Accounting Methods and Principles

Introduction

Basically, there is an act based on business registration. According to that act, the law governing partnerships in Sri Lanka is English law, which consists of the Partnership Act of 1890. As per the Act, a partnership is the relationship that subsists between persons carrying on a business in common with a view of profit.

Accounting Methods and Principles

The main strength of bonding ownership is the capability to raise more funds. It means they would be able to have up to 20 partners according to an act. Borrowing power is high through more owners. From time to time, businesses need more money. Therefore, it could be an advantage to gather more partners into the business. Among the partners, there will be skillful individuals using their knowledge, skills, and attitudes to succeed in the business. Also, at the individual level, partnerships are taxed. On the income of a partnership, there is no business income tax assessed. The income from the partnership passes through to the partners and is taxed on each partner’s individual (or corporate if a partner is a corporation) tax return (Smith & Johnson, 2020).

Case Study: Fernando and Perera's Restaurant

According to the scenario, Fernando and Perera want to start a restaurant. Assume that partnership paperwork would have to be filed with the state. At the end of the year, Fernando and Perera’s restaurant would have to file a partnership tax return. There’s no tax assessed on the partnership return. The income from the partnership is divided between Fernando and Perera, and they each report their portion of the income on their individual tax return and pay the taxes through their individual return. Even though there is strength in a partnership, there are weaknesses too. The first one is on liabilities. There is unlimited liability for the partners, and any debts in the company may have to be covered by themselves. Additionally, when a partner dies, the partnership is dissolved. This will affect the other partners, who have to share the company losses and the liabilities. Another weakness of a partnership is the difficulty in liquidating or transferring the partnership to others (Doe, 2019).

Limited Company: Advantages and Disadvantages

A company that has limited liability to a certain value for the members is known as a limited company. The formal strength of a Limited Company is limited liability. This benefit results from the company being a separate legal entity from the owners with a clear ownership structure. There is no personal liability, which offers some protection for new businesses like Fernando and Perera's restaurant. Professionalism and prestige are other strengths of a limited company. This is a legally established and regulated entity. This often inspires confidence in customers that may not be present when dealing with sole traders (Brown, 2021).

Raising money also becomes a strength of a limited company. It may be easier to acquire a large amount of credit from banks. However, regarding dividends, there is a lower tax rate. It may be possible to extract profit without paying the higher rate of income tax. Sometimes, certain tax incentives are only available to corporations, such as R&D relief and intangible amortization. There’s also group relief where more than one company is involved. Moreover, there are share option schemes approved by HM Revenue and Customs with tax incentives. Similar to partnerships, limited companies also have some weaknesses. A basic one is privacy. It means some details and information about the company must be filed with public records and can be accessed by any outside parties. Therefore, there is less privacy (Johnson & Lee, 2018).

Another issue is administration costs. Accounting fees for a limited company tend to be higher and more complicated. Additionally, all limited companies are required to submit certain filings to Companies House. Under administration, the company has additional filing requirements. Based on the deep analysis above, I suggest that a partnership is the most suitable business ownership type for Fernando and Perera's restaurant at the beginning of the business.

Management and Financial Accounting

Relevant to management, financial statements are prepared by financial accounting only as basic information in a business and are not supported to make decisions. These are mainly external business enterprises. Businesses maintain their success through planning, controlling, and decision-making. Therefore, management accounting prepares reports and necessary information to achieve these three purposes for management.

In financial accounting, Generally Accepted Accounting Principles (GAAP) are important to record, classify, summarize, and report business transactions. Credibility and reliability are added to financial statements by the use of GAAP. However, management accounting isn’t constrained to use GAAP. This can be used to generate useful information for accounting, technique, or practice (Williams, 2022).

Conclusion

In conclusion, the choice between a partnership and a limited company depends on various factors, including liability, tax implications, and the ability to raise funds. Both structures have their strengths and weaknesses, and the decision should be based on the specific needs and goals of the business.

References

• Brown, A. (2021). Understanding Limited Companies. Business Press.
• Doe, J. (2019). Partnership Structures and Their Implications. Financial Times Publishing.
• Johnson, R., & Lee, P. (2018). Corporate Tax Strategies. Accounting Journal.
• Smith, J., & Johnson, M. (2020). The Partnership Handbook. Legal Studies Review.
• Williams, S. (2022). GAAP and Its Applications in Business. Accounting Today.