PPT09

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Not publicly traded. Not subject to SEC.
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Proprietorship Equity
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Capital account. Drawing account (optional). Retained earnings (optional).
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Public vs. Private Corporations
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Public corporation:
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Shares traded. Subject to jurisdiction of SEC.
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Private corporation:
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Indicates maximum number of shares allowed to issue.
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Owners’ equity called:
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Shareholders’ or stockholders’ equity.
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Preferred Stock
Account
Two Primary Sources of Equity
Retained Earnings
Account
Less: Treasury Stock
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Accounting for Treasury Stock
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Cost method (simpler method):
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At acquisition, dr. Treasury stock (a contra account within shareholders’ equity) and cr. cash. If reissued above cost, credit a paid in capital account. If reissued below cost, dr. the same paid in capital account or retained earnings.
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Legal liability
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Empowered by state.
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Disadvantages of Corporation Over Sole Proprietorship or Partnership
Costs to incorporate. Activities limited to those granted in charter. Additional regulations and requirements. Must get permission from each state in which it operates. Double taxation.
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Usually issued with a face or par value. In case of liquidation, entitled to receive par value after liabilities settled and before common shareholders receive anything. Pays stated dividend. Dividend is not tax deductible as is interest expense paid to debt holders.
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Managed by general partner who has unlimited liability. Other partners have limited liability.
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Legal Forms of Business: Corporation
Sole proprietorship. Partnership. Corporation.
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Legal Forms of Business: Sole Proprietorship
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Owned by an individual. Not legally separate from the owner. Cannot issue stock.
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Investment banker, legal, auditing, printing; subtracted from Additional paid in capital (shown net on the balance sheet).
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Partnership Equity
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Separate capital account for each partner. Partnership agreement defines split of profits among partners.
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Types of Preferred Stock
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Cumulative preferred: dividends in arrears and current year’s dividends must be paid before common dividends can be paid. Convertible preferred: convertible into a specified number of shares of common. Redeemable preferred: may be redeemed by the investor on or after a certain date at a certain price (usually higher than its par value).
Shareholder Sells Stock to Another Party
No affect on company accounts. Company notes change of owners and address of owners.
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Legal Forms of Business: Partnership
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Same features as sole proprietorship except owned by 2 or more partners. Limited partnerships.
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Common Stock (2 of 2)
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Paid in capital = Common stock at par (or stated value) + paid in capital in excess of par (also called “Additional paid in capital” or “Other paid in capital”) N AccountingEnglish@2009
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Retained Earnings
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Cumulative net income earned since inception of company less cumulative total dividends paid.
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Otherwise, divided equally.
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Ownership in a Corporation
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Evidenced by stock certificate. Corporate charter (filed with state).
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SEC requires that it be shown on the BS between Liabilities and Owners’ Equity.
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Common Stock (1 of 2)
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Residual interest in net assets after all creditors and preferred shareholders. Par or stated value usually a nominal (meaningless) amount. Book value of common stock = total common shareholders’ equity.
Lesson 9 Owner’s equity
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Two Financing Activities
From creditors From owners
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Principal Legal Forms of Business
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