Chapter
7
FINANCIAL Accounting:
BBA-III-C, BBA-I-Bridging
Fall 2021
Course Instructor
Sehrish Abro
sehrishabro@smiu.edu.pk
Forms of Business Organization
Marks Distribution
Marks Head
Total
Frequency
Marks
Frequency
Total Marks
Quiz
2
5
10
Assignments
Project+CP
Multiple
1
1
10
20
Mid Term
1
20
20
Final Exam
1
40
40
Total
100
Types of Business Ownership
• SOLE PROPRIETORSHIP
• PARTNERSHIP
• CORPORATION
SOLE PROPRIETORSHIP
• Business owned by only one person
ADVANTAGES
• Easy to start up
• Be your own boss
• Keep all the profits
• Taxes are usually low
SOLE PROPRIETORSHIP
DISADVANTAGES
• Pay for everything yourself
• May have to use personal savings
or borrow money from the bank
• You might lack business skills
HUGE DISADVANTAGE
• unlimited liability =
or “full responsibility” for
your company’s debts
Partnership
•Business owned by two
or more persons who
share the risks and rewards
To start up, need to create a
partnership agreement - a
contract that outlines the
rights/responsibilities of
each partner
Partnership Agreement
• Amount of cash and other contributions to
be made by each partner
• Division of partnership income (or loss)
• Partner responsibilities—who does what
• Conditions under which a partner can sell
an interest in the company
• Conditions for dissolving the partnership
• Conditions for settling disputes
Registering a Partnership in
Pakistan
• Firm name
• Place or principal place of business of the
firm
• Names of any other places where the firm
carries on business
• Date when each partner joined the firm
• Names in full and permanent addresses
of the partners
• Duration of the firm
Types
• General Partnership
• Limited Partnership
• Limited Liability Partnership
Partnership
ADVANTAGES
• “May” only need a license to start
• Pay taxes on your personal profits
• Each partner can add money to start up
• Banks are more willing to lend money
to partnerships than sole proprietorships
• Each partner brings different skills
Partnership
DISADVANTAGES
• You share not only the RISKS, but
PROFITS too
• Might not get along with your partners
• You share unlimited legal and financial
liability with your partners
Accounting for Partnership
• Investment by owners:
Division of Net Income
King and Lee are co-partners in the Kingslee
Company. The partnership agreement
provides for:
(1)salary allowances of $8,400 to King and
$6,000 to Lee
(2) interest allowances of 10% on capital
balances at the beginning of the year, and
(3) the remainder equally. Capital balances on
January 1 were King $28,000, and Lee
$24,000. In 2020, partnership net income is
$22,000.
Illustration..
Division of Net Income
• Jack and Jill Co. reports net income of
$28,000. Interest allowances are
jack$7,000 and Jill $5,000; salary
allowances are Jack $15,000 and Jill
$10,000; the remainder is shared equally.
• Show the distribution of income for
partners.
Admission of new partner
• INVESTMENT OF ASSETS IN A PARTNERSHIP
• The admission of a partner by an investment of
assets is a transaction between the new partner
and the partnership.
• Often referred to simply as admission by
investment
• the transaction increases both the net assets and
total capital of the partnership
Admission of new partner
• PURCHASE OF A PARTNER’S INTEREST
• The admission of a partner by purchase of
an interest is a personal transaction
between one or more existing partners and
the new partner.
CORPORATE CHARACTERISTICS
A corporation is
organized under
state or federal
statutes as a
separate legal entity.
J & M, Inc.
Advantages
• The ability to obtain large
amounts of resources by
issuing stocks
• Limited liability for the
owners
• Continuous Life
Disadvantages
• Double taxation
• More complexity
and regulations
• Corporations will be revisited in Chapter #
14