Question

Describe the three major types of business organizations and how they are reflected in the financial statements.

Answer 1

Answer:

Three main types of Business organizations- Are as following:

Sole Proprietorship- This business is owned by a single person, he is the owner and he is responsible for all types of liabilities of the business. The business is not separate legal entity, all the profits and losses are borne by the owner himself.

Limited Liability company- As the name suggests, this company is formed by two or more people with limited liability and they are not responsible for business debt. LLC do not pay taxes rather taxes are paid by the owners on their profits. They are hybrid entity as they have characteristics of partnership as well as corporation.

Corporation- A corporation is a separate legal entity, owners in the corporation are not personally liable for any debt and obligation of the company. There are two types of corporation; C and S. C corporation is subject to double taxation while S corporation is not subject to Federal income tax.

Financial statements of these business organizations- As the business structure differs, their financial statements also differ. Their primary purpose does not change that is to provide the business owners and stakeholders about the fair and true picture of business.

The three main financial statements for any business-

1. Income statement
2. Balance sheet
3. Cash flow statement

There are some items that differ in the financial statements of these entities like

• Drawings and Owner's equity section in Sole properitorship
• Partner's capital in partnership
• Units in the LLC
• Shareholder's equity in the corporation.