Accounting Concepts and Business Structures PDF

Summary

This document covers various accounting concepts and business structures such as sole traders, partnerships, companies, and trusts. It explains the role of accounting in decision-making and discusses accounting standards and regulations within the Australian context. The material is structured into chapters on different business models and their advantages and disadvantages.

Full Transcript

**CHAPTER 1&2** **Definition of Accounting:** The process of identifying, measuring, and communicating financial information about an organization to make informed decisions. ### **1. Accounting (Financial vs. Management)** - - - - - - - - - - - - - - -...

**CHAPTER 1&2** **Definition of Accounting:** The process of identifying, measuring, and communicating financial information about an organization to make informed decisions. ### **1. Accounting (Financial vs. Management)** - - - - - - - - - - - - - - - - - ### **2. Conceptual Framework** The conceptual framework in accounting provides the foundation for the creation and interpretation of accounting standards. It ensures consistency and reliability in financial reporting, focusing on several key elements: - - - - - - - - - - - - - - - - - - ### **3. Role of Accounting** Accounting plays a critical role in business by providing a systematic approach to recording, summarizing, and interpreting financial data for decision-making. - - - - - - ### **4. Accounting Standards and Regulation** - - - - - - - - - - - - - - - - - - - - - - - These standards and regulations ensure that financial statements are accurate, comparable, and reliable, helping stakeholders make well-informed decisions based on trustworthy data. **CHAPTER 3:** **Sole trader** -- the business is not a separate legal entity -- the general registration requirements involve applying for an Australian Business Number (ABN) ** Advantages** -- Quick, inexpensive and easy to establish; inexpensive to wind down. -- Not subject to company regulation. -- Owner has total autonomy over business decisions. -- Owner claims all the profits of the business and all the after-tax gains if the business is sold. ** Disadvantages** -- Unlimited liability --- bears full responsibility for business debts and legal actions such as negligence. -- Limited by skill, time and investment of owner. -- Restrictive structure due to non-legal status of the entity. -- Business will cease to exist if owner leaves, retires or dies. -- Tax disadvantage ** Partnership** is the relation which exists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership. ** Advantages** -- Enables sharing of ideas, skills and resources. -- Easy and cheap to establish. -- No separate taxation payable but does lodge income tax return with ATO. -- Some partnerships have a written agreement, others don't. ** Disadvantages** -- Unlimited liability for business debts and obligations by all partners. -- Limited life: if one partner dies or withdraws from the business then the partnership must dissolve. -- Mutual agency: each partner is seen as being an agent for the business and so is bound by any partnership contract. -- Many partnership disputes arise from profit sharing and decision-making issues. A **company** is a business structure that has a separate legal identity from its shareholders and is taxed on its taxable income. ** Advantages** -- Limited liability for shareholders. -- As of 2021, the company taxation rate is 30% (25% for SMEs); considerably lower than top personal tax rate. -- Business expansion networks made easier due to legal structure. -- Can raise additional equity (capital) through public share offerings. -- The perpetual existence of the entity. ** Disadvantages** -- More time consuming and costly to set up. -- Must comply with complex company rules and other legal requirements. -- Taxed from the first dollar of profit. -- Limited liability aspect may cause problems: banks often prefer to have director's personal guarantees instead -- Separation of ownership and control. A **trust** is a business structure in which a person/s holds property for others who are intended to benefit from the property or income of that property. ** Advantages** -- Minimises tax payments, as a trust does not pay tax: beneficiaries pay tax on the amount of income distributed to them -- Limited liability. -- Simple to form. -- Little government regulation (unless listed on ASX). ** Disadvantages** -- Trust law is complex. -- Should be administered by qualified accountant. -- Business structure can be exploited for tax minimisation purposes.

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