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 The partnership agreement should also confirm when profit can be withdrawn from the business.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.