1) Accounting Fundamentals

Question 1

Accounting Entity

Answer 1

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.

Question 2

Monetary

Answer 2

States that an item must be able to be assigned monetary value before it can be recorded in accounting system.

Question 3

Historical Cost

Answer 3

Assumes that business trasactions are recorded in terms of their cost at the time the transaction occurred.

Question 4

Materiality

Answer 4

Refers to the importance of an item to the particular entity.

Question 5

Accounting Period

Answer 5

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.

Question 6

Going concern

Answer 6

Assumes that the business will continue to operate for the foreseeable future and its records should, therefore, be kept on that basis.

Question 7

Sole Trader:

Answer 7

Business owned by one person.

Question 8

Sole trader advantages

Answer 8

1. Owner responsible for all decisions.
2. Owner dont have to share profit w other owners.
3. Easiest + least expensive form of business to establish.
4. Winding up business is easy.

Question 9

Sole Trader disadvantages

Answer 9

1. Business not separate legal entity, owner liable for all debts, loss X shared.
2. Owner has unlimited liability, personal assets of owner can be seized if business assets not ufficient to cover debts.
3. One person may not have enough money to start/expand business.
4. If owner sick/absent from business, nobody to replace them.

Question 10

Partnership

Answer 10

Business owned by two or more person (maximum size of partnership is 20 people, with exceptions).

Question 11

Partnership advantage

Answer 11

1. 2+ partners can raise more capital than sole trader.
2. Bring together people who have specialist skills + knowledge.
3. Share workloads, greater flexibility if partner is absent.
4. Share risks of business and any loss.

Question 12

Partnership disadvantage

Answer 12

1. Unlimited liability
2. Any actions and decisions made by any partner are legally binding for all partners.
3. Conflict over business policy + personality clashes mean business decisions take time to reach.
4. Profits must be shared btwn all partners.
5. Have limited life as death/retirement of partner ends partnership, unless prior agreement.

Question 13

Small Proprietary Company

Answer 13

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.

Question 14

Conditions of small proprietary company

Answer 14

1. Revenue for a year is less that 25 mil.
2. Asset at end of year less than 12.5 mil.
3. Comapny has less than 50 employees at end of year.

Question 15

Advantages of small proprietary company

Answer 15

1. Separate legal existence.
2. Shareholders have limited liability, leaving personal assets safe should company get into financial difficulty.
3. Continuity of company not dependent on any of the owners and can continue to exist if shareholder dies/decide to withdraw.
4. Generally easier to raise capital, cos there more potential owners.

Question 16

Disadvantages of Small Proprietary Company

Answer 16

1. Subject to greater regulation than sole trader or partnership.
2. Set up, admin and running costs can be hi.
3. Recordkeeping and reporting requirements more demanding than for sole trader/partnership.
4. Can be difficult to dissolve.

Question 17

What is a Manufacturing business undertaking?

Answer 17

Businesses that purchase raw materials or components and convert them into products, which are then sold onto other businesses/directly to consumers.

Question 18

What is the trading/retailing business undertaking?

Answer 18

Includes businesses that sell goods in bulk to other businesses (wholesale) and business that sell direct to the public. Generate profit by purchase stock, sell at higher price.

Question 19

What is the service providing business undertaking?

Answer 19

Generates profit by providing a service to its customers.