Business Entities & Management Functions

Types of Business Entities

• Single proprietorships or sole traders are owned by one person.
• Single proprietorships are simple to set up and a common business structure.
• Single proprietorships are separate accounting entities.
• Partnerships are owned by two or more partners.
• Partnerships are simple to set up.
• They are separate accounting entities but not separate legal entities.
• Companies or corporations are owned by shareholders.
• Companies or corporations are separate accounting entities.
• They are separate legal entities
• They are known as limited liability.

Management Functions

• An organization is a group of people sharing common goals with a defined labor division.
• Owner-managers have decision-making responsibilities for purchasing, selling, performing services, accounting, and financing.
• The role of management becomes increasingly important.

Role of Managers

• The goal of every business entity is satisfactory performance.
• A good reputation attracts strong customer support for business products and services.
• The management decision process includes planning, organizing, directing, and controlling.

Basic Financial Statement Information For Users

• Users want and need financial performance information.
• Financial performance is the entity’s ability to utilize its assets effectively and efficiently.
• Users want to know the business goals, whether it be profit or non-profit.
• Users want and need financial position information.
• Financial position comprises the financial resources controlled by the entity.
• It includes the financial structure
• It includes liquidity and solvency measures.
• Information on cash flow generation is key, focusing on three areas.
• Operating activities include the provision of and payment for goods and services.
• Investing activities include the acquisition and disposal of long-term assets.
• Financing activities include the raising of funds for operating and investing activities.

Statement of Financial Position (Balance Sheet)

• A Statement of Financial Position reports an entitys financial position at a specific point in time.
• It shows the assets, liabilities, and equity of the entity.
• It represents the accounting equation: Assets = Liabilities + Equity
• Alternative Statements of Financial Position formats can be account format or narrative format.

Balance Sheet

• The balance sheet is an accounting equation.
• A = L + Eq is an account format
• A – L = Eq is a narrative format
• Assets - Liabilities = Net Assets = Equity

Statement of Financial Position Assets

• Assets are present economic resources controlled by the entity
• Assets result from past events.
• An economic resource is a right that can produce economic benefits.

Statement of Financial Position Liabilities

• Liabilities are present obligations of an entity.
• Liabilities arise from past transactions or events
• A settlement is expected to result in an outflow of resources from the entity.

Statement of Financial Position Equity

• Equity is the residual interest of the owner in the assets (less liabilities) of the entity
• Assets – Liabilities = Equity, or Net Assets = Equity
• Equity is sometimes called capital or accumulated surplus/funds.

Statement of Financial Performance (Income Statement)

• The Statement of Financial Performance reports an entitys financial performance over a specific time period, such as a month or year.
• It shows income and expenses.
  • Income > Expenses = Profit.
  • Income < Expenses = Loss
• These statements can called a Profit or Loss statement or Operating Statement.
• Income increases economic benefits.
• It includes inflows or enhancements of assets.
• It shows decreased liabilities.
• It can result in equity.
• It is separate from those relating to equity participants.
• Expenses decrease economic benefits.
• They are outflows or incurrences of liabilities.
• Expenses result in decreases in equity
• They are separate from those relating to the equity participants.

Statement of Changes in Equity

• Shows capital for the period.

Statement of Cash Flows

• The Statement of Cash Flows reports on cash inflows and outflows of the entity.
• The Statement of Financial Performance reports on income earned and expenses incurred.
• The statement helps users assess cash sources and applications.
• It helps users assess the entity's ability to remain solvent.

Accounting Entity Assumption

• This assumption clearly identifies the boundaries of the entity being accounted for.
• Personal transactions of the owner must remain separate from the transactions of the entity.
• Each entity controls its assets and incurs its liabilities.

Accrual Basis Assumption

• Accounting is an event-driven process.
• Transactions recognized when they occur, not when cash is received/paid.
• Providing information about transactions and other events is done through the accrual basis.
• This information benefits decision-making by internal and external users.

Going Concern Assumption

• An entity assumed to continue operating in the future.
• Liquidation values are not generally reported unless there is evidence to the contrary.

Reporting period

• The life of the entity can be 'broken up' into equal time intervals
• It is determined for particular periods of time in order to be comparable.
• The division of the life of the entity into equal time intervals is known as the reporting period.

Fundamental Qualitative Characteristics

• Relevance is useful for decision-making and can influence users’ economic decisions.
• Faithful representation involves presenting information without bias or undue error.

Enhancing Qualitative Characteristics

• Comparability aids users in identifying economic data similarities and differences between two sets.
• Verifiability ensures independent observers can reach a consensus on information accurately representing what it claims.
• Timeliness ensures users have access to timely information for decision-making.
• Understandability anticipates a reasonable understanding of business, economic activity, and financial accounting, alongside reasonable diligence in studying information.

The Concept of Materiality

• Materiality determines whether omission or misstatement would be misleading to users.
• Assesses relevance, varying from entity to entity.

Cost Constraints

• Providing information benefits must justify its provision and usage costs.
• Financial reporting information has benefits, including better investment, credit, and similar economic decisions.

The Effects of Transactions

• The accounting equation always balances: Assets = Liabilities + Equity
• Transactions change assets, liabilities, and owners' equity.
• The equation's change elements keep the equation's equality unchanged.
• Every transaction affects at least two components of the equation, which gives rise to double-entry accounting.
• The accounting equation remains balanced after each transaction is recorded.