Introduction to Financial Accounting
1.1 How a business works
• Accounting is the language of business.
• A business is funded by
§ Investors (equity)
§ Lenders (liabilities)
§ Funds are used to buy resources (assets)
• Resources used to earn income and during this process, expenses are incurred.
o Income - expenses = profit
o Profit reverts to the investors as an increase in equity.
1.2 Introduction to business entities
• A business entity is an organisation that uses economic resources for the primary goal of
maximising profit.
• A non-business entity = concerned with providing a service to members or to others
(charity).
• NPO = not a business as by definition because it does not aim to make a profit.
• Entity = individual, business, or organisation with its own identity.
• Formed by 1 or more entrepreneurs.
• Entrepreneurs = individuals who set up a business with a goal of generating a profit.
• Provide goods and services in response from demand from potential customers.
1.2.1 Forms of business ownership
4 forms of business ownerships in SA
§ Sole proprietorship
§ Partnership
§ Company
§ Close corporation
Entrepreneurs consider a number of factors when deciding which of the forms to choose.
• Unincorporated entity = no legal personality (no barrier)
• Sole proprietorship
• Partnership
• Incorporated entity = legal personality, separate legal entities
• Company
• Close corporation
Sole proprietorship:
• Owned by 1 person.
• No formal procedures to set up entity.
• Expansion is limited = due to funding available to the owner.
, • Not a separate legal entity apart from the owner - unincorporated entity.
• Cannot be involved in any legal relationship/activity except in the name of the owner.
• Owner benefits from all profits earned through the business entity.
• BUT also held liable for any debts the business incurs.
• Not a separate taxable entity.
Partnership:
• Used for widely comparatively small business entities that wish to take advantage of
combined financial capital, managerial talent and experience.
• Dentists, doctors, lawyers, accountants.
• However, some of the large audit, tax and advisory practices have decided to incorporate.
(special provisions in Companies Act 2008 for this).
• Legal relationship as a result of an agreement between 2 or more persons.
• Does not exceed 20.
• Not a legal entity apart from its owners.
• Each partner could incur unlimited liability for all debts and obligations of the partnerships.
• Individual partners the joint owners of the assets and are jointly and severally liable for
liabilities in partnership.
• Not a separate taxable entity.
Company:
• Incorporated entity = company is a legal entity that is distinct from the persons who own it.
• Owners = shareholders (own company through ownership of shares).
• Don’t personally own assets.
• No direct claim to the profit, only due to them in the form of dividends.
• Shareholders and the company = separate legal persons = limited liability.
• Limited liability = obligation of shareholders is limited to their investment in shares in the
company.
• 2 types of companies:
o Profit company = incorporated for financial gain for shareholders
o Non-profit company = incorporated for public benefit
• Private companies
o May be formed and managed by one person, who is sole shareholder / director.
o May be more than one shareholder / director.
o Typically used by small or micro-businesses wishing to incorporate.
o Owner/(s) and management = usually same group of persons
o Does not require such owner-managed companies to be audited
o May require an independent review / prep of financial statements with no indep.
Audit or review
• Public company
o Larger businesses
o Often listed on stock exchange
o Required to have at least one shareholder and 3 directors
o Most listed companies have hundreds or more
o Shareholders = owners of company
1.1 How a business works
• Accounting is the language of business.
• A business is funded by
§ Investors (equity)
§ Lenders (liabilities)
§ Funds are used to buy resources (assets)
• Resources used to earn income and during this process, expenses are incurred.
o Income - expenses = profit
o Profit reverts to the investors as an increase in equity.
1.2 Introduction to business entities
• A business entity is an organisation that uses economic resources for the primary goal of
maximising profit.
• A non-business entity = concerned with providing a service to members or to others
(charity).
• NPO = not a business as by definition because it does not aim to make a profit.
• Entity = individual, business, or organisation with its own identity.
• Formed by 1 or more entrepreneurs.
• Entrepreneurs = individuals who set up a business with a goal of generating a profit.
• Provide goods and services in response from demand from potential customers.
1.2.1 Forms of business ownership
4 forms of business ownerships in SA
§ Sole proprietorship
§ Partnership
§ Company
§ Close corporation
Entrepreneurs consider a number of factors when deciding which of the forms to choose.
• Unincorporated entity = no legal personality (no barrier)
• Sole proprietorship
• Partnership
• Incorporated entity = legal personality, separate legal entities
• Company
• Close corporation
Sole proprietorship:
• Owned by 1 person.
• No formal procedures to set up entity.
• Expansion is limited = due to funding available to the owner.
, • Not a separate legal entity apart from the owner - unincorporated entity.
• Cannot be involved in any legal relationship/activity except in the name of the owner.
• Owner benefits from all profits earned through the business entity.
• BUT also held liable for any debts the business incurs.
• Not a separate taxable entity.
Partnership:
• Used for widely comparatively small business entities that wish to take advantage of
combined financial capital, managerial talent and experience.
• Dentists, doctors, lawyers, accountants.
• However, some of the large audit, tax and advisory practices have decided to incorporate.
(special provisions in Companies Act 2008 for this).
• Legal relationship as a result of an agreement between 2 or more persons.
• Does not exceed 20.
• Not a legal entity apart from its owners.
• Each partner could incur unlimited liability for all debts and obligations of the partnerships.
• Individual partners the joint owners of the assets and are jointly and severally liable for
liabilities in partnership.
• Not a separate taxable entity.
Company:
• Incorporated entity = company is a legal entity that is distinct from the persons who own it.
• Owners = shareholders (own company through ownership of shares).
• Don’t personally own assets.
• No direct claim to the profit, only due to them in the form of dividends.
• Shareholders and the company = separate legal persons = limited liability.
• Limited liability = obligation of shareholders is limited to their investment in shares in the
company.
• 2 types of companies:
o Profit company = incorporated for financial gain for shareholders
o Non-profit company = incorporated for public benefit
• Private companies
o May be formed and managed by one person, who is sole shareholder / director.
o May be more than one shareholder / director.
o Typically used by small or micro-businesses wishing to incorporate.
o Owner/(s) and management = usually same group of persons
o Does not require such owner-managed companies to be audited
o May require an independent review / prep of financial statements with no indep.
Audit or review
• Public company
o Larger businesses
o Often listed on stock exchange
o Required to have at least one shareholder and 3 directors
o Most listed companies have hundreds or more
o Shareholders = owners of company
