Business Accounting FAQ:

1.) Type of entity formation

A. Proprietorship.
1. Simplest to form
a. just hang out shingle. no application to govt. units before starting operations.
1. might file OBA application with city/county govt to protect name of business from false use.
b. owners are "the business... same identity as owner
1. only one owner (joint with spouse still is "one owner).

B. Partnership.

1. Two or more owners
2. Ownership interest determines amount of income/loss that is allocated to each owner
a. Interest is determined by how much cash or property is given to partnership for operations.
3. Partnership agreement is legal document shows the part ner's share of income/loss and capital allocation, what each partner can or cannot do as partner.
4. Must have at least one general partner to run the operations and be accountable to outside parties

C. Corporation.

1. Legal entity separate from owner(s).
a. Created by state where incorporated.
2. Owner(s) get their share of profits by the corporation through dividend.
a. Management through a Board of Directors votes on the granting and amount of dividend to be paid.

2.) How is income reported?

A. Calendar year vs. fiscal year
     1. Calendar year reporting is from January 1 to December 31.
     2. Fiscal year reporting is any other 12 month period such as February 1 to January 31, April 1 to March 31, etc.

B. The statement that reports the net income or loss of the entity for the current year is called the "Profit or Loss Statement".

    1. More correctly it should be titled "Statement of Operations" in a for profit business.
    2. For a nonprofit entity such as Salvation Army. Goodwill, it should be titled "Statement of Revenues and Expenditures".
    3. What is considered an expense in the current year?
         a. Formally, it is a disbursement to pay for a good or service consumed in the current year.
             1.) Examples are wages and salaries, office supplies, fuel for the delivery trucks, etc.
    4. What is the difference between gross revenue and net income?
        a. "Gross Revenue" are the monies collected from the sales of goods or services for an agreed price.
        b. "Net Income" is excess of gross revenue less disbursements for current expenses of the entity.
        a. Does not include loan payments, credit card disbursements, etc. 
   5.  Forms of compensation are:
       a.  Wages- computed by the hour or by the day at agreed rate of pay.
       b.  Salary- agreed rate that is fixed by the period such as per week, semi­ monthly, or monthly as examples.
       c.  Commission-used for sales personnel, an earned percentage of dollar sales made. Can be more volatile type of payas sales volume can vary from period to period.
      d.  Bonus-compensation as a reward for meeting a sales target by sales personnel pre-set by management; can be a specific dollar amount or as a percentage of total sales in a set period of time.