Eaquity Theories of Accounting

Following is an income statement calculated based on the different equity theories of accounting.

Entity Theory

Proprietary Theory Orthodox Unorthodox Residual Equity Theory

Revenues $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000

Less:

Operating Expenses

Cost of goods sold $400,000 $400,000 $400,000 $400,000

Depreciation $100,000 $100,000 $100,000 $100,000

Salaries and Wages $200,000 $200,000 $200,000 $200,000

Operating Income $ 30,000 $300,000 $300,000 $300,000

Less

Bond Interest $80,000 $80,000 $80,000

Dividend on Preferred Stock $30,000 $30,000

Dividend on Common Stock $100,000

Net Income $220,000 $300,000 $90,000 $190,000

The proprietary theory assumes that owners and the firm are virtually identical. The entity theory states that the firm and the