Lecture Reference: Hoggett et al, Accounting 8th

Edition, 2012.
Supplementary Lecture Notes
from lecturer.
 Understand Sole Trader or Single
Proprietorship business entity.
 Weigh out the advantage and
disadvantages of Single Proprietorship
Business.
 Define Partnership Business Entity.
 The three necessary attributes to
partnership business.
 Weigh out the advantages and
disadvantages of partnership business.
 Understand requirement of partnership
agreement.
 The profit and Loss sharing agreements.
 The content of a financial statement of a
partnership.
 Distinguish different types of companies.
 Limited Companies
 No – Liability Companies
 Special Companies.
 When interested in commencing a business,
 The choice of an appropriate business
structure is important.
 In this lecture you will be familiar with the
three common business structures.
 Financial statements are therefore
prepared for this business structures.
 Some of the business structures are
reporting entities while others are not.
 Some business entities are viewed as legal
entities while others are not.
 A business entity own and run by one person known as
‘owner’.
 Many small service enterprise, retail stores and professional
practices are operated as single proprietorship.
 The owner of the business provides resources in the
business.
 The owner is therefore entitled to all the profits generated
by the business.
 Like wise personally responsible for any loss the business
may incur.
 A Sole trader is not a separate legal entity.
 From accounting standing point entity is separate from the
owner.
 All business transactions must be recorded separate from
the owners personal activities.
 This type of business entity is quick, inexpensive
and easy to form.
 Likewise inexpensive to manage or dissolve the
business operations.
 It is not subject to company regulations such as
‘Companies Act 1997’.
 Does not pay separate income tax as an
entity.
 Tax is borne by individual in disclosing profit
and loses and lodging individual tax returns
 The owner has complete autonomy over the
business dealings and takes all the profits.
 Owner has unlimited liabilities for debts and
any legal disputes.
 Owner can pay more income tax due to
increase in income earned.
 The entity ceases to operate when the
owner leaves the business.
 Owner is constrained by resources and skills.
 Non-legal status may prevent them from
dealings with government and other
entities.
 Define by Partnership Act as the relationship
that exists between persons (individual or legal)
carrying on a business with a view to profit.
 Assets are owner and liabilities are incurred
jointly by the owners known as ‘partners’.
 The partners contribute capital and skills in
operating the business as per their agreement.
 This business entity is not a separate legal
entity, but a separate accounting entity.
 Cab be start with a minimum of 2 and
maximum of 20 persons.
 There must be an agreement (verbal or
written) between two or more legally
competent persons or entities to carry on
business.
 The business must be operated with a
view to generate profit for the partners.
 Partners must be co-owners of the
business.
 It permits the pooling of both capital
resources and skills of individual partners.
 It is easy and less costly to establish than
a company.
 Partners may be able to operate with
more flexibility because they are not
subject to the control of board of
directors.
 There may be tax advantages.
 Mutual agency – normally every partner act as
an agent for the partnership and every other
partner.
 Unlimited liability – each partner is personally
liable for the obligation of the partnership.
 Transfer of partnership interest.
 Limited Life – A Partnership is dissolved for
number of reasons;
 Death of a partner.
 Bankruptcy of the business or individual partner.
 Expiration of the period specified in the contract.
 Judgment of a court that a partner is unsound mind.
 The name of the partnership and its partners.
 Location of the business operation.
 The amount of capital to be introduced by each
partner.
 How profits and losses are to be shared.
 How withdrawal of assets by a partner is to be
handled.
 Conduct of partnership affairs.
 How disputes among partners are to be resolved.
 How day to day operations are to be conducted.
 How various partners’ interest to be satisfied on the
admission, death, retirement or expulsion of partner
and cessation of business.
 Based on stated fraction.
 Based on Capital contributions.
 Based on capital contribution and on
services.
 Sharing based on Salaries and on
interest.
 If the partnership is not a reporting entity – will
prepare special-purpose reports, if the business is
reporting entity then it prepares general purpose
financial reports complying with accounting
standards and regulations.
 Each individual partner’s equity in the business is
reported separately on the balance sheet and cash
flow statement.
 Salaries authorized for each partner, interest on
capital investment are not reported as expenses but
considered sharing of profit.
 No income tax expense since its not a legal entity.
 The profit and loss allocation for a partnership should
comply with the basic reporting requirement.
 Company is a form of business organization
established in accordance with the
Company’s Act 1997.
 It is therefore, a legal entity or artificial
person separate and distinct from its owners
when it is registered with the Investment
Promotion Authority.
 The owners of the companies are known as
‘Shareholders’.
 They own the company to the extent of the
number of shares they have in that
company.
 The notion of separate legal entity means:
 Have many of the rights, duties and
responsibilities of a natural person.
 Can go through its agents, buy, own and sell
property in its own name.
 Engage in business activities by entering into
contracts with other entities and persons.
 It has legal status in a court, hence can sue and
be sued.
 Legally responsible for its liabilities.
 Pays income tax just as natural person does.
1. Limited Companies
a) Propriety companies with a share capital.
b) Public companies with share capital and
by guarantee.
2. No – Liability companies.
3. Special Companies.
a) Investment companies.
b) Banking companies.
 Common business organization operation in
the country.
 Mostly incorporated by family members
and individuals to obtain the benefits of
limited liability.
 Can be formed with the minimum of one
person and may need only one director.
 The maximum can be 50 shareholders with
some restrictions.
 Must have the word ‘Proprietary’ (PTY) as
part of its name inserted before the word
‘Limited’ (LTD). e.g: Jonkuu PTY LTD.
 Must have share capital limited by shares and not guarantee.
 Must have at least one shareholder and can not have more
than 50 shareholders.
 No restrictions on the transfer of its shares.
 Must have the word ‘Proprietary’ (PTY) as part of its name
inserted before the word ‘Limited’ (LTD).
 Can be classified as large or small depends on their operations.
 Company’s Act 1997 does not provide small proprietary
companies to prepare financial statements or have it audited.
 Large proprietary companies must prepare accounts in
accordance with the Accounting Standards, having them
audited and send them to the shareholders.
 A small company will be required to prepare financial reports if
its is controlled by foreign company partly or wholly.
 Business registered as a public company
may have a minimum of only one member,
required to have three directors.
 Ownership is widely spread, with large
number of people owning small number of
shares.
 Major advantage be that company is
entitled to raise capital by inviting members
of the public to subscribe its assets
portfolios.
 Must comply with the Stock Exchange
Listing Rules, i.e. POM SOX.
 A public company that does not have a
right to require shareholders to make any
contributions towards the debts of a
company.
 That is there is not liability on the part of the
shareholders.
 Non-payment on calls lead to forfeiture of
shares not been paid.
 Operates solely in mining activities.
 When registered it must have the word ‘No
Liability’ (NL) inserted at the end of its
name.
 Engage mainly in the business of
investment in marketable securities for
the purpose of earning profit and not for
purpose of exercising control.
 Banking companies are given certain
privileges and provisions regarding the
issues of prospectus of the purpose of
subscribing debentures.
 All commercial banks and financial
institutions operating in the country are
regulated by the Bank of Papua New
Guinea as a Central Bank.
 Limited Liability
 Broad source of capital
 Continuity of existence.
 Ready transferability of shares
 Use of professional management.
 Potential income tax savings.
 Greater Government Regulations.
 Separation of ownership and
management.