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Proprietary, Parent Company and Entity Theory

Describe Proprietary, Parent Company and Entity Theory

How would you apply each theory?

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Proprietary Theory:

According to Baker, this theory means that the firm is an extension of its owners. For accounting purposes, the owners of the firm and the business are one and they are not treated separately from each other. The purpose of the financial statements is to benefit the owners and their perspective. The assets, liabilities, revenues are viewed as those that belong to the controlling shareholders. An increase or decrease in profits occurs for each individual company and not of the entire group of companies in the proprietary theory.

Assets - Liabilities = Capital

Capital represents the net value to the owner. The revenues increase capital while the expenses decrease it. Net income and liabilities belong to the owner alone. This theory is applied in single proprietorship entities where the owner and the manager of the business have a personal relationship with each other or the same person for both.

In the preparation of the consolidated financial statements, a pro rata consolidation of the assets and liabilities of the subsidiaries are consolidated by the parent company.

This theory is applicable to closely held companies, e.g., partnerships, proprietorships and it can also be found as ...

Solution Summary

The solution describes Proprietary, Parent Company and Entity Theories. References are included.