Topic 2: Organisational forms and why, what, how and to whom should they provide accounts? Flashcards
Organisation
A collection of people who work toward a common
goal or objective
2 types of organisations
For profit
Not for profit
For profit
‘for-profit’ organisations are those that are created to generate profits typically for owners (shareholders).
Not for profit
‘Not-for-profit’ organisations, by contrast, are organisations
that are established to satisfy particular needs such as education and environmental protection.
What will influence the form of accounting undertaken
Type of organisation
Those organisations that are ‘for-profit’ might also be subdivided into:
- Service businesses
- Merchandising businesses
- Manufacturing businesses
- (but can also be a mixture)
Ownership types of organisations
Sole trader
Partnerships
Company - private, public, group
Sole trader advantages
easy set up
absolute control
no specific accounting requirements
Sole trader disadvantages
Unlimited liability
Limited life
Sole risk bearer (and profit recipient)
Partnerships advantages
easy set up
sharing of risks and profit
reports do not have to comply to accounting standards
Partnerships disadvantages
Mutual agency - each partner is an agency of the business
unlimited liability
limited life- will often discontinue on departure of a partner
Company advantages
Seperate legal entity
Limited liability
indefinite life
Company disadvantages
More complicated to form
Might have to comply with accounting standards depending on size of company
private company
In Australia, private companies are denoted by “Pty Ltd”. Often family owned or amongst a small shareholder group;Not permitted to offer shares
to the public. In Australia,
restricted to 50 shareholders
public company
The most common form of public companies are those that offer their shares to the public and the obligation of shareholders is restricted to any amount unpaid on those shares. There is a separation between ownership and control in public companies. Public companies have quite a significant number of reporting obligations. This raises
various monitoring and reporting issues.
Group company
Company is the control shareholder of other companies. (parent
company and subsidiaries) These ‘groups’ might be international in nature with the parent company located in one
country and subsidiaries dispersed throughout many different countries. In practice,
separate accounts are provided for the parent company as well as one aggregated set of
accounts for the group (the consolidated entity).
Supply chain
the network between an organisation and its
suppliers as necessary to produce and distribute a
specific good or service. Organisations often outsource aspects of their operations to other unrelated organisations –
these are part of the ‘supply chain’
Resources
A resource can be broadly defined as something that has
value in the sense that it allows an entity to accomplish
an activity so as to achieve a desired outcome. Organisations will use or rely upon a variety of ‘resources’ when performing their operations
Outputs
Organisations (whether ‘for-profit’ or ‘not-for-profit’) will create various outputs (or impacts). Some intended and some not
Externalities
Impacts that an entity has on parties external to the
organisation where such parties did not agree to or take part in the activities causing the externality. Externalities can be viewed as positive externalities (benefits) or negative externalities (costs)
Different responsibilities of different organisations
Because different organisations will have different purposes or goals, and different stakeholders who are able to affect the organisation, or those that are affected by the organisation. As a result they can be considered to have different responsibilities. As we should now appreciate, different responsibilities will mean different accountabilities, and therefore different demands on ‘accounting’.
Outsourcing example
For example, sportswear companies might outsource the production of t-shirts to factories in developing countries, such as Bangladesh.
Accountable organisation
an organisation
that has the responsibility to provide accounts to its stakeholders
Sole trader
Sole trader is where one individual controls and manages a business and is responsible for
all of its debts. In a sole trader, the owner is also typically the
manager. A sole trader is not a separate legal entity so business is not separate to the
person’s non-business affairs. As such, the business is not separately taxed but the
earnings are included in the total earnings of the owner.
Sole trader flexibility
A sole trader is not difficult to set up. Apart from having to comply with tax requirements,
there are generally no specific accounting requirements applying to sole traders. Sole
traders do not have to apply accounting standards and can be flexible with their reporting,
but they still need to do accounting.
Partnerships
A partnership exists when two or more people come together with a common purpose and
usually for the purpose of making a profit. The profit would generally be shared according to the ‘partnership agreement’.
Partnership agreement
- Names of the partners.
- Required contributions of cash and/or other assets.
- Working responsibilities – who does what.
- The basis of sharing profits or losses.
Unlimited liability
Like a sole trader, there is unlimited liability and all partners are liable for the debts incurred. That is, if there are not enough assets within the partnership to satisfy
obligations, then the personal assets of each partner may be used to satisfy the debt;
What are the owners of a company known as
Members or shareholders
Group company example
For example, while we normally know Coles, Target and Kmart as separate companies, they
are actually subsidiaries under the Wesfarmers Group.
Many forms of organisations
What we are emphasising here is that the focus of our ‘accounting’ can take on many
different forms and have vastly different ‘account users’. In some cases, there will be separation of ownership and management (or ownership and control); whilst in other situations (e.g. sole trader) there will be no such separation.
Forms of not for profit entities
Not-for-profit entities can be of various forms, they even can be companies. Many are
‘incorporated associations’ (profits must be retained in the organisation and not paid to
members).
Resource examples
- Financial resources;
- Machinery;
- Natural resources (for example, air, water, timber, material from mining);
- Human-based resources (factory labour, managerial labour, intellectual capital);
Outputs examples
- Goods and services for sale;
- Educated people (eg universities);
- Healthy people (eg hospitals);
- Wasted material and other rubbish;
Measurement and reporting of accounts
What we measure and report really depends upon the goals of those managing the
organisation and the underlying ‘purpose’ of the organisation. Internal and external perspectives
Internal perspective of measurement
That is, from an ‘internal’ perspective, managers want to make informed decisions to
achieve particular goals. They need information to do this.
External perspective of measurement (expectations of stakeholders)
For example, from an ‘external’ perspective, investors in a company might want to
know about the profits, resources, and liabilities of the company so that they can evaluate the security of their investment and the prospects for future dividends and
capital growth. A bank might also want to know about the profits, resources, and liabilities of a borrower so that it can assess the likelihood that a loan will be repaid.
Positive externality example
An example of a positive externality might be the benefits to the environment
from a zoo releasing bred endangered animals back into the environment.
Negtive externality example
An example of a negative externality might be the loss of homes of people living
in the Pacific islands as a result of climate change attributed to industry CO2
emissions.
