QUESTION 1 (36 MARKS)

A. State and fully explain four advantages of a limited company over a partnership

Succession- In a limited company there is perpetual succession meaning that even if a

shareholder dies or leaves, the company may continue through sale of shares while in a
partnership according to the partners terms of the business, if one partner leaves or dies
the company will be dissolved meaning that there is lack of continuity or succession.
(Kurt 2013)
Separate legal entity- As stated by Businessdictionary.com a separate legal entity is a
business given its own individual status. This is to say actions of the business are
separated from its individuals in the company and the company itself will be held liable
for the actions and debts incurred by the business. So a limited company has separate
legal entity while a partnership has no separate legal entity meaning the partners
knowingly or unknowingly are responsible for debts and liabilities incurred.(Khurana
2008)
Liability- A limited company has limited liability thus its name. Shareholders
individually have liability to the extent of the amount of shares they hold. Once the
shares are fully paid out, a shareholder will no longer be bound to any debts incurred by
the company while in a partnership each partner has unlimited liability and is personally
liable for the debts incurred by the firm. (Robinson, 2012)
Ease of operations- In a limited company there is less work as not every member is
required to run the company. The use of votes of which majority rules is used in deciding
decisions unlike is a partnership where every partner has to be head in when it comes to
important decisions being carried out.(Khurana, 2008)

B. State and fully explain four disadvantages of a sole trader over a limited company.
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 Liability- A sole trader business has unlimited liability meaning that the debts
carried by the business will extend to the owners personal assets if he/she is unable to
pay what the business owes he risks to lose everything while a limited company has
limited liability, the debts carried by the business do not extend any further than to
the amount of money they invested.(Nickles, Mchugh J and Mchugh S, 1999:1)
Funding- Because a limited company is a distinct entity, it is easier to secure
business funding from different sources like banks unlike the sole trader as they are
considered too risky as there is no separation between the business and personal
finances therefore the owner will be held liable for the debts the business has
incurred. (Nickles, Mchugh J. and Mchugh S. 1999:)
Succession- If a shareholder dies or decides to retire, his shares can be sold, that is to
sat it is easier to transfer ownership and if one shareholder leaves the business does
close down while in a sole trader, if the owner dies or retires it is very rear for
someone to run the business on their behalf as they may not know the operations as
run by the owner which may lead to the company falling and shutting down.
(Robinson, 2016)
Taxation For a sole trader profits are taxed on a higher marginal rate i.e. if one has
a higher income earner while if one owns a limited company they have lower tax
rates.(Martin, 2016)

C. i) List five users of accounting information

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Management
Owners
Creditors
Investors
Government authorities

ii) For each of the five users referred above state their information needs and the statement from
which they will get will get such information.

Management- Accounting information is of great assistance when it comes to

management planning, controlling and decision making. They also need to measure the
progress of the business determining the performance and position of it, so necessary
measures may be taken in improvement of its results. A financial statement and cash
flow statement will be used to determine these and management makes decisions based
on it thus allowing them to make those important decisions depending on the
performance of the business.(Siddiqui, 2015)
Owners- Accounting information gives owners the assess ability of the organization.
They are able to analyze the viability and profitability of their investment by using
statements like the income statement to measure the profitability of the business, balance
sheet to show the net worth of the business as it is a measurement of the time expected
for the business to stay in financial power and the cash flow statement to reveal the net
increase or net decrease in cash for a certain period.(Siddiqui, 2015)
Creditors- They use financial information because it helps them determine the credit
worthiness of the business. This is shown by the financial health which will reflect on the
income statement as it outlines the revenue and expenses of the business. It helps lenders
like banks and suppliers to decide whether or not to lend fund to the organization.
(Siddiqui, 2015)

Investors-Investors need to know what goes on with their business finances in order for
them to know the risks they inherit in investing their money in that business and their
returns after investing. A statement of financial position balance sheet and cash flow
statement are needed as to show the profitability of the business and if it happens that it
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liquefies they will be able to retain the money they have invested in the business. A cash
flow statement will show them how money is used in the business (outflow) and how
much money comes in i.e. how the company generates money. (OConnor, 2015)
Government Authorities- Government wants to know if the business is fulfilling their
legal duties by paying tax and if they are ascertain the property and accuracy of taxes
and other relevant duties. The income statement, balance sheet and cash flow statement
give a good indication to government authorities how much tax the business should be
paying over.(Celender, 2013)
D. Explain fully two types of the fundamental accounting concept.
ACCRUALS CONCEPT
According to Averkamp Under the accrual basis of accounting, revenues are reported on the
income statement when they are earned. (Under the cash basis of accounting, revenues are
reported on the income statement when the cash is received.) Under the accrual basis of
accounting, expenses are matched with the related revenues and/or are reported when the
expense occurs, not when the cash is paid. The result of accrual accounting is an income
statement that better measures the profitability of a company during a specific time period.
The accruals concept says net profit is the difference between revenue and expenses i.e.
NET PROFIT= REVENUE EXPENSES
Determining the expenses used up to obtain the revenue is referred to as matching expenses
against revenue. The all-round application to the equation is that all income and charges relating
to the financial period the accounts relate to should be taken into account without regard to when
payment was received. (Wood and Sangster 1999)
MATCHING CONCEPT
This concept states that an expense should be recorded in the same period as the income related
to that expense is generated. (Aparicio, 2016)

For example, one has been hired to be the accountant for your favorite band. Let's assume that
the group has a concert coming up in New York on January 15, 2016. However, there are a lot of
expenses that must be paid in the months leading up to January that will actually take place in
2015, the prior accounting period.
If you, as the accountant, post all of the expenses for airline tickets, hotel deposits, security,
buses, stage hands, equipment technicians, and advertising in 2015, but none of the income, then
it will look like the band is doing much worse than it really is. Then in 2016 when the band has
more of the income and fewer expenses, because they were already closed out in 2015, then it
will appear to be doing much better financially than it actually is. The matching principle ensures
that these types of misleading accounting principles do not happen.
In this case, prior to closing out the books for 2015, you will have to estimate the total revenue
that the band will earn for the January concert so that both the same percentage of expenses and
income from the concert are reflected within the same period. (Aparicio, 2016) .

QUESTION 2
Discuss fully the concept of an accounting equation and why it is so important to
accounting.
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The accounting equation can be explained by saying that when a firm or business is setup, it will
need resources to start trading and we can assume that these resources needed it is the owner
who is going to supply or buy them. This can be explained by: (Wood and Sangster, 1999)
RESOURCES IN THE BUSINESS = RESOURCES SUPPLIED BT THE OWNER

In accounting, the use of terms is vital. The amount of resources from the owner to the business
is knows as capital. The actual resources owned or controlled by the company to be used in the
future are called assets. Once the owner of the business has supplied the business with these
assets the equation can now be written as: (Wood and Sangster, 1999)
ASSETS = CAPITAL
Ordinarily, the owner does not supply business assets alone. Liabilities and equity are essentially
sources of funding as so to purchase these assets. The equation will now be shown as:
ASSETS = LIABILITIES + EQUITY
The equation is generally written with liabilities before equity because creditors usually have to
be repaid before investors in bankruptcy, that is to say that liabilities are considered more current
than equity. So for it to remain balanced, both sides to the equation will have to have the same
totals because we are dealing with two similar things in two different ways. (Wood and Sangster
1999)

RESOURCES: what they are = RESOURCES: who supplied them

(Assets)

(Liabilities + equity)

REFERENCES

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[Accessed 9 Sep. 2016].
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2016].
Martin, R. (2016). Sole trader v. limited company: key tax & legal differences. [online]
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Siddiqui, F. (2016). Th users of accounting information and their needs. [online] LinkedIn.
Available at: https://www.linkedin.com/pulse/users-accounting-information-needs-fareed
[Accessed 8 Sep. 2016].
Sullivan, W., Feldman, J. and McHugh, S. (1999). Understanding business. 5th ed. Boston: Irwin
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