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Accounting wace

TermDefinition
Asset A resource (item used to make money) that is controlled by the entity (100% owned) as a result of past events (a transaction) which then future economic benefits is expected to flow to the entity.
Recognition criteria of an asset Probable will be definite economic benefits and the value of the asset can be proven or measured reliably (a receipt)
Current Asset An asset, due to its nature, is converted into cash within 12 months like gst credits, cash, stock, debtors
Non current asset An asset, due to its nature, is not converted into cash within 12 months like buildings and technology
Liability A present obligation (debt) of an entity arising from past events (a transaction) where settlement requires an outflow (selling of assets) from the entity embodying future economic benefits (purchasing power)
Recognition Criteria of a liability it is probable that an outflow of future economic benefits will occur and that the value of the liability can be measured reliably (debt is known)
Current Liability A debt which can be paid off within 12 months like a short term loan or creditors or tax
Non current liability A debt in which cannot be paid off within 12 months like a long term loan or a mortgage
Equity The residual (remaining) interest (what an owner legally owns) in assets of the entity after deducting liabilities like capital and drawings.
Company: Liability Liability is limited. the owners (shareholders) are not responsible for company debts. A company is protected by the law as the company its self is responsible as all debts are created in the companies name.
Company: Raising Capital Easier than a partnership but limiting if the business is growing
Company: Distribution of profits Shareholders receive profits in the form of dividends, which is dependent on the number of shared owned in the first place. the more shares a shareholder has the more profit they will receive.
Company: Transferring of Ownership Great. Owners can come and go as they like. Shareholders can leave by selling their shares to another. The company continues forever irrespective of who the shareholders are as it is a separate entity (an artificial person)
Company: Legal Entity The company itself is responsible for all business debt created in its name. This is because by law a company is an artificial person.
Company: Continuity of existence Does exist as it survives into the future irrespective of who is shareholders are. The company name will never die.
Advantages of a company Continuance is not affected by death or withdrawal of shareholders. There is considerable flexibility (large number of shareholders/pty or pty ltd/easy finance large projects.) Ownership/management can be separated with directors managing the company.
Disadvantages of a company More expensive/complex to form due to accountancy/legal work. More detailed legal/financial reporting. Financial information must be filed publicly which means less privacy with financial affairs and shareholders may not have effective involvment.
Number of owners of a company Min 1 and Max 50
Sole trader: Number of owners 1
Sole trader : Liability Unlimited which means that all debts created belong to the owner who must pay it back.
Sole trader: Raising Capital Difficult and limited, often relying on family assistance and separate job income to finance the business
Sole trader: Transferring of ownership Very difficult. Can only be done through a will or trust and needs legal process to pass it on.
Sole trader: Legal Entity Owner is totally responsible for all business debts made.
Sole trader: Continuity of existence Does not exist as when owner dies or retires the business collapses.
Advantages of a sole trader Least legal procedures/costs of implementation/administration. Owner has full control. Owner is entitled to all profits. Owner is entitled to sell/discontinue business. Discontinuance requires minimum legal costs.
Disadvantages of a sole trader Unlimited personal liability for debts. Continuance is dependant on the health/ability of the owner. Management skill confined to owner/employees. Expansion/raising capital is more difficult
Partnership: Number of owners Min: 2 partners, Max: 20 partners
Partnership: Liability
Created by: happyabbsy101