Financial Ch. 1.3

Category: Business Education

Tags: accountingcorporationliabilityprinciplestaxation

Entities: ABC CorporationAmazonTesla

Transcript

00:00

okay so we were speaking about the economic entity assumption and how a business is separate from the people who own it or run it we are again I'm going to mention in this course we are speaking from the point of

00:17

view of a public corporation so let's focus on a corporation and some of their features um it is a separate legal entity legally so if let's say something happens like someone gets hurt through

00:34

the corporation a restaurant um something steaming hot falls into your lap a waiter's passing by and drops a fajita plate on your head right and that that restaurant is a corporation then the business itself can

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be sued but you can't go after the owners of the business for their personal assets and things like that so it's a level of protection um that makes it a separate legal entity it also is separate in terms of paying

01:06

taxes it pays taxes under its own name so ABC Corporation would file its own tax return despite the fact that there's a thousands and thousands of owners who own its stock those their names would not be on it it's the name of the

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corporation continuous life and transferability of ownership meanings as you you know corporations can exist for hundreds of years they can go on and on um and ownership people buy stock on the open exchange they sell it they Beque it

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things like that that's what that second bullet there means when we speak about no Mutual agency I mentioned earlier that the stockholders are the owners of the corporation however they do not have the ability to run the corporation in terms of uh entering agreements and

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things like that so if um one of us has a couple of shares in a stock like an Amazon or a Tesla doesn't mean you can show up at their headquarters and um you know enter enter the company into a contract because you're you're partially

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an owner of that Corporation stockholders are limited owners only to uh for financial purposes they cannot make any decisions or run the company for the most part there are employees who who own stock and receive stock

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options but generally speaking limit liability of the stockholders exactly what I described earlier so if something uh unfortunate happens with the company the company may have to pay a settlement of some kind through its own assets but

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that would never flow through to the stockholders who own shares of the company you would the most you are liable to lose is the extent of what you paid for your stock in the worst case scenario you would lose all that money but no one could come after you and your

03:02

personal resources your house your bank account things like that um and the rest we kind of spoke about a little bit oh corporate taxation uh we often hear with corporations that one of the negatives

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is double taxation so we'll mention that because as I said earlier the corporation will file its own tax return and however much money they make $100 million $100 million they pay tax taxes on that at a corporate rate the money

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then after taxes is possible if the board of directors vote on and decide to give dividends in return to their stockholders thank you for owning our holding our stock we're doing well here's some money in return in addition

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to your shares appreciating um those dividends then go to stockholders and they again pay tax on that money so in essence there is a um they consider it a disadvantage that the

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money was taxed at the corporate level and then when the shareholders get their hands on it they have to include that money on their personal tax return and pay tax again that's where the term double taxation comes from and of course government regulation um corporations

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are highly regulated there's lots of um formal procedures depending on the state you're in the reporting requirements things like that so that is somewhat burdensome at times but overall your corporation is the entity that gives you

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um the most access to Capital people are going to buy your stock uh Banks and bond holders are going to lend you money uh with that money you can do enormous things so it's a powerful

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powerful type of entity in terms of business formation so the economic entity principle if you go through the slides there are a few more and you can go through those independently and certainly follow up with any questions you may have but that was the

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first um sort of big guiding principle under Gap so economic entity principle we also have three more so we can discuss those one is the cost principle you will see very quickly as we go through accounting we start

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learning how to capture and record transactions that the cost principle tells tells us we are going to put an asset or items We Buy in our accounting records at the cost we paid

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so for example even if I go to buy a building and I am a a master negotiator and the building was supposed to sell for a million dollars and I talked the seller down I gave him great arguments and he agreed to sell it to me for

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$800,000 even if that building is worth a million and I I only pay 800,000 then it is recorded in my accounting records as 800,000 likewise if I go to buy a tool and I have a discount and I um well

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let's just say a discount they give me a discount I'm going to record that tool at the discounted price I pay so whatever you pay for it that's how an item is recorded in accounting records and that's referred to as the cost principle

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the next is the going concern going concern assumption and that is telling us that we're assuming we are preparing the financial statements we're presenting them we're selling our stock all these things our assumption is that this business will continue into the

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foreseeable future we don't there is nothing we know of or expect to happen where we're going to have to close our doors and shut down abruptly okay it's that's the going concern assumption and the mon AR unit assumption um assumes

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that you are in a particular monetary unit so for us and for you for United States based corporations that would be the US dollar right so those four um you need to know those principles under Gap make

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sure you know them economic entity cost principle going concern and monetary unit assumption again I'm going to stop this video and I will see you in video four of chapter 1