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LET’S REMEMBER

THERE ARE THREE (3) FORMS OF BUSINESS ORGANIZATIONS:

SOLE PROPRIETORSHIP

PARTNERSHIP

CORPORATION

SOLE PROPRIETORSHIP

A SOLE PROPRIETORSHIP IS A BUSINESS THAT IS OWNED AND MANAGED BY ONE PERSON.

NORMALLY, THESE ARE THE TYPES OF BUSINESSES THAT A STARTING ENTREPRENEUR HAS.

OWNER OF THIS TYPE OF BUSINESS IS SIMPLY CALLED SOLE PROPRIETOR.

ADVANTAGES OF A SOLE PROPRIETORSHIP

IT IS EASY TO SET UP AND HAS NO COMPLEX LEGAL PROCESS. IT REQUIRES A SMALL CAPITAL ONLY. IT IS EASY TO MANAGE AND CONTROL. OWNER GETS ALL THE PROFIT OF THE BUSINESS. FOR THE CREDITORS, THE UNLIMITED LIABILITY OF THE OWNER IS AN ADVANTAGE.

DISADVANTAGES OF A SOLE PROPRIETORSHIP

IT HAS A LIMITED SOURCE OF CAPITAL. OWNER MAY NOT BE ABLE TO HANDLE MORE COMPLEX BUSINESS OPERATIONS IF HE IS ALONE IN MANAGING THE BUSINESS. IN CASE OF POOR PERFORMANCE, THE OWNER WILL SOLELY ABSORB ALL LOSSES. IT CAN EASILY BE DISSOLVED. FOR THE OWNER, THE UNLIMITED LIABILITY MAY BE A DISADVANTAGE.

PARTNERSHIP

PARTNERSHIP IS A BUSINESS FORMED BY TWO OR MORE INDIVIDUALS WHO ARE WILLING TO CONTRIBUTE MONEY,

PROPERTY, OR SERVICE TO A COMMON FUND WITH THE AGREEMENT OF DIVIDING PROFITS AMONG THEMSELVES.

OWNERS OF THIS TYPE OF BUSINESS ARE CALLED PARTNERS.

ADVANTAGES OF A PARTNERSHIP

IT HAS A MORE CAPITALIZATION THAN SOLE PROPRIETORSHIP. IT HAS A MORE POOLING OF SKILLS AND EXPERTISE. ALTHOUGH WITH BIGGER SOURCES OF CAPITAL THAN SOLE PROPRIETORSHIP, PARTNERSHIP IS STILL EASIER TO FORM THAN CORPORATION. THE INTEREST OF ONE PARTNER CANNOT BE TRANSFERRED TO A NEW PARTNER WITHOUT THE CONSENT OF OTHERS.

DISADVANTAGES OF A PARTNERSHIP

DISAGREEMENTS AMONG PARTNERS MAY CAUSE DELAY IN DECISION-MAKING. IT CAN BE EASILY DISSOLVED THROUGH WITHDRAWAL, INSOLVENCY OR DEATH OF A PARTNER. PROFIT IS NOT OWNED BY ONE PERSON ALONE. IT HAS AN UNLIMITED LIABILITY EXCEPT FOR LIMITED PARTNERS.

CORPORATION

AS DEFINED BY THE CORPORATION CODE OF THE PHILIPPINES, A CORPORATION IS AN ARTIFICIAL BEING CREATED BY THE OPERATION OF LAW, HAVING THE RIGHT OF SUCCESSION AND

THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE.

CORPORATION

IN SIMPLE TERMS,

A CORPORATION IS SEPARATE AND DISTINCT FROM ITS OWNERS.

IT HAS ITS RIGHTS, DUTIES, AND RESPONSIBILITIES AS A JURIDICAL PERSON.

INVESTORS OF THIS TYPE ARE CALLED SHAREHOLDERS.

CORPORATION

UNLIKE SOLE PROPRIETORSHIP AND PARTNERSHIP WHERE THE OWNERSHIP AND MANAGEMENT ARE VESTED ON THE OWNERS THEMSELVES, A CORPORATION SEPARATES OWNERSHIP FROM

MANAGEMENT.

IN A CORPORATION, SHAREHOLDERS ELECT THE BOARD OF DIRECTORS WHO WILL MANAGE THE CORPORATION.

ADVANTAGES OF A CORPORATION

IT HAS A HUGE SOURCE OF CAPITAL. IT HAS INCREASED CAPACITY TO HANDLE MORE COMPLEX AND WIDER OPERATIONS. IT HAS THE CAPACITY TO HIRE PEOPLE TO MANAGE THE COMPANY. IT HAS AN INDEFINITE LIFE. A CORPORATION CAN OPERATE FOR FIFTY (50) YEARS RENEWABLE FOR ANOTHER FIFTY (50) YEARS. INVESTORS HAVE NO UNLIMITED LIABILITY (ADVANTAGE FOR THE INVESTORS). DEATH OF ANY SHAREHOLDERS WILL NOT DISSOLVE THE CORPORATION BECAUSE OF THE TRANSFERABILITY OF SHARES.

DISADVANTAGES OF A CORPORATION

IT HAS MORE LEGAL AND TAX REQUIREMENTS. IT HAS MORE COMPLEX OPERATIONS. INVESTORS HAVE NO UNLIMITED LIABILITY (DISADVANTAGE FOR CREDITORS). HIGHER RISK OF FRAUD DUE TO PERSONAL MOTIVES OF BOD.

STATEMENT OF CHANGES IN EQUITY

THE STATEMENT OF CHANGES IN EQUITY IS A FINANCIAL STATEMENT THAT SHOWS THE MOVEMENT IN THE EQUITY OR CAPITAL.

STATEMENT OF CHANGES IN EQUITY

ACCORDING TO THE INTERNATIONAL ACCOUNTING STANDARDS, THE STATEMENT MUST INCLUDE THE:

TOTAL COMPREHENSIVE INCOME FOR THE PERIOD

EFFECTS OF ANY RETROSPECTIVE APPLICATION OF

ACCOUNTING POLICIES OR RESTATEMENTS MADE.

STATEMENT OF CHANGES IN EQUITY

ACCORDING TO THE INTERNATIONAL ACCOUNTING STANDARDS, THE STATEMENT MUST INCLUDE THE:

RECONCILIATIONS BETWEEN THE CARRYING AMOUNTS AT THE BEGINNING AND THE END

OF THE PERIOD SEPARATELY DISCUSSING:

PROFIT OR LOSS

OTHER COMPREHENSIVE INCOME

TRANSACTIONS WITH OWNERS, SHOWING CONTRIBUTIONS BY AND

DISTRIBUTIONS TO OWNERS SEPARATELY.

STATEMENT OF CHANGES IN EQUITY

IN OTHER WORDS, THE STATEMENT OF CHANGES IN EQUITY FOR A SOLE PROPRIETORSHIP PRESENTS IN

DETAIL THE MOVEMENT OF THE CAPITAL ACCOUNT FOR

THE PERIOD.

SAMPLE PROBLEM

ASSUMING THE FOLLOWING BALANCES FROM CHANCE COMPANY FOR THE YEAR ENDED DECEMBER 31, 2017:

BEGINNING CAPITAL

ADDITIONAL INVESTMENTS FROM OWNER

CASH WITHDRAWAL FROM OWNER

NET INCOME FOR THE PERIOD

P 900,000

200,000

50,000

300,000

SAMPLE PROBLEM

Q: HOW MUCH IS THE ENDING CAPITAL?

SAMPLE PROBLEM

CHANCE COMPANY

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED DECEMBER, 31, 2017

BEGINNING CAPITAL

P

900,000

ADDITIONAL INVESTMENTS FROM OWNER

200,000

NET INCOME FOR THE PERIOD

300,000

CASH WITHDRAWAL FROM OWNER

(50,000)

ENDING CAPITAL

P 1,350,000

OTHERS

EQUITY OR CAPITAL CAN ALSO BE COMPUTED AS:

EQUITY OR CAPITAL = ASSETS - LIABILITIES