Accounting Notes

GST Act 1999 (what is GST)

• A broad based taxed of 10% on most goods and services and other items sold or consumed in Australia

• Any item under this act with GST is called Taxable Supply

Items that GST isn’t included on

GST Exempt products:
GST free products: GST can’t be applied but can be claimed for expenses (e.g. fresh foods, education, child services, medical services)

Input Tax supply: GST can’t be applied or claimed (Residential services, financial services, rent)

Application for GST

To register for GST a small business must make a GST turnover of 75,000 or more

NGO’s must register if they make a GST turnover of 150,000 or more

A business must register for an Australian Business Number (ABN), complete a business activity survey monthly or every 3 months

If a business doesn’t meet the requirements then GST is optional

Business Names and Registration Act 2011 (WA)

When a person starts a business, they have to register the name with the ASIC

Unless the business name is the owner’s name only

It is registered for 3 years then after the period it must be re registered

A fee is charged for the application of a business name

Some names can’t be register (e.g. profane words)

Types of Business’s

• Sole Trader

• Partnership

• Small Proprietary Company (SPC)

Max Number of Owners and Liability of Owners

Sole Trader: 1 owner and is liable for all debts of the business (unlimited liability)

Partnership: 2 (up to 20 depending on conditions) and are jointly and severally liable for all debts incurred of the business (unlimited liability)

SPC: 1 Share Holder
50 non employee shareholders and the liability for debts is limited by the amount of shares they own (Restricted to amount business owes to all their shares) (Limited Liability)

Ability to raise capital and How are profits distributed?

Sole Trader: Limited Ability- only one source of finance / All profit go to owner

Partnership: Limited Ability- not many sources of finance / Profit split between partners

SPC: Can raise capital via selling shares and have a higher potential to raise capital due to multiple shareholders / Pay in form of dividend - owner can choose to pay shareholders or not

How can a new owner take over?

• Sole Trader: New owner can usually take over without restriction. However certain jobs may require a person who is actually qualified
  

• Partnership: Death / Retirement of partner usually ends partnership unless the agreement says to continue the business
  

• SPC: Easily transfer ownership without affecting the business and will continue going
  

Accounting / Legal Entity / Both?

Sole Trader: Accounting entity

Partnership: Accouting entity

SPC: Both Separate legal and accounting entity

What happens if owner leaves / dies / retires

Sole Trader: Business Ends

Partnership: Business Ends unless agreement says otherwise

SPC: Business Continues

Conditions of SPC

A SPC must satisfy 2 of 3 conditions to be considered a “small” PC

1. Income (sales, fees) for a year must be less than 25 million

2. Assets must be less than 12.5 million at the end of the year

3. Less than 50 employees at the end of the year

Adv and Dis of Sole Trader

Advantage:

1. easy to setup

2. owner has complete control over the business

3. owner keep all other tax profit

4. easy to change business structure

5. separate accounting entity ( lodge tax return at the end of year)

6. Least expensive compared to other types of Business

Disadvantage:

1. unlimited liability → personal assets at risk when in financial trouble

2. not separate legal entity → responsible for all tax debts

3. low ability to raise capital → only source is owner

4. Owner dies business ends

Adv and Dis of Partnerships

Advantages:

1. Each partner can contribute funds to the business

2. Each partner brings certain skills to the business

3. workload is shared

4. separate accounting entity → lodge tax return

5. less expensive compared to setting up business

6. easy to dissolve

7. bring in more capital compared to sole trader

Disadvantages:

1. unlimited liability → personal assets are at risk in financial trouble

2. partnership has limited life → if partner dies business may end

3. profits shared among number of partners ( More partners, less money you get)

4. Decisions may take time due to disagreements

5. difficult to change ownership of the business

Adv and Dis of SPC

Advantages

1. separate legal entity → finances separate from personal assets → also separate accounting entity

2. It can buy, sell property, agree to legally binding contracts, can sue or be sued

3. transfer of ownership is simple

4. limited liability → usually limited to value of its shares → personal assets are safe when in financial trouble

5. easier to raise capital

6. wider range of expertise

7. reduced financial reporting requirements compared to Large Proprietary Company

Disadvantages:

1. expensive to set up

2. more complicated to form

3. Demanding recordkeeping and reporting requirements

4. Companies can be difficult to dissolve

Definitions of Business Types

Sole Trader: Business owned by one person

Partnerships: When 2 or more people (up to 20 with some exceptions) go into a business together.

• Partners can choose to have a partnership and has to be formed with a valid agreement (specifically to operate an ongoing business)

• WA partnerships are governed by Partnership Act 1895

SPC: A business structure limited by shares or an unlimited company with a share capital which has a minimum of one member (shareholder) with no more than 50 non employee members

• Must include “PTY” (proprietary) in name (and if liability of members is unlimited)

• if liability of company members is limited → “Pty Ltd” (proprietary limited)

Types of business undertakings

1. Service providing: a business set up to offer a service .(e.g. tutoring, bricklaying, lawn mowing) Less costly to start → Don’t have to buy inventory

2. Manufacturing: Business that purchases raw materials which it converts to products for sale ( usually sells to a retailer ) e.g. making greeting cards at home for sale

3. Trading or retailing: A trading or retailing business purchases products that have already been manufactured and sells them at a higher price to customers to make a profit. e.g. any other store like clothing store or shoe store

What is finance?

Money used to fund a business

3 reasons for finance

1. Set up the business

2. working capital ( money available for day to day costs)

3. Capital expenditure - buying expensive assets

Internal Sources of Finance

What is it?
Money that comes from inside the business

1. Capital contributed by the owner

2. Retained earnings- Profits after taxes and drawings / dividends

Advantages:

• No need to repay

• No interest

Disadvantages:

• Can be limited (sole trader only source of finance0

• No leverage/gearing benefits

External sources of Finance / What is Bank Overdraft

What is it?

Money that comes from outside of the business

1. Bank overdraft (short term source): A facility that allows a business to spend and/or withdraw more money from their account that is available. Amount that is over is an agreed fixed amount for a fixed amount of time.

Advantages:

• flexible

• less paperwork

• interest only charged when overdraft amount is used

Disadvantages:

• High Interest rate

• Short term use of finance

• risk of asset seizing if payment not made

External Sources of Finance / What is a Term Loan

Term Loan (Long Term): Borrowed money obtained from a financial institution that will be paid back on an agreed time frame

Advantages:

• Higher amounts can be borrowed

• Can fund bigger operations

• Ultimately generate more income in the long term

• Interest rate may be fixed ( payments can possibly be forecast)

• Interest paid on loan is a tax reduction

Disadvantages:

• Interest is paid on the loan

• Assets may be secured if payment not made (assets are taken and sold to make payment)

• Lack of flexibility over some loans

• may require personal guarantee for business to start up ( A personal guarantee is a promise made by a person or organisation to take responsibility for some other party’s debt if debtor fails to pay)

External Sources of Finance / What is a mortgage

Mortgage (Long Term): A specific type of long term loan secured over land or property

Advantages:

• Interest paid on loan is a tax reduction

• Interest may be lower in long term because loan is long (20-30yrs)

Disadvantage:

• Mortgage : is secured over property → if loan isn’t paid then the financial institution can take the property or land

External Sources of Finance / What is a credit card

Credit Card (short term source): Lended by a financial institution → use their money → pay them back later

• used when a business has no cash available

Advantages:

• Convenient → can avoid interest paid off within interest free period

• Safer than using cash

• widely accepted

Disadvantages:

• Very high interest rate (12-13%)

• Stolen credit card carries a great liability

Factors Considered by Institutions When Approving Finance (RISK)

What is risk?

The chance money won’t be paid back → the chance of losing money on an investment

Factors Considered when Lending Money:

1. Collateral: Assets may be sold if financial conditions aren’t met ( its something you agree to give to the financial institution if you can’t make the payment)

2. Liquidity: Cash flow ( how easy it is for them to make money)

3. Credit History: See if they pay back credit on time

4. Guarantor: People/Business to guarantee payment if you/your business can’t

Factors Considered by Institutions When Approving Finance (RETURN)

What is Return?

The earnings from lending money → total income investor makes from investment

Factors Considered when Lending the Money

1. Interest Rate Available- must be attractive to the lender and the borrower

2. Future business: If the borrowers business can make enough money to cover the finance in the future

What is Corporate Social Responsibility (CSR)

When a business engages in socially, environmentally and ethically responsible behaviour

How can a business put CSR into practice

• Support community projects financially i.e. sponsorships

• Support community projects non financially i.e. have employees volunteer

• Introduce occupational health and safety measure → business will become safer, healthier and happier

• Listen to employees need and preferences

• Donate to charity

• Producing products ethically and sustainably

Benefits of CSR

• Increased ability to attract and retain staff → less money being spent on new staff

• Increased customer loyalty

• Happier staff and customers

• higher staff participation and satisfaction

• New business opportunites

• Improved brand perception

• Boosted employee morale

• Greater competitive advantage (superior brand recognition and ability to attract skilled staff)

Responsibilities by which a business should operate

Philanthropic Responsibilities: Responsible for giving back to society and improving quality of life in the community

Ethical Responsibilities: Responsible for being Just, moral and fair → must avoid causing harm

Legal Responsibilities: Responsible for obeying all national and international rules, laws and regulations for their industry

Economic Responsibilities: Responsible for being profitable → they can invest in the community by creating Job opportunities, supporting local organistions and partnering with non profits.

Challenges (or Costs of CSR)

Why does CSR fail?

• some business may be reluctant to commit themselves to CSR

• Companies may choose to promote “socially responsible” behaviour but insufficient evidence to prove it

• Not attempt in getting shareholder, customers, or employees to buy in on CSR strategy

• Advocacy doesn’t align with brand operation, service or message.

Challenges:

1. Limits ability to maximise profits

2. fear of loss of competitiveness → competitors may not be conducting similar schemes

3. Believe customers aren’t interested

4. Too expensive (train employees, source products etc.)

5. Lack of Time

Ways Businesses can engage in CSR / What is Sponsorship?

Sponsorship: financial or non financial support or other by activity by another organisation → supporting another organisation

Advantages:

• Create positive publicity

• Increase visibility of brand

• Increase Sales

• Access to Niche Markets

• Promotes Sponsoree

Disadvantages:

• If sponsored does something bad → then organisation is associated with supporting it → Negative image association.

• Minority sponsors may struggle to sponsor larger things

• Sponsorship overload → too many sponsors causes your sponsor to not stand out

Taxation Responsibility

Tax Avoidance (legal): Making arrangements to reduce amount of tax paid

Tax Evasion (illegal): Breaking the law to get out of paying taxes that one should be paying

Ways Businesses can engage in CSR / What is Resource Conservation

Careful management of resources so they are used in a way that eliminates wastefulness

• Less waste

• Minimise emissions

Characteristics of GST

1. Must be connected to australia (sold or bought in or imported to)

2. mustn’’t be a gst exempt product

3. must involve a furthering enterprise ( must involve activity from a business)

4. Something of value must be exchanged for the product