Income statement (sometimes known as the statement of operations)▶ Statement of retained earnings (usually included in statement of stockholders’ equity)▶ Balance sheet (sometimes known as the statement of financial position) ▶ Statement of cash flows
Financial statements are the business documents that companies use to report the results of their activities to various user groups, which can include managers, investors, creditors, and regulatory agencies.
Accounting is an information system. It measures business activities, processes data into reports, and communicates results to decision makers. Accounting is “the language of business.”
Don’t confuse bookkeeping and accounting. Bookkeeping is a mechanical part of accounting, just as arithmetic is a part of mathematics.
Financial accounting provides information for decision makers outside the entity, such as investors, creditors, government agencies, and the public.
Management accounting provides information for managers of RadioShack Corporation.
Proprietorship. A proprietorship has a single owner, called the proprietor. Legally, the business is the proprietor, and the proprietor is personally liable for all the business’s debts. But for accounting purposes, a proprietorship is a distinct entity, separate from its proprietor. Thus, the business records should not include the proprietor’s personal finances.
Partnership. A partnership has two or more parties as co-owners, and each owner is a partner. Individuals, corporations, partnerships, or other types of entities can be partners. Income and loss of the partnership “flows through” to the partners, and they recognize it based on their agreed upon percentage interest in the business. The partnership is not a taxpaying entity. Instead, each partner takes a proportionate share of the entity’s taxable income and pays tax according to that partner’s individual or corporate rate. General partnerships have mutual agency and unlimited liability, meaning that each partner may conduct business in the name of the entity and can make agreements that legally bind all partners without limit for the partnership’s debts. Partnerships are therefore quite risky, because an irresponsible partner can create large debts for the other general partners without their knowledge or permission. This feature of general partnerships has spawned the creation of limited-liability partnerships (LLPs). A limited-liability partnership is one in which a wayward partner cannot create a large liability for the other partners. In LLPs, each partner is liable for partnership debts only up to the extent of his or her investment in the partnership, plus his or her proportionate share of the liabilities. Each LLP, however, must have one general partner with unlimited liability for all partnership debts.
Limited-Liability Company (LLC). A limited-liability company is one in which the business (and not the owner) is liable for the company’s debts. An LLC may have one owner or many owners, called members. Unlike a proprietorship or a general partnership, the members of an LLC do not have unlimited liability for the LLC’s debts. An LLC pays no business income tax. Instead, the LLC’s income “flows through” to the members, and they pay income tax at their own tax rates, just as they would if they were partners.
Corporation. A corporation is a business owned by the stockholders, or shareholders, who own stock representing shares of ownership in the corporation. Corporation is formed under state law. Unlike proprietorships and partnerships, a corporation is legally distinct from its owners. The corporation is like an artificial person and possesses many of the same rights that a person has. The stockholders have no personal obligation for the corporation’s debts. So, stockholders of a corporation have limited liability, as do limited partners and members of an LLC. However, unlike partnerships or LLCs, a corporation pays a business income tax as well as many