Types of business

According to the activity of

the business, business is
classified in to three types According to the ownership of the business, business is classified

1. Manufacturing business
also in to three types
1. Proprietorship

2. Merchandising business
2. Partnership
3. Corporation

3. Service business
 1- proprietorship
Proprietorship is business owned by one individual person.
Advantages of this type
Ease to organize this type of business
Low cost of organizing
Disadvantages of this type
Limited source of financial resources
Limited source of financial resources
 partnership

A partnership is business owned by two or more individuals

Advantages of this type
More financial resources than a proprietorship.
Additional management skills
Disadvantages of this type
Unlimited liability
 corporation
A corporation is organized under state or federal statutes as a
separate legal entity.
Advantages of this type
The ability to obtain large amounts of resources by issuing
stocks.
Disadvantages of this type
Double taxation
 Business Stakeholders
A business stakeholder is a person or entity having
an interest in the economic performance of the
business.
Business stakeholders are divided in to
two types Internal Stakeholders and
External Stakeholders
Business Stakeholders

Internal External
Stakeholders Stakeholders
1.Shareholders 1.Customers
( owners) 2.Creditors
2.Employees 3.Government
3.Management Team
Profession of Accounting
The Accounting Equation
What is a business transaction?

A business transaction is an economic event

or condition that directly changes an entitys
financial condition or directly affects its
results of operations
 Financial statements
1. Income statements is a summery of revenue and expense
for specific period of time
2. Balance sheet is a list of the assets, liabilities, and owners
equity as of a specific date
3. Statement of owners equity is a summery of the
changes in the owners equity that have occurred during a
specific period of time
4. Statement of cash flows is a summary of the cash
receipts and disbursements for a specific period of time
 What is account, ledger, and chart
of accounts?
Account : each financial statement item is called account
Ledger : is a tool which is used to accumulate the debit
and credit of the account and the ending balance.
Chart of accounts: a list of accounts in a ledger is
called chart of accounts
 Major Account Classifications

Accounts are classified into five categories

1. Asset accounts = assets are the resources of the company
2. Liability accounts = liabilities are the debts owed to the
outsiders creditors
3. Owners equity accounts = equity is the owners right to the
assets of the business
4. Revenue accounts = are the increase of the owners equity as
result of selling service or product.
5. Expense accounts = are the using up of assets or consuming of
service to generate revenue.
Major Account Classifications

Example of assets Example of liabilities

a) Cash a) Accounts payable
b) Account receivable b) Notes payable
c) Inventory c) Wages and salary payable
d) Equipment
e) Land
f) building
Major Account Classifications
Example of owners Example of revenue
equity accounts
a) Owners capital a) Sales revenue
b) Retained earnings b) Service revenue
c) Drawings c) Fees revenue
d) Consulting revenue
 Major Account Classifications

Examples Of Expense Accounts

a) Cost of goods sold
b) Rent expense
c) Advertising expense
d) Marketing expense
e) Tax expense
Rules of Debit and Credit
 Normal Balances of Accounts
Increase
(Normal Balances) Decreases

Balance sheet accounts:

Asset Debit Credit
Liability Credit Debit
Owners Equity:
Capital Credit Debit
Drawing Debit Credit
Income statement accounts:
Revenue Credit Debit
Expense Debit Credit
 Journal Entry
Journal is a record that keeps accounting transaction
in chronological order, i.e. as they occur.
Journal can consist of several recording, each of which
is either Debit or Credit. the total of Debits must equal
the total of the Credits or the journal entry is said to be
Unbalanced.
 Journal Entry
To record a journal entry, the following questions must be
considered:
1. How many and which accounts are involved?
2. Whether the accounts involved are asset, liability, equity,
revenue and expense
3. Which accounts are increased and which accounts are
decreased? And you have to the rules of Debit and Credit
4. Which account must be Debited and which accounts must be
Credited?
Posting to the ledger ( T
account)
 solution of exercise one
Bob sample opened the campus Laundromat on September
1, 2010. During the first month of operations the following
transactions occurred
September 1 -Bob invested $20,000 cash in the business
 September 2- The company paid $1,000 cash for store rent for
September

September 3-Purchased office supplies for $25,000 paying

$10,000 in cash and the rest in account .
 September 4- Paid $1,200 for an equipment like computer printers
and another machinery

September 10- Received a bill from the daily news for advertising
the opening of the Laundromat $200
September 20- Bob withdrew $700 cash for personal use

September 30- The company determined that cash receipts for

laundry service for the month were $6,200
General ledger ( T account)
Trial Balance
 Financial statements
In this semester we will learn to make two financial
statements which is balance sheet and Income statement

Balance sheet
balance sheet contains three account types or categories
which is Asset, liabilities and owners equity
Assets are the first one and it is categorized into two types
Current assets and fixed assets current assets must be
written before fixed assets.
 Financial statements

Liabilities is the second one type of accounts to be written

in the balance sheet and it is categorized into two types
which is current liabilities and long term liabilities.
The third accounts to be written in balance sheet is
Owners equity and it contains owners capital retairned
earnings and Drawings.
Note ( assets must equal liabilities plus owners equity
that is why we called balance sheet)
 Financial statements
The second financial statements that we must learn in this
semester is Income Statement.
Income statement contains two account types or
categories which is revenue accounts like ( sales, service
revenue, fees earned) and expense accounts like (cost of
goods sold, rent expense, advertising expense, interest
expense, and utility expenses)
In income statement (Revenue Expense = net income or
net profit)
 Income statement
Income statement differs between a service company and
merchandizing company.