Accounting Basics Quiz - Stock/Shareholders Equity

A partnership is a business arrangement where two or more individuals come together to work towards making a profit. In a partnership, each person contributes their skills, resources, or capital to the business. The profits and losses are shared among the partners based on the agreed-upon terms. Therefore, the statement that a partnership is defined as two or more people working towards a profit is true.

For corporations and limited liability companies, shareholders are entitled to a share of the company's profits, which is known as a dividend. Dividends are typically paid out to shareholders as a way to distribute the company's earnings and provide a return on their investment. This payment is separate from any salary or wages that the shareholders may receive from the company.

Soletraders and partnerships are types of business structures where the business is owned and operated by one individual or a group of individuals, respectively. Unlike corporations, which have external owners in the form of shareholders, soletraders and partnerships do not have external owners. In these structures, the owners have full control and responsibility for the business, and they are personally liable for any debts or legal obligations. Therefore, the statement that soletraders and partnerships do not have external owners is true.

The main disadvantage of trading as a sole trader or as a partnership is that the owner's liability is unlimited - and the owners personal assets may be in danger. This means that if the business incurs debts or legal obligations, the owner or partners are personally responsible for fulfilling those obligations. Unlike in a limited liability company or corporation, where the owners' personal assets are protected, in a sole trader or partnership, the owners' personal assets can be at risk if the business fails to meet its financial obligations.

When corporations calculate their profits, they subtract dividends paid to shareholders from the total profits. The resulting amount is known as retained earnings. Retained earnings represent the portion of profits that the corporation has chosen to keep and reinvest back into the business rather than distributing it to shareholders. It is an important measure of the company's financial health and can be used for future business expansion, debt repayment, or dividend payments in the future.

The accounting equation states that for a sole trader or a partnership, the total assets of the business are equal to the sum of its liabilities and owners' equity. This means that the owners' equity represents the portion of the business's assets that belongs to the owners or partners. It is the residual interest in the assets after deducting liabilities. Owners' equity includes the initial investment made by the owners, as well as any additional contributions made and retained earnings.

The accounting equation for a company states that the total assets of the company are equal to the sum of its liabilities and stockholders' equity (or shareholders' equity). This means that the value of the company's assets is funded by either the claims of its creditors (liabilities) or the claims of its owners (stockholders' equity or shareholders' equity). Stockholders' equity represents the residual interest in the company's assets after deducting liabilities, and it is the ownership interest of the shareholders in the company. Therefore, the correct answer is Stockholders equity, Shareholders equity.

Profits extracted from a business by a sole trader or a partner are referred to as "drawings" or "withdrawals". This term is used to describe the personal use of funds from the business for the owner's or partner's personal expenses. It represents the amount of money taken out of the business by the owner or partner for their own use, which reduces the overall equity or ownership in the business.