1) Accounting Fundamentals Flashcards
Accounting Entity
Regards a business as having a separate existence from that of the owner for accounting purposes. This means business transactiosn recorded separately from priv transactions of owner.
Monetary
States that an item must be able to be assigned monetary value before it can be recorded in accounting system.
Historical Cost
Assumes that business trasactions are recorded in terms of their cost at the time the transaction occurred.
Materiality
Refers to the importance of an item to the particular entity.
Accounting Period
Requires that the life of a business be divided into equal periods of time for reporting purposes. Cannot be longer than a year, once chosen, it must remain.
Going concern
Assumes that the business will continue to operate for the foreseeable future and its records should, therefore, be kept on that basis.
Sole Trader:
Business owned by one person.
Sole trader advantages
- Owner responsible for all decisions.
- Owner dont have to share profit w other owners.
- Easiest + least expensive form of business to establish.
- Winding up business is easy.
Sole Trader disadvantages
- Business not separate legal entity, owner liable for all debts, loss X shared.
- Owner has unlimited liability, personal assets of owner can be seized if business assets not ufficient to cover debts.
- One person may not have enough money to start/expand business.
- If owner sick/absent from business, nobody to replace them.
Partnership
Business owned by two or more person (maximum size of partnership is 20 people, with exceptions).
Partnership advantage
- 2+ partners can raise more capital than sole trader.
- Bring together people who have specialist skills + knowledge.
- Share workloads, greater flexibility if partner is absent.
- Share risks of business and any loss.
Partnership disadvantage
- Unlimited liability
- Any actions and decisions made by any partner are legally binding for all partners.
- Conflict over business policy + personality clashes mean business decisions take time to reach.
- Profits must be shared btwn all partners.
- Have limited life as death/retirement of partner ends partnership, unless prior agreement.
Small Proprietary Company
Company that cannot raise money from the public. must have at least 1 shareholder, max of 50 non-employee sharehoders, Pty must be included in name.
Conditions of small proprietary company
- Revenue for a year is less that 25 mil.
- Asset at end of year less than 12.5 mil.
- Comapny has less than 50 employees at end of year.
Advantages of small proprietary company
- Separate legal existence.
- Shareholders have limited liability, leaving personal assets safe should company get into financial difficulty.
- Continuity of company not dependent on any of the owners and can continue to exist if shareholder dies/decide to withdraw.
- Generally easier to raise capital, cos there more potential owners.
