Accounting Concepts Overview

Accounting Definition

• Accounting involves identifying, measuring, and communicating financial information about an organization to aid in informed decision-making.

Accounting (Financial vs. Management)

• Financial Accounting: Focuses on providing information to external stakeholders, such as investors, creditors, and regulatory bodies.
• Management Accounting: Provides information to internal stakeholders, like managers, for operational decisions and performance analysis.

Conceptual Framework in Accounting

• The conceptual framework serves as the foundation for accounting standards, ensuring consistency and reliability in financial reporting.
• Key elements:
  • Objective of financial reporting - Provide useful information for economic decision-making.
  • Qualitative characteristics of financial information - Relevance, reliability, comparability, and understandability.
  • Definition, recognition, and measurement of elements of financial statements - Assets, liabilities, equity, income, and expenses.

Role of Accounting in Business

• Provides systematic approaches to recording, summarizing, and interpreting financial data.
• Supports decision-making by providing insights into financial performance and position.
• Facilitates communication of financial information to stakeholders.
• Helps in planning, controlling, and evaluating business operations.

Accounting Standards and Regulation

• Accounting standards are guidelines that govern the preparation and presentation of financial statements.
• Key bodies:
  • Australian Accounting Standards Board (AASB) - Sets accounting standards in Australia, following International Financial Reporting Standards (IFRS).
  • Australian Securities and Investments Commission (ASIC) - Oversees the corporate sector and enforces compliance with accounting standards.
  • Taxation (ATO) - Plays a role in influencing accounting practices through its tax requirements.

Sole Trader

• Legal structure: Not a separate legal entity; the business owner is personally liable for all debts and obligations.
• Registration: Requires an Australian Business Number (ABN).
• Advantages:
  • Easy and inexpensive to establish and wind down.
  • No company regulations.
  • Owner has full control of business decisions.
  • Owner keeps all profits and gains from selling the business.
• Disadvantages:
  • Unlimited liability.
  • Limited by the owner's skills, time, and investment.
  • Restrictive structure due to non-legal status.
  • Business ceases to exist if the owner leaves, retires, or dies.
  • Tax disadvantage.

Partnership

• A business structure where two or more individuals operate a business together for a profit.
• Legal structure: Not a separate legal entity; partners are personally liable for debts and obligations.
• Advantages:
  • Sharing of ideas, skills, and resources.
  • Easy and inexpensive to establish.
  • No separate taxation; income tax is filed with the ATO.
  • Partnerships can be formed with or without written agreements.
• Disadvantages:
  • Unlimited liability for all partners.
  • Limited life: dissolution upon partner death or withdrawal.
  • Mutual agency: each partner is bound by partnership contracts.
  • Potential disputes over profit sharing and decision-making.

Company

• A separate legal entity from its shareholders, enjoying distinct liability and being taxed separately.
• Advantages:
  • Limited liability for shareholders.
  • Lower tax rate compared to personal tax rates.
  • Ease of business expansion through legal structure.
  • Ability to raise equity through public share offerings.
  • Perpetual existence of the entity.
• Disadvantages:
  • More time-consuming and expensive to set up.
  • Compliance with complex company rules and regulations.
  • Taxed from the first dollar of profit.
  • Limited liability may hinder access to financing: banks often prefer personal guarantees from directors.
  • Separation of ownership and control.

Trust

• A legal structure where one or more persons (trustees) hold property for the benefit of others (beneficiaries).
• Advantages:
  • Minimises tax payments: the trust itself does not pay tax, beneficiaries pay tax on distributed income.
  • Limited liability.
  • Simple to form.
  • Relatively little government regulation (unless listed on the ASX).
• Disadvantages:
  • Complex trust laws.
  • Requires administration by a qualified accountant.
  • Potential for exploitation for tax minimisation purposes.