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.
|Stockholders'||Owner's equity:||Partners' capital:|
|equity:||John Smith,||John Smith,|
|Capital stock...$100,000||Capital....$150,000||Capital............ $75,000|
|earnings..... 50,000||Capital............ 75,000|
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owner’s investments in the business, plus cumulative net income since the beginning of the business, less any amounts withdrawn by the owner.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the business, plus that partner’s cumulative share of net income since that partner became a partner, less any amounts withdrawn by that partner.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.
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||$10,000|
|8||Feed expense||$ 800||(800)|
|$ 8,800||$ 800||+$10,000||$(2,000)|
|$ 8,800||$ 3,000||=||$ 800||+ $ 10,000||$ 1,000|
|$ 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|
|$ 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
For the Month Ended 2010 June 30
|Horse boarding fees revenue||$ 3,000|
|Riding and lesson fee revenue||2,800|
|Total revenues||$ 5,800|
|Rent expense||$ 1,200|
|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|
|Retained earnings, June 30||$ 2,500|
d. GREEN HILLS RIDING STABLE, INCORPORATE
2010 June 30
|Total assets||$ 53,300|
Liabilities and Stockholders' Equity
|Accounts payable||$ 800|
|Total liabilities||$ 40,800|
|Capital stock||$ 10,000|
|Total stockholders' equity||$ 12,500|
|Total liabilities and stockholders' equity||$53,300.00|