Accounting Concepts and Business Structures PDF

**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.