ACC 342 Lecture Notes - Lecture 6: Limited Liability Company, Limited Liability, Sole Proprietorship
*Provide information to enhance controls
*Basis for management decisions
*Deals with proposed events
Tax Accounting
Preparation and filing of taxes
-Federal, state, and local
-income tax, sales tax, property tax, payroll tax
Tax planning to minimize taxes paid
Auditing
Reviewing and evaluating documents, records, and control systems
Financial audits done by external firms
Accounting Systems
Includes the integration of all information systems
Sole Proprietorships
Single owner
Owner is legally responsible for all debts of the business Owner is not paid a salary or wage, instead
withdrawals cash
Income or loss is reported on the owner's personal income tax return
Benefits are not deductible for the owner, only employees
Disadvantage: unlimited liability, difficult to raise large amounts of cash
Partnerships
Two or more people
Oral or written agreement
- Written preferred to record the duties of each partner, investment by each partner, distribution of
profits and losses
Advantages:
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Additional capital can add to financial strength
Business does not pay taxes; income distributed to the partners
Disadvantages:
Partners taxed of their share of the profits regardless if cash is distributed
Disagreements, uneven distribution of responsibilities
Unlimited legal responsibility
Limited Partnerships
Protection of limited liability to limited partners
Limited partners may not actively participate in managing the business
Must have at least on general partner - responsible for the debts (Unlimited liability)
Must be in writing and filed with proper government authorities
Personal liability is limited to their investment in the business
Same tax advantage as general partners
Limited Liability Company
Combines corporate limited liability with tax treatment of sole proprietorships
and partnerships
Unlimited number of owners
May include non-individuals such as corporations
Corporations
Legal entity created by the state or other authority Characteristics
Exclusive name, continued existence independent of stockholders, transferable shares of
common stock, limited liability of its owners, control of business by directors
Advantages:
Shareholder liability limited to their investment, owners taxed only on distributed profits, equity
can be raised by selling more stock, tax rates usually lower for small corporations than for individuals
Disadvantage: Double taxation
Corporate profits taxed and profits paid out as dividends considered taxable to individual stockholders
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Cost Principle
Record at transaction price (the cost)
Some exceptions to the rule, but for right now understand record transaction at the actual dollar
amount.
Business Entity
Businesses maintain their own set of accounts
Accounts are separate from other financial interest of the owner.
**For example, if hotel owner took home food for personal use, he would have to properly charge his
own account.
Continuity of the Business Unit
Assumed the business will continue indefinitely
Liquidation is not a prospect
Unit of Measurement
Monetary terms
U.S. Dollar Stable unit of value to that historic and future periods are comparable
Objective Evidence
Invoice, receipt or canceled check needed for documentation of transactions
Full Disclosure
No secrets
Must provide all facts related to the financial statements Can reported in the body of the financial
statements or in the footnotes
Footnotes disclosure may include:
Accounting method used, changes in accounting methods, contingent liabilities, unusual and
nonrecurring items
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Document Summary
Income tax, sales tax, property tax, payroll tax. Reviewing and evaluating documents, records, and control systems. Owner is legally responsible for all debts of the business owner is not paid a salary or wage, instead withdrawals cash. Income or loss is reported on the owner"s personal income tax return. Benefits are not deductible for the owner, only employees. Disadvantage: unlimited liability, difficult to raise large amounts of cash. Written preferred to record the duties of each partner, investment by each partner, distribution of profits and losses. Business does not pay taxes; income distributed to the partners. Partners taxed of their share of the profits regardless if cash is distributed. Limited partners may not actively participate in managing the business. Must have at least on general partner - responsible for the debts (unlimited liability) Must be in writing and filed with proper government authorities. Personal liability is limited to their investment in the business.
