Bookkeepers and Accountants entities
Ultimate Guide on bookkeepers and Accountants entities
types of entity
So far we have examined the basic principles of accounting and their interpretation. We now go on to look at different types of entity in business, such as sole traders, partnerships and limited companies, and their capital structure. The accounts of the sole trader are a simple example of the capital structure. However, whether the capital structure is of a sole proprietorship or ten partners or a million shareholders, the interpretation of the basic principles remains the same. What is required as the number of owners multiply is an extension of the form of presentation of accounting information. We will now examine the changing capital structure as ownership of a business is extended, and the effect this has on the accounting information. Studying bookkeeping course is made easy with online study option click here for more information about this certificate. You can also study The Diploma of Accounting as part of you ongoing finance education - information about this class available here
sole traders
Sole traders are entities owned by one person and are the simplest form of business entity. A sole trader’s major source of finance is his own savings and his ability to borrow often depends on the security of his business assets or private property. While borrowing makes possible a greater scale of operations, it subjects the borrower to limitations that creditors may impose. A sole trader is personally liable for any debts incurred by the business, so if the business does not generate enough cash to pay bills as they fall due, the sole trader’s personal resources and assets will be used to satisfy debts. .
partnership
A partnership exists between two or more people engaged in any activity in common with a view to profit. The greater the number of owners means that, in contrast to a sole trader, more finance becomes available, and this is a common reason for forming a partnership. Partnership is also a means of both sharing and managing the risks of business. Profits are divided among partners, often in accordance with the proportions in which they contributed capital to the business, though the partners can agree to divide profits in any way they wish. The rights and obligations of partners are usually defined by a written partnership agreement or oral agreement, and the existence of a partnership may be inferred from the conduct of the individuals concerned.
owners
Owners want to see whether the business is profitable. They also want to know the financial resources of the business. The owners place a lot of reliance on the auditor’s report and, in many cases, they rely on stockbrokers, analysts, and newspapers to guide them and interpret the information they have available to them. Of course, while the vast majority of owners are individuals with relatively small investments and levels of ownership, the ‘man-in-the-street’ is not the only type of owner. Large companies, insurance companies and pension funds, for
analysts
Analysts generally know more about a company than any other external stakeholder group. Their job is to assess whether it is advisable to invest in a business. Analysts will want to know everything possible about a business. They will use financial statements, newspaper reports, commentaries from other analysts and anything else that may be relevant to make an analysis of a business.
limited company
A limited company is regarded as an entity that is separate from the parties who contribute capital to it. In the UK, companies are created and regulated by the Companies Act and have a legal personality of their own, distinct from the various groups – employees, owners, directors, managers – who have an interest in them.
Individuals (shareholders) contribute capital in agreed units usually referred to as shares, which have a nominal value, i.e. the price below which they cannot be issued, for example, £1, £10, etc. Where shareholders pay more than the nominal value of a share, the excess over the nominal value is called share premium and is recorded separately by the company. The amount of capital provided (or subscribed) by shareholders is referred to as share capital. The concept of being limited by shares means that the liability of the shareholders to creditors of the company is limited to the capital shareholders invest, that is, the nominal value of the shares and any premium paid in return for the issue of the shares by the company. A shareholder’s personal assets are protected if the company cannot generate enough cash to pay its bills and becomes insolvent, but money already invested in the company may be lost.
A limited company may be private or public. A private limited company is not required by law to disclose as much about its activities and operations as a public limited company, and can only issue its shares privately. This is the major distinguishing feature between a private limited company and a public limited company, which can issue shares to the general public and trade them on a public stock exchange, though it is not compelled to do the latter. Table 1.1 below summarizes the different types of business.
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