Flashcards in Final Accounts Prep Deck (58)
What are the main types of for-profit business structure?
Limited Liability Partnership (LLP)
Limited Company (Ltd)
What are the disadvantages of Sole Traders?
If the Sole Trader os sick or takes holidays, the business normally has to stop. Long hours.
Profits are taxed as income, as if the Trader was employed. As the business begins to grow, the higher tax thresholds will quickly reached.
Why become a Sole Trader?
When there are little or no start-up costs and it is unlikely that there will be need for outside finance.
If there is confidence that little Loss will be incurred by the business.
To set up the company, HMRC must be informed and little else.
What is a partnership?
It may be formed anew or from a Sole Trader seeking to expand the business with additional skill and capital.
Typically a group of friends (usually between two and twenty) or a husband and wife m, or any association of people.
Responsibility is shared.
How is a partnership formed?
A partnership agreement is drawn up which (among other things) stipulates profit share ratios.
Anything not covered by the agreement will be covered by a the Partnership Act of 1890.
Profits will be shared equally unless otherwise stated in the agreement.
How flexible is a partnership?.
Almost as flexible as a Sole Trader. No set form of finance recording. All that's needed legally is P&L
How does a Partnership pay tax?
Each partner will pay income tax and National Insurance on their share of the profits.
Each partner will send their own Tax Return to HMRC each year according to their share and a nominated partner must send a tax return for the whole business.
It must register for VAT if the turnover (sales) exceeds the registration threshold.
What are the advantages of Sole Traders?
Discretion in decision making. sua sponte.
Alone responsible for the success of the business (no blame game).
No reliance on anyone else.
Little red tape (however, few banks will supply finance without proper financial records).
A sole trader cam claim expenses which is set off against income.
What are the advantages of partnerships?
Potentially more capital = more potential for growth;
Holidays and illness cover.
What are the disadvantages of partnerships?
No discretion = limited by consultation = slower decision making;
Potential for disagreement;
Liability of a partner leaving and taking with them key skills;
Shared responsibility for each partner's debts.
What is a Limited Company?
It is an incorporated business which is legally separate from its "owners".
What is "incorporating"?
It means registering a limited company/limited liability partnership at Companies House.
What is needed to register a limited company?
A memorandum of association: a legar statement signed by all initial shareholders agreeing to form the company;
The articles of association: written rules about running the company agreed by shareholders and directors.
Who are the owners of a limited company and how much financial liability do they have?
The shareholders; but the company's finances are separate from the shareholders' personal finances i.e. shareholders have limited liability.
What are the different types of limited company?
Private limited companies;
Public limited companies.
What are the main differences between private and public limited companies?
Private limited companies (ltd) may have ONE or more shareholders and shares cannot be offered to the public;
Public limited companies (plc) MUST have AT LEAST TWO shareholders AND MUST have issued shares worth at least £50,000.
What must all limited companies do?
Must register at Companies House;
Must appoint a director (at least two if it's a plc) who will manage the business;
Must file its accounts with Companies House where the figures are open to the public;
How are profits shared in limited companies?
Profits are distributed to shareholders each year (dividends) in proportion to shares owned.
Some profits are retained for internal use paying future debts and future investments.
Can Small Businesses be incorporated?
There may be one shareholder and one director who can be the same person.
i.e. a Sole Trader can elect to become a limited company.
What peace of legislation relates to limited companies? What does it state? How big is it?
The Companies Act 2006.
States in sections 380-474 that the directors of every company must prepare accounts for the company for each of its financial years.
It has 1300 sections.
What does the Companies Act 2006 state.
Every company must keep adequate accounting records;
According to the Companies Act 2006, what are adequate accounting records?
Records that are sufficient to:
Show and explain a company's transactions;
Disclose with reasonable accuracy, at any time, the financial position of the company at that time;
Enable the directors to ensure that any accounts required to be prepared comply with the requirements of the Act.
According to the Companies Act 2006, what must accounting records particularly contain?
Entries from day to day of all sums of money received and expended by the company and the matters in respect of which the transaction takes place;
A record of the assets and Liabilities of the company.
If the company's business involves dealing with goods, what must the accounting record contain?
Statements of stock held at year end;
All documents of stocktaking used to prepare the above mentioned statement;
All records of stock sold or purchased in any way other than by ordinary trade. Buyers and sellers must be clearly identified.
List which accounts must be kept according to the Companies Act 2006.
Statement of profit and Loss
Statement of financial position
Supporting notes to the financial statements
Director's report to the shareholders
Which document may some smaller Limited Companies be relieved from presenting?
What is the deadlines for filling accounts for a plc?
Six months after the end of the accounting period.
What is the deadline for filling accounts for a private limited company?
Nine months after the end of the accounting period.
What are the fines for late filling of accounts?
Between £150 and £7500 depending on degree of lateness