Bean Counter Dave Marshall has this to say about the different types of business organizations:

Types Of Business Organization
One of the first decisions that a person(s) needs to make is how the company should be structured. The four basic legal forms of ownership for small businesses are a Sole Proprietorship, Partnership, Corporation, and Limited Liability Company. There are advantages and disadvantages as well as income tax ramifications associated with each type of organization. We aren’t going to delve in to this area but a brief description of the different types of organization and what they are is needed.

• Sole Proprietorship
  Most small business start out as sole proprietorships. These firms are owned by one person who is normally active in running and managing the business.
• Partnership
  A partnership is two or more people who share the ownership of a single business. In order to avoid misunderstandings about how profits/losses are shared , who’s responsible for what, and other management, ownership, and operating decisions the partners normally have a formal legal partnership agreement.
• Corporation
  A corporation is an organization that is made up of many owners who normally are not active in the decision making and operations of the business. These owners are called shareholders or stockholders. Their ownership interest is represented by certificates of ownership (stock) issued by the corporation.
  Two types of corporations:
  • Regular or “C” Corporation
    Earnings are taxed to the corporation. Shareholders not personally liable for income taxes unless dividends are paid.
  • Subchapter-S
    A special type of corporation allowed by the Internal Revenue Service (IRS) that passes or transfers its earnings to the individual shareholders who personally pay the income taxes.
• Limited Liability Company (LLC)
  The LLC is a relatively new type of business structure that combines the benefits of a partnership and corporation.

Factors To Consider
Some Factors and a brief description of what to consider when choosing a type of organization:

• Tax Consequences – Federal and State
  What taxes do you have to pay to the federal and state taxing authorities ?
  Is the business organization a pass-through (income only taxed once) or is the income taxed twice ?
• Ease and cost of formation and recurring registration fees
  What documents do you need to file and what are the initial and recurring costs for the type of organization ?
• Degree of control
  Do you want to call all the “shots” ?
  As a sole owner you get to.
• Liability (personal)
  Do your personal assets need protection from legal liability ?
  Are you willing to be liable for others (partners) ?
• Ability to get money (capital)
  Do you need other investors to get your business “off the ground” ?
• Type of Business
  If your type of profession requires a special license, is it limited to what type of organization that can be selected ?

All the different types of organizations listed above have some unique methods and rules for accounting for their transactions associated with their equity (ownership) accounts. This tutorial in order to keep it simple and since many small businesses start out organized as sole proprietorships will focus on bookkeeping for a sole proprietorship.

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The Daybook is a book that records daily transactions, usually sales or purchases.  The transactions are recorded as they occur.

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The general ledger, sometimes known as the nominal ledger, is the main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses.

The general ledger is a collection of the group of accounts that supports the items shown in the major financial statements. It is built up by posting transactions recorded in the sales daybook, purchases daybook, cash book and general journals daybook. The general ledger can be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. For instance, an accounts receivable subsidiary ledger would contain a separate account for each credit customer, tracking that customer’s balance separately. This subsidiary ledger would then be totaled and compared with its controlling account (in this case, Accounts Receivable) to ensure accuracy as part of the process of preparing a trial balance.

There are seven basic categories in which all accounts are grouped:

1. Assets
2. Liability
3. Owner’s equity
4. Revenue
5. Expense
6. Gains (Profits)
7. Losses

The balance sheet and the income statement are both derived from the general ledger. Each account in the general ledger consists of one or more pages. The general ledger is where posting to the accounts occurs. Posting is the process of recording amounts as credits, (right side), and amounts as debits, (left side), in the pages of the general ledger. Additional columns to the right hold a running activity total (similar to a checkbook).[2]

The listing of the account names is called the chart of accounts. The extraction of account balances is called a trial balance. The purpose of the trial balance is, at a preliminary stage of the financial statement preparation process, to ensure the equality of the total debits and credits.

The general ledger should include the date, description and balance or total amount for each account. It is usually divided into at least seven main categories. These categories generally include assets, liabilities, owner’s equity, revenue, expenses, gains and losses. The main categories of the general ledger may be further subdivided into sub-ledgers to include additional details of such accounts as cash, accounts receivable, accounts payable, etc.

Because each bookkeeping entry debits one account and credits another account in an equal amount, the double-entry bookkeeping system helps ensure that the general ledger is always in balance, thus maintaining the accounting equation:

Assets = Liabilities + Shareholders’ Equity

The accounting equation is the mathematical structure of the balance sheet.

Wikipedia

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The Chart-of-Accounts (COA) is a chart that lists the names of the accounts that a company has identified and made available for recording transactions in its general ledger. The COA is flexible and can be modified and updated according to the needs of the company.

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Taxes are monies collected by the government based on income, sales price, accumulated wealth or based on some other criteria.

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