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Accounting Methods and Principles

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

The main strength of bonding ownership is the capability of 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. Time to time business needs more money. So it could be advantage which gathering more partners to the business. Among the partners there will be skillful person using their knowledge, skills and attitudes to success 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.

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 more 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. And also when a partner dies partnership is dissolved. This will effect to other partners have to share the company loses and the liabilities. The other weakness of a partnership is, difficult to liquidate or transfer the partnership to others.

A company that has limited liability to a certain value for the members is known as 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 clear ownership structure. No personal liability. This offers some protection for new business like Fernando and Pereras restaurant. Professionalism and prestige is the other strength of limited company. This is a legally established and regulated entity. This often inspires a confidence in customers that may not be present when dealing with sole traders.

And also raising money is becoming strength of limited company. It may be easier to acquire huge value of credit from the banks. However, on dividend there is a lower tax rate. It may be possible to extract profit without paying the higher rate of income tax. Sometimes some tax incentives only available to corporate for an example R&D relief, Intangible amortization. There’s having group relief where more than one company as well. Moreover share option scheme approved by HM Revenue and Customer with tax incentives. Similar to partnership, limited company also have some weaknesses. 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.

The other one is administration costs. Accounting fees for a limited company tend to be higher and complicated. And also all limited companies are required to submit certain filings to Companies House. Under administration the company has additional filling requirements. According to the deep analysis that I have done above, I suggest Partnership is the most suitable business ownership type for Fernando and Pereras restaurant at the beginning of the business.

Relevant to managements, 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 are keeping their success through planning, controlling and decision making. So management accounting prepares reports and needful information to gain these 3 purposes to the management.

In financial accounting all the transactions are recorded through double entry system. But the double entry system will not use for management accounting. They used their collected data for various segments or different activities of an organization.

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

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Accounting Methods and Principles. (2018, December 03). GradesFixer. Retrieved December 5, 2022, from https://gradesfixer.com/free-essay-examples/accounting-methods-and-principles/
“Accounting Methods and Principles.” GradesFixer, 03 Dec. 2018, gradesfixer.com/free-essay-examples/accounting-methods-and-principles/
Accounting Methods and Principles. [online]. Available at: <https://gradesfixer.com/free-essay-examples/accounting-methods-and-principles/> [Accessed 5 Dec. 2022].
Accounting Methods and Principles [Internet]. GradesFixer. 2018 Dec 03 [cited 2022 Dec 5]. Available from: https://gradesfixer.com/free-essay-examples/accounting-methods-and-principles/
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