Owner27s Equity.ppt

1、Unit 5:,Owners Equity,About the Programme,Section 1,Ownerships of Business Entities,take out of the following three alternative legal forms:,Businesses,Proprietorships a business that is owned by one person and is not organized as a corporation the owners equity is reported by means of a single capi

2、tal account.,Partnerships an unincorporated association of two or more persons to carry on a business for profit as co-owners. capital accounts are established for each partner.,Corporations a separate legal entity chartered(or incorporated)under laws in different jurisdiction.The ownership(or equit

3、y)of a corporation is divided into inits called shares of stock,and the individuas or organizations that own these shares are called shareholders or stockholders.The advantages of corporations are as follows: a.Corporations are separate legal entities. b.Corporations have continuity of life. c.Share

4、holders are not liable for the corporations debts. d.Stockholders are not agents of the corporation. e.Ownership rights can be easily transferred. Disadvantages a.The income of a corporation is taxed twice, b.corporations are generally subject to more regulations than other businesses,Section 2,Sole

5、 Proprietorship and Partnerships Accounting,Sole Proprietorship and Partnerships Accounting,1.Opening the accounts of a new partnership 2.Additional investments 3.Closing the accounts of a partnership at year-end 4.Income statement for a partnership 5.Statement of partners equity,Sole Proprietorship

6、 and Partnerships Accounting,In most respects, partnership accounting is similsr to that in a sole proprietirship except there are more owners.As a resule, a separate capital account and drawing account is maintained for each partner. Partnerships recognize no salaries expense for services provided

7、to prganization by the partners. Accounts paid to partners are recorded by debiting partners drawing account.,1.Opening the accounts of a new partnership The journal entries to open the accounts of the partnership: Dr. Cash *,* Accounts Receivable *,* Inventory *,* Accounts Payable *,* Cr. Capital *

8、,*,2.Additional investments After six months of poeration the firm is in need of more cash, and the partners make additional investments of $10,000 each on July1. These additional investments are credited to the capital accounts as shown below: To record additional investments Dr. Cash 20,000 Cr. A

9、man Capital 10,000 B man Capital 10,000,3.Closing the accounts of a partnership at year-end At the end of the accounting period, the balance in the Income Summary account is closed into the partnerscapital accounts.The profits or losses of a partnership may be divided among the partners in any manne

10、r agreed upon by the p artners. Ex: Adams and Brown have agreed to share profits equally.Assuming that the partnership earns net income of $60,000 in the First year of operations, the entry to close the Income Summary account is as follows: (1) To divide net income for the year in accordance with pa

11、rtnership agreement to share profits equally. The next step in closing the accounts is to transfer the balance of each partners drawing account to his capital account.Assuming that withdrawals during the year amounted to $24,000 for Adams and $16,- for Brown, the entry at December31 to close the dra

12、wing accounts is as follows: Dr. Income Summary 60,000 Cr. Joan Adams, Capital 30,000 Richard Brown,Capital 30,000 (2) To transfer debit balances in partners drawing accounts to their respective capital accounts. Dr. Joan Adams, Capital 24,000 Cr. Richard Brown,Capital 16,000 Dr. Joan Adams, Drawing

13、 24,000 Cr. Richard Brown, Drawing 16,000,Section 3,Rights and Privilege of Shareholders,Rights and Privilege of Shareholders,1.Rights and Privilege of Common Shareholders,2.Rights and Privilege of Preferred Shareholders,1.Rights and Privilege of Common Shareholders,The basic rights of common stockh

14、older include the following: (1) Voting right (2) Dividends a cumulative feature, affording the preferred shareholders the protection that their dividends in arrear,Difference between common stock and preferred stock,Preferred shareholders are owners who have certain rights superior to those of comm

15、on shareholders.,preferred stock will be fully satisfied before the common shareholders participate in any earnings distribution; and convertibility or call ability by the corporation.,In exchange for the preferences,the preferred shareholders rights are limited. The right to vote, and the right to

16、participate withou limitation in the earnings of the corporation, may be restricted to common shareholders.,Section 4,Capital vs. Retained Earnings,Owners equity in a corporation is defined as stockholders equity, shareholders equity,or corporate capital.An example of a stockholders equity section o

17、f a corporation balance sheet is shown below: Stockholders equity Paid-in capital Common stock. 330,000 Retained earnings 80,000 Total stockholders equity 410,000 Stockholdersequity normally includes the following three categories: Capital stock Additional paid-in capital(In China.it is called capit

18、al surplus.) Retained earnings (In China,it is called undistributed profit.) Capitals stock and additional paid-in capital constitute contributed (paid-in) capital while retained earnings represent the earned capital of the enterprise.,Capital vs. Retained Earnings,Section 5,Issuance of Shares,Issua

19、nce,of,Shares,1.Par value stock,2.No-par value stock,1.Par value stock If the stock has par value, stockholders permanent investment is equal to the number of shares outstanding times the par value of each share. Sometimes a corporation may issue par value stock at a price in exvess of par,then the

20、stock is said to be issued at a premium Issuance of par value stock When shares are issued, net assets and equity increase by fair value of assets given to corporation.The capital stock account is credited for the par value of the stock issued.The excess over par is credited to a descriptively named

21、 paid-in capital in excess fo par account to record source in detail. In China, we use capital surplus account instead of paid-in capital in excess of par account.,2.No-par value stock If the stock is No-par valuestock,investment of stockholder is an arbitrary amount that the board assigns to the st

22、ated capital account. Corporations may issue no-par value stock for the following reasons: To avoid the stocks werre issued at a discount; To avoid confusion over the relationship between the par value and fair market value. Issuance of no-par value stock Please notice that treatment of par value st

23、ock is quite different from no-par value stock.No-par stock with a stated(or assigned) value is accounted for in the same manner as discussed for par value stock because the ststed value places the no-par stock on essentially the same basis as par value stock. True no-par stock,when sold, is recorde

24、d as a credit to the capital stock account.Thus the capital stock account should be credited for the full amount received. In this case, no paid-in capitalin excessis recorded.,Section 6,Retained Earnings,Retained Earnings,1.Appropriated retained earnings 2.Dividends and stock split 1) Cash dividend

25、s 2) Stock dividends 3.Dividend declaration 4. Stock split,1) Cash dividends Cash dividend is a pro rata distribution of cash to stockholders. For cash dividend to be paid, a corporation must have sufficient cash. There is no necessary relationship between the balance in the retained earnings accoun

26、t and the balance in the cash account. The fact that the company reports large earnings does not mean that it has a large amount of cash on hand. The amount of distributed dividend is subject to retained earnings limit.,2) Stock dividends Dividends may also be paid in the form of additional shares of stock rather than cash.This type of dividend is called stock dividend. Stock dividend is quite different from cash dividend.If dividends paid are in the form of cash, those dividends are taxable. To illustrate the accounting for stock dividen