Sole Proprietorship Accounting
A Sole-proprietorship is a separate business entity owned and managed by a single person. It is one of the oldest, simple and common forms of business. The main characteristic of sole-proprietorship is that the business is considered non-separate from the person owning it.
The owner of a sole proprietorship has complete control over the business, its operations, and is financially and legally responsible for all debts and legal actions against the business, because they are the same entity. Another aspect of the "same entity" aspect is that taxes on a sole proprietorship are determined at the personal income tax rate of the owner. In other words, a sole proprietorship does not pay taxes separately from the owner.
Advantages:
1. Complete decision-making power
2. Absolute control of operations
3. No profit-sharing with anyone
4. No corporate tax payments
5. Legal costs are minimum
Disadvantages:
1. For the debts and liabilities of the business, the sole-proprietor is personally held liable.
2. He has to solely take all responsibilities of decision-making.
3. This form of business will not attract outside investors.
Sole-proprietorship Accounting:
The accounting and recording of transactions is a little less complicated than of a company’s. He needs to keep and maintain a separate bank account, keep track of all his business transactions including receipts and disbursements, maintain payroll records if he has additional employees and a list of the assets and liabilities of the business.
Example: Mr. A invested $20,000 as capital in his sole-proprietorship business, on 1st Jan 2010, the firm named AB trading.
The journal entry for the above transaction would be:
Date Particulars Debit Credit
1-Jan-10 Cash a/c Dr $20,000
A, Capital $20,000
The effect of the above transaction in his balance sheet would be:
AB Trading
Balance Sheet as on 1st Jan 2010
Liabilities Assets
Owner’s equity: Cash $20,000
A, Capital $20,000
Jan 10: If Mr. A withdraws, $500 cash out of his capital, the entry would be:
10-Jan-2010 A, Drawings a/c Dr $500
Cash a/c $500
The above transaction would subsequently reduce his assets and liabilities by $500 on either side respectively.
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