Different forms of business unit

Assignment Task:

You are a semi senior member of staff at the Accounting firm “Turpin, Barker and Armstrong based in Sutton. You have been appointed to deal with a pair of new prospective clients who have inherited quite a substantial sum of money from their grandfather’s will.

These two are brothers want to set up a business but have no knowledge as to what type of business they want to get into let alone the form of business entity available to them

As a Semi-Senior member of the accounting staff, you are required to write a report to be delivered by your firm to these brothers explaining the issues below:

• Explain the different forms of business units(sole proprietorship, partnership, limited company) available, highlighting the benefits and limitations of each

• Explain financial accounting and management accounting, highlighting the differences between the two strands of accounting

• Assuming that you have not been given any information about the inheritance of the brothers. Explain the sources of finance available to a business owner, looking at Short-term sources, Medium-term sources and Long-term sources of finance giving examples of each.   

• Style, layout, format (Report writing format expected) and relevance

• Introduction, conclusion and Recommendation

• Referencing – Harvard Style

A report has been prepared to guide the clients to start up a new business. The report highlights the different forms of business units. The benefit and limitations of the forms of business unit has been identified. The key concepts of financial accounting and management accounting have been discussed in the report. The difference between the two concepts has been identified. The sources of finance that can be available to the business unit for raising money has been discussed in the report (Gaughan, 2011).

Sole Proprietorship

Sole proprietorship is a type business entity that is run by the owner of the business unit. The owner of the business unit is responsible for controlling the debts and assets of the business. The business form is operated by a single owner (Vermeulen, 2003).

• It is less complicated to start a sole proprietorship business than a formal corporation. It is also much cheaper to start a sole proprietorship business. The standards of double taxation are not applicable to most of the corporations.
• The owner has control over the decision making of the organization (Weltman, 2013).

• The owner of the business will be held responsible for any kind of debt, loss or the violations that are coming from the business. These have to be satisfied by the personal funds of the owner.
• Sole proprietor enjoys various tax benefits but main drawback is that the owner of the business has to pay the self employment taxes.
• The business may be deceased on the death of the owner of the business.
• It is difficult for the sole proprietorship business to raise funds (Sexton, 2010).

Partnership is the form of business that is owned and operated by several individuals. There are various forms of partnership. They are general partnership and limited partnership. In case of general partnership, the management of the company is looked by the partners. They take responsibility of the debts and other obligations. But in case of limited partnership, it has both limited and general partners. The general partners look after the management of the business but the limited partners serve as the investors.

• It is easy to establish the business and the cost of starting the business is low.
• The capacity of borrowing is high.
• The external regulation is limited.

• The liability of the partners for the business debt is unlimited.
• There is high risk of disagreement between the partners and the management of the business (Lee, 2006).

A limited company is a private company where the owners are legally responsible for the debts. The liability of the owners depends to the extent of the amount that has been invested.

• In case of a limited company, the owner of the company has to pay less personal tax than the sole trader.
• A limited company has limited liability.
• The financial security of a limited liability company is more.

• It is expensive to set up a limited company.
• The rules governing limited liability are complex and restrictive towards maintaining the accounts and book keeping of the company (Sitkin and Bowen, 2010).

Financial accounting is the field of accounting that is concerned with the reporting and analysis of the financial transactions that pertain to a business. It involves the preparation of the financial statements that are available for the consumption of the public (Powers, Needles and Crosson, 2010).

Financial accounting

Management accounting is the process of preparation of the management reports and accounts that provide accurate financial information in a timely manner that is required by the managers to make day to day and short term decisions (Brigham and Houston, 2004).

Management accounting is the field of accounting that is concerned with the analysis and cost information is provided for the internal management of the organization for the purpose of planning, decision making and controlling the financial resources of the business.

On the other hand financial accounting is concerned with providing information to the creditors, stockholders. The financial information is provided in the form of financial statements like the income statement, balance sheet and cash flow statement (Heitger, Hansen and Mowen, 2008).

The essential data are provided to the organization by using management accounting tools which are required to run the organization. On the other hand financial accounting provides the scorecard by which the past performance of the company is judged (Brinker, 2000).

The sources of finance for a business can be divided into short term sources, medium term sources and long term sources (Finnerty, 2007).

The short term finances of the business helps the business firms to seize the quick business opportunities that need the completed transactions within a short span of time. Short term sources of finance can be raised in the term of short term bank loans, trade credit and lease (Preston, 2011).

Trade credit

Trade credit is short term source of finance to buy spare parts, stores and the raw materials from the suppliers. The credit period offered by the suppliers is 3 to 6 months (Pizzey, 2015).

Discounting bills of exchange

Bills of exchange are drawn for raising short term finance. In this method, the bills are not held till their maturity date. These are discounted by the companies with the commercial banks on the payment of a charge which is known as the bank discount. The discount rate is prescribed by the central banks of the country (Rao, 2006).

The requirement of the business for a period of 2 to 5 years is met by the medium term capital. The medium term sources of finance are shares, debentures, reinvestment of the profits and borrowing from banks. Shares of the company are issued to the public to raise capital. The share holders receive a share of the profit which is known as dividend. Debentures are short term loan that are issued to raise capital. The debenture holders are paid fixed amount of interest.

Sources in the long-term of finance can be in the form of equity funds and debt funds.

Equity funds

The investors invest in the business in exchange of the ownership of shares of the business. The owner of the company will lose control over the company if he sells more than 51 % of the shares. The funds are not secured with any of the assets of the business (Aspe Armella, Dornbusch and Obstfeld, n.d.).

Debt funds

The debt funds can be raised in the form of Government funding and commercial loans.

Government funding

Companies raise capital for long term in the form of Government grants. The government grants are free money and they are received free of cost and the company does not have to pay back the money. They government funds are allocated to the company in the form of loans.

Commercial loans

Commercial loans are offered by the financial institutions to start the business. They are long term loans. The long term loans are used to purchase the fixed assets of the company. They are secured by assets of the company (Hughes, Kapoor and Pride, 2013).

Conclusion

The report has tried to advice to the clients for starting up a new business. The business can be a sole proprietorship business, partnership or it can be a limited company. Both management accounting and financial accounting are important for the business firm. There are various sources of finance for the business. They are long term finance, short term finance and medium term finance. The short term sources of finance are trade credit, bank overdraft. The medium term finance is issue of shares and debentures and the long term funds are equity capital and loans from banks.

References

Aspe Armella, P., Dornbusch, R. and Obstfeld, M. (1983). Financial policies and the world capital market. Chicago: University of Chicago Press.

Brigham, E. and Houston, J. (2004). Fundamentals of financial management. Mason, Ohio: Thomson/South-Western.

Brinker, B. (2000). Guide to cost management. New York: Wiley.

Finnerty, J. (2007). Project financing. Hoboken, N.J.: John Wiley & Sons.

Gaughan, P. (2011). Mergers, acquisitions, and corporate restructurings. Hoboken, N.J.: Wiley.

Heitger, D., Hansen, D. and Mowen, M. (2008). Fundamental Cornerstones of Managerial Accounting. pp.100-500.

Hughes, R., Kapoor, J. and Pride, W. (2013). Business foundations. Mason, Ohio: South-Western.

Lee, I. (2006). Advances in e-business innovation and process management. Hershey, Pa.: Idea.

Pizzey, A. (2015). Accounting and Finance: A Firm Foundation. pp.314-350.

Powers, M., Needles, B. and Crosson, S. (2010). Principles of financial and managerial accounting. Mason, Ohio: South-Western.

Preston, S. (2011). Angel Financing for Entrepreneurs. Hoboken: John Wiley & Sons, Inc.

Rao, M. (2006). Accounting and financial management for BCA & MCA. New Delhi: New Age International (P) Ltd., Publishers.

Sexton, R. (2010). Exploring macroeconomics. Mason, Ohio: Cengage Learning.

Sitkin, A. and Bowen, N. (2010). International business. Oxford [England]: Oxford University Press.

Vermeulen, E. (2003). The evolution of legal business forms in Europe and the United States. The Hague: Kluwer Law International.

Weltman, B. (2013). J.k. lasser’s small business taxes 2012. Hoboken, N.J.: Wiley.