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The Proprietary versus the Entity Theory
Finance & Accounting
Pages 8 (2008 words)
THE PROPRIETARY VS THE ENTITY THEORY This discussion seeks to answer - How a selected accounting theory has contributed to the development of existing accounting practice? This would show how an accounting theory such as proprietary theory or entity theory could help in the development of accounting practice.
The proprietary theory suggests that business or other organizations tend to belong to one or more persons thought of as proprietors or owners, and their views are reflected in the accounting process used by the business. So assets of the business are considered as assets of the proprietors and their liabilities are considered as their liabilities. The balance sheet equation would thus be "Assets—Liabilities = Proprietorship.'' (Riahi-B, 2004) The stockholders are seen as individuals joined in owning a business and a corporation is thus not seen as fundamentally different from a sole proprietorship. The corporation is seen as a "device of a representative nature by means of which the association's business affairs may be conveniently administered with certain legal privileges and within certain legal limitations."' (Riahi-B, 2004) Using a proprietary theory, in accounting practice, the emphasis is on the proprietor's equity and the proprietors' net income and changes in income or other aspects of the proprietorship. The retained earnings also belong to the proprietors. However stockholders are distinct from creditors and the distinction is based on proprietorship as creditors may not be proprietors but stockholders are usually proprietors so proprietors in a business organisation include all stockholders. ...
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