POA theory

POATHEORY TradingBusinessAtradingbusinessisabusinesswhichbuysgoodsfromsuppliersandsellsittoitscustomers.Atradingbusinesshasagrossprofit,salesreturnandcostofsales ServiceBusinessAservicebusinessisabusinesswhichsellsitsservicestothebusiness.Aservicebusinessonlyhasservicefeerevenue TypesofbusinessandownershipsSoleProprietorship CapitalStructure ItisownedbyonepersonwhosolelycontributestothecapitaltosetupthebusinessBanksandotherlendersarelesslikelytolendmoneytoanspduetothelackofpersonalassetsthatserveascollaterals.Hencetheaccesstofundsisnormallylimitedtothepersonalfundsoftheowner Risks Whenanspincursdebtsandlosses,theownerisobligedtopaythemusingherorherpersonalassets Managementofthebusiness 1. Thesoleownerrunsthebusinessbyhimselforherselfandhasabsolutecontroloverthebusinessandheorshecanhireprofessionalstohelphimorherout2. Itexistsuntiltheownerisaliveandwillingtocontinueoperations3. Thesoleownercantransferhisofherownershiptoanotherpersonbyupdatingtheparticularsofthenewownertonotifythecorporateregulatoryauthorityofthetransferofownership4. AnSPhasminimalAdministrativedutiestoadhereto LimitedLiabilityPartnership(LLP) CapitalStructure ItisownedbytwoormorepartnerswhereeachpartnercontributescapitaltosetupthebusinessBanksandotherlendersaremorelikelytolendmoneytoanLLPduetomoresourcesofpersonalandassetsfromownersandbusinessassets.Alternativelytheycanalsojoinmorepeopleaspartnersandcontributetothecapital. Risks WhenanLLPincursdebtsandlosses,theownersarenotpersonallyliableforthem,HoweverwhenanLLPincursdebtsandlossesduttothewrongfulactionsthatpartnerispersonallyliableforthosedebtsandlossesandtheotherpartnersarenotaffected Managementofthebusiness Usuallythecontroloverthebusinessissharedamongthepartnerswithatleastonepartnerheavilyinvolvedinmanagingthebusiness.Itexistsuntilwounduporstruckoff.Allownersneedtoagreetotheadditionorwithdrawalofownersbeforethecorporateregulatoryauthorityacknowledgesthetransferofownership.AnLLPhasfewregulatorydutiestoadhereto.Howeveroneoftheownershavetosubmitanannualdeclarationstatingwhetherthebusinessisabletopaythedebtsandlossesduringthenormalcourseofthebusiness.

Privatelimitedcompany(PLC) CapitalStructure Itisownedby50orlessshareholderswhereeachshareholderbuyssharesandcontributescapitalBanksandotherlendersaremorelikelytolendmoneytoacompanyduetomoresourcesofbusinessofhighvaluethatserveascollaterals.Alternatively,thecompanycanissuemoresharesandraisefunds Risks Whenacompanyincursdebtsandlosses,Theshareholdersarenotobligedtopaythemusingtheirpersonalassetsandmaylosetheirdividends.Intheworstcasescenario,theywouldhavetoforfeittheirinvestment. Managementofthebusiness Theshareholdershavenocontroloverthebusinessunlesstheyarepartofthemanagementteam.Thecompanyhiresprofessionalstomanagethebusinessonbehalfofshareholders.Itexistsforeveruntilwounduporstruckoff.ShareholderscanpaystampdutytothetaxauthoritytogivetheirsharestoanotherpersonororganisationTheyhavestatutoryrequirementstocomplywithandfileannualfinancialreports. Different stakeholdersandtheir decisions OwnersandShareholders ContributecapitalandexpectprofitdistributioninreturnWhethertocontinuetoinvestonthebusinessdependingontherisksandreturnsrelatedtothebusiness Managers WorkforthebusinessanddevisestrategicplanstorunthebusinessefficientlyWhethertoconsiderwaystoimprovetheperformanceofthebusiness Employees WorkforthebusinessandperformexecutivedutiesWhethertocontinuetoworkforthebusiness Banksandotherlenders MakemoneyavailabletothebusinessandexpectittobefullyrepaidwithinterestWhethertograntloanstothebusinessdependingonthebusinessabilitytorepaytheloanprincipalandpayinterest Suppliers Supplygoodsand/orservicestothebusinessWhethertosupplygoodsand/orservicestothebusinessoncreditdependingonthebusinessabilitytopay Customers Buygoodsand/orservicefromthebusinessWhethertobuygoodsand/orservicesfromthebusiness,dependingonthebusinessabilitytoprovidewhattheyneedandgoodaftersalesservice Governments EnforcetaxregulationsWhetherthebusinesscomplieswiththetaxregulationsanddecidetheamountoftaxtobecollectedfromthebusiness Competitors Sellsimilargoodsand/orservicesasthebusinessWhethertheyarecomparablewiththebusinessandhowtoimprovetheirownperformance.

RoleOf AccountingAccountingisaninformationsystemwhichprovidesaccountinginformationforstakeholderstomakeinformeddecisionsregardingthemanagementofresourcesandtheperformanceofthebusinesses. RoleOf AnAccountantAccountantsprepareandprovideaccountinginformationforstakeholderstomakeinformeddecisions.Bydoingso,theysetuptheaccountinginformationsystemandbecomestewardsofthebusiness. Professional ethicsIntegrityAnaccountantwhoisstraightforwardishonestinallprofessionalrelationships ObjectiveAaccountantwhoisobjectivewillnotletbias,conflictofinterestsorundueinfluenceofothersaffecttheirprofessionaljudgement Accountingtheories ● AccountingEntityTheory:Theactivitiesofthebusinessarerecordedseparatelyfromtheactionsoftheowners,Alltransactionsarerecordedfrombusinesspointofview● Accountingperiod:Thelifeofabusinessisdividedintoregulartimeintervals(usually12years=1financialyear)● Accrual of Basisof Accountingtheory:Businessactivitiesthathaveoccurredregardlessofwhethercashispaidorreceivedmustberecordedintherelevantfinancialperiods.Expenses:Expensesincurredregardlessofwhethercashispaidornotmustberecordedinrelevantaccountingperiod Beginningofthefinancialperiod Endingofthefinancialperiod PrepaidExpenses + - Expensepayable - +

Income:Incomeearnedregardlessofwhethercashisreceivedornotmustberecordedinrelevantaccountingperiod Beginningofthefinancialperiod Endingofthefinancialperiod IncomeReceivedinadvance + - Incomereceivables - + ● Going-ConcernTheory:Abusinessisassumedtohaveanindefiniteeconomiclifeunlessthereiscredibleevidencethatthebusinessisgoingtoclosedown.● Historical Cost Theory:Alltransactionsarerecordedattheiroriginalcosts● MonetaryTheory:Onlytransactionsthatcanbemeasuredinmonetarytermsarerecorded● ObjectivityTheory:Alltransactionsrecordedmustbesupportedwithreliableandverifiableevidencetofreefinancialstatementsfromopinionsandbiases.● PrudenceTheory:1. Inventoryshouldbevaluedatitscostornetrealisablevaluewhicheverislower.2. Theallowanceforimpairmentlossoftradereceivableisshownasadeductionagainstthebookvalueoftradereceivablestopreventoverstatingthebookvalueoftradereceivablesandreflectthenetamountwhichiscollectible.3. Noncurrentassetsshouldbevaluedatitsnetbookvaluewhichiscost-accumulateddepreciation(depreciationistheallocationofcostofanoncurrentassetovertheestimatedusefullife)● MatchingTheory:1. Itstatesthattheexpensesincurredismatchedagainsttheincomeearnedtodeterminetheprofitfortheperiod2. Thechangeintheallowanceforimpairmentoftradereceivablesisrecordedasimpairmentlossoftradereceivablesinthestatementoffinancialperformancewhichisaddedtotheotherexpensesandismatchedagainsttheincomeearnedtodeterminetheprofitfortheperiod.3. Itstatesthataportionofthenoncurrentassetisrecordedasadepreciationexpenseinthestatementoffinancialperformanceasanexpensewhichismatchedagainsttheincomeearnedtodeterminetheprofitfortheperiod● ConsistencyTheory1. TheAccountingmethodusedmustbethesameforallfinancialperiodstoenablemeaningfulcomparison2. Thesamemethodofdepreciationandrateofdepreciationmustbeusedtocalculatethedepreciationexpenseofnoncurrentassetstoenablemeaningcomparisonovertime

● Materialitytheory1. Relevantaccountinginformationisrecordedifitislikelytomakeachangetothedecisionmakingprocess2. WhenthecostspentonaNCAisinsignificantwhencomparedtothesizeofincomeandprofititdoesnotneedtoberecordedasanoncurrentassetinthestatementoffinancialpositionitmustberecordedasanrevenueexpenditureintheexpensecolumninthestatementoffinancialperformance. CapitalExpenditure RevenueExpenditure ItisthecostspenttobuyandbringthenoncurrentassettointendeduseItisthecostspenttoenhancethenoncurrentasset Itisthecostspenttooperate,maintainandrepairthenoncurrentassetinworkingcondition Itprovidesbenefitsbeyondoneyear Itprovidesbenefitswithinoneyear RecordedasaNonCurrentasset Recordedasanexpense ● RevenueRecognitionTheory:Revenueisearnedwhenthegoodshavebeendelivere