FINANCIAL

ACCOUNTING

ASSIGNMENT

PRESENTED BY:
Mr. Naeem Jafri
MBA (MORNING)
SECTION ‘A’

SUBMITTED TO:
Dr. A. Ghafoor Awan
 ASSIGNMENT SUBJECT:

DIFFERENTIATE BETWEEN THE

TYPES OF FIRMS THAT ARE:

 SOLE PROPRIETERSHIP
 PARTNERSHIP
 PUBLIC LIMITED COMPANY
 PRIVATE LIMITED COMPANY
SOLE PROPRIETERSHIP:

Definition:
A sole proprietorship is a business run by a single individual. It is not
considered to be an entity that is separate from the individual and
hence it is also known as a firm which has single ownership.

Explanation:
In this type of firm, the owner of the firms has to bear all expenses
personally as well as he enjoys all the profit of the business. According
to the accounting perspective, sole proprietorship has the following main
features which go in the favor of it:

 Basic accounts can be quite simple as a formal accounting

system is not required.
 Owners can establish a sole proprietorship instantly, easily and
inexpensively.
 Sole Proprietor is an easy entity to form, simple to administer
and not difficult to report.
 Owners may freely mix business or personal assets.
 Preparation of accounts can be reduced to simple lists of
income and expenditure supported by documentary evidence
of sales and purchase invoices.
 It has the effective single entry bookkeeping system which only
suits to this type of firm.
 Producing a balance sheet is optional as all the major
transactions are made by the owner and he knows well what
he’s doing by using single entry system.
 Due to the simplicity of this system, an accountant may not be
required and hence saving a significant cost for the owner.
  No formal procedures are required to set up in business.
 A sole trader need not to consult anyone about business decisions and
is not required to reveal the state of the business to anyone (other
than the tax authorities each year).
 Personal supervision of the business by the sole trader should ensure
its effective operation.
 Personal contact with customers may enhance commercial flexibility.
 All the profits of the business accrue to the owner of the sole
proprietorship.
 Easiest and least expensive form of ownership to organize.
 Sole proprietors are in complete control, and within the
parameters of the law, may make decisions as they see fit.
 If the firm has a small number of the employees to work than it
is a good option to start a sole proprietorship business.

But there are also some problems into it which may affect the sole
proprietorship. They are as follows:

 Absence of economies of scale and problems of raising finance.

 The individual who is also the owner may only have one skill.
 The death of the proprietor may make it necessary to sell the
business in order to pay the resulting tax liabilities, or family
members may not wish to continue the business anyway.
 The business has a high dependence on the individual which
can mean long working hours and difficulties during sickness
or holidays.
 If the business gets into debt, a sole trader's personal wealth
(for example, private house) might be lost if the debts are
called in, as they are the same legal entity.
 PARTNERSHIP:
Definition:
A partnership is a business of two or more individuals or entities. It is
considered to be an entity apart from the partners. A partnership is
governed by state law.

Explanation:
It is obvious from the above definition that a partnership is a
relationship of two or more entities conducting business for mutual
benefit. But every sort of mutuality of persons do not form a
partnership like if two or more persons are merely the passive joint
owners of revenue-producing property, such as rented houses, that
fact does not make them partners.

Partnership has the following main features which go in the favor of it:

 Partnerships are relatively easy to establish in a way if

persons want to get a lot from the different sort of expert
opinion; however time should be invested in developing the
partnership agreement and resolving legal issues.
 The ability to raise funds from general public and from other
sources increases.
 Business expansion is relatively much easier in partnership.
 Work load is divided among the partners.
 Partners also can receive remunerations other than profits in
exchange of their working capability.
 The business usually gets benefit from those partners who
have complementary skills.
  Setting up a partnership require less cost to partners as the
burden of starting expenses has been divided among the
partners.
 The objectives of the partnerships i.e. the business objective
can be achieved in a better way and in short time if all
partners work together.
 The decision taken to achieve the aim of partnership can be
the effective decisions if they are taken after discussing with
the other partners.
 Partners can work at two or more places at a time while
remaining in partnership provided with the fact that they are
allowed to do so according to the agreement of partnership.
 Partnership business has the much stronger administrative
ability along with a stronger financial backup to use as capital
in the partnership.

After discussing the above favorable points of partnership, now we should

have to discuss the negative aspect as well. The negative side of the
partnership is:

 It is a long term business and hence it involves a long term

future expectations as well.
 One must have to negotiate according to the mindset of his
partner in order to carry on the partnership which requires
flexibility.
 While sharing the profit on the bonus basis, the most crucial
time starts with it as the partners have to decide that which
one has to get that bonus amounts at what rate.
 Partners are personally liable for business debts and liabilities
which they have to pay even from their homes.
 The whole partnership may have to face the judicial inquiry if
even only a single partner did a fraud or perform any illegal
activity in the name of partnership.
 Partners may have different visions or goals for the business.
This may create many problems if the goals are not same for
all the partners.
 There may be unequal commitment in terms of time and
finances.
 While taking decisions, disagreement is a normal fact as it
includes human nature if all the partners are not of the equal
mindset.
 The worst drawback is, when a partner ask for withdrawal of
his share from partnership, it ends at the same time
regardless of the fact that other partners want to continue it.
On the death of a partner, it also ends.
 According to the taxation rules, in many countries, partners
can not enjoy the reliefs and benefits on their income which an
employed individual can have.
 The disputes between partners are very common and as a
result it affects the business and in many cases partnership
came to an end.
 PUBLIC LIMITED
COMPANY:
Definition:
Any firm which is registered in such a manner that it gives its owners a
limited liability and whose shares are publically made available to be
buying or sell by general public is called a public limited company.

Explanation:
A public limited company is also abbreviated as ‘plc’ also. It can be
either listed or unlisted company on stock exchanges. The ability to offer
shares on the stock market makes it easier to raise capital; however the
accounts of the company are in the public domain. All financial records,
including the director’s reports must be audited and available to the
Registrar of Companies at the Companies House and to all who want to
scrutinize them. The most commonly known plc in Pakistan is:

 Arif habib insurance limited.

 Faysal bank limited
 Libass Textile
 PIAC

Following are the points which go in the favor of forming a ‘plc’:

 The liability of the members of this company is limited to the

extent they invested in the company.
 Plc has board of directors who takes decisions for the
company. Mostly directors have been called due to their
expertise in the field.
 These companies are majorly owned by government and
hence there is about nil chance of fraudulent activities and
this is the basic reason that general public mostly wants to
invest in these companies.
 The major objective of these companies is this that they want
to provide the best quality services. This becomes the reason
that they get the trust of investors and gets more
investments.
 The major investment in these companies is by govt. in
shape of taxes which we pay to govt.
 They can also raise funds from the market through stock
exchange.
 The employees have been motivated in these types of
companies by granting them shares options. By this they get
the incentives and encouraged easily to work more for the
prosperity of the company as their personal interest is also
involved in this.
 The company can also encourage its valuable customers by
issuing them right issues or bonus issues.
 By this the company can gain the trust of the investors which
may help in the increase of the financing of the company.
 Through these investments the company achieves the trust of
market which also increases its goodwill as well.
 It works under the concept of “perpetual succession” which
means that the death or retirement of any member may not
seize the business routine and the work of the business
remained continue as it was on its track.
 Plc also enjoys tax reliefs under corporation tax rules.
Beside these advantages, there are also many disadvantages of the
plc. They are as follows:

 The major disadvantage is this, company has to publish its

results and they should be available publically.
 The market economy, political change affects the company
than any other change strongly.
 Usually in these types of companies, technology adoption is
later than other companies which are also a threat to these
types of companies.
 If these companies are only supported by govt. and they do
not financed by general public and if the financing gets
seized by the govt. it may result in the closing of the
company.
 A plc can not start its business immediately after getting the
certificate of incorporation. They have to follow some other
legal rules as well.
 A plc is much more heavily regulated due to the fact that
they have a bigger affect on society at whole.
 A plc will have to consider shareholders interests when
running the company, which may differ from company’s own
objectives.
 Plc must have to follow the rules of corporate governance
strictly.
 Plc can be converted into a private limited company when
there is a heavy investment made by a private limited
company.
 PRIVATE LIMITED
COMPANY:

Definition:
A legal entity which separates the entity from its officers with its own
profits, losses, assets and liabilities is known as PRIVATE LIMITED
COMPANY. Ownership of a private limited company is established through
the division of shares.

Explanation:
Unlike a public limited company, a private limited company is
restricted from selling shares to the public i.e. the shares of pvt. Ltd. is not
offered to general public. All private limited companies protect the
associated officers from financial liability should the company encounter
problems. If the company gone insolvent, than the shareholder of this
company is liable to pay the unpaid amount of the shares which is not paid
till that time. Although private limited companies are usually small in size
but they are expensive to set up and have to produce proper accounts.
Furthermore unlike a sole trader, private limited companies have to pay
auditors, hold meetings as stipulated in the Companies Act and share
profits between all of the shareholders according to the set rules and pre
defined code that has been agreed already between them.
 Some examples of private limited companies in Pakistan are as
follows:

 TURNER SMITH ASBESTOS (PRIVATE) LIMITED

 ROCK STONE CRUSHING COMPANY (PRIVATE) LIMITED
 SHIFA CARDIOLOGY CONSULTANTS (PRIVATE) LIMITED
 INDUSTRIAL FABRICATION CORPORATION (PRIVATE)
LIMITED

The major advantages of a private limited company are as follows:

 It can form with only 2 members but restricts the number of

members up to 50.
 Shareholders share limited liabilities and shares may not be
offered to the public.
 It has no freedom to transfer of shares.
 Under the private limited company, the members can not go for
public subscription.
 It also prohibits the money deposit from others excluding
members and their relatives.
 The shares of private limited company are not listed in any
recognized stock exchange.
 It can start the business immediately after the incorporation of
private limited company.
 There is no restriction on the number of employees in private
limited company.
 A private limited company can takeover a plc.
 The accounts of the company are not publically available.
 Audit requirement is not compulsory.
 Unlike a public limited company, a newly startup Private Limited
Company is eligible for local tax exemptions and incentives.
 When it is required to sell the business, it can be done under
‘going concern’ basis by transferring the entire shareholding to
purchaser.
Now we’ll look into the disadvantages of the private limited company as
well. So the major drawbacks are as follows:

 Even though shares in a PLC cannot be publicly traded,

information concerning the company is made public.
 Account balances and details about the company's directors,
including their names and contact information, must be made
available upon request.
 There are significant legal matters which have to be dealt with
before the company can be formed.
 The company cannot offer its shares to the general public. By
this the funding of the company is limited up to some extent.
 The shares cannot be sold or transferred to anyone without an
agreement.
 The accounting systems of such companies are relatively very
much complicated.
 There is a restriction on the raising of capital via sale of shares.