Question 1 (70 marks)Fernando and Perera would like to start a restaurant business in Colombo. Knowing that you are learning accounting, they approach you for suggestions as to the type of business ownership to be established. Explain to them the strengths and weaknesses of partnership and limited company and provide your recommendations with supporting reasons.AnswerBusiness is an economic activity which is related with continuous and regular production and distribution of goods and services for satisfying human needs and wants.Businesses can divide in to these types based on ownership of the business.Sole ProprietorshipPartnershipCorporationLimited Liability CompanyCooperative These all types of businesses have strengths and weaknesses. Fernando and Perera want to know about the strengths and weaknesses of partnership and limited company for select the best type for their business.
PartnershipPartnership business is a business owned by two or more persons.StrengthsMore investmentInvestment is a most important thing in businesses. When there is a partnership in a business, partners can invest more money to the business.Shared lossesWhen we run a business we have to make both profits and losses. If there are partners in the business, we can share the losses.
High flexibility in the businessRules and regulations of the partnership business are not tuff too much like limited company’s rules and regulations.Effective decision making processDecision making process of partnership business is effective because we can get the best decision after comparing many decisions.Weaknesses Shared profitsWe have to share the profits of the business with partners equally.Unlimited liabilityIn partnership businesses, there is an unlimited liability. And also each of the partners have to share the liability and financial risk of the business.Disagreement between partnersIn a partnership business that has two or more partners to control the business and they have to share their own ideas with others. Sometimes it’s not match their ideas with others and it create disagreement between partners.Partners have to do everything according to agreement.
In a partnership business all the activities are done according to the agreement. Partners cannot easily enter to the business or exit from the business. And also partners cannot be doing anything beyond an agreement. Limited CompanyLimited Company is a business which operated by the director board.StrengthsLimited liabilityIn Limited companies, the company’s shareholders are only being liable for any debt the company accrues according to their own investment.High investmentInvestment is high rather than other businesses. Investors prefer to invest in limited companies because they can be shareholders of the company.
Easy to get support from banks etc.Banks and other financial companies are preferring to deal with limited companies more than other types of businesses because it is more secured than other types of businesses.WeaknessesHigh rules and regulationsRules and regulations of the company are high comparing to other businesses.Difficult to handleThere is more complex accounting, administration requirements. And also the accountancy costs are high because professional accountant might be required to the company.Less privacyPrivacy is less in limited companies because company details, accounts etc. are held on public recode.
Consider the above facts, I prefer the best business ownership type for Fernando and Perera is Partnership.Because,Easy to startPartnership business can easily start than limited company. In this situation there are only two persons going to start the business. If they are going to start a limited company, they have to invest more money and it is a complex thing, starting a limited company to these beginners.High flexibilityRules and regulations of the partnership is not tuff too much like limited companies. Because of that Fernando and Perera can easily start the business and continue the business.Easy to wind upIt is normal to have profits and losses in the business. Unfortunately, if we have to face to many losses in the business, it is better to wind up the business.
Because in Colombo, restaurant business is common thing and we do not know what happen in future. In this situation, partnership businesses can easily wind up than a limited company. Question 2 (30 marks)Discuss THREE main distinctions/ differences between Financial Accounting and Management Accounting.AnswerAccounting is the system of recording and summarizing financial transactions and analyzing, verifying, and reporting the results.There are two types of Accounting,Financial AccountingFinancial Accounting is used to present the financial health of the organization to the external party.Management AccountingManagement Accounting is used by managers to make decisions of day to day operation.
There are differences between Financial Accounting and Management Accounting.Financial AccountingManagement AccountingThe main objectives of financial accounting is make periodical report outsiders like shareholders, government, customers, suppliers, managers.The main objectives of management accounting is assist managers at all levels, internal users by providing necessary accounting information.
Financial Accounting reports are past oriented. It’s mean reports are prepared by after the event.Management Accounting reports are future oriented.
It’s mean reports are prepared by before the event.Financial Accounting have specific standards to report. This is common in every company.Management Accounting do not have specific standards to report. This is different from company to other company.