Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
34 Cards in this Set
- Front
- Back
Entity
|
a person, partnership, company or other organisation for which financial statements are prepared
|
|
Accounting entity
|
the financial affairs of a business are separate and distinct from the financial affairs of its owners. All businesses are separate accounting entities from their owners
|
|
What are the three main types of ownership?
|
- Sole Trader
- Partnership - (Limited Liability) Company |
|
Sole Trader
|
An individual in business on his or her own account
- single owner |
|
Sole Trader characteristics:
|
- no separate legal entity (but still a separate accounting entity)
- limited life - unlimited liability - minimal regulations - limited funds - low establishment costs/easy to establish |
|
Advantages of a sole trader
|
- simple and inexpensive to establish and operate
- minimal financial reporting regulations - ownership and management normally combined - all profits to owners - timely decision making possible |
|
Partnership
|
The relationship that exists between 2 or more persons carrying on a business with a view to making a profit
|
|
What sort of partnership agreement can you have?
|
Formal partnership agreement (written) or informal arrangement (spoken)
|
|
What must a partnership agreement include?
|
- resource contributions (capital)
- resource withdrawals (drawing) - share of undistributed profits (either current or prior earnings) |
|
Partnership characteristics
|
- no separate legal entity
- limited life - unlimited liability - mutual agency (each partner responsible for actions of other partners) - co-ownership of assets - co-ownership of profits - limited membership |
|
Up to how many partners can you usually have?
|
25
|
|
Disadvantages of a partnership
|
- profits shared
- assets shared - reduced decision-making authority - must be responsible for actions of others - limited life may affect long-term planning - unlimited liability = greater risk for ownership - lacks specialist management team - limited access to funds/capital |
|
Partnership Act of 1908
|
law to cover issues not in a partnership agreement
|
|
What are the default legal rules an agreement may cover?
|
- no entitlement of partners to remuneration (annual fixed salary)
- partners not entitled to interest on capital contributed - equal shares of profits and losses |
|
Company
|
- an artificial legal person which has an identity separate from that of those who own and manage it
- a business entity owned by many people (shareholders) investing in (buying shares) the business |
|
Company characteristics
|
- separate legal entity
- unlimited/perpetual life - limited liability (amount invested) - assets owned by company - profits belong to shareholders - extensive membership possible - separation of ownership and management - extensive regulation - greater capital/wealth - potential taxation advantages/disadvantages |
|
Unlimited Liability
|
- sole traders and partnerships
- when business cannot pay debts, owners are responsible and can lose personal assets |
|
Limited Liability
|
- company
- when business cannot pay debts, owners are not personally responsible |
|
Bankruptcy
|
Occurs when a business cannot pay its liabilities/debts due. The business files for bankruptcy in a court and is given relief from its liabilities. If a business wants to come out of bankruptcy, it must pay those liabilities.
Sole traders or a partnership cannot file for bankruptcy but a company can |
|
Corporate governance
|
the system by which corporations are directed and controlled
|
|
Directors
|
Individuals elected to act as the most senior level of management in a company
|
|
How many directors must a limited company have?
|
At least one
|
|
What are the three aspects a company must abide by?
|
disclosure, accountability and fairness
|
|
Disclosure
|
Company telling owners what they've been doing. It lies at the heart of good corporate governance and is all about adequate and timely information being available to investors
|
|
Accountability
|
Defining the roles and duties of directors and establishing an adequate monitoring process which may include external auditing
|
|
Fairness
|
Directors not benefiting from 'inside information'. Regulations are in place to restrict directors' ability to buy and sell shares
|
|
A company can be ______ on a stock exchange or _________
|
listed, unlisted
|
|
Listed company
|
- public sale/trade of shares
- typically larger companies - typically many shareholders - extensive regulations (NZX rules, Securities Market Act 1988) - full reporting requirements |
|
Unlisted company
|
- no public sale/trade of shares
- typically smaller companies - typically few shareholders - moderate regulation - less reporting requirements |
|
Capital of companies
|
The money invested by owners is called share capital
|
|
What are the different types of shares?
|
- ordinary
- preference - partly-paid - fully paid |
|
Dividends
|
Distributions of profits by a company to its shareholders
|
|
Reserves
|
Amounts reflecting increases in owners' claims
|
|
What is the most common type of reserve?
|
retained earnings. (a.k.a general reserve)
Profits and gains earned by the company that have not been distributed to shareholders and are held within this reserve for use within the company |