Topic 2: Organisational forms and why, what, how and to whom should they provide accounts?

Question 1

Organisation

Answer 1

A collection of people who work toward a common

goal or objective

Question 2

2 types of organisations

Answer 2

For profit

Not for profit

Question 3

For profit

Answer 3

‘for-profit’ organisations are those that are created to generate profits typically for owners (shareholders).

Question 4

Not for profit

Answer 4

‘Not-for-profit’ organisations, by contrast, are organisations
that are established to satisfy particular needs such as education and environmental protection.

Question 5

What will influence the form of accounting undertaken

Answer 5

Type of organisation

Question 6

Those organisations that are ‘for-profit’ might also be subdivided into:

Answer 6

• Service businesses
• Merchandising businesses
• Manufacturing businesses
• (but can also be a mixture)

Question 7

Ownership types of organisations

Answer 7

Sole trader
Partnerships
Company - private, public, group

Question 8

Sole trader advantages

Answer 8

easy set up

absolute control

no specific accounting requirements

Question 9

Sole trader disadvantages

Answer 9

Unlimited liability

Limited life

Sole risk bearer (and profit recipient)

Question 10

Partnerships advantages

Answer 10

easy set up

sharing of risks and profit

reports do not have to comply to accounting standards

Question 11

Partnerships disadvantages

Answer 11

Mutual agency - each partner is an agency of the business

unlimited liability

limited life- will often discontinue on departure of a partner

Question 12

Company advantages

Answer 12

Seperate legal entity
Limited liability
indefinite life

Question 13

Company disadvantages

Answer 13

More complicated to form

Might have to comply with accounting standards depending on size of company

Question 14

private company

Answer 14

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

Question 15

public company

Answer 15

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.

Question 16

Group company

Answer 16

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).

Question 17

Supply chain

Answer 17

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’

Question 18

Resources

Answer 18

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

Question 19

Outputs

Answer 19

Organisations (whether ‘for-profit’ or ‘not-for-profit’) will create various outputs (or impacts). Some intended and some not

Question 20

Externalities

Answer 20

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)

Question 21

Different responsibilities of different organisations

Answer 21

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’.

Question 22

Outsourcing example

Answer 22

For example, sportswear companies might outsource the production of t-shirts to factories in developing countries, such as Bangladesh.

Question 23

Accountable organisation

Answer 23

an organisation

that has the responsibility to provide accounts to its stakeholders

Question 24

Sole trader

Answer 24

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.

Question 25

Sole trader flexibility

Answer 25

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.

Question 26

Partnerships

Answer 26

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’.

Question 27

Partnership agreement

Answer 27

• Names of the partners.
• Required contributions of cash and/or other assets.
• Working responsibilities – who does what.
• The basis of sharing profits or losses.

Question 28

Unlimited liability

Answer 28

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;

Question 29

What are the owners of a company known as

Answer 29

Members or shareholders

Question 30

Group company example

Answer 30

For example, while we normally know Coles, Target and Kmart as separate companies, they
are actually subsidiaries under the Wesfarmers Group.

Question 31

Many forms of organisations

Answer 31

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.

Question 32

Forms of not for profit entities

Answer 32

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).

Question 33

Resource examples

Answer 33

• Financial resources;
• Machinery;
• Natural resources (for example, air, water, timber, material from mining);
• Human-based resources (factory labour, managerial labour, intellectual capital);

Question 34

Outputs examples

Answer 34

• Goods and services for sale;
• Educated people (eg universities);
• Healthy people (eg hospitals);
• Wasted material and other rubbish;

Question 35

Measurement and reporting of accounts

Answer 35

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

Question 36

Internal perspective of measurement

Answer 36

That is, from an ‘internal’ perspective, managers want to make informed decisions to
achieve particular goals. They need information to do this.

Question 37

External perspective of measurement (expectations of stakeholders)

Answer 37

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.

Question 38

Positive externality example

Answer 38

An example of a positive externality might be the benefits to the environment
from a zoo releasing bred endangered animals back into the environment.

Question 39

Negtive externality example

Answer 39

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.