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Introduction To Accounting: Turpin, Barker And Armstrong Add in library

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Question:

You are a semi senior member of staff at the Accounting firm “Turpin, Barker and Armstrong based in Sutton. You have been appointed to deal with a pair of new prospective clients who have inherited quite a substantial sum of money from their grandfather’s will.
 
These two are brothers want to set up a business but have no knowledge as to what type of business they want to get into let alone the form of business entity available to them.

As a Semi-Senior member of the accounting staff, you are required to write a report to be delivered by your firm to these brothers explaining the issues below:

• Explain the different forms of business units(sole proprietorship, partnership, limited company) available, highlighting the benefits and limitations of each

• Explain financial accounting and management accounting, highlighting the differences between the two strands of accounting

• Assuming that you have not been given any information about the inheritance of the brothers. Explain the sources of finance available to a business owner, looking at Short-term sources, Medium-term sources and Long-term sources of finance giving examples of each.

• Style, layout, format (Report writing format expected) and relevance

• Introduction, conclusion and Recommendation

• Referencing - Harvard Style
 
 

Answer:

Introduction:

The term management accounting means the method of making the reports of management and the accounts which represent the exact and appropriate monetary and numerical data needed by the managers to take short term decisions.

The term financial accounting means the method which represents the yearly report for the share holders like the balance sheet of the company and the statement of income of the company. This helps the company to understand the financial position of the company. This data’s are prepared by the company for their investors, tax department of the company and for the share holders of the company.

In this research, the research analyst will study the different forms of business units available in the market and the concept of financial accounting and the concept of management accounting.

The different forms of business units:

Sole Proprietorships:

A business which is owned and run by an individual is known as the sole proprietorship business. It is one of the ordinary and simplest kind of a business. The business may control many people but the ownership of the business should be one (Kaliski, 2007). This type of business can be easily formed and the owner of the company can easily enjoy with the whole amount of profit earned by the business.

How a sole proprietorship is formed:

The sole proprietorship can be formed very easily. When a proprietor wants to open a business, can open a sole proprietorship business. To operate a sole proprietorship business no different type of licenses is needed to open a sole proprietorship business. The business which is sole proprietorship business can be maintained till the proprietor wants to operate the business.

 

Advantages of Sole Proprietorship business:

Sole Proprietorship business has many advantages as compared to other type of business. The Sole Proprietorship business have operational and tax advantages business.

One of the operational advantages of sole proprietorship business is the sole proprietorship business is very easy to build the business. An individual can become a owner of a company by operating the business (Mariotti and Glackin, 2013). Another operational advantage of this type of business is the proprietor will operate the business alone and will enjoy the profit percentage of the business alone.

The tax advantages in the sole proprietorship business are the sole proprietorship business does not need to file a different tax. The total profit of the business or the total loss of the business will be taxable amount on the proprietor own income tax form.

Disadvantages of Sole Proprietorship business:

Sole proprietorship has operational disadvantages and also has liability disadvantages as compared to other business.

One of the major disadvantages of the sole proprietorship business is the latent experience to liability. The proprietor is individually responsible for any debts of the company or compulsion of the company.

Another limitation on sole proprietorship is operational disadvantages of the proprietor. If the proprietor wants to comprise another proprietor, then the business will no more be sole proprietorship company. The company will be then a partnership company. The owner of the sole proprietorship business can only comprise with his spouse or with her husband.

 

Demise of a Sole Proprietorship:

A sole proprietorship trims when the proprietor stops operating the business. This situation can be face by the business when the proprietor sells the business or shut down the business (Mintzer, 2013).

Partnership:

A business which is owned by two or more individuals who adhere their hands each other to form an institution or a business with the aim of earning gain for the company is known as Partnership in business. The individuals who adhere their hands together to form the business are known as the Partners. The partners of the firm can supply the required money to operate the business together and can split the errands among the partners. When the individual wants to open a business with the individual’s partners, the individual should decide and split the errands among the partners that how much amount will each partner will contribute, which partner will manage how much, who will recover the loss of the business and who will get the maximum percentage of the profit earned by the company (Oberrecht, 2010). Before starting the business all the partners makes an agreement and on the basis of the same agreement the partners will operate the business. The agreement on the basis of which the partners operate the company is known as Partnership Deed.  According to this agreement the partners should open the business and operate the partnership company. The agreement should be in written to avoid future controversies.

Features of partnership form of business:

Two or more members: A business which is owned by two or more individuals who adhere their hands each other to form an institution or a business with the aim of earning gain for the company is known as Partnership in business. The individuals who adhere their hands together to form the business are known as the Partners.

Agreement: Before starting the business all the partners makes an agreement and on the basis of the same agreement the partners will operate the business. The agreement on the basis of which the partners operate the company is known as Partnership Deed.  According to this agreement the partners should open the business and operate the partnership company. The agreement should be in written to avoid future controversies.

Lawful Business: The partners should stay together to run the business by following all types of laws. The partners should not do black marketing or should not have black money. The firm should pay the taxes in the account of Government to keep their business run under all the laws.

Competence of Partners: According to the business law, the individuals who adhere their hands to run a partnership business. The individuals should not be minors who stays together to run partnership business. If this happens then the business are not following the laws of the partnership business which can lead into trouble for the company (Crowther and Trott, 2004). The minors cannot take any type decisions to run the company. The minors can only get the share of the profits earned by the business.

Sharing of profits: The main aim of the business is to earn maximum profit. The sharing of the profits should be written in the agreement. The partners who own the company should follow the agreement to avoid the controversies (Tesner and Kell, 2000). If the sharing of profits is not mentioned in the agreement then the profit earned by the company should be shared among the partners equally.

 

Advantages of Partnership business

a) Establishment of Partnership business is very easy.
 
b) Large amount of resources are available in Partnership business..
 
c) The business is running by the partners. So, all the partners take part in decision making process for the company. This makes the company to have a better decision.
 
d) The operations of the partnership business is very flexible in nature.
 
e) All the partners of the business, shares the risk factor of the company among themselves.

Disadvantages of Partnership business:

a) The liability of Partnership business is unlimited.

b) There is no certainty of life for the partnership business.

c) In Partnership business, the management of the company have lack of harmony.

d) The capital amount in Partnership business to operate the business is very limited.

e) The shares of the profits earned by the partnership business cannot be transferred to other people without taking permission from other partners of the company (Steingold, 2011).

Limited Company:

The structure of assimilation that confines the total amount of accountability should be under concern of the share holders of the company. The designation of this type of structures of a corporate company is used in the European countries. It is mainly known as the limited liability company. Later, this type of company is known as Liability Company (Shaw and Barry, 2001).

There are two types of limited company. One type of Limited Company is known as Public Limited Company and another type of Limited Company is known as Private Limited Company. In Limited Company, the amounts outstanding of the company are divorced from the shareholders of the company. Proprietorship of the limited company can be transferred easily. Many of the Limited Company is running through their generations.

How a Limited Company is formed:

When an individual decides to open a limited company, then the first thing should be done by the owner is to register the company name with the Companies House. The main function of Companies House is to look after the companies which are registered under Companies House. The registration of the company follows under the Companies Act 2006 (Birkin, 2000). In the beginning of the 21st Century, there are over two millions limited company present in the corporate market of United Kingdom and more than three lakhs limited companies is present in the current year. Under the Act of Companies Act 2006, each and every limited company must have one director and secretary. But recently having a secretary of the company is not necessary.

Advantages of Limited Company:

a) Investors always showed interest to invest in the limited company.
 
b) The phrase limited always gives an extra weightage to the company.
 
c) The investors can easily transfer the shares in the limited company and the agreement of limited company is much more transparent and flexible as compared to other types of company.
 
d) The dividends paid by the limited company and the dividend paid to the investors are less taxable as compared to other types of company (Clubb, 2005).
 
e) The tax payable rate is very low in limited company.

Disadvantages of Limited Company:

a) Due to the compulsion in legislative, the cost of accountancy is very much higher in limited company.
 
b) The company secretary and the directors of the company holds the legislative under the Company Act 2006.
 
c) In limited company, the compulsion in legislatives is greater in form such as VAT, the accounts of the annual report of the limited company.

The concept of Management Accounting:

The term management accounting means the method of making the reports of management and the accounts which represent the exact and appropriate monetary and numerical data needed by the managers to take short term decisions (Collier, Berry and Burke, 2007).

The concept of Financial Accounting:

The term financial accounting means the method which represents the yearly report for the share holders like the balance sheet of the company and the statement of income of the company. This helps the company to understand the financial position of the company (Epstein and Lee, 2003). This data’s are prepared by the company for their investors, tax department of the company and for the share holders of the company (Jones, Atkinson and Lorenz, 2012).

 

Difference between the financial accounting and management accounting:

The term financial accounting means the method which represents the yearly report for the share holders whereas the management accounting represents the monthly or weekly report for the managers of the company and for the chief executive officer of the company (Koyuncugil and Ozgulbas, 2013). The report which we get from the management accounting shows the manager that how much cash is available in the company’s fund, the generation of revenue sales, the accounts payable by the company, the accounts receivable by the company and also gives much other statistical information about the company (Elliott and Elliott, 2008).

According to the nature of the source of finance, they are mainly classified as internal source and external source. However, they are also categorized as sort term source of finance, medium term source of finance and long term source of finance.

Short term sources of finance are those which are available only for one year. Similarly, medium term source of finance are available for business up to 5 years and long term source of finance are available for more than 5 years.

Personal sources of finance can be categorized under any of the above mentioned three heads. However, ordinary share capital is the major long term source of finance. In addition to this, loan capital, bank loan and venture capital are also considered as the long term source of finance. On the other hand, several loan capitals also termed as the medium term source of finance. Again, bank over draft is the major short term source of finance.

While considering any sources of finance whether it is short term, medium term or long term, there needs to consider the legal structure of the business organization like whether it is Ltd or PLC. Taken for example, LTD and PLC can sell their shares, but sole traders, even partnership cannot go for this. So, based on the legal structure of the business, the sources of finance may changes.

Similarly, the use of finance also indicates what kind of source needs to be used. Taken for example, for setting up a new business one should go for long term source of finance. Further, the profit level also indicates what kind of source of finance should be utilized. In this context, the level of risk or risk taking capabilities, preference of the owners, the level of amount required also largely affects the availability of the source of finance.

Conclusion:

The research analyst studies that there are different types of business units. They are Sole Proprietorship business, Partnership business, Limited Company. There are many advantages imposed in the each type of business unit. From the advantage the research analyst finds that the Limited Company business is much better than the other two types of business. There are also some disadvantages imposed in each type of business units.

The research analyst also studies the importance of management accounting and financial accounting in a company to operate the business successfully. To reach the strategic objectives of the company, the study of management accounting and financial accounting is needed. This two accounting tools also helps the company to understand the position of the company.

Recommendation:

Each and every business units have advantages and disadvantages. The investors should keep in mind about the advantages and the disadvantages of the business units. The investors should identify the type of business the investor wants to operate. The investor should try to minimize the disadvantages of the business unit by keeping in mind about the disadvantages of the business unit.

 

References:

Kaliski, B. (2007). Encyclopedia of business and finance. Detroit: Macmillan Reference USA.

Mariotti, S. and Glackin, C. (2013). Entrepreneurship. Upper Saddle River, N.J.: Pearson/Prentice Hall.

Mintzer, R. (2013). Start your own grant writing business. Irvine, Calif.: Entrepreneur Media.

Oberrecht, K. (2010). How to start a home-based photography business. Guilford, Conn.: Globe Pequot Press.

Sinclair, J. (2007). EBay business the smart way. New York, NY: Amacom.

Crowther, J. and Trott, B. (2004). Partnering with purpose. Westport, Conn.: Libraries Unlimited.

Tesner, S. and Kell, G. (2000). The United Nations and business. New York: St. Martin's Press.

Birkin, M. (2000). Building the integrated company. Aldershot, Hampshire, England: Gower.

Shaw, W. and Barry, V. (2001). Moral issues in business. Belmont, CA: Wadsworth.

Steingold, F. (2011). Legal guide for starting & running a small business. Berkeley, Calif.: Nolo.

Clubb, C. (2005). The Blackwell encyclopedia of management. Malden, Mass.: Blackwell Pub.

Collier, P., Berry, A. and Burke, G. (2007). Risk and management acounting. Amsterdam [u.a.]: Elsevier.

Epstein, M. and Lee, J. (2003). Advances in management accounting. Amsterdam: JAI.

Jones, T., Atkinson, H. and Lorenz, A. (2012). Strategic Managerial Accounting. Oxford: Goodfellow Publishers Ltd.

Koyuncugil, A. and Ozgulbas, N. (2013). Technology and financial crisis. Hershey, PA: Business Science Reference.

Patz, A. and Rowe, A. (2007). Management control and decision systems. Santa Barbara [Calif.]: Wiley.

Elliott, B. and Elliott, J. (2008). Financial accounting and reporting. Harlow: Financial Times Prentice Hall.

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