journals
• Some businesses encounter voluminous quantities of similar and recurring transactions which may create
congestion if these transactions are recorded repeatedly in a single day or a month in the general journal.

We use different special journals and these are the following:

1. Cash Receipts Journal - This is used to record all the cash that has been received.
2. Cash Disbursements Journal - This is used to record all the transactions involving cash payments.
3. Sales Journal or the Sales on Account Journal - This is used to record all sales on credit or on account.
4. Purchase Journal or the Purchase on Account Journal - This is used to record all purchases of inventory on
credit or on account.

Ledger
- The “book of final entry” that contains the total or balance of each account.
- It is also referred to as the T Account because the basic form of a ledger is like the “T”.

Two kinds of ledgers:

1. general ledger
2. subsidiary ledger

General Ledger
The general ledger is grouping of all accounts used in the preparation of financial statements. The GL, as accounting
professionals call it, summarizes all the activities that have taken place as recorded.

Subsidiary Ledger
- A subsidiary ledger is a group of similar accounts that consists of an independent data of a specific general
ledger.
- It is officially created or maintained if individualized data is needed for a specific general ledger account. Individual
record of various payables to suppliers is the best example of a subsidiary ledger.
- When we total the amount of all subsidiary ledgers it should equal the balance in the Accounts Payable of the
general ledger.