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Financial Accounting > 02 - Business Kinds > Flashcards

02 - Business Kinds Flashcards

1
Q

Types of Organizations

1.
2.

A
  1. for profit - private sector - sole traders, partnerships, limited companies
  2. (not in this module) - public sector organisations, charities
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2
Q

Definition Sole Proprietorship

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2.
3.
4.

A
  • individual entering a business alone
  • business might be intertwined with personal life
  • for accounting purposes, the business is… a seperate economic entity
  • sole trader takes risk of the bad times and the benefit of the good times
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3
Q

Accounting information will be needed by….

1.
2.
3.

A
  • accounting information will be needed by government (tax authorities) for tax collecting purposes
  • the bank for the purpose of ledning money to the business
  • a person intending to buy the business when the existing owner retires
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4
Q

Definition Partnership

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2.
3.

A
  • two or more individuals carrying on business together
  • intention is to make profit
  • for accounting purposes: partnership is seen as a seperate economic entity, owned by the partners
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5
Q

Why is accounting information needed in Partnerships?

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2.
3.

A
  • ensuring that every partner receives a fair share of the profits
  • for banks and tax authorities
  • other persons who may be invite to join the partnership
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6
Q

What is the major risk that is attached to either a sole trader or a partnership?

A

losing their personal property and possessions including the family home, in case that the business fails

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7
Q

What are the advantages of a partnership compared to a sole trader?

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4.
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A
  • fully liable and limited partner
  • sharing burden and risk
  • additional expertise and capital
  • specialization
  • more creditworthiness
  • ability to raise capital
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8
Q

What are the disadvantages of a partnership compared to a sole trader?

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2.

A
  • risk of acquiring unsuitable partners
  • limits on individual decision making
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9
Q

What are the disadvantages of a partnership compared to a sole trader?

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2.

A
  • risk of acquiring unsuitable partners
  • limits on individual decision making
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10
Q

Why do owners might need Limited liability company?

1.
2.

A
  • to encourage the development of larger business entities they need the protection of limited liability
  • this means: business fails, owners lose all money they had put into the business, but the personal wealth would be safe
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11
Q

What does Plc and Ltd stand for?

A
  • ltd: limited, for a private limited company
  • plc: for a public limited company
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12
Q

What is a ltd NOT allowed to do?

A
  • offering its shares to the public
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13
Q

What does the public limited company (plc) have to do in order to offer its shares to the public?

A
  • it has to satisfy more onerous regulations
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14
Q

Explain the formation of…

  1. a partnership
  2. a limited liability company
A
  1. by agreement but not necessarily in writing
  2. registering the company under the companies act | memorandum and articles of association setting out the powers allowed to the company
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15
Q

Explain who runs the business…

  1. partnership
  2. limited liability company
A
  1. all partners are entitled to share in the running of the business
  2. shareholders appoint directors to run the business
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16
Q

Explain the accounting duties of…

  1. a partnerhsip
  2. a limited liability company
A
  1. not obliged to make accounitng information available to the public
  2. must make accounting information available to the public through registration of companies | annual financial statement (the accounts)
17
Q

Advantages of a
partnership compared to a limited company?

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2.
3.
4.

A
  • Simple to set up: A partnership is easy to set up, and the legal formalities are minimal
  • Shared responsibility: share of workload and responsibilities
  • Flexibility: greater flexibility than limited companies in terms of decision-making and running the business
  • Tax benefits: benefit from tax advantages as profits are distributed to partners and taxed at individual tax rates
18
Q

Disadvantages of a partnership compared to a limited company

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2.
3.
4.

A
  • Unlimited liability: Partners have unlimited liability, so they are personally responsible for all the debts and obligations of the partnership
  • Lack of continuity: partnership ends when one of the partners dies or leaves
  • Disagreements can be difficult
  • Limited capital as they cannot issue shares to the public
19
Q

Organisation of Businesses

1.
2.

A
  • finance from owners (shareholders) and lenders (e.g. banks)
  • ## appointment of a board of directors to manage do business on their behalf (owners dont do daily running in business) | setting overall direction and strategy, controlling activities, communication with shareholders
20
Q

What is the financial objective of a business?

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2.
3.
4.

A
  • enhancing the wealth of the owners
  • generating wealth is NOT seeking to maximze current year´s profit
  • other objectives related to the needs of others associated with the business (employees, local community)
  • strong economic forces in market economy
21
Q

Identify groups of main users of accounting
information for a university.
For what purposes
would different user groups need information?

1.
2.
3.
4.

A
  1. University Management and Administration | making informed decisions and ensuring financial health / allocating resources, setting budgets
  2. Students | understanding cost of education and seeking info about financial aid, scholarships / ensuring that they can afford education
  3. donors | evaluate financial stability and effectiveness of university / ensuring that donations are used efficiently and in aligment with university´s stated goals
22
Q

Why might someone in a sole proprietorship be reluctant to disclose financial information?

1.
2.
3.

A
  • value of privacy (no separation between owner and business entity)
  • vulnerable to creditors or legal actions because of unlimited personal liability
  • competitive advantage of other because of revealing financial strategies or weaknesses

Financial Accounting (11 decks)

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