Chapter 13 Notes

Corporations: Organization, Stock, Transactions, and Dividends

Corporations make up 20 percent of the businesses in the economy but 90 percent of total business dollars made in the US

Corporation-is a legal entity distinct and separate from the individuals who create and operate it. corporations can acquire, own and dispose of property in its own name. 

Stocks- This is a characteristic of large corporations. It is when corporations sell a portion of its ownership. This allows corporations to generate large amounts of capital. The buying and selling of a corporations stock does not affect the operations and existence of the company.

Stockholders- Also called shareholders are the people who own stock in the corporation. Stockholders have limited liability. Stockholders also control the corporation by electing the board of directors.

There are two different types of corporations there are public corporations or there are private corporations

Public Corporations- Corporations whose shares of stock are traded in public markets

Private Corporations- Corporations whose shares of stock are not traded publicly. They are usually bought by a small group of investors in a nonpublic or private market.

Board of Directors- It is a board of elected officers in a corporation that meet periodically to establish corporate policies and also manage day to day affairs with in the business.

Organizational Structure of a Corporation

*Stockholders

*Board of Directors
*Officers

*Employees

Forming a corporation

First step is filing for an application of incorporation

laws of incorporation differ from state to state and corporations usually organize in the states with more favorable laws. For example Delaware is a popular for corporations to form.

Secondly after the application of incorporation has been approved the state must grant a charter or articles of incorporation. These articles is what formally makes the business a formal corporation.

Bylaws- are rules and procedures for conducting the corporations affairs.

Many costs go into the creation of a corporation called Organizational Expenses these costs include things such as legal fees, taxes, state incorporation fees, license fees, and promotional costs.

* the journal entry for organizational expenses is organizational expenses is debited and cash is credited 

Stockholders Equity

There are many names for owners equity in a corporation for example is is commonly referred to as stockholders equity, shareholders equity, shareholders investment, or capital. 

There are two main sources of stockholders equity paid in capital and retained earnings

Paid in Capital- Capital contributed to the corporation by the stockholders 

Retained Earnings- Net income retained in the business

*Stockholders Equity Journal entry is common stock and retained earnings debited added together to get total stockholders equity which is then credited

Deficit- A debit in Retained earnings, this balance results from accumulated net losses.

Characteristics of Stock

Outstanding Stock- Stock remaining in the hands of stockholders
Par- Shares of stock that are often assigned a monetary amount
Stated Value- requirement of some statees that says board of directors have to assign a value to no- par stock

Stock Certificates are  given to stockholders that indicate a ownership of the stock and the value and amount of stock owned.

Stockholders also have major rights, are parrtical owners of a company or corporation

• right to vote in matters concerning the company
• right to share in distribution of earnings
• right to share in assets on liquidation

Classes of Stock

Common Stock- When only one class of sotck is issued, each share of common stock has equal rights
Perferred Stock- Common example of perferred rights when owning stock is the prreference to dividends

Issuing Stock

The journal entry for issuing stock to investors is done by using a seperate account . Cash is debited and perferred stock and common stock are credited.

The price at which stock can be sold by a corporation depends on a variety of factors

• Financial conditions, earnings records, and dividend record of the corp.
• Investor expectations of the corp potential earning power
• General business and economic conditions and prospects

Premium- When stock is issued for a price that is more than its par the stock has sold at a premium price

Chapter 12 Notes

Chapter 12
Accounting for Partnerships and Limited Liability Companies

There are four major forms of businesses
-Proprietorship
-Partnerships
-Limited Liability Company
-Corporation

For theses types of businesses and all businesses in general the owner should keep personal finances completely separate from business finances. This is so the business will run in a more smooth manner and taxation and profit can be accurately calculated either monthly or annually. As many people say you must not mix business and pleasure. In other words keep you social and personal life completely seperate from your business life.

*Proprietorships- also know as Sole Proprietors are typically small businesses owned and operated by one person. These types of businesses are the most common making up 70% of the market, but on the flip side proprietorships only make up 5% of the total revenue brought in by businesses across the board. And to add to this there are many positive and negative factors to having a proprietorship. The positives include that as the sole owner of the business you can make decisions on how you want to run your business yourself without any interference from other people. Also as the owner you keep all the profits for yourself and do not have to share any of the earnings with other people. However the negatives are, since you are the only owner you have a limited amount of capital to invest in your business and you are responsible for all expenses. You can however borrow money from a family or friend or take a loan from a bank but your resources are still very limited alone to create a large business right off the bat. There are many risks as far as liabilities go as well being the sole owner of a company as well.

*Partnerships- are another route to go when starting up your own business, a partnership is a business owned and managed by two or more people. All the expenses and operation costs are split in  this case between all the members of the partnership, therefore lessening the financial burden of owning a business on your own. However partnerships are sometimes short lived and dissolve easily. This is because if one person decides to leave the partnership whether it is for a number of reasons, the partnership must be terminated and the assets of the business are properly distributed to all members of the business. Also if the other people of the business want to continue to do business they must for a new partnership between them. One positive to having a partnership is more capital to invest in the business. Since there are more people that in turn means more money to put into the creation of your business.

*Limited Liability Company- An LLC is very similar to a partnership but is different in ways that benefit the owners. Instead of the business ending when someone leaves a partnership, LLC allow businesses be members and not be partners. So the business will continue instead of ending like in a traditional partnership.

Dividing Income for Partnerships-
when partnerships merge their businesses and create a partnership there are two different transactions to calculate the salaries of the partners and also the division of the sales. The salaries of the partners should be determined at the beginning of the partnership in the partnership agreement. It is mainly determined based on which person contributed more to the business and who invested more money and assets. Secondly the other division of net income is the division of revenue or sales income. Most traditionaly this money is split 50/50 between the two partners. The major reason that partnerships fail is because of disagreements over money and the failure to come to an agreement over income distribution.

*The partners equally share either a net gain or a net loss depending on the net income for the period. A net gain is achieved by allowances, and expenses being less than the net income, and a net loss is the opposite where allowances and expenses exceed the net income. 

*When new partners join the partnership, there are two possible scenarios which a new partner can be admitted. First a person can buy there way into the busy or pay interest into the business and this makes the person a new partner in the business and gives him rights to a percentage of the profits. This way doesn't directly have an effect on the business itself it is a transaction between solely between the partners of the business. However the other way does have an effect on the business. This way is a person would put money or assets directly into the business itself and therefore having an affect on the business's asset and owners equity accounts. 

*Pretty much the same scenarios occur when withdrawing a partner from the business except the opposite transactions occur to the business'a accounts. So instead of crediting the owners equity and debuting the asset accounts when admitting a partner if someone wants to leave the business you would debit owners equity and credit asset. The money which that partner specifically contributed to the business will be returned to him or a

Her, and if the business doesn't have the assets to give the partner which is leaving the business will set up a liability account to pay off the partner the amount of money which they deserve.