Chapter 4

Knowing the Accounting Entity


Securing capital for a business

Taking stock of the corporate legal structure

Partnering with others in business

Looking out for Number One in a sole proprietorship

Choosing a legal form for income tax

The enterprise being accounted for is called the accounting entity. An accounting entity can be a business, a not-for-profit (NFP) association, a church, a social club, a cooperative, or what have you. There are many kinds of accounting entities. In this chapter, I focus on profit-motivated business entities, although other types of accounting entities are interesting creatures that have unique features and accounting issues. But let’s get back to business here.

The preceding chapter explains the accounting equation and notes that this accounting axiom is echoed in the balance sheet of a business — assets on one side, liabilities plus owners’ equity on the other. This chapter, for the most part, explains the right-hand side of the balance sheet, emphasizing owners’ equity. Every business entity has an owners’ equity structure of some sort. Financial report readers should definitely know which configuration of owners’ equity the business uses.

Asset titles in a balance sheet are largely self-explanatory (although there are some weird titles, to be sure). Without knowing much accounting, you can get a good sense about the assets listed in a balance sheet — although you may not be certain about the values reported for the assets. ...

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