Chapter 10: Accounting and Reporting for Non Incorporated Businesses

Question 1

What are the three forms of business organizations highlighted in the text?

Answer 1

The three forms of business organizations are corporations, sole proprietorships, and partnerships.

Question 2

Is a corporation considered a separate legal entity from its owners?

Answer 2

Yes, a corporation is a legal entity separate and distinct from its owners.

Question 3

What is a sole proprietorship?

Answer 3

A sole proprietorship is an unincorporated business owned by one individual.

Question 4

Are legal papers necessary to create a sole proprietorship?

Answer 4

No, it is not necessary to file any legal papers to create a sole proprietorship.

Question 5

What is a partnership in terms of business structure?

Answer 5

A partnership is an unincorporated business owned by two or more people.

Question 6

Are partnerships and proprietorships separate legal entities?

Answer 6

No, neither partnerships nor proprietorships are separate legal entities.

Question 7

How are the owners of unincorporated businesses taxed?

Answer 7

The owners of unincorporated businesses may be directly sued and are individually taxed on the earnings of the business.

Question 8

What is the typical account structure for a corporation’s shareholders’ equity?

Answer 8

A corporation’s shareholders’ equity typically includes share capital, contributed surplus, retained earnings, dividends paid, and the usual revenues, expenses, gains, losses, assets, and liabilities.

Question 9

How do the accounting structures of sole proprietorships and partnerships compare to corporations?

Answer 9

The accounting structures for sole proprietorships and partnerships do not include retained earnings and have individual capital and drawing accounts for each owner or partner, but are otherwise the same.

Question 10

Do Canadian private enterprises issue shares to the public?

Answer 10

No, Canadian private enterprises do not issue shares to the public.

Question 11

What are the primary users of financial statements prepared by Canadian private enterprises?

Answer 11

The primary users are creditors.

Question 12

How do the Canadian accounting standards for private enterprises differ from IFRS regarding the reporting of changes in equity?

Answer 12

Canadian private enterprises prepare a statement of retained earnings and disclose all other changes in equity in the notes to their financial statements, as opposed to preparing a full statement of changes in equity.

Question 13

What valuation model do Canadian private enterprises use for share-based compensation expense?

Answer 13

Canadian private enterprises are permitted to use a simplified valuation model due to the difficulty in determining a fair value for shares that have no public market.

Question 14

Are Canadian private enterprises required to report earnings per share (EPS)?

Answer 14

No, Canadian private enterprises are not required to report EPS because external users, particularly creditors, are more interested in cash flows from operating activities.

Question 15

What is the primary financial reporting difference between sole proprietorships/partnerships and publicly accountable enterprises?

Answer 15

Sole proprietorships and partnerships do not issue shares to the public and report their financial information according to accounting standards for private enterprises, which are less complicated than the International Financial Reporting Standards (IFRS) used by publicly accountable enterprises.

Question 16

How many owner’s equity accounts are needed in a sole proprietorship, and what are they?

Answer 16

A sole proprietorship requires only two owner’s equity accounts: a capital account and a drawings (or withdrawal) account.

Question 17

What are the purposes of the capital account in a sole proprietorship?

Answer 17

The capital account serves to record investments by the owner and to accumulate periodic net earnings or loss.

Question 18

What is the function of the drawings account in a sole proprietorship?

Answer 18

The drawings account is used to record the owner’s withdrawals of cash or other assets from the business for personal use.

Question 19

How does the accounting for a sole proprietorship compare to that for a corporation?

Answer 19

In most respects, the accounting for a sole proprietorship is the same as for a corporation.

Question 20

What happens to the drawings account at the end of an accounting period?

Answer 20

The drawings account is closed to the capital account at the end of each accounting period, reflecting the total withdrawals of resources from the entity by the owner.

Question 21

How do you record the investment of personal savings into a sole proprietorship?

Answer 21

The investment is recorded by debiting the Cash account and crediting the Owner’s Equity account under the owner’s name (e.g., J. Doe, capital).

Question 22

How are monthly withdrawals for personal living expenses recorded in a sole proprietorship?

Answer 22

Each withdrawal is recorded by debiting the Owner’s Equity account under drawings and crediting the Cash account.

Question 23

What financial results are closed to the capital account at the end of the year in a sole proprietorship?

Answer 23

The revenues and expenses for the year are closed to the capital account, affecting the owner’s equity.

Question 24

If a sole proprietorship earned $128,000 in revenues and had $110,000 in expenses, how is the net income closed to the capital account?

Answer 24

Net income is recorded by debiting the individual revenue accounts with $128,000, crediting the individual expense accounts with $110,000, and crediting the owner’s capital account with the net income of $18,000.

Question 25

What is the primary financial reporting difference between sole proprietorships/partnerships and publicly accountable enterprises?

Answer 25

Sole proprietorships and partnerships do not issue shares to the public and report their financial information according to accounting standards for private enterprises, which are less complicated than the International Financial Reporting Standards (IFRS) used by publicly accountable enterprises.

Question 26

How many owner’s equity accounts are needed in a sole proprietorship, and what are they?

Answer 26

A sole proprietorship requires only two owner’s equity accounts: a capital account and a drawings (or withdrawal) account.

Question 27

What are the purposes of the capital account in a sole proprietorship?

Answer 27

The capital account serves to record investments by the owner and to accumulate periodic net earnings or loss.

Question 28

What is the function of the drawings account in a sole proprietorship?

Answer 28

The drawings account is used to record the owner’s withdrawals of cash or other assets from the business for personal use.

Question 29

How does the accounting for a sole proprietorship compare to that for a corporation?

Answer 29

In most respects, the accounting for a sole proprietorship is the same as for a corporation.

Question 30

What happens to the drawings account at the end of an accounting period?

Answer 30

The drawings account is closed to the capital account at the end of each accounting period, reflecting the total withdrawals of resources from the entity by the owner.

Question 31

How do you record the investment of personal savings into a sole proprietorship?

Answer 31

The investment is recorded by debiting the Cash account and crediting the Owner’s Equity account under the owner’s name (e.g., J. Doe, capital).

Question 32

What are the main differences between the financial statements of a partnership and those of a corporation?

Answer 32

The main differences include:

The statement of earnings for a partnership includes a section for the distribution of net earnings.

The partners’ equity section of the statement of financial position is detailed for each partner.

Partnerships have no income tax expense recorded since each partner reports their share of the net earnings on their individual tax return.

Salaries paid to partners are not recorded as an expense but treated as a distribution of net earnings (withdrawals).

Question 33

How is partners’ equity calculated in the statement of partners’ capital for AB Partnership?

Answer 33

Partners’ equity is calculated by starting with the initial investments, adding any additional investments during the year, adding net earnings, and then deducting any drawings made by the partners. For A. Able, the equity at the end of the year is $66,000, and for B. Baker, it is $44,200.