Wk2 Business structures & transactions Flashcards
What are the 4 basic business structures for for-profit entities available in Australia?
Sole traders, companies, partnerships and trusts
What is a sole trader?
It is an individual who controls and manages a business and is solely liable for all the business debts.
What are the features of a sole trader?
- The business is not a separate entity from the owner.
- The general registration requirements involve applying for an Australian Business Number (ABN).
- Usually uses accounting software such as MYOB to prepare financial reports.
What is unlimited liability?
Refers to the full legal responsibility that business owners and partners assume for all business debts and legal actions.
What is a partnership?
An association between two or more persons who:
- carry on a business as partners
- share profits and losses according to partnership agreement
What is a company?
A business structure that has a separate legal identity from its shareholders and is taxed on its taxable income.
What are the features of a company?
- Shareholders have limited liability
- Company has unlimited life
- Owners are known as shareholders
- Independent legal entity
How to form a company?
Individual must apply to the ASIC for registration of the company
ASIC allocates a unique Australian Company Number (ACN)
Companies will also register for an ABN
Follow the jurisdiction of the Corporations Act
What is a proprietary company and SME?
It is a common form of business structure adopted by small and medium-sized entities (SMEs) in Australia.
SME: Defined by IASB as ‘an entity that does not have public accountability and does not need to public general purpose financial reports for external users’.
Pty Ltd: Cannot offer their shares to the public.
What are the types of public companies?
- Capital is limited by shares
- Capital is limited by guarantee
- No-liability companies
- Capital is unlimited
What is the accounting entity concept?
Business transactions are recorded separately from personal transactions involving the owner(s) as the business is regarded as a separate accounting entity from the owner(s).
Personal transactions show reduction in cash and equity (i.e. Drawings).
What are the main parts from sole trader reports?
- The statement of profit or loss shows
income less expenses.
-No taxation is shown.
-Statement of financial position or Balance sheet has only one capital account. - Profit (or loss) is added (or subtracted) to capital account (in balance sheet).
What are the main parts from partnership reports?
- Profit and loss is split according to original capital contributions as
specified in the partnership agreement. - No taxation is shown.
- Balance sheet has a capital account (and often a current account) for each partner.
What are the main parts of private company reports?
- Income tax is deducted directly from company profit.
- Balance sheet has a share capital account as opposed to owner’s or partner’s capital account.
- Retained earnings.
What are the main parts of public company reports?
- Include more information than private company reports.
- May include information about all the companies controlled by a parent entity.
What is the difference between Tier 1 entity and Tier 2 entity according to differential reporting?
Tier 1 entity - an entity that is publicly accountable
Tier 2 entity - is a non-publicly accountable entity
Do business transactions affect assets, liabilities AND equity items in an entity?
TRUE
What is the accounting equation?
Assets = Liabilities + Owner’s Equity
What are assets?
Resources controlled by entity
What are liabilities?
External sources of funds for the resources controlled by entity
What is owners’ equity?
Internal sources of funds (from owners) for resources controlled by entity
What is the expanded accounting equation?
Assets = Liabilities + Equity + Income - Expenses
What are the 3 accounting errors?
- Single entry error
- Transposition error
- Incorrect entry
What does income less expenses equal?
Profit
What is the chart of accounts?
- Complete listing of ledger account titles and ID numbers.
- Used as reference point when analysing transactions.
- Maintained in both a manual or computerised system like MYOB or QuickBooks.
- Should have flexibility to cater for expansion of accounts as the business grows.
- A good chart will reveal:
- Nature of the organisation
- Nature of activity
- Types of income and expenses
