Question

The proprietory theory, the entity theory, and the funds theory, are three approaches to accounting for equities.

CASE 15 -7 Theoretical Implications of Various Theories Equity

A. Describe briefly each of these theories

b. State your reasons for emphasizing the application of one of these theories to each of the following:

Single proprietorship

Partnership

Financial Institutions

Consolidated statements

Estate accounting

Answer 1

A) Briefing of these theories in two significant points.

1. Under Proprietary theory:

i. Determination and analysis of net worth of the proprietor is the primary objective.

ii. Assets-Liabilities = Proprietor equity.

2. Under Entity theory:

i. The business or entity is viewed as a separate entity from those who provide capital to it unlike in the Proprietary theory.

ii. Assets - Liabilities = Shareholder's equity.

3. Under Funds theory:

i. It views business as a separate unit having economic resources and mainly asset known as 'funds' and looks after its various obligations and restrictions and its use.

ii. Assets = Restriction of funds (assets)

B) Reasons for emphasizing the application of one of these theories to each of the following.

1. Single proprietorship: Proprietary theory is balance sheet oriented as only one person plays a key role here.

2. Partnership theory : Entity theory is followed by them as more than 1 person is required to be answered and it's not balance sheet oriented completely rather looks after for mutual benefits.

3. Financial institutions: Fund theory is followed as only the main item called cash and bank transaction happens mainly and so restriction and usage of it is the main objective here.

4. Consolidated statements: Entity theory is followed as proper denominations to shareholders should be guaranteed.

5. Estate Accounting: Fund theory as it focus on the said asset.