MOS II 1023 A - Chapter 1

MOS II 1023 A - Chapter 1 - MOS II 1023 A Chapter 1...

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MOS II 1023 A - Chapter 1 Accounting — The information system that identifies and records the economic events of an organization, and then communicates them to a wide variety of interested users Internal and External Users: Internal Users of Accounting Information (Finance directors, marketing managers, human resource personnel, production supervisors, and company officers) — Plan, organize, and run companies (Work of the company) External User of Accounting Information (Investors) — Make decisions to buy, hold, or sell their ownership interest (Do not work for the company) External User of Accounting Information (Lenders) ex. Bankers — Evaluate the risks of lending money. (Do not work for the company) External User of Accounting Information (Creditors) ex. Supplier — Decide whether or not to grant credit (sell on account) to a customer (Do not work for the company) Primary users of accounting information: Investors, lenders, and other creditors Shareholders — Another name for investors Lenders — Another name for creditors Forms of Business Organization: Three common forms of business organization — proprietorships, partnerships, and corporations Proprietorships: A business owned by one person...often “sole" simple to set up and gives the owner control over the business only a relatively small amount of money (capital) is needed to start in business as a proprietorship Unlimited liability: owner (the proprietor) receives any profits, suffers any losses, and is personally liable (responsible) for all debts of the business no legal distinction between the business as an economic unit and the owner life of the proprietorship is limited to the life of the owner business profits are reported as self-employment income and taxed on the owner’s personal income tax return the business records of the proprietorship must be kept separate from those related to the owner’s personal activities Reporting Entity Concept (applies to all businesses): requires that the economic activity that can be identified with a particular company be kept separate and distinct from the activities of the owner and of all other economic entities
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Partnerships: a business owned by more than one person often formed because one person does not have enough economic resources to start or expand the business, or because partners bring unique skills or other resources to the partnership Each partner generally has unlimited liability for all debts of the partnership, even if one of the other partners created the debt partnerships can be formed with limited liability for selected partners profits of the partnership are reported as self-employment income and taxed on each partner’s personal income tax return Corporations: a business organized as a separate legal entity owned by shareholders corporations pay income tax as separate legal entities on any corporate profits Public corporations: distribute their financial statements to investors, lenders, other
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