Accounting Principles - L.O. 1

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Learning Outcome One

Students will discuss the purpose of accounting and its relationship to the New Zealand business environment

5. The impact of GST on business

The goods and services tax is a comprehensive tax that is applied to almost all goods and services provided in NZ. It is indirect and is included in the cost of a good or service. Rent on private houses, financial services ,bank charges sales of shares and items sold by people or businesses that are not registered for GST do not have gst added. GST is collected when goods or services are sold by businesses and organisations that are registered for GST. Businesses are required to register for GST if their sales are greater than $60,000 a year but they may also register voluntarily.

Business Transactions and Source Documents

Must keep all business record in such a way that GST can be calculated. Has to charge GST on all sales. Must calculate the GST and file the returns and pay the GST when it is due.

Every business transaction must have a source document which identifies the transaction and ascribes a monetary value

Source documents include; purchase orders, invoices (for both sales and purchases), receipts (eftpos receipt insufficient unless under $50), bank statements, cheque butts, credit notes

Goods and Services Tax

Consumption tax paid by final consumer

Regulation - goods and services Tax Act 1985

The Impact of GST on business

Once registered must follow rules - file returns, pay amounts due, penalties for non-compliance

Only cost is the administration cost of collecting and paying it to the IRD.

Becomes a collection agency for the government

Must follow the Goods and Services Tax Act 1985

May have penalties and interest imposed if GST calculations are incorrect or does not file returns or payments by the due dates.

The impact of GST on Business

NZ rate (began at 10% in 1985 raised to 12.5% in 1989 and raised to 15% in 2010)

UK Value added tax now at 20%

Advantages of being registered for GST

Able to claim back GST on business purchases (including asset purchases) (expenses)

No fee to register

Have regular insight into how the business is doing by tracking the performance.

Disadvantages

Might have to pay a bookkeeper/accountant to assist her to prepare GST returns

Manage cash flow appropriately to ensure funds are available to pay GST when it is due

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Learning Outcome One

Students will discuss the purpose of accounting and its relationship to the New Zealand business environment

6. The various forms of business ownership

Sole Trader

Owned by an individual

Responsible for all aspects of the business and debts

Uses own personal IRD number

Can employ staff, no specific legislation and can be subject to GST

Subject to individual tax rates

Advantages

Low start-up costs- many use their own resources and or homes

In direct control

Minimal working capital requirements- can operate easily with the cash flows of a business

All profits to owner- taxed as ordinary income

Disadvantages

Unlimited liability- If things go wrong the owner may lose all of his/her wealth trying to pay back claims of creditors or those who may sue the owner.

Management responsibility- The owner is responsible for the administration of the business and therefore restricts the time available for the owner to evaluate and plan future opportunities. Owner may employ someone with the skills needed for an aspect of the business

Lack of continuity - when the owner get sick or retires the business goes out of existence. The owner may have difficulty attracting employees who want stable long term employment

Difficulty raising external capital- the ability of raising external capital is limited to the wealth of the owner

Partnership

Jointly owned by two or more individuals.

Capital contribution

Share of assets and profit

Personally liable for all debts of the firm

Advantages

Low start-up costs- many partnerships begin with the resources belonging to the individuals

Additional sources of finance- because two or more people form a partnership, the base from which finance can be obtained from is greater.

Broader management base- management workload can be shared between the partners and a broader range of skills will be available to the business

Ease of formation- the organisational requirements for the operation of a partnership are set out in the partnership agreement

Disadvantages

Unlimited liability

Lack of continuity

Divided authority- each partner can make decisions affecting all of the partners

Difficult external capital

Partnership Agreement- a written contract between the partners that specifies the rights and responsibilities of each partner such as

Capital contribution- amount contributed by each partner

Share of each partner in the assets and profit

Terms applicable for payment of salaries and withdrawal or death of a partner

Which individuals own the brand

What happens when someone leaves the partnership

How are new partners added

How will debts be divided

How will decisions be made and disputes be resolved.

Companies

A company us a business enterprise incorporated under the Companies Act 1993

Must have one or more shareholders

Must have one or more shares

Must have a name

Must have one or more directors

Because a company has a separate existence and legal identity it acts as its own not those of its members (the shareholders) The assets and liabilities belong to the company not the members. It can own assets, incur debts, employ people, sell, sue, be sued, in its own right without implicating its members.

Advantages

Limited liability- because a company has a separate legal status. The owner's liability is limited to the owner’s investment in the company and the shareholders personal wealth is not available to creditors unless a lender requires a personal guarantee

Transferability of ownership- corporate ownership is evidenced by shares which can be sold easily to new owners without the prior consent of other shareholders. The legal existence and continuity of the company is therefore not jeopardised by the partial transfer of ownership or the death of any of the owners.

Ease of additional funds-Large firms can easily raise large sums of capital through shares listed on the New Zealand Stock Exchange (NZX) the price per share is relatively low and so capital can be raised from many individuals who wish to invest their money into a company. As a company becomes better known and its management and stability is established it is generally easier for the company to raise debt funds (loans).

Disadvantages

Regulatory requirements- a company is subject to regulation and therefore required to fulfil regulatory requirements such as having to prepare annual reports and filing an annual return.

Slow start up-establishing the company is time-consuming

Higher costs- costs of incorporation and issuing shares are substantial

Personal guarantees for loans- for small companies, banks and other lenders may require a personal guarantee from the owners as security fit the loan.

Partnership Agreement

Contract stating how much each individual will put into the business

States the responsibility of each individual

States the share of profits for each individual

If you do not have an agreement everything is split evenly

Shareholder= Receives an equal share of dividends and holds the residual own of shares

Directors=Operates the business but aren't allowed to cause loss to anyone

Public Company=Open to the public to invest

Private Company=Closely held entity. Directors and Shareholders are the same

Insolvent; cannot pay back debts when they are due

Soletrader

Bankruptcy, seize all assets, sell everything to pay back debts you owe. Cannot be a director while you are bankrupt

Company

Investigate company's affairs, if you have breached any laws as well as seize all assets and sell everything to pay back the debts owing.

The prime objective of business enterprise to make money and thus create wealth for its owners.

Continuity- must be planned so that enterprises will have enough capital for long term security. Continuity- is the survival of the business

Patent- A legal right to use a product or process that is not available to others.

Non-trading enterprises- The motive is not to make a profit but providing social and cultural activities for a group of people

Government and semi government ownership- the owners a tax payers and rate payers. NZ Post Genesis Power Ltd

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Learning Outcome One

Students will discuss the purpose of accounting and its relationship to the New Zealand business environment

7. The New Zealand Sharemarket

The New Zealand Sharemarket

The NZX is a market providing a platform and facilitating the public trading of shares,bonds and derivatives.

Shares- provides equity to companies and is not required to be repaid. Shares recieve dividends at times at the discretion of the company

Bonds- provide debt to companies and is required to be repaid at some time. Interest is likely to be paid to the bondholder.

Prices are established on NZX when a willing seller and willing buyer reach an agreement on the price to be paid,

What the NZX does

Provides the ability for companies to raise capital by issuing shares or bonds. By raising capital this allows companies to grow. This benefits the NZ economy with jobs and contributions to GDP.

NZX Markets

NZX Mainboard; large companies

NZXT Market; small businesses

NZX Alternative; lower tier to big

NZX Debt Market; bonds traded

NZX Derivatives

Fonterra Shareholders Fund

NZX Derivatives

Contracts whose value derives from something else such as variation over time in a commodity or exchange rate.

Options are contracts that provide the right but not the obligation to purchase a derivative

Futures are contracts between two parties that agree to buy a product or asset at a specified price on a specified date.

How is the NZX governed

The Financial Markets Authority (FMA) governs the financial markets in New Zealand

Share Ownership

If you own shares you are entitled to an equal share of dividends paid by the company

You are entitled to vote at Annual General Meetings

You are entitled to a residual share in the assets

Shares are personal property unless owned by a trust (asset)

Subject to matrimonial division

No minimum value/ can lose all value

What is a Listed Entity

A listed entity is a company that has offered shares to the public

Other Notes

The NZX is a ‘self regulatory organisation’

The NZX publishes volume of securities traded

Publishes current market prices of shares

Publishes company performance information and announcements

Places rules and regulations on member companies (severe penalties for non-compliance)