chapter1notes - GETTING STARTED IN BUSINESS CHAPTER 1...

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GETTING STARTED IN BUSINESS & CHAPTER 1 – Accounting as a Form of Communication: Accounting is the Language of Business I. Forms of Business Organization Sole Proprietorship - one owner. For accounting purposes the affairs of the business and the owner must be kept separate (Economic Entity Concept). However, not a separate entity for tax purposes. Partnership two or more owners. Profits and losses are divided among the owners. Each partner has unlimited liability (each partner is responsible of the debts of the business). A partnership is not a separate entity for tax purposes; however it is a separate business entity for accounting purposes. Corporation Business incorporated under the laws of a particular state. Advantages of incorporating a business: 1) Ownership represented by shares of capital stock that can be bought and sold freely (ease of transfer of ownership). 2) Opportunity to raise large amounts of money by selling shares of stock to a large number of people. 3) A corporation is a separate legal entity (separate for both tax purposes and accounting purposes). The owners (stockholders) have limited liability (stockholders are liable for the corporation’s debt only to the extent of their investment in the company). 4) continuity of life II. Accounting: An Information System:
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Purpose of Accounting: To Identify , Measure , and Communicate information about a company that is useful in making economic decisions. Ex) Identify: bought a truck Measure: 24,000 Communicate: on Financial Statement Result-4 financial statements 1) Balance Sheet 2) Income Statement 3) Statement of Stockholder’s Equity or Statement of Retained earnings (more simplified) 4) Statement of Cash Flow III. 2 User Groups: 1. External -stockholders/owners -creditors (banks, etc) -government/auditors looking at profit and liquidity -competitors 2. Internal - management -chief financial officer budgeting/planning -chief executive officer IV. (3) Types of Business Activities A. Financing Activities - 1. Borrowing – Bank loans notes payable
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“temporary financing” (must pay back) Credit from suppliers account payable 2. Selling Ownership Interest – “permanent financing” Common stock-investment by the owners B. Investing Activities – acquire resources to be used in day to day operations Ex. Buildings books furniture, fixtures, supplies, equipment, computer, land, trucks, cash, accounts receivable C.
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