ACCN2 REVISION NOTES - FROM A* STUDENT

1. BUSINESS ORGANISATION
Sole trader
Individual who owns a business by himself
Advantage Disadvantage
 Owner keep all profits  Limited access to capital (savings,family,..)
 Easy to set up  Do all tasks
 Be his own boss  If the owner is sick, the business might stop
Make his own decision trading
 Unlimited liability

Partnerships
2 to 20 people working together as a business with a view of point
Advantages Disadvantages
 More access to capital  If a partner leaves/ retires
 Partners share workload  Reduce capital
 More idea for the business  More works for the remaining partners
 Partners can specialise in an area of the business  Cause the business to do badly or fail
 Partners share profit
 Partners might argue, decision-making could take
longer
 Unlimited liability
Accounting requirements
Partnership Act 1890 Partnership agreement
 Share profit/loss equally  Division of profit/loss between partners
 No partner is entitled to a salary  Salaries
 Partners – not - receive interest on their capital  Interest based on capital or at rate
 Interest – not charged – partners’ drawings  Interest charged on drawings or at rate
 One contribute more -> receive 5% interest/year

Limited company
A separate legal entity, owned by shareholders and run by directors
Advantages Disadvantages
 Limited liabilities for shareholders  Could lose control of the company if too many
 More access to capital (issuing shares,lender) shares are issued
 Final accounts must be audited
 Final accounts are published . viewed by public
Private limited company Public limited company
 Can not offer share to public, only friends/family  Can offer shares to the public
 Could not sell shares on stock exchange  Can sell shares on stock exchange
 Limited liability for shareholders  Limited liability
 At least one shareholder, a director ( can be 1 )

2. ACCOUNTING CONCEPTS
 Business entity: differentiate assets, liabilities included(equipment)or not(staff’s belongings) in bus accounts
 Materiality: only record items that can mislead the use of account (materials), not low valuable items
 Cost: record assets, liabilities at historical costs
 Going Concern:business – continue – trade – present form –foreseeable future
 Accruals (matching) : Expenditure/income are matched to same time period
Expenses are recorded when taken place , not when paid
Income is recorded when a sale occurs , not when payment is received
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,  Consistency : business – adopt accounting policies -> continue that policy unless- good reasons – change
Importance: enable users to compare financial statements over time with confidence as they know that they
have been prepared in similar ways and are reliable. This enables users to make decisions with confidence.
 Prudence: final accounts – always – report – conservative(lower)figure for profit and valuation of assets,
profits should never be overstated, losses should be anticipated
Importance: Users of financial statements can be confident that the profits shown are real, true, fair and this
will affect decision-making such as taking drawings or paying dividends
 Realisation: business transactions – recorded – final accounts WHEN legal title passes between buyer, seller.
E.g: Credit sales are recorded at –time of sale – not time of payment
 Objectivity : account – objective (fact, not opinion)
 Money Measurement: Money is used in recording and reporting all business transactions
 GENERAL : concepts make final accounts relevant, reliable, comparable and understandable
Buss materi co Going accrual consist prud realisat obje
entity ality st concern s ency ence ion ctivit
y
Accruals of expenses and income  
Prepayment of expenses and income  
Depreciation of non-current assets   
Bad debts   
Provision for doubtful debts 
Inventory valuation      
Asset valuation      
Asset revaluation 
Business will continue to trade 
Accounts prepared on same principles 
Business separate from owner 
Capital and drawings 
Good for own use taken by owner 
3. FINAL ACCOUNTS
Income Statement
£
Purchases ( purchases – goods for own use – insurance claims )
Gross profit
+ Income
Rent received / Commission received
Discount received
Bad debts recovered
Decrease in provision for doubtful debts = (trade receivables – bad debts) x (%) – previous PFDD
Profit on sale of _
-Expenses ( - prepayment , + accruals )
Bad debts
Discount allowed
Increase in provision for doubtful debts = (trade receivables – bad debts) x (%) – previous PFDD
Depreciation (increased figure) = straight line = ( at cost – residual value ) : expected year of use
= at cost x (%) x years (or months/year)
= reducing balance = Yr1 = (at cost – provision) x % = D1
Yr2 = (at cost –D1) x % = D2
Yr3= (at cost –D1-D2) x %
Loss on sale of _
Profit from operations
-Finance costs (Loan interest, debentures interest)

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