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34 Cards in this Set
- Front
- Back
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Entity
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a person, partnership, company or other organisation for which financial statements are prepared
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Accounting entity
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the financial affairs of a business are separate and distinct from the financial affairs of its owners. All businesses are separate accounting entities from their owners
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What are the three main types of ownership?
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- Sole Trader
- Partnership - (Limited Liability) Company |
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Sole Trader
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An individual in business on his or her own account
- single owner |
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Sole Trader characteristics:
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- no separate legal entity (but still a separate accounting entity)
- limited life - unlimited liability - minimal regulations - limited funds - low establishment costs/easy to establish |
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Advantages of a sole trader
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- simple and inexpensive to establish and operate
- minimal financial reporting regulations - ownership and management normally combined - all profits to owners - timely decision making possible |
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Partnership
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The relationship that exists between 2 or more persons carrying on a business with a view to making a profit
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What sort of partnership agreement can you have?
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Formal partnership agreement (written) or informal arrangement (spoken)
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What must a partnership agreement include?
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- resource contributions (capital)
- resource withdrawals (drawing) - share of undistributed profits (either current or prior earnings) |
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Partnership characteristics
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- no separate legal entity
- limited life - unlimited liability - mutual agency (each partner responsible for actions of other partners) - co-ownership of assets - co-ownership of profits - limited membership |
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Up to how many partners can you usually have?
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25
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Disadvantages of a partnership
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- profits shared
- assets shared - reduced decision-making authority - must be responsible for actions of others - limited life may affect long-term planning - unlimited liability = greater risk for ownership - lacks specialist management team - limited access to funds/capital |
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Partnership Act of 1908
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law to cover issues not in a partnership agreement
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What are the default legal rules an agreement may cover?
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- no entitlement of partners to remuneration (annual fixed salary)
- partners not entitled to interest on capital contributed - equal shares of profits and losses |
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Company
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- an artificial legal person which has an identity separate from that of those who own and manage it
- a business entity owned by many people (shareholders) investing in (buying shares) the business |
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Company characteristics
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- separate legal entity
- unlimited/perpetual life - limited liability (amount invested) - assets owned by company - profits belong to shareholders - extensive membership possible - separation of ownership and management - extensive regulation - greater capital/wealth - potential taxation advantages/disadvantages |
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Unlimited Liability
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- sole traders and partnerships
- when business cannot pay debts, owners are responsible and can lose personal assets |
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Limited Liability
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- company
- when business cannot pay debts, owners are not personally responsible |
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Bankruptcy
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Occurs when a business cannot pay its liabilities/debts due. The business files for bankruptcy in a court and is given relief from its liabilities. If a business wants to come out of bankruptcy, it must pay those liabilities.
Sole traders or a partnership cannot file for bankruptcy but a company can |
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Corporate governance
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the system by which corporations are directed and controlled
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Directors
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Individuals elected to act as the most senior level of management in a company
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How many directors must a limited company have?
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At least one
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What are the three aspects a company must abide by?
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disclosure, accountability and fairness
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Disclosure
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Company telling owners what they've been doing. It lies at the heart of good corporate governance and is all about adequate and timely information being available to investors
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Accountability
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Defining the roles and duties of directors and establishing an adequate monitoring process which may include external auditing
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Fairness
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Directors not benefiting from 'inside information'. Regulations are in place to restrict directors' ability to buy and sell shares
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A company can be ______ on a stock exchange or _________
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listed, unlisted
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Listed company
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- public sale/trade of shares
- typically larger companies - typically many shareholders - extensive regulations (NZX rules, Securities Market Act 1988) - full reporting requirements |
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Unlisted company
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- no public sale/trade of shares
- typically smaller companies - typically few shareholders - moderate regulation - less reporting requirements |
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Capital of companies
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The money invested by owners is called share capital
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What are the different types of shares?
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- ordinary
- preference - partly-paid - fully paid |
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Dividends
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Distributions of profits by a company to its shareholders
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Reserves
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Amounts reflecting increases in owners' claims
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What is the most common type of reserve?
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retained earnings. (a.k.a general reserve)
Profits and gains earned by the company that have not been distributed to shareholders and are held within this reserve for use within the company |
