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Theoretical Implications of Various Theories of Equity

The proprietary theory, the entity theory, and the funds theory are three approaches to accounting for equities.

Required:
1. Describe briefly each of these theories.
2. State your reasons for emphasizing the application of one of these theories to each of the following.
a. Single proprietorship
b. Partnership
c. Financial institutions (banks)
d. Consolidated statements
e. Estate accounting

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Theoretical Implications of Various Theories of Equity
The proprietary theory, the entity theory, and the funds theory are three approaches to accounting for equities.

Required:
1. Describe briefly each of these theories.
Proprietary theory - The business and its owners are one and are virtually identical since the assets of the proprietor are owned by him and all his liabilities are owed by him, too. Under this theory, the revenues add to the capital of the business while its expenses reduce it. The net income belongs to the owner and when it increases, it also represents an increase in the owner's capital.
Since there is a personal relationship between the owner and the business, this theory is best in single proprietorship entities. In partnerships where the partners agree to add the net income to the partner's capital accounts, the proprietary theory can also be applied (Answers.com). The primary objective of this system is determining the net worth or wealth of the owner/s.
Entity theory - This type of theory views the business as separate from its owners hence, the assets and the liabilities of the business are treated as a separate 'entity' from its owners. In the entity theory, the liabilities have different legal standing and rights in the business and the assets, revenues, expenses and liabilities are accounted separately and distinct from its owners. The company is viewed as an economic and legal unit separate and distinct from its owners. (Answers.com)
Funds theory - This system views a group of assets and liabilities as specific economic functions. The assets of each funding are restricted for specific purposes. This theory is applicable to nonprofit entities such as schools, ...

Solution Summary

Description of the three approaches to accounting for equities: proprietary theory, entity theory & funds theory. References are included.

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