Overview Of Accounting

Introduction

The following presentation has been prepared to assist small business owners, with no accounting or finance knowledge, in recognizing key financial statements and managerial reports. Aside from these reports, the business men and women should also consider nonfinancial information that can severely impact a company's decisions regarding business ethics and good business practices. A number of different types of businesses will be considered and addressed in this presentation.

In order to deliver effectively, information regarding business finances and accounting, one must first consider the audience. Information differs from business to business based on the type of organization heading the company falls under. Among these types of businesses are sole proprietorships, partnerships, and corporations. Following is an explanation of each type of organization and the primary source of funding for each.

The sole proprietorship is the most common small business and is usually comprised of 10 or less employees. "The sole proprietorship form of organization represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs," (Block & Hirt, p. 8). The benefits of single ownership, as mentioned, are the ability to make any and all decisions without needing to consult anyone else and the relatively low cost of running the business. Draw backs to sole proprietorships include unlimited liability to the owner which can also lead to lack of funding from outside sources, considering that financial institutions and other lenders are unwilling to take on the risk. Unlimited liability means that in the case of settling debts, the owner could lose all the money invested in the business as well as personal assets. Income, or lack thereof, is reported under the individual owner and taxed as such.

Partnerships are small businesses with two or more owners that share the liability risk as well as profits and losses. "Most partnerships are formed through an agreement between the participants, known as the articles of partnership, which specifies the ownership interest, the method for distributing profits, and the means for withdrawing from the partnership," (Block & Hirt, p.8). Liability risks are the same for partnerships as for sole proprietorships except that the risk is spread among more than a single individual. Partnerships can also consist of limited liability partners who stand to lose nothing more than what they invested in the company, but also have no active part in business decisions. "For taxing purposes, partnership profits or losses are allocated directly to the partners, and there is no double taxation. . ." (Block & Hirt, p. 8).

Corporations are businesses made up of a number of shareholders with limited liability, whose numbers can reach into the millions. "The corporation is unique Ð'- it is a legal entity unto itself. Thus the corporation may sue or be sued, engage in contracts, and acquire property. A corporation is formed through articles of incorporation, which specify the rights and limitations of the entity," (Block & Hirt, p. 9). This said, the shareholders' personal assets are not at risk if the corporation is sued, unlike a partnership or sole proprietorship. The shareholders of a corporation most resemble the limited liability partner of a partnership, in that the most they can lose is what they have invested in the corporation. "Because the corporation is a separate legal entity, it reports and pays taxes on its own income. As previously mentioned, any remaining income that is paid to the shareholders in the form of dividends will require the payment of a second tax by the shareholders. One of the key disadvantages to the corporate form of organization is this potential double taxation of earnings," (Block & Hirt, p. 9).

Depending on an individual's role in the business, a variety of financial statements and managerial reports will be viewed differently. Someone looking to invest in a company would be most concerned with the overall profitability of the company, and what return on their investment they could expect. A lender considering funding for an organization would be most interested in the company's ability to repay the debt in a timely manner. Likewise, a bondholder would be concerned with both the profitability of an organization as well as the debts and assets.

A company's income statement reflects the profitability of the organization over a set period, which could be as little as one month or up to three years or more. The income statement shows the amount of money the company took in over that period then adjusts for debts and cost of goods sold. It also takes into account any interest owed on debt, operating expenses and dividends available to shareholders. "First, note the income statement covers a defined period, whether it is one month, three months, or a year. The statement is presented in a stair-step or progressive fashion so we can examine the profit or loss after each type of expense item is deducted," (Block & Hirt, p. 25). The income statement would be closely examined by investors and bondholders, while lenders may only glance at the debt portion of the statement.

A balance statement is a report of what an organization owns and how they are financed. A company's assets are paid for through borrowed debt, known as liabilities, or private investors known as stockholders. Unlike the income statement,