Chapter 1 - Understanding Businesss Flashcards
Types of businesses
Sole trader, partnership, limited liability partnership, private limited company, public limited company and not for profit organisation.
Financial statements of a sole trader
Statement of profit or loss
Statement of financial position
Financial statements of a partnership
Statement of profit or loss
Statement of financial position
Goodwill
The amount by which the fair value of the net assets of the business exceeds the carrying amount of the net assets.
Limited liability partnerships
This is the often preferred business format for professional partnerships including accountants and solicitors.
It is advisable for an LLP to have a members agreement setting out the rights and obligations of members. In a LLP those who own the business are called members not partners. An LLP must have two or more designated members to make sure the the legal and accounting requirements are carried out.
Financial statements of a LLP
Statement of profit or loss
Statement of financial position
Supporting notes to the financial statements
Auditors report (smaller LLPs may be exempt from audit)
Limited partnerships
A limited partnership is similar to an LLP except that it must appoint at least one general partner and one limited partner. Like an LLP all limited partners will have limited liability, however, the general partners will have unlimited liability. The general partner is normally responsible for the day to day running of the business.
Limited companies
Main two types of limited companies:
Private limited companies
Public limited companies
A company may become a public limited company if it has:
More than £50,000 of issued share capital
At least two members
At least two directors
A private limited company is privately owned with:
No minimum requirement for issued share capital
At least one member
At least one director
Financial statements for limited company’s
Statement of profit or loss
Statement of financial position
Supporting notes to the financial statements
Directors report to shareholders
Auditors report
Advantages of incorporation
The liability for members and shareholders is limited to the amount they have invested
The continuing existence of the business as a separate entity
An enhancement of the credibility of the business
Access to finance may be easier
Transfer of ownership of the business may be easier
Disadvantages of incorporation
The main disadvantage is the more complex requirements of setting up the business and then the additional costs associated with record keeping and filing an annual return
Business finances must be kept separate from those of the owners which contrasts with a sole trader who can take drawings from the business as and when required
Not for profit organisations
Public sector - organisations in the public sector provide all public services in the uk. Some public sector organisations form partnerships with private sector companies to provide a service, eg hospitals in the nhs.
Charities - charities are set up to provide charitable activities within the scope of the charity. Most of their income is from donations, grants and funding and most of their expenditure is finance for their charitable activities
Charities are restricted in what they can do and they work:
They must follow charity law
Their purpose must be for public benefit
Most charities must register with the charity commission
They are run by trustees who do not usually benefit personally from the charity but could become liable for the debts of the charity
Financial statements for charities
Statement of financial activities
Statement of financial position
Cash flow statement
Supporting notes to the financial statements
Trustees annual report
Auditors report
Common features of business organisations
Structure
Common objectives and team working
Co-operation
Responsibility, authority and division of work
Manufacturing and service businesses
Manufacturing businesses are those organisations that actually make and sell products.
Service businesses are those organisation that provide a service to individual customers or clients or another business. This could be a firm of accountants or a cleaning company.
A manufacturing organisation will find it relatively easy to identify the cost of the products that it makes and sells. A service organisation will find this more difficult as the majority of its costs relate to staff time and expertise and overheads to run the business.
There are a number of qualities that differentiate a service business from a manufacturing business. This can be summarised as:
Intangibility - service does not provide a physical product
Inseparability - a service cannot be separated from its consumption by customers
Perishability - any unused service cannot be stored for future use
Variability - a service will be tailored to the needs of an individual customer