Page 130 - Business Principles and Management

Chapter 5 • Proprietorships and Partnerships

5.2 Proprietorship

Goals Terms
• Explain the advantages and • sole proprietorship • proprietor
disadvantages of proprietorships. • proprietorship • creditors
• Describe the types of businesses
suited to being proprietorships.

The Nature of Proprietorships

The most common form of business organization is the proprietorship, of which
there are over 16 million in the United States. A business owned and managed
by one person is known as a sole proprietorship, or proprietorship, and the
owner-manager is the proprietor. In addition to owning and managing the busi-
ness, the proprietor often performs the day-to-day tasks that make a business
successful, with the help of hired employees. Under the proprietorship form of
organization, the owner furnishes expertise, money, and management. For as-
suming these responsibilities, the owner is entitled to all profits earned by the
business.
Provided that no debts are owed, a proprietor has full claim to the assets, or
property owned by the business. If the proprietor has business debts, however,
creditors (those to whom money is owed) have first claim against the assets.
Figure 5-2 presents a simple financial statement of Jennifer York, who is the pro-
prietor of a small retail grocery store and fruit market.
This simple financial statement, known as a statement of financial position,
or balance sheet, shows that the assets of the business are valued at $218,400.
Because York has liabilities (money owed by a business) amounting to $14,400,
the balance sheet shows her capital as $204,000 ($218,400 minus $14,400). In
accounting, the terms capital, net worth, and equity are interchangeable and are

FIGURE 5-2 Jennifer York’s Balance Sheet

ASSETS CLAIMS AGAINST ASSETS

Cash $ 17,760 Accounts Payable
(Liabilities) $ 14,400
Merchandise 31,680
J. York, Capital 204,000
Equipment 24,960
Land & Buildings 144,000

Total $218,400 Total $218,400

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