Company legal structure, trial balance, budgeting and management accounting

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Assignment Topic

Assignment Topic

You have been asked by the Managing Director of Bay Ltd to prepare a report for the next meeting of the Board of Directors.

Your report should address the following issues

  1. An analysis of the how the accounts of Limited Companies differ from those of Sole Traders. Outline the nature and purpose of limited liability and explain the standard headings contained in the balance sheet of a Limited Company and how they are related. 6 Marks
  1. The nature and purpose of the trial balance the manner in which it relates to the profit and loss and balance sheet. Generally a “balanced” trial balance indicates your double entry is correct; outline the circumstances when this may not be the case. 6 Marks
  1. The importance of budgets and budgeting to a modern well run business paying particular attention, but not exclusively to the relationship between functional and master budgets. 6 Marks
  1. The function of management accounting and briefly list ways in which it differs from financial accounting. 4.5 Marks

Learner Number

Module Title

Accounting

Date

17/02/2015

  1. An analysis of the how the accounts of Limited Companies differ from those of Sole Traders. Outline the nature and purpose of limited liability and explain the standard headings contained in the balance sheet of a Limited Company and how they are related.

Private Limited Company

Main Advantages

  • Due to directors being taxed under PAYE they’re not taxed on annual profits..
  • No cap on company pension contributions.
  • Easier to procure Enterprise Boards/BES schemes
  • Limited liability – directors not personally liable for company’s debts, they are only liable for nominal value of their guarantees may be required.
  • Start-up exemption.
  • Corporation tax rate just 12.5%.
  • Due to directors being Transparency makes it easier to get credit.
  • Usually easier to operate in a business environment through a limited company.
  • Potential to offset against previous capital losses on shares by liquidating the company.
  • A gain can be made.
  • Selling the company is much easier. (Lewis & Co, L&C, Charted accountants)

Disadvantages

  • Annual costs filing annual returns, audit if relevant, penalties for late filing
  • potential for double tax on removing profits from the company
  • PAYE/PRSI must be regularly filled.
  • A separate bank account. (lewis & Co, L&C, Charted accountants)

Sole Trader/Partnership

Advantages

  • Easy to start
  • Profits are taxed
  • Low cost for registering company’s name
  • Other employment income can offset the losses but only for 3 years in a row.
  • By using you home, car etc a greater scope of deductions can be accomplished. (lewis & Co, L&C, Charted accountants)

Disadvantages

  • Since the business it identifiable to the owners (Family name as company’s name) it is more difficult to sell.
  • You and your partners are personally liable for outstanding credit owed to the creditors.
  • More obstacles when applying for grants and contracts.
  • Partnership proportions are contributable to profits
  • You’re the direct (lewis & Co, L&C, Charted accountants)

The Balance Sheet will give a different type of information. It measures the wealth

of the business at a particular moment in time. For our examples this will be at the

end of the month. The Balance Sheet will show the assets of the business i.e. what

it owns and the liabilities of the business i.e. what is owed. We subtract one from

the other to give us the wealth of the business (IIPMM manual)

Contents of the balance sheet

  • fixed assets - long-term
  • current assets - short-term
  • current liabilities - what the business owes/ repayments in the short term
  • long-term liabilities - including owner's or shareholders' capital

(Northern Ireland Business info)

  1. The nature and purpose of the trial balance the manner in which it relates to the profit and loss and balance sheet. Generally a “balanced” trial balance indicates your double entry is correct; outline the circumstances when this may not be the case. 6 Marks

From time to time, it is necessary to check the General Ledger for accuracy. The process of drawing up a trial balance checks the arithmetic accuracy of the general ledger and whether all postings to the ledger observed the rules of double-entry bookkeeping.

On a monthly basis this is done the time interval between this checking procedures is arbitrary. It depends on the policies/ procedures of the business organisation.

Definition: The trial balance is a list of ledger account balances prepared on a particular date. (Online learning for sports management)

A trial balance may "balance" but it does not mean that there are no errors. Incorrect amounts may have been entered on both sides of the ledger. There may also have been entries to wrong Accounts but on the right side. There’s also a possibly some figure have been omitted completely. Therefore some degree of comfort is afforded when both sides balance but there is no guarantee of correctness.

Resolving such mistakes at this late stage will take considerable more time, effort and resources of the business than would have been the case if the error had been identified at the beginning

  1. The importance of budgets and budgeting to a modern well run business paying particular attention, but not exclusively to the relationship between functional and master budgets.

Of all business activities, budgeting is one of the most important and, therefore, requires detailed attention. The chapter looks at the concept of responsibility centres, and the advantages and disadvantages of budgetary control. It then goes on to look at the detail of budget construction and the use to which budgets can be put. Like all management tools, the chapter highlights the need for detailed information, if the technique is to be used to its fullest advantage.

Budgetary control

  • Co-ordinates activities within an organisation
  • A formal statement of financial resources set aside to accomplish specific activities in certain amount of time.
  • A budget method

Budgetary control:

  • A technique where actual results are compared to budgets.
  • Any variances are made the responsibility of key individuals who can either exercise control action or revise the original budgets.

Budgetary control and responsibility centres;

Enables managers to organise.

A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the activities of that unit.

There are four types of responsibility centres:

a) Revenue centres

Organisational units in which outputs are measured monetarily.

b) Expense centres

Only inputs are measured in monetary terms.

c) Profit centres

Performance is measured between the inputs and outputs.

d) Investment centres

Where outputs are compared with the assets employed in producing them, i.e. ROI.

Advantages of budgeting and budgetary control

Advantages to budgeting and budgetary control are as follows:

  1. Management are compelled to think about the future, one of the most important features of a budget plant and control system. Management are forced to look ahead and to set plans for achieving the targets for each department.
  2. Promotes coordination and communication.
  3. Defines areas of responsibility. Requires budget centre managers to be made responsible for the achievement of targets for the operations under their own control.
  4. This provides a good basis for performance appraisal. A budget is basically a yardstick against how actual performance is assessed.
  • Scare resources can be allocated for effectively.
  • Economises management time, using the management by exception principle.
  • If variances emerge remedial action can be taken.
  • Employees are motivated by being a part of setting of budgets

(Basic finance for marketers, Fao.org, accessed 07/02/15)

Management accounting is often used to run companies and help managers to make vital financial decisions. Accountants then prepare documents and then send them directly to staff within a company. These reports offer a break down in numbers and projections related to departments, products and how they affect the company. (Mitchell Hall, Demand Media, Chron.com)

Financial accounting reports are prepared by accountants and sent directly to entities outside of the company, such as stockholders, tax professionals and lenders. These reports show concrete numbers, as well as past mistakes and achievements. These documents are objective, factual and avoid projections.

Benefits

Financial and management reports, while each used in different settings, provide their recipients with benefits that are unique to each format. (Mitchell Hall, Demand Media, Chron.com)

  1. The function of management accounting and briefly list ways in which it differs from financial accounting. 4.5 Marks

Management Accounting vs. Financial Accounting

Financial and management accounting require both precision and attention to detail.

Identification

Management accounting is mainly used to run companies and assist managers make important financial decisions. Accountants would prepare and send them directly to personnel, including executives and managers. These reports break down numbers and projections related to departments, products, employees and customers and how they affect the company.

Financial accounting reports are prepared by accountants and sent directly to entities outside of the company, such as stockholders, tax professionals and lenders. These reports show concrete numbers, as well as past mistakes and achievements. These documents are objective, factual and avoid projections. (Mitchell Hall, Demand Media, Chron.com)

Benefits

Management and financial accounting reports, while each used in different settings, provide their recipients with benefits that are unique to each format.

Management accounting reports provide estimates for what might happen in the future. A manager needs projections and would rather use estimates on what will happen than reports on what has already happened because of the ever-changing financial terrain in business. This type of accounting often benefits the future of a company. (Mitchell Hall, Demand Media, Chron.com)

Principles

Financial accounting reports are for objective outside sources, they must abide by the generally accepted accounting principles (GAAP), according to Accounting for Management. This means that all reports have to be delivered in accordance with ground rules to remain as consistent and concrete on every occasion. (Mitchell Hall, Demand Media, Chron.com)

Significance

Management accounting and financial accounting both serve important roles within a business. Their differences make them significant in different ways, but equal in importance. (Mitchell Hall, Demand Media, Chron.com)

Bibliography

http://www.lewisco.ie/index.php/information/company-v-sole-trader/

Northern Ireland Business info.co.uk

https://www.nibusinessinfo.co.uk/content/contents-balance-sheet

Online learning for sports management.

http://www.leoisaac.com/fin/fin022.htm

Basic finance for marketers

http://www.fao.org/docrep/w4343e/w4343e05.htm

Mitchell Hall, Demand Media, Chron.com)

http://smallbusiness.chron.com/management-accounting-vs-financial-accounting-3987.html

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