Wk2 Business structures & transactions

Question 1

What are the 4 basic business structures for for-profit entities available in Australia?

Answer 1

Sole traders, companies, partnerships and trusts

Question 2

What is a sole trader?

Answer 2

It is an individual who controls and manages a business and is solely liable for all the business debts.

Question 3

What are the features of a sole trader?

Answer 3

• The business is not a separate entity from the owner.
• The general registration requirements involve applying for an Australian Business Number (ABN).
• Usually uses accounting software such as MYOB to prepare financial reports.

Question 4

What is unlimited liability?

Answer 4

Refers to the full legal responsibility that business owners and partners assume for all business debts and legal actions.

Question 5

What is a partnership?

Answer 5

An association between two or more persons who:
- carry on a business as partners
- share profits and losses according to partnership agreement

Question 6

What is a company?

Answer 6

A business structure that has a separate legal identity from its shareholders and is taxed on its taxable income.

Question 7

What are the features of a company?

Answer 7

• Shareholders have limited liability
• Company has unlimited life
• Owners are known as shareholders
• Independent legal entity

Question 8

How to form a company?

Answer 8

Individual must apply to the ASIC for registration of the company
ASIC allocates a unique Australian Company Number (ACN)
Companies will also register for an ABN
Follow the jurisdiction of the Corporations Act

Question 9

What is a proprietary company and SME?

Answer 9

It is a common form of business structure adopted by small and medium-sized entities (SMEs) in Australia.
SME: Defined by IASB as ‘an entity that does not have public accountability and does not need to public general purpose financial reports for external users’.
Pty Ltd: Cannot offer their shares to the public.

Question 10

What are the types of public companies?

Answer 10

• Capital is limited by shares
• Capital is limited by guarantee
• No-liability companies
• Capital is unlimited

Question 11

What is the accounting entity concept?

Answer 11

Business transactions are recorded separately from personal transactions involving the owner(s) as the business is regarded as a separate accounting entity from the owner(s).
Personal transactions show reduction in cash and equity (i.e. Drawings).

Question 12

What are the main parts from sole trader reports?

Answer 12

• The statement of profit or loss shows
  income less expenses.
  -No taxation is shown.
  -Statement of financial position or Balance sheet has only one capital account.
• Profit (or loss) is added (or subtracted) to capital account (in balance sheet).

Question 13

What are the main parts from partnership reports?

Answer 13

• Profit and loss is split according to original capital contributions as
  specified in the partnership agreement.
• No taxation is shown.
• Balance sheet has a capital account (and often a current account) for each partner.

Question 14

What are the main parts of private company reports?

Answer 14

• Income tax is deducted directly from company profit.
• Balance sheet has a share capital account as opposed to owner’s or partner’s capital account.
• Retained earnings.

Question 15

What are the main parts of public company reports?

Answer 15

• Include more information than private company reports.
• May include information about all the companies controlled by a parent entity.

Question 16

What is the difference between Tier 1 entity and Tier 2 entity according to differential reporting?

Answer 16

Tier 1 entity - an entity that is publicly accountable
Tier 2 entity - is a non-publicly accountable entity

Question 17

Do business transactions affect assets, liabilities AND equity items in an entity?

Answer 17

TRUE

Question 18

What is the accounting equation?

Answer 18

Assets = Liabilities + Owner’s Equity

Question 19

What are assets?

Answer 19

Resources controlled by entity

Question 20

What are liabilities?

Answer 20

External sources of funds for the resources controlled by entity

Question 21

What is owners’ equity?

Answer 21

Internal sources of funds (from owners) for resources controlled by entity

Question 22

What is the expanded accounting equation?

Answer 22

Assets = Liabilities + Equity + Income - Expenses

Question 23

What are the 3 accounting errors?

Answer 23

1. Single entry error
2. Transposition error
3. Incorrect entry

Question 24

What does income less expenses equal?

Answer 24

Profit

Question 25

What is the chart of accounts?

Answer 25

• Complete listing of ledger account titles and ID numbers.
• Used as reference point when analysing transactions.
• Maintained in both a manual or computerised system like MYOB or QuickBooks.
• Should have flexibility to cater for expansion of accounts as the business grows.
• A good chart will reveal:
• Nature of the organisation
• Nature of activity
• Types of income and expenses