Sole Proprietorship
A sole proprietorship is an unincorporated business owned by one person. Proprietorships are the most common form of business organization because they are so easy to start.
Creating a sole proprietorship requires no authorization from any governmental agency. For example, a youngster with a paper route. Or lawn mowing business has a sole proprietorship. On a larger scale, sole proprietorships are widely used for farms, services businesses, small retail stores, restaurants, and professional practices.
A sole proprietorship provides an excellent model for demonstrating accounting principles because it is a simplest form of business organization. But in the business world you will seldom encounter financial statements for these organizations.
Most sole proprietorships are relatively small business with few if any financial reporting obligations. Their needs for accounting information consists primarily of data used in daily business operations the balance in the company’s bank account and the amounts receivable and payable. In fact, most sole proprietorships do not prepare formal financial statements unless some special needs arise.
Characteristics:
1. Ease of information
2. Business assets actually belong to the proprietor. As the Business is not a legal entity, it cannot own property. The Business actually belong to the proprietor, not to the business. Therefore, the proprietor may transfer assets in or out of business at will.
3. The business pays no income taxes. Tax laws do not view a sole proprietorship as separate from the other financial activities of its owner. Therefore, the proprietorship does not file an income tax return or pay income taxes.
4. The Business pays no salary to the owner. The owner of the sole proprietorship is not working for salary. Rather, the owner’s compensation consists of the entire net income of the business.
5. The owner is personally liable for the debts of the business. This concept called unlimited personal liability. Is too important to be treated as just one item in a list. It deserves special attention from us and from you.
Accounting Particles of Sole Proprietorship:
In the balance sheet of a sole proprietorship, total owner’s equity is represented by the balance in the owner’s capital account. Investments of assets by the owner are recorded by crediting account. Withdrawals of the assets by the owner are recording by debiting the owner’s drawing account. At the end of the accounting period, the drawing account and the income summary account are closed into the owner’s capital account.
The only financial reporting obligation of much sole proprietorship is the information that must be included in the owner’s personal income tax return. For this reason, much sole proprietorship bases their accounting procedures on income tax rules, rather than generally accepted accounting principles.
Evaluating the Financial statements of a proprietorship:
Sole proprietorship does not recognize any salary expense relating to the owner or any interest expense on the capital that the owner has invested in the business. Thus, if the business is to be considered successful, its net income should at least provide the owner with the reasonable compensation for any personal services and equity capital that the owner has provided to the business.
In addition, the net income of a sole proprietorship should be adequate to compensate the owner to take the significant risks. Many small businesses fail. The owner of the sole proprietorship has unlimited personal liability for the debts of the business. Therefore, if a sole proprietorship sustains large losses, the owner can lose much more than the amount of his or her equity investment.
In summary the net income of a sale proprietorship should be sufficient to compensate the owner for three factors: (1) personal service rendered to the business (2) capital invested (3) the degree of financial risk that the owner is taking.
A sole proprietorship is an unincorporated business owned by one person. Proprietorships are the most common form of business organization because they are so easy to start.
Creating a sole proprietorship requires no authorization from any governmental agency. For example, a youngster with a paper route. Or lawn mowing business has a sole proprietorship. On a larger scale, sole proprietorships are widely used for farms, services businesses, small retail stores, restaurants, and professional practices.
A sole proprietorship provides an excellent model for demonstrating accounting principles because it is a simplest form of business organization. But in the business world you will seldom encounter financial statements for these organizations.
Most sole proprietorships are relatively small business with few if any financial reporting obligations. Their needs for accounting information consists primarily of data used in daily business operations the balance in the company’s bank account and the amounts receivable and payable. In fact, most sole proprietorships do not prepare formal financial statements unless some special needs arise.
Characteristics:
1. Ease of information
2. Business assets actually belong to the proprietor. As the Business is not a legal entity, it cannot own property. The Business actually belong to the proprietor, not to the business. Therefore, the proprietor may transfer assets in or out of business at will.
3. The business pays no income taxes. Tax laws do not view a sole proprietorship as separate from the other financial activities of its owner. Therefore, the proprietorship does not file an income tax return or pay income taxes.
4. The Business pays no salary to the owner. The owner of the sole proprietorship is not working for salary. Rather, the owner’s compensation consists of the entire net income of the business.
5. The owner is personally liable for the debts of the business. This concept called unlimited personal liability. Is too important to be treated as just one item in a list. It deserves special attention from us and from you.
Accounting Particles of Sole Proprietorship:
In the balance sheet of a sole proprietorship, total owner’s equity is represented by the balance in the owner’s capital account. Investments of assets by the owner are recorded by crediting account. Withdrawals of the assets by the owner are recording by debiting the owner’s drawing account. At the end of the accounting period, the drawing account and the income summary account are closed into the owner’s capital account.
The only financial reporting obligation of much sole proprietorship is the information that must be included in the owner’s personal income tax return. For this reason, much sole proprietorship bases their accounting procedures on income tax rules, rather than generally accepted accounting principles.
Evaluating the Financial statements of a proprietorship:
Sole proprietorship does not recognize any salary expense relating to the owner or any interest expense on the capital that the owner has invested in the business. Thus, if the business is to be considered successful, its net income should at least provide the owner with the reasonable compensation for any personal services and equity capital that the owner has provided to the business.
In addition, the net income of a sole proprietorship should be adequate to compensate the owner to take the significant risks. Many small businesses fail. The owner of the sole proprietorship has unlimited personal liability for the debts of the business. Therefore, if a sole proprietorship sustains large losses, the owner can lose much more than the amount of his or her equity investment.
In summary the net income of a sale proprietorship should be sufficient to compensate the owner for three factors: (1) personal service rendered to the business (2) capital invested (3) the degree of financial risk that the owner is taking.
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