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MANG1025 - Accounting entities
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This document contains notes on sole traders, partnerships and limited liability companies. *Essential!! *Precise!! *For you!!
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MANG1001: Lecture 2 Accounting entities:Types of accounting:
Practices being developed for reporting to those who are not part of the day-to-day
running of the business.
o External reporting or financial accounting
For those who are managing the business on a day-to-day basis, special techniques
have been developed.
o Internal reporting or management accounting
Sole trader:
An individual may enter into business alone, either selling goods or providing a
service.
If cash not available, may borrow from the bank.
Unlimited liability.
For accounting purposes, the business is regarded as a separate economic entity,
takes risk of bad times and benefit of good times.
May not feel any great need for accounting information because they know business
very well, but it may be needed by:
o Government (HMRC), tax collecting purposes.
o Bank for lending money purposes.
o A person intending to buy business.
Partnership:
so trader may expand to enter into partnership with one or more people.
Permits a pooling of skills, person with ideas can work with person with money.
One partner may be required to meet all the obligations of the partnership if the
other partner does not have sufficient personal property, possessions and cash.
o Described in law as joint and several liability.
For accounting purposes, the partnership is seen as a separate economic entity
owned by the partners.
Major risk attached to sole trader and partnership is that of losing their personal
property and possessions if business fails.
Stakeholders such as partners, HMRC, banks and others who may join have a need
for accounting information.
Limited liability company:
To encourage the development of large business entities, owners needed the
protection of limited liability.
If businesses failed, then owners may lose all the money they had put into the
business, but the personal wealth would be safe.
Private limited liability – Ltd
Public limited company – Plc
A Ltd is prohibited by law from offering its shares to the public (e.g. family business).
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