(Test Bank) Accounting Cyc1.

Unknowm, 1

Business

Test Bank

1st Edition

• $15.00 $50.00

---

Description

Test Bank for Accounting Cyc1., The downloadable file consists of 526 pages, and the total size of the file is 0.96 MB. Purchase now only for highly discounted price.

Author(s): Unknowm

---

---

Study Note Preview

Accounting provides financial information about a business or a nonprofit organization. Owners, managers, investors, and other interested parties need financial information in order to make decisions. Because accounting is used to communicate financial information, it is often called the “language of business.” The Need for Financial Information Suppose a relative leaves you a substantial sum of money and you decide to carry out your lifelong dream of opening a small sportswear shop. You rent space in a local shopping center, purchase fixtures and equipment, purchase goods to sell, hire salespeople, and open the store to customers. Before long you realize that, to run your business successfully, you need financial information about the business. You probably need information that provides answers to the following questions: <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> How much cash does the business have? <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> How much money do customer s owe the business ? <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> What is the cost of the merchan dise sold? <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> What is the change in sales volume?<a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> How much money is owed to suppliers ? <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> What is the profit or loss? As your business grows, you will need even more financial information to evaluate the firm's performance and make decisions about the future. An efficient accounting system allows owners and managers to quickly obtain a wide range of useful information. The need for timely information is one reason that businesses have an accounting system directed by a professional staff. Accounting Defined AccountingThe process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties is the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties. An accounting systemA process designed to accumulate, classify, and summarize financial data is designed to accumulate data about a firm's financial affairs, classify the data in a meaningful way, and summarize it in periodic reports called financial statements Periodic reports of a firm's financial position or operating results . Owners and managers obtain a lot of information from financial statements. The accountant:>>1. OBJECTIVE Define accounting. p. 5 establish es the records and <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>procedur es that make up the accounti ng system, <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> supervis es the operatio ns of the system, <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> interpret s the resulting financial informati on. Most owners and managers rely heavily on the accountant's judgment and knowledge when making financial decisions. Accounting Careers Many jobs are available in the accounting profession, and they require varying amounts of education and experience. Bookkeepers and accountants are responsible for keeping records and providing financial information about the business. Generally, bookkeepers are responsible for recording business transactions. In large firms, bookkeepers may also supervise the work of accounting clerks. Accounting clerks are responsible for recordkeeping for a part of the accounting system—perhaps payroll, accounts receivable, or accounts payable. Accountants usually supervise bookkeepers and prepare the financial statements and reports of the business.>>2. OBJECTIVE Identify and discuss career opportunities in accounting. Newspapers and Web sites often have job listings for accounting clerks, bookkeepers, and accountants:<a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> Accounti ng clerk positions usually require one to two accountin g courses and little or no experienc e. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> Bookkee per positions usually require one to two years of accountin g education plus experienc e as an accountin g clerk. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> Accounta nt positions usually require a bachelor' s degree but are sometime s filled by experienc ed bookkeep ers or individual s with a two-year college degree. Most entry- level accounta nt positions do not have an experienc e requirem ent. Both the education and experienc e requirem ents for accounta nt positions vary according to the size of the firm. Accountants usually choose to practice in one of three areas: <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> public accountin g <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> manageri al accountin g<a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> governme ntal accountin g ABOUT ACCOUNTING Accounting Services The role of the CPA is expanding. In the past, accounting firms handled audits and taxes. Today accountants provide a wide range of services, including financial planning, investment advice, accounting and tax software advice, and profitability consulting. Accountants provide clients with information and advice on electronic business, health care performance measurement, risk assessment, business performance measurement, and information system reliability. PUBLIC ACCOUNTING Public accountants Members of firms that perform accounting services for other companies work for public accounting firms. Public accounting firms provide accounting services for other companies. Usually they offer three services: <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> auditing <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> tax accountin g<a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> manage ment advisory services The largest public accounting firms in the United States are called the “Big Four.” The “Big Four” are Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers. Many public accountants are certified public accountants (CPAs) An independent accountant who provides accounting services to the public for a fee . To become a CPA, an individual must have a certain number of college credits in accounting courses, demonstrate good personal character, pass the Uniform CPA Examination, and fulfill the experience requirements of the state of practice. CPAs must follow the professional code of ethics. AuditingThe review of financial statements to assess their fairness and adherence to generally accepted accounting principles is the review of financial statements to assess their fairness and adherence to generally accepted accounting principles. Accountants who are CPAs perform financial audits. Tax accountingA service that involves tax compliance and tax planning involves tax compliance and tax planning. Tax compliance deals with the preparation of tax returns and the audit of those returns. Tax planning involves giving advice to clients on how to structure their financial affairs in order to reduce their tax liability. Management advisory services Services designed to help clients improve their information systems or their business performance involve helping clients improve their information systems or their business performance. p. 6 MANAGERIAL ACCOUNTING Managerial accounting Accounting work carried on by an accountant employed by a single business in industry , also referred to as private accounting, involves working for a single business in industry. Managerial accountants perform a wide range of activities, including:<a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> establishi ng accountin g policies, <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> managing the accountin g system, <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> preparing financial statement s, <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> interpretin g financial informatio n, <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> providing financial advice to managem ent, <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> preparing tax forms,(K)</a> <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> performin g tax planning services, <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> preparing internal reports for managem ent. GOVERNMENTAL ACCOUNTING Governmental accounting Accounting work performed for a federal, state, or local governmental unit involves keeping financial records and preparing financial reports as part of the staff of federal, state, or local governmental units. Governmental units do not earn profits. However, governmental units receive and pay out huge amounts of money and need procedures for recording and managing this money. Some governmental agencies hire accountants to audit the financial statements and records of the businesses under their jurisdiction and to uncover possible violations of the law. The Securities and Exchange Commission, the Internal Revenue Service, the Federal Bureau of Investigation, and Homeland Security employ a large number of accountants. Users of Financial Information The results of the accounting process are communicated to many individuals and organizations. Who are these individuals and organizations, and why do they want financial information about a particular firm?>>3. OBJECTIVE Identify the users of financial information. OWNERS AND MANAGERS Assume your sportswear shop is in full operation. One user of financial information about the business is you, the owner. You need information that will help you evaluate the results of your operations and plan and make decisions for the future. Questions such as the following are difficult to answer without financial information: <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> Should you drop the long- sleeved pullover that is not selling well from the product line, or should you just reduce the price? <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> How much should you charge for the denim jacket that you are adding to the product line? <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> How much should you spend on advertisi ng? <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? How does this month's it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>profit compare with last month's profit? <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> Should you open a new store? SUPPLIERS A number of other people are interested in the financial information about your business. For example, businesses that supply you with sportswear need to assess the ability of your firm to pay its bills. They also need to set a credit limit for your firm. BANKS What if you decide to ask your bank for a loan so that you can open a new store? The bank needs to be sure that your firm will repay the loan on time. The bank will ask for financial information prepared by your accountant. Based on this information, the bank will decide whether to make the loan and the terms of the loan. p. 7 TAX AUTHORITIES The Internal Revenue Service (IRS) and other state and local tax authorities are interested in financial information about your firm. This information is used to determine the tax base: <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> Income taxes are based on taxable income. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', Sales taxes are 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>based on sales income. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> Property taxes are based on the assesse d value of building s, equipm ent, and inventor y (the goods availabl e for sale). The accounting process provides all of this information. REGULATORY AGENCIES AND INVESTORS If an industry is regulated by a governmental agency, businesses in that industry have to supply financial information to the regulating agency. For example, the Federal Communications Commission receives financial information from radio and television stations. The Securities and Exchange Commission (SEC) oversees the financial information provided by publicly owned corporations to their investors and potential investors. Publicly owned corporations trade their shares on stock exchanges and in over-the-counter markets. Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934 in order to protect those who invest in publicly owned corporations. The SEC is responsible for reviewing the accounting methods used by publicly owned corporations. The SEC has delegated this review to the accounting profession but still has the final say on any financial accounting issue faced by publicly owned corporations. If the SEC does not agree with the reporting that results from an accounting method, the SEC can suspend trading of a company's shares on the stock exchanges. Major changes were made to the regulatory environment in the accounting profession with the passage of the Public Company Accounting Reform and Investor Protection Act of 2002 (also known as the Sarbanes-Oxley Act) that was signed into law by President Bush on August 2, 2002. The Act was the most far-reaching regulatory crackdown on corporate fraud and corruption since the creation of the Securities and Exchange Commission in 1934. The Sarbanes-Oxley Act was passed in response to the wave of corporate accounting scandals starting with the demise of Enron Corporation in 2001, the arrest of top executives at WorldCom and Adelphia Communications Corporation, and ultimately the demise of Arthur Andersen, an international public accounting firm formerly a member of the “Big Five.” Arthur Andersen was found guilty of an obstruction of justice charge after admitting that the firm destroyed thousands of documents and electronic files related to the Enron audit engagement. Although on May 31, 2005, the Supreme Court of the United States reversed the Andersen guilty verdict, Arthur Andersen has not returned as a viable business. As a result of the demise of Arthur Andersen, the “Big Five” are now the “Big Four.” The Act significantly tightens regulation of financial reporting by publicly held companies and their accountants and auditors. The Sarbanes-Oxley Act creates a five-member Public Company Accounting Oversight Board. The Board will have investigative and enforcement powers to oversee the accounting profession and to discipline corrupt accountants and auditors. The Securities and Exchange Commission will oversee the Board. Two members of the Board will be certified public accountants, to regulate the accountants who audit public companies, and the remaining three must not be and cannot have been CPAs. The chair of the Board may be held by one of the CPA members, provided that the individual has not been engaged as a practicing CPA for five years. Major provisions of the bill include rules on consulting services, auditor rotation, criminal penalties, corporate governance, and securities regulation. The Act prohibits accountants from offering a broad range of consulting services to publicly traded companies that they audit and requires accounting firms to change the lead audit or coordinating partner and the reviewing partner for a company every five years. Additionally, it is a felony to “knowingly” destroy or create documents to “impede, obstruct or influence” any existing or contemplated federal investigation. Auditors are also required to maintain all audit or review work papers for seven years. Criminal penalties, up to 20 years in prison, are imposed for obstruction of justice and the Act raises the maximum sentence for defrauding pension funds to 10 years. p. 8 Chief executives and chief financial officers of publicly traded corporations are now required to certify their financial statements and these executives will face up to 20 years in prison if they “knowingly or willfully” allow materially misleading information into their financial statements. Companies must also disclose, as quickly as possible, material changes in their financial position. Wall Street investment firms are prohibited from retaliating against analysts who criticize investment- banking clients of the firm. The Act contains a provision with broad new protection for whistle blowers and lengthens the time that investors have to file lawsuits against corporations for securities fraud. By narrowing the type of consulting services that accountants can provide to companies that they audit, requiring auditor rotation, and imposing stiff criminal penalties for violation of the Act, it appears that this new legislation will significantly help to restore public confidence in financial statements and markets and change the regulatory environment in which accountants operate. CUSTOMERSCustomers pay special attention to financial information about the firms with which they do business. For example, before a business spends a lot of money on a new computer system, the business wants to know that the computer manufacturer will be around for the next several years in order to service the computer, replace parts, and provide additional components. The business analyzes the financial information about the computer manufacturer in order to determine its economic health and the likelihood that it will remain in business. EMPLOYEES AND UNIONS Often employees are interested in the financial information of the business that employs them. Employees who are members of a profit-sharing plan pay close attention to the financial results because they affect employee income. Employees who are members of a labor union use financial information about the firm to negotiate wages and benefits. Figure 1.1 illustrates different financial information users. As you learn about the accounting process, you will appreciate why financial information is so important to these individuals and organizations. You will learn how financial information meets users' needs. 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. Types of Business Entities The three major legal forms of business entity are the sole proprietorship, the partnership, and the corporation. In general, the accounting process is the same for all three forms of business. Later in the book you will study the different ways certain transactions are handled depending on the type of business entity. For now, however, you will learn about the different types of business entities. SOLE PROPRIETORSHIPS A sole proprietorship A business entity owned by one person who is legally responsible for the debts and taxes of the business is a business entity owned by one person. The life of the business ends when the owner is no longer willing or able to keep the business going. Many small businesses are operated as sole proprietorships. The owner of a sole proprietorship is legally responsible for the debts and taxes of the business. If the business is unable to pay its debts, the creditors One to whom money is owed (those people, companies, or government agencies to whom the business owes money) can turn to the owner for payment. The owner may have to pay the debts of the business from personal resources, including personal savings. When the time comes to pay income taxes, the owner's income and the income of the business are combined to compute the total tax responsibility of the owner. p. 11 It is important that the business transactions be kept separate from the owner's personal transactions. If the owner's personal transactions are mixed with those of the business, it will be difficult to measure the performance of the business. The term separate entity assumption The concept of keeping a firm's financial records separate from the owner's personal financial records describes the concept of keeping the firm's financial records separate from the owner's personal financial records. PARTNERSHIPS A partnershipA business entity owned by two or more people who are legally responsible for the debts and taxes of the business is a business entity owned by two or more people. The partnership structure is common in businesses that offer professional services, such as law firms, accounting firms, architectural firms, medical practices, and dental practices. At the beginning of the partnership, two or more individuals enter into a contract that details the rights, obligations, and limitations of each partner, including: <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> the amount each partner will contribut e to the business, <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? it=jpg::::/sites/dl/premium/0077430506/student/brown_bull.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a> each partner's percenta ge of ownershi p, <a onClick="window.open('/olcweb/cgi/pluginpop.cgi? each partner's