Introduction to Financial and management Accounting

Different Forms of Business Organizations

Different Forms of Business
Organizations
Learning Outcomes
•
•

Explain the characteristics of, and differences between the three main types of organizations Illustrate the differences in financial statement preparation for each form of entity.

The Big Three
Proprietorship
Owner(s)

· 1 owner

Life of business Owner(s) liability Balance
Sheet

· limited
· personally liable
· Owner's Equity

· Owner Capital

Partnership

Corporation

· 2 or more owners partners
· limited

· many owners - shareholders

· partners personally liable · Partners' Equity

· Partners' Capital

· shareholders not personally liable · Shareholders Equity

· Common Shares
· Retained
Earnings

· unlimited

The Balance Sheet
Remember the Balance Sheet Equation: Assets = Liabilities + Owners Equity
In each of the three differing forms of business different terms are attached to the Owners
Equity portion as the type of ownership differs.
Here are some examples:
Proprietorship: Owner – G. Chan
Assets = Liabilities +

Owner’s Equity
↓
G. Chan Capital

Partnership: Partners – A. McFee, P. Sandler
Assets = Liabilities +
Partners Equity
↓
A.McFee, Capital
P. Sandler, Capital
Corporation: Shareholders – many

Introduction to Financial and management Accounting

Assets = Liabilities +

Different Forms of Business Organizations

Shareholders Equity
↓
Common Shares
+
Retained Earnings

Statement of Retained Earnings
The Statement of Owner’s Equity shows how the Ending Capital of a sole proprietorship is calculated. For example:
Statement of Owner’s Equity
Opening Capital
Add: Net Income
Less: Drawings
Ending Capital

$2,000
500
$2,500
300
$2,200

Drawings are amounts the owner of a sole proprietorship withdraws from the business for personal use.
A Statement of Partners’ Equity is calculated for each partner in a partnership in the same manner as the Statement of Owner’s Equity. The amount of each partner’s equity is then shown on the balance sheet.
The equity of a corporation is presented in a Statement of Retained Earnings. For example:
Statement of Retained Earnings
Opening Retained Earnings
Add: Net Income
Less: Dividends
Ending Retained Earnings

$2,000
500
$2,500
300
$2,200

Dividends are similar to Drawings. They are amounts paid by the corporation to its owners
(investors) for their personal use.

Learning Check – Financial Statements
With all of our understanding of recording, financial statement creation, and differing forms of organizations print out the following trial balance and practice preparing financial statements.

Introduction to Financial and management Accounting

Cash
Accounts Receivable
Supplies
Equipment
Accounts Payable
Share Capital
Dividends
Training Revenue
Salaries Expense
Rent Expense
Advertising Expense
Utilities Expense

Different Forms of Business Organizations

Trial Balance
Resource Training Centre Inc.
December 31, 2008
Debit
$8,050
1,400
1,600
7,000

Credit

1,600
15,000
1,300
4,700
900
600
250
200
$21,300

$21,300

Resource Training Centre Inc.
Income Statement
For the year ended December 31, 2008
Revenues
Training Revenue
Less Expenses
Salary Expense
Rent Expense
Advertising Expense
Utilities Expense
Answer:
Resource Training