Proprietary View

Definition

The proprietary view in accounting is a perspective that focuses on the company as an extension of its shareholders. It emphasizes the rights, interests, and benefits of shareholders rather than treating the enterprise as a separate entity distinct from its owners. According to this view, the financial statements primarily reflect the wealth and changes in the wealth of the owners.

Examples

Dividends: When a company declares dividends, the proprietary view sees this as a direct reduction in the shareholders’ equity representing a return on their investment.
Owner’s Drawings: In small businesses, any withdrawals made by the owners for personal use are noted as reductions in the shareholders’ equity because, under the proprietary view, the company and the owners are not seen as separate entities.
Retained Earnings: The accumulation of retained earnings is seen as a direct increment to shareholder wealth. Decisions on reinvestment of profits are based on their potential to increase shareholder value.

Frequently Asked Questions (FAQs)

What is the contrast between the proprietary view and the entity view?

The proprietary view sees the business primarily as an extension of its shareholders, focusing on their interests. Conversely, the entity view treats the business as a separate legal and accounting entity distinct from its owners, with its rights and duties.

How does the proprietary view affect financial reporting?

Financial reporting under the proprietary view emphasizes the distribution and residual claims of shareholders, rather than focusing solely on the broader picture of the enterprise’s operational status.

How does the proprietary view relate to residual equity theory?

The proprietary view is closely aligned with residual equity theory, which states that shareholders are the residual claimants to the company’s assets after all liabilities have been met.

What is shareholder value in the context of the proprietary view?

Shareholder value refers to the overall worth delivered to shareholders due to the management’s ability to grow earnings, dividends, and the stock price. It is central to the proprietary view.

Can the proprietary view be applied to all types of businesses?

While the proprietary view can be particularly relevant for owner-managed businesses and smaller enterprises, larger corporations often adopt the entity view due to their complex structures and diverse shareholder base.

Entity View: This concept treats the business as a separate legal and accounting entity distinct from its owners. It focuses on the financial sustainability and operational efficiency of the enterprise as a whole.
Residual Equity Theory: A theory that places shareholders as the last claimants to the company’s assets after all other claims (liabilities) have been settled.
Shareholder Value: The value delivered to shareholders as a return on their investment considering earnings growth, dividends, and stock price appreciation.

Online Resources

Suggested Books for Further Studies

“Financial Accounting Theory” by William R. Scott
“The End of Accounting and the Path Forward for Investors and Managers” by Baruch Lev and Feng Gu
“Financial Reporting and Analysis” by Charles H. Gibson

Accounting Basics: “Proprietary View” Fundamentals Quiz

### What does the proprietary view in accounting emphasize? - [x] The rights and interests of shareholders - [ ] The company's overall performance - [ ] Government regulations - [ ] Employee compensation > **Explanation:** The proprietary view emphasizes the rights and interests of shareholders, considering them as extensions of the company. ### How does the proprietary view treat dividends? - [x] As a reduction in shareholders' equity - [ ] As an increase in company liabilities - [ ] As a separate income - [ ] As part of retained earnings > **Explanation:** Dividends are viewed as a reduction in shareholders' equity since they represent a payout to shareholders under the proprietary view. ### Which theory aligns closely with the proprietary view? - [ ] Fair Value Theory - [ ] Historical Cost Theory - [x] Residual Equity Theory - [ ] Contingency Theory > **Explanation:** Residual Equity Theory aligns closely with the proprietary view, placing shareholders as residual claimants. ### What is a key feature of proprietary view financial statements? - [x] Highlighting shareholder wealth changes - [ ] Focusing solely on company debt - [ ] Emphasizing philanthropy - [ ] Detailing employee benefits > **Explanation:** Financial statements under the proprietary view highlight changes in shareholder wealth. ### In the proprietary view, how are owner’s drawings treated? - [ ] As company revenue - [ ] As an asset reduction - [x] As a reduction in shareholder’s equity - [ ] As a liability increase > **Explanation:** Owner’s drawings are reductions in shareholder’s equity because the proprietary view does not distinguish between the owner and the company. ### How is retained earnings viewed under the proprietary perspective? - [x] As an increment in shareholder wealth - [ ] As a disposable company resource - [ ] Unrelated to shareholders - [ ] Only as a future expense account > **Explanation:** Retained earnings are seen as increments to shareholder wealth, reflecting profitability and reinvestment. ### What distinguishes entity view from proprietary view? - [ ] Focus solely on assets - [x] Treats the business as a separate entity - [ ] Emphasizes debt - [ ] Prioritizes employee wages > **Explanation:** The entity view treats the business as a separate legal and accounting entity, unlike the proprietary view which aligns the business closely with its shareholders. ### Why is the proprietary view relevant for small businesses? - [ ] Due to strict regulations - [ ] Because it focuses on debt management - [x] Because these businesses are often owner-managed - [ ] For enhancing employee benefits > **Explanation:** The proprietary view is relevant for small businesses which are often owner-managed, making it suitable for reflecting the owner’s direct involvement and stake. ### What financial aspect does the proprietary view directly affect? - [ ] Loan repayment plans - [x] Shareholder equity evaluations - [ ] Employee retirement funds - [ ] Corporate social responsibility charts > **Explanation:** The proprietary view directly affects evaluations of shareholder equity, focusing on their returns and investments. ### How do proprietary view and shareholder value relate? - [ ] They have no relation - [ ] They both minimize tax obligations - [x] Proprietary view pushes for maximizing shareholder value - [ ] They both primarily manage employee wages > **Explanation:** The proprietary view pushes for maximizing shareholder value, ensuring the owners' investments yield favorable returns.

Thank you for delving into the accounting world through the proprietary view and tackling our sample quiz questions designed to test and enhance your financial expertise!