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1.13: Appendix: A comparison of corporate accounting with accounting for a sole proprietorship and a partnership

  • Page ID
    43545
  • Some textbook authors use a sole proprietorship and a partnership form of business ownership to illustrate accounting concepts and practices. In a survey of users and nonusers of our text, we learned that the majority preferred the corporate approach because most students will probably work for or invest in corporations. Also, many small businesses operate as corporations because of the investors’ desire for limited liability.

    This appendix briefly describes the differences in accounting for these three forms of business ownership. The major difference is in the stockholders’ equity or owner’s equity section of the balance sheet.

    As you learned in this chapter, the stockholders’ equity section of the balance sheet for a corporation consists of capital stock and retained earnings. The owner’s equity section of the balance sheet for a sole proprietorship consists only of the owner’s capital account. The owner’s equity section of a partnership is similar to that of a single proprietorship except that it shows a capital account and its balance for each partner.

    Corporation Sole Proprietorship Partnership
    Stockholders' Owner's equity: Partners' capital:
    equity: John Smith, John Smith,
    Capital stock...$100,000 Capital....$150,000 Capital............ $75,000
    Retained Sam Jones,
    earnings..... 50,000 Capital............ 75,000
    Total..................$150,000 $150,000 $150,000

    The stockholders’ equity section of a corporate balance sheet can become more complex as you will see later in the text. However, the items in the owner’s equity section of the balance sheets of a sole proprietorship and a partnership always remain as just shown. In a sole proprietorship, the owner’s capital balance consists of the owner’s investments in the business, plus cumulative net income since the beginning of the business, less any amounts withdrawn by the owner. Thus, all of the amounts in the various stockholders’ equity accounts for a corporation are in the owner’s capital account in a single proprietorship. In a partnership, each partner’s capital account balance consists of that partner’s investments in the business, plus that partner’s cumulative share of net income since that partner became a partner, less any amounts withdrawn by that partner.

    The Dividends account in a corporation is similar to an owner’s drawing account in a single proprietorship. These accounts both show amounts taken out of the business by the owners. In a partnership, each partner has a drawing account. Accountants treat asset, liability, revenue, and expense accounts similarly in all three forms of organization.

    Demonstration problem

    On 2010 June 1, Green Hills Riding Stable, Incorporated, was organized. The following transactions occurred during June:

    June 1 Shares of capital stock were issued for USD 10,000 cash.

    4 A horse stable and riding equipment were rented (and paid for) for the month at a cost of USD 1,200.

    8 Horse feed for the month was purchased on credit, USD 800.

    15 Boarding fees of USD 3,000 for June were charged to those owning horses boarded at the stable. (Fee is due on July 10.)

    20 Miscellaneous expenses of USD 600 were paid.

    29 Land was purchased from a savings and loan association by borrowing USD 40,000 on a note from that association. The loan is due to be repaid in five years. Interest payments are due at the end of each month beginning July 31.

    30 Salaries of USD 700 for the month were paid.

    30 Riding and lesson fees were billed to customers in the amount of USD 2,800. (Fees are due on July 10.)

    Prepare a summary of the preceding transactions. Use columns headed Cash, Accounts Receivable, Land, Accounts Payable, Notes Payable, Capital Stock, and Retained Earnings. Determine balances after each transaction to show that the basic accounting equation is in balance.

    Prepare an income statement for June 2010.

    Prepare a statement of retained earnings for June 2010.

    Prepare a balance sheet as of 2010 June 30.

    Solution to demonstration problem

    a. GREEN HILLS RIDING STABLE, INCORPORATED

    Summary of Transactions

    Month of June 2010

    Assets = Liabilities + Stockholders Equity
    Date Explanation Cash Accounts Receivable Land Accounts Payable Notes Payable Capital + Stock Retained Earnings
    June 1 Capital stock issued $10,000 $10,000
    4 Rent expense (1,200) $(1,200)
    $ 8,800 = +$10,000 $(1,200)
    8 Feed expense $ 800 (800)
    $ 8,800 $ 800 +$10,000 $(2,000)
    15 Boarding fees $3,000 3,000
    $ 8,800 $ 3,000 = $ 800 + $ 10,000 $ 1,000
    20 Miscellaneous expenses (600) (600)
    $ 8,200 $ 3,000 = 800 + $ 10,000 $ 400
    29 Purchased land by borrowing $40,000 $40,000
    $ 8,200 $ 3,000 $40,000 = $ 800 $40,000 + $ 10,000 $ 400
    30 Salaries paid (700) (700)
    $ 7,500 $ 3,000 $40,000 = $ 800 $40,000 + $ 10,000 $ (300)
    30 Riding and lesson fees billed 2,800 2,800
    $ 7,500 $ 5,800 $40,000 $ 800 $40,000 + $ 10,000 $ 2,500

    b. GREEN HILLS RIDING STABLE, INCORPORATE

    Income Statement

    For the Month Ended 2010 June 30

    Revenues:
    Horse boarding fees revenue $ 3,000
    Riding and lesson fee revenue 2,800
    Total revenues $ 5,800
    Expenses:
    Rent expense $ 1,200
    Feed expense 800
    Salaries expense 700
    Miscellaneous expense 600
    Total expenses 3,300
    Net income $ 2,500

    c. GREEN HILLS RIDING STABLE, INCORPORATED

    Statement of Retained Earnings

    For the Month Ended 2010 June 30

    Retained earnings, June 1 $ -0-
    Add: Net income for June 2,500
    Total $ 2,500
    Less: Dividends -0-
    Retained earnings, June 30 $ 2,500

    d. GREEN HILLS RIDING STABLE, INCORPORATE

    Balance Sheet

    2010 June 30

    Assets

    Cash $ 7,500
    Accounts receivable 5,800
    Land 40,000
    Total assets $ 53,300

    Liabilities and Stockholders' Equity

    Liabilities:
    Accounts payable $ 800
    Noted payable 40,000
    Total liabilities $ 40,800
    Stockholders' equity:
    Capital stock $ 10,000
    Retained earnings 2,500
    Total stockholders' equity $ 12,500
    Total liabilities and stockholders' equity $53,300.00