Accounting Paper 1 - Ownership + Sources of Finance + Computerised Accounting

Sole Trader (Advantages + Disadvantages)

a business owned and controlled by one person (they can employ people)

Advantages:

• has full control over business - makes all decisions

• easy to establish legally (fewer rules and regulations)

• keep all the profits

Disadvantages:

• unlimited liability (personal assets at risk when in debt)

• if ill - business slows down + or stop altogether - also hard to find time for holiday

• heavy workload + long hours

Business Entity (Not a legal separation, purely for accounting records)

Partnership (Advantages + Disadvantages)

a business owned and controlled by 2 - 20 people (covered by the Partnership Act 1980)

Advantages:

• possibility of increased capital

• easier to gain finance - likely to get a loan

• losses are shared

Disadvantages:

• unlimited liability

• profits are shared

• disagreements over decision-making - slows down process

Business Entity (Not a legal separation, purely for accounting records)

Private Limited Companies (Ltd) (Advantages + Disadvantages)

business owned and controlled by shareholders, shares are sold privately to family + friends

Advantages:

• limited liability

• separate legal entity from owners - any legal action will be against the company and not the individual shareholders

• gain funds from issuing shares that don’t need to be paid back

Disadvantages:

• more documentation when preparing financial documents

• must register financial documents to company houses to be checked and audited

Public Limited Company (PLC) (Advantages + Disadvantages)

business owned and controlled by shareholders, shares are sold publicly to the stock exchange

Advantages:

• limited liability

• raise large amount of finance

Disadvantages:

• expensive to set up - minimum of £50000 share capital

• expect to be paid a percentage of profits as dividends (essentially a reward for investing into the company)

• loss of ownership - open to takeover by rivals

Owners Capital (Advantages + Disadvantages)

funds provided by the owners or partners e.g capital from savings

for an established business, funds generated from profits can be used to provide finance

Advantages:

• no legal documents required to raise finance

• funds can be taken out and provided to the business when needed

Disadvantages:

• owners or partners may not have further cash to provide to the business

• business may not have sufficient funds generated from profits to provide finance for new assets

Bank Overdraft (Advantages + Disadvantages)

a flexible arrangement with the bank which allows a customer to borrow money on a current account up to a certain limit to cover working capital - interest is paid

Advantages:

• flexible - business can borrow and repay whenever it likes

• interest is only payable when the business borrows, and is only charged on the amount borrowed

Disadvantages:

• interest rates a high - expensive long-term

• if business gets into financial difficulties, the bank can order them to re-pay the over-draft which creates further cash-flow problems for the business

Bank Loan (Advantages + Disadvantages)

borrowing a fixed amount for a fixed period usually to purchase an asset

Advantages:

• payments can be spread over a fixed term - manageable payments

• able to budget around knowing when a repayment is due

Disadvantages:

• must pay interest

• security needed to secure the loan e.g house of owner

Mortgage (Advantages + Disadvantages)

an arrangement in which property is used as security for borrowing - interest is paid

Advantages:

• able to budget around knowing when a repayment is due

• payments can be spread over a fixed term - manageable payments

Disadvantages:

• if repayments aren’t made, the lender will sell the property used for the security of borrowing

Share Capital (Advantages + Disadvantages)

issuing ordinary shares to owners and investors who become the shareholders - in return for payment of a fixed amount per share + becomes the capital of the business

Advantages:

• raise more finance

• can attract new management with skills and expertise

Disadvantages:

• outside investors who buy shares will have some control over the business which is disruptive for current management

Debenture

long-term debt agreement, typically issued by a limited company, that is secured by the company’s assets - grants the lender security over borrowers assets, meaning they can claim them to recover the loan if the borrower defaults

Computerised Accounting (Advantages + Disadvantages)

Advantages:

• quicker + accurate process - eliminates calculation errors + no human error

• produces detailed analysis of sales to look for patterns of activity to meet customer needs

• easily able to produce schedules of receivables and payables

Disadvantages:

• cost of buying in technical support is high

• important data may be lost due to inadequate back-up of records at the time e.g power cut

• files could be corrupted by viruses

• staff may be unable to learn new skills so will be demotivated and increase labour turnover