In line with the Syllabus (p. 12) Topic 7 looks at forms of business ownership: Business purposes and ownership.

Transcription

1 Unit 11.3 Introduction to Accounting Topic 7: Business organisation types of ownership In line with the Syllabus (p. 12) Topic 7 looks at forms of business ownership: Business purposes and ownership. Sole proprietors. Partnerships. Companies. Community organisations. Finance and ownership. Purposes of business organisations There are two recognised sectors of business organisations the private sector and the public sector. Private sector organisations are established by individuals or groups of people sole proprietors, partnerships, companies, and clubs and societies. Private sector organisations usually aim to: Make a profit. Become market leaders. Provide customer service. Meet demand. Be a going concern. Grow bigger. In the case of clubs and societies, the profit is not intended for the use of an individual or for the payment of dividends to shareholders, but to finance facilities for the club or to aid the poor and needy or the victims of cataclysmic events such as earthquakes. Example A Clubs and societies include local netball clubs and the Red Cross. Public sector organisations are those that are owned by the state and managed by the government. They receive their income by way of public taxes and by trading. Public sector organisations usually aim to: Supply essential and social services. Provide customer service. Be efficient. Be able to expand. Local government, also known as local bodies, is part of the public sector and receives its income by way of rates and trading. Example B Collecting entrance fees at the NCD-owned swimming pool in Port Moresby is a type of local body trading. Business ownership There are four main business types: Sole proprietor. Partnership. Company. Community organisation (not-for-profit organisation). Each business type has accountability according to its particular form of organisation.

2 186 Unit 11.3 Introduction to Accounting Sole proprietor Many businesses are owned and managed by one person a sole proprietor (sole trader), or sole trader. People may decide to start a business because: They have an idea that they think will be profitable. They are tired of working for someone else and want to be their own boss. Example C Glenis is a cook in a big hotel a large organisation Big organisation Glenis Glenis is not used to working for another person and finds it difficult. She would like to be her own boss and thinks she would make a profit if she set up her own business. Glenis sets up her business as a sole proprietor. Glenis Sole proprietor A business with a sole proprietor may have some paid employees to help with the actual production of goods and services. Example D Glenis cannot do all the cooking herself and manage the kai bar as well, so she hires two helpers. There are advantages and disadvantages to running a business as a sole proprietor: Advantages Easy to set up if you have the capital and the desire or determination to succeed. Complete freedom in the running of the business apart from making sure that all Health Department, Local Authority and other laws are kept. The owner keeps all the profits. The financial details of the business are kept private. Can offer a more personal service in keeping with local needs, able to adapt to change faster. Sole proprietor business Disadvantages Unlimited liability if the business gets into financial difficulty, the owner is responsible for all debts, even to the extent of selling personal possessions to pay the business debts. The owner must bear all losses. Tied to the business. It is difficult to go on holiday, and time outside normal working hours is needed to write up the accounting records and to plan and order for future requirements. Limited capital difficult to expand the business.

3 Topic 7: Business organisation types of ownership 187 The owner does not have to wait until the Income Statement is completed before drawing out funds for personal needs. Drawings can be made when they are needed. Later, when the Balance Sheet is drawn up, the total amount of drawings is deducted from capital. Partnership A partnership consists of 2 25 people who have joined together with the aim of making a profit. The law allows some professional accounting partnerships to have up to 150 partners. Example E Fee, Fi and Fo have joined together as a partnership. Fee Fo Fi Partnership of Fee, Fi and Fo Each partner contributes cash or skills (or both) to the partnership, and usually shares in the running of the partnership. The exception to this is when there is a sleeping partner (or silent partner ), one who contributes cash, but takes no part in the day-to-day running of the business. There are advantages and disadvantages to being in a partnership: Advantages Partnership business More cash available to expand the business. Skills and time of more than one person available. Specialisation is possible. Losses are shared. Disadvantages Disagreements may take place. Profits are shared. Each partner is personally liable for debts (unlimited liability). If one partner dies or retires, the partnership ceases. Most partnerships draw up a partnership agreement to ensure that profits and losses are shared according to the wishes of the partners and to ensure that disagreements may be settled easily. If they do not draw up this agreement, the Partnership Act 1908 will govern the partnership. This Act states that profits and losses are shared equally among partners. Company A company is a legal entity, registered under the Companies Act 1997, and is a separate legal entity from its shareholders and directors. A company must have: A registered name companies can be recognised by the word Limited or Ltd in the name. One or more directors. One or more shareholders who buy shares in the company. There is no limit on the number of company shares issued.

4 188 Unit 11.3 Introduction to Accounting Example F In the diagram below, shareholders are represented by the circles, and the company Wara Pumps Ltd is represented by the rectangle. Wara Pumps Ltd There are advantages and disadvantages of the company form of ownership: Advantages The company can sell more shares to expand. Companies do not cease trading if a shareholder dies. Shareholders have limited liability because any losses are limited to their contributed capital. The company can issue debentures to raise money to expand. Company Disadvantages Expensive to form there are a lot of legal requirements. Shareholders often have no say in decisionmaking. Because shares may be sold to anyone, it is possible the company could be taken over by another enterprise, eg another company. Community organisations Various clubs and societies are formed to offer services to club members or to provide aid and assistance to various groups. Clubs and societies are different from the other entities because of their special ownership characteristics. No one group or individual is the owner of a club or society that is formed on a non-profit basis. Clubs and societies obtain their funds from subscriptions paid by members, the sale of equipment, uniforms, drinks and so on, and from various types of fundraising. Any surplus funds are kept in an Accumulated Fund to improve facilities or to buy equipment. The Accumulated Funds section of the Balance Sheet for a club or society is shown below. Example G Accumulated Funds section of Balance Sheet Accumulated Funds Opening balance K Net surplus/net deficit K7 000 Closing balance K Incorporated and unincorporated clubs and societies Many clubs and societies choose to become incorporated, which means they become a separate legal entity with similar legal status to a company.

5 Incorporated clubs or societies are also required to: Topic 7: Business organisation types of ownership 189 Use the word Incorporated or Inc. as part of their name. State the objectives or aims of the club or society. State how people can become members of the society and how they cease to be members. State procedures for holding meetings, and for the control and investment of funds. There are advantages and disadvantages of an incorporated society: Advantages The club has limited liability. The club can raise money by issuing debentures. Incorporated society Disadvantages Legal requirements and increased costs associated with forming the society and financial reporting each year. Some clubs and societies choose to remain unincorporated. An unincorporated society comprises two or more people who join together for a common purpose (which is not profit). There are advantages and disadvantages of an unincorporated society: Advantages Few legal requirements to adhere to. Can have a club or society with only a few members. Unincorporated society Disadvantages Members have unlimited liability. Difficult to raise extra funds other than through subscriptions or fundraising. Limited and unlimited liability One of the major differences between legal entities is whether they have limited or unlimited liability. Limited liability (companies, incorporated societies) The loss of personal assets is limited to any money outstanding on unpaid shares or subscriptions. If the owner/member is fully paid up, his or her personal assets are protected. Unlimited liability (sole proprietor, partnership, unincorporated society) If the business/ club is in financial difficulty and unable to meets its financial obligations, the personal assets of the owners/members can be sold to pay off the entity s debts. Legal entities with limited liability have the advantage for their owners/members. Example H The advantage of limited liability for the members of an incorporated club or society is that they are not liable for any contract, debt or obligation made or incurred by the club or society. The advantage of limited liability belongs to the owners/members by right because they have a separate legal entity status from the company or incorporated society.

6 190 Unit 11.3 Introduction to Accounting Sources of finance for entities Entities can source finance in different ways: Bank overdraft the bank allows the entity to access more funds than are available in its bank accounts. The amount available is normally limited, and must be repaid in the short term. Bank loan an agreed amount is transferred to the entity. Loans can be short or long term, and are repaid in the form of principal and interest. Mortgage a loan using land or buildings as security. A mortgage is normally long term, and if the terms of the mortgage are not met by the borrower, then the land and buildings can be sold by the lender to repay the debt. Shares a source of finance for companies. Shareholders purchase a share of the business, become part owners, and receive a portion of the profits in the form of dividends. Debentures a source of finance for companies and clubs. Shareholders or members lend funds to the entity and are issued with a bond acknowledging the loan and specifying the date for repayment and the rate of interest. Entities also source finance from their day-to-day operations through the following: Fees earned by providing a service. Example I Doctors or plumbers earn fees for the services they provide. Sales income generated from the purchase and resale of goods/inventory. Example J A supermarket generates income by purchasing and reselling food and groceries. Commission earned by selling goods or providing services on behalf of clients, and receiving a portion of the income received by the clients. Example K When a real estate agent sells a property, the agent (and the agency) receives a portion of the sale price as commission. Subscriptions the amounts paid annually by members to belong to a club or society. Grants clubs and societies can apply for grants from other organisations. Fundraising clubs and societies often raise funds by holding special events such as raffles, fairs and so on.

7 Ownership and profit-sharing Sharing of profits from the entity depends on the type of ownership. Topic 7: Business organisation types of ownership 191 Type of ownership Sole proprietor Sharing of profits Profits are transferred to equity, and the owner can withdraw any part of this in the form of drawings. Partnership Company Community organisation Profits are transferred to equity, according to the partnership agreement, or if there is no agreement, profits are shared equally among partners. Partners may also take drawings. Profits are normally divided into two areas: Retained earnings the portion of profit kept in the company for expansion. Dividends the portion of profit paid to shareholders based on the number of shares held. Members are not entitled to a share in any surplus. Any surplus remains as Accumulated Funds in the organisation. Unit 11.3 Activity 7A: Ownership structures 1. Which type of ownership structure is legally obliged to keep proper records of its financial transactions? 2. Name two ownership structures that have unlimited liability. 3. The treasurer of the local rugby club asks you to write out the club s Accumulated Funds account correctly. They started the year on 1 July 2012 with K and had a net deficit of K Sam Banduro wants to start a business. He has always been interested in becoming his own boss, but he doesn t understand what would be a suitable type of organisation to be involved with. Explain to Sam who receives the profits, and the advantages and disadvantages, of the following: a. A sole proprietor. b. A partnership. 5. Sam decides he will manage better if he takes a partner. Explain to him what difficulties he may meet, and how he can ensure any future problems can be solved. 6. Find a match from List A for the organisations in List B: A B i. Gutpela Tru Hair Styles. a. An unincorporated society. ii. Avon Basketball Club. b. A sole proprietor. iii. Madras Ltd. c. A partnership. iv. Kombruk & Yuasi (solicitors). d. A company. 7. Using your local paper, telephone book or Yellow Pages, identify in your area: a. A sole trader. b. A partnership. c. A club/society. d. An incorporated club/society.

8 192 Unit 11.3 Introduction to Accounting 8. The advertisements shown appeared in the Post Courier on Friday, 27 January Advertisement A Advertisement B ELECTRICIAN Domestic Commercial Industrial Installations and Maintenance safepower For prompt and efficient service contact: HOHOLA HEL ELECTRICAL LTD ph: Advertisement C MADANG NETBALL CLUB TRIALS STARTING PREMIER GRADE Monday 11 February 2012 Thursday 14 February 2012 Sunday 17 February to 8.30 Madang Netball Courts Enquiries to Lesley Edwards Lutheran Guest House Fantastic views of waterfalls. Wonderful bush walks. Amazing range of farm animals. Nita and Pare Henry Phone Advertisement D PORT MORESBY Painting For complete painting and wallpapering services call DAVID KELLY Phone Mobile a. Write the letter of the advertisement that best matches the type of organisation in the chart below. An example has been done for you. Type of organisation Example: Partnership Company Community organisation Sole proprietorship Advertisement B b. Write the letter of the advertisement that best matches possible sources of finance in the chart on the right. An example has been done for you. Do not use the same advertisement twice. Sources of finance Example: Owner Partners Sponsors Shareholders Advertisement D

9 Topic 7: Business organisation types of ownership 193 c. State one advantage of operating a business as a partnership rather than as a sole proprietor. d. State one disadvantage of operating a business as a: i. Sole proprietor. ii. Company. e. The owners of Hohola Electrical Limited are not personally liable for the business s debts. This is called liability. (Fill in the gap.) 9. Pacific Appliances Ltd supplies goods to POM Electrical. Tau and Geno Electricians, jointly owned by Tau Tau and Will Geno, is a customer of POM Electrical. Complete the chart comparing these three businesses by placing each of the following words/phrases in the correct spaces in the sentences in each box. Use each word or phrase only once. Words and phrases to use: loan from bank capital company subscriptions members loan from family partnership personally shares shareholders sole trader debentures community organisation Business features POM Electrical East Appliances Ltd Tau and Geno Electricians Ownership A sole proprietor, A a. which A c. which which means one means one or more means two or more owner. b. are owners. partners are owners. The source of finance d. provided by e. are issued to Capital provided by that is provided by the owner. the owners. each owner. the owner(s) of each entity. A second source of finance for this business. Use a different example for each entity. f. g. h. 10. The following sentences relate to the Champions League Club Incorporated, an amateur rugby league club in Goroka. Copy the following sentences, and complete the gaps in order to describe the role of accounting in an incorporated sports club. a. The treasurer of the Champions League Club Incorporated is required to prepare financial statements for users such as the committee and. b. The Statement of Cash Flows is prepared to show members. c. The Balance Sheet shows members. d. Before the financial statements are presented to members they must be audited. The auditor s job is to.

10 194 Unit 11.3 Introduction to Accounting Unit 11.3 Activity 7B: Types of ownership multiple choice 1. A sole trader is the: A. Only person who owns the business. B. Only worker in the business. C. Owner of a company. D. Only person allowed to sell shares to others. 2. There are two recognised sectors of business organisations. They are: A. Private sector and government. B. Private sector and public sector. C. Public sector and government. D. Government and individuals. 3. Public sector organisations are those that are owned by: A. Individuals. B. Companies. C. The government. D. The city authority. 4. The number of people required to form a partnership business ranges from: A. One to fifteen. B. Two to forty. C. Two to twenty-five. D. Five to one hundred. 5. Which of the following is an advantage of a partnership business: A. Disagreement may occur between partners. B. Profits are shared. C. There is more money for expansion. D. Each partner is liable for any losses that occur. 6. Owners of companies are called: A. Directors. B. Partners. C. Shareholders. D. Creditors. 7. Which of these business units are required to have their reports made public: A. Sole proprietors. B. Partnership businesses. C. Private companies. D. Public companies. 8. The number of people required to form a public company is from: A. 5 to 200. B. 5 to no upper limit. C. 10 to D. 50 to