Why is understanding what type of legal entity a business uses important when initially setting up an accounting system?
A)Legal entity dictates what types of reports a business must use to make informed beneficial internal decisions; therefore,the accounting systems is set up to support the need to make the most beneficial internal decisions.
B)Legal entity has very little impact on what tax form a business uses,therefore,it is really not of great importance when setting up an accounting system.
C)A company's type of legal entity impacts the equity accounts and the tax form a business files.The tax form a business files greatly impacts the type of financial information an accounting system must track.
D)A company's type of legal entity is relatively fluid and changes often.An accounting system must be able to respond to these changes from year to year.

Question

Quizplus · Accepted Answer

The type of legal entity a business uses impacts the equity accounts and tax form filed, which in turn affects the financial information that an accounting system must track. Therefore, it is important to understand the legal entity when initially setting up an accounting system. Choice A is not entirely accurate as legal entity does not dictate what types of reports must be used for internal decisions. Choice B is incorrect as the type of legal entity impacts the tax form a business uses. Choice D is also incorrect as the type of legal entity is generally not fluid and can have a significant impact on financial reporting.

Why Is Understanding What Type of Legal Entity a Business