ACCOUNTING PROJECT
1. Introduction
A partnership is an agreement between two or more parties that have agreed to finance
and work together in the pursuit of common business goals. Even though profits are
shared in a partnership, people often form them due to the reason that their liabilities are
shared as well. Partnership agreements also require less complicated procedures.
2. Partnership agreement
Rules and responsibilities: When you create your partnership agreement, you will want to
make sure it offers a lot of clarity on everyone’s responsibilities. The partnership
agreement clearly establishes personal responsibilities for each partner in terms of capital,
profits, losses, and liabilities in addition to business management and oversight. Set out
individual responsibilities in addition to explaining decision-making and voting between
partners. Think through what concerns or disagreements could arise and then outline how
you would solve them.
Financial Issues: Cover everything involving finances in your agreement. Explain the
percentage of the profit and loss assigned to each partner and how the company will
distribute revenue. Include the accounting obligations of the partners and how you will
handle salaries, vacation, sick leave, etc. Think about the funds that will be necessary to
operate the business as well as who will be contributing these funds.
Partners and Staff: The partnership agreement should also cover points involving the work
itself. Create specific guidelines for adding new partners, removing partners who want to
leave, and removing partners who don’t want to leave. Decide who is in charge of
managing your staff. Establish what kind of authority role each partner has.
Division of Profit and Loss: Partners can agree to share in profits and losses in line with
their percentage of ownership, or this division can be allocated to each partner equally
regardless of ownership stake. It is necessary these terms are detailed clearly in the
partnership agreement to avoid conflicts throughout the span of the business. The
partnership agreement should also confirm when profit can be withdrawn from the
business.
Percentage of Ownership: Within the partnership agreement, individuals commit to what
each partner is going to contribute to the business. Partners may agree to pay capital into
the company as a cash contribution to help cover start-up costs or contributions of
equipment, and services or property may be pledged within the partnership agreement.
These contributions decide the percentage of ownership each partner has in the business,
and as such as are important terms within the partnership agreement.
3. IFRS, GAAP AND READERS OF FINANCIAL STATEMENTS
3.1
IFRS
International Financial Reporting Standards (IFRS) are a set of accounting standards that
govern how particular types of transactions and events should be reported in financial
statements. They were developed and are maintained by the International Accounting
Standards Board (IASB).
GAAP
Stands for Generally Accepted Accounting Practices.
It states the guidelines on the preparing or reporting of financial statements.
1. Business Entity Principle:
The financial affairs of the business are kept separate from those of the owners.
2. Historical cost principal
The assets must be recorded at their original cost prices.
3. Going-concern principal
Financial statements are prepared with the assumption that the business will continue
to exist in the foreseeable future.
4. Matching Principal
Expenses and income are recorded in the correct financial period whether they have
been paid or received.
5. Prudence principal
The financial results are reported in a pessimistic manner. Anticipated losses are
recorded.
6. Materiality principal
Items of importance must be disclosed in the books.
3.2
Readers of financial statements
1. Investors: Investors are the owners of the company. They would like to understand and
keep updated with the company’s financial performance. Based on the financial
statement, they would like to decide whether they need to keep invested or move out
of the company based on its performance.
2. Customers: They need to view the financial statements of the company from which
they are obtaining goods or services. Big clients would like to have a long-term
partnership or contract with the company, therefore, they would like to work with a
financially stable company. A financially strong company can provide its customers
with credit sales and can deliver products and services at a discount than the market.
3. Competitors: Competitors would like to know the financial status of the competing
company to maintain a competitive edge on their competitors as well as wantin to
know the other company’s financial health. A competitor could use the statements to
their advantage by seeing it and changing their strategy to be better.
4. Employees: Employees look at the financial statement of the company from different
perspectives. They would like to know if the company is doing as their bonus and
increases depend on the company’s financial performance. They would also look to
have a deep understanding of the business and the current industry situation, which
will be available in the financial statements. The company may choose to involve
employees in decision-making, so the employees will need to know and understand the
company’s financials.
5. Suppliers: Suppliers would like to deal with companies with good financial health. Thus,
they are also users of financial statements and make decisions to provide credit to the
company.
4. Analysis and interpretation of financial statements
4.1
Profitability ratios
Measures the operating efficiency of the business, control of expenses and profitability.
Return Ratios
Indicates the return earned on investments. This is compared to the return on
alternative investments.
Solvency Ratios
Measures the ability of the business to pay its liabilities.
Liquidity Ratios
Measures the ability of the business to pay its current liabilities.