Section 2| SECTION OBJECTIVES | | 4. | Compare and contrast the three types of business entities.
WHY IT’S IMPORTANT
Each type of business entity requires unique legal and accounting considerations. | | 5. | Describe the process used to develop generally accepted accounting principles.
WHY IT’S IMPORTANT
Accounting professionals are required to use common standards and principles in order to produce reliable financial information. |
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| TERMS TO LEARN | | Auditor’s reportAn independent accountant’s review of a firm’s financial statements | CorporationA publicly or privately owned business entity that is separate from its owners and has a legal right to own property and do business in its own name; stockholders are not responsible for the debts or taxes of the business | | CreditorOne to whom money is owed | Discussion memorandumAn explanation of a topic under consideration by the Financial Accounting Standards Board | | Economic entityA business or organization whose major purpose is to produce a profit for its owners | EntityAnything having its own separate identity, such as an individual, a town, a university, or a business | | Exposure draftA proposed solution to a problem being considered by the Financial Accounting Standards Board | Generally accepted accounting principles (GAAP)Accounting standards developed and applied by professional accountants | | International accountingThe study of accounting principles used by different countries | PartnershipA business entity owned by two or more people who are legally responsible for the debts and taxes of the business | | Separate entity assumptionThe concept of keeping a firm’s financial records separate from the owner’s personal financial records | Social entityA nonprofit organization, such as a city, public school, or public hospital | | Sole proprietorshipA business entity owned by one person who is legally responsible for the debts and taxes of the business | Statements of Financial Accounting StandardsAccounting principles established by the Financial Accounting Standards Board | | StockCertificates that represent ownership of a corporation | StockholdersThe owners of a corporation; also called shareholders |
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The accounting process involves recording, classifying, summarizing, interpreting, and communicating financial information about an economic or social entity. An entityAnything having its own separate identity, such as an individual, a town, a university, or a business is recognized as having its own separate identity. An entity may be an individual, a town, a university, or a business. The term economic entityA business or organization whose major purpose is to produce a profit for its owners usually refers to a business or organization whose major purpose is to produce a profit for its owners. Social entitiesA nonprofit organization, such as a city, public school, or public hospital are nonprofit organizations, such as cities, public schools, and public hospitals. This book focuses on the accounting process for businesses, but keep in mind that nonprofit organizations also need financial information. |
