BAFS Elective Part Accounting Module Financial Accounting Topic
BAFS Elective Part Accounting Module – Financial Accounting Topic A 02: Financial Reporting for Different Forms of Business Ownership Technology Education Section Curriculum Development Institute Education Bureau, HKSARG 1 April 2009
Lesson One Profit Distribution and Appropriation Account Topic A 02 Financial Reporting 2 BAFS Elective Part Learning and Teaching Example
Tell us … Do you know the different business ownership structures available to set up your business? Topic A 02 Financial Reporting 3 BAFS Elective Part Learning and Teaching Example
Forms of Business Ownership l l l Sole proprietorship Partnership Limited Company Topic A 02 Financial Reporting 4 BAFS Elective Part Learning and Teaching Example
Do you know the differences among sole proprietorship, partnership and limited company in terms of: Owner liabilities, l Management of the business, and l Profit distribution? l Topic A 02 Financial Reporting 5 BAFS Elective Part Learning and Teaching Example
Activity 1: Group discussion Discuss and present answers to Activity 1 in student worksheet p. 1. Topic A 02 Financial Reporting 6 BAFS Elective Part Learning and Teaching Example
Answer to Activity 1 Sole Proprietorship Partnership Limited Company Liabilities of the owner Unlimited Limited Management of business By owner By partners By directors Distribution of profits All to the sole owner Shared by partners according to profit and loss sharing ratio Distribute to shareholders by way of dividends Topic A 02 Financial Reporting 7 BAFS Elective Part Learning and Teaching Example
What are the factors you should consider when choosing the ownership form to establish your business? Topic A 02 Financial Reporting 8 BAFS Elective Part Learning and Teaching Example
Activity 2: Matching Limited liability Sole Proprietorship Unlimited liability Does not have to share the profits Partnership Involve more documentation and expensive Simple and easy to set up Limited Company Pool resources, knowledge, and skills More sources to obtain finance Topic A 02 Financial Reporting 9 BAFS Elective Part Learning and Teaching Example
Activity 2: Matching (cont’d): Easy to make business decisions Sole Proprietorship Possible conflict between co-owners Separate ownership and management Partnership Personally responsible for all losses Provide all the capital to start the business Limited Company A separate legal entity Need to disclose company information Topic A 02 Financial Reporting 10 BAFS Elective Part Learning and Teaching Example
Activity 3: Case Study Ming has set up a small business, Smart Phone Company selling mobile phones and accessories for a year. Now he wants to expand…. Topic A 02 Financial Reporting 11 BAFS Elective Part Learning and Teaching Example
Additional information Sources of fund Interest charge Management Liability Topic A 02 Financial Reporting From a friend, Lee: Maximum $120, 000 From parents: Maximum $100, 000 5% per annum Need somebody who is trustworthy and reliable to help Concerned about the obligation in the liabilities of the business 12 BAFS Elective Part Learning and Teaching Example
Ming and Lee are considering forming a partnership or a limited company. They want to know the profit distribution criteria for each form. Topic A 02 Financial Reporting 13 BAFS Elective Part Learning and Teaching Example
Activity 3 – Case Study Determine the differences between a partnership and a limited company Sole Proprietorship Number of owners entitled to profit sharing 1 Financial Statement showing distribution of net profit Profit and Loss Account Item(s) for profit distribution Net Profit Accounting entries made for profit distribution Non-cash item credited to capital Methods to withdraw profit earned Topic A 02 Financial Reporting Partnership Limited Company Cash Drawings 14 BAFS Elective Part Learning and Teaching Example
Differences between a partnership and a limited company Number of owners entitled for profit sharing Financial Statement showing profit distribution Item(s) for profit distribution to owners Accounting entries made for profit distribution Way to withdraw profit earned Topic A 02 Financial Reporting Sole Proprietorship Partnership Limited Company 1 2 -20 Private: 2 -50 Public: more than 2 Profit and Loss account Appropriation account l. Interest Net Profit of Capital l. Salary to Partners l. Share of Profit Non-cash item credited to capital Non-cash items credited to capital Cash Drawings 15 Dividend paid according to number of share held l. Cash Dividend l. Retained Profit carried forward Cash dividend BAFS Elective Part Learning and Teaching Example
Which form of business ownership do you suggest Ming use if he wants to expand his business? Topic A 02 Financial Reporting 16 BAFS Elective Part Learning and Teaching Example
Lesson Two Capital or Owner’s Equity and Regulatory Framework of Accounting Topic A 02 Financial Reporting 17 BAFS Elective Part Learning and Teaching Example
Preparation of Financial Statements After reviewing the Balance Sheets for different business ownership types, Ming, the owner of Smart Phone Company does not understand why there are differences in the owner’s equity. Topic A 02 Financial Reporting 18 BAFS Elective Part Learning and Teaching Example
Activity 4 – Case Study Trace the change of capital in Sole Proprietorship and Partnership Sole Proprietorship Form of Capital Partnership Limited Company In terms of money Change of Capital (Opening) Opening Capital increased by Net Profit Opening Capital Equity Capital Drawings decreased by Capital (Closing) Topic A 02 Financial Reporting Closing Capital 19 BAFS Elective Part Learning and Teaching Example
Activity 4 – Case Study Trace the change of capital in Sole Proprietorship and Partnership Sole Proprietorship Form of Capital In terms of money Partnership In terms of money Changes in Capital (Opening) Opening Capital l. Interest Capital increased by Net Profit on Capital l. Salary to Partner l. Share of Profit Capital decreased by Drawings Interest on Drawings Capital (Closing) Closing Capital Topic A 02 Financial Reporting Can be recorded in Current Accounts of Partners Closing Capital 20 BAFS Elective Part Learning and Teaching Example
Activity 4 – Case Study Trace the change of capital in Sole Proprietorship and Limited Company Sole Proprietorship Form of Capital Limited Company In terms of money In terms of shares -Ordinary Shares -Preference Shares Changes in Capital (Opening) Capital increased by Opening Capital Equity Net Profit profit after dividend l. Reserves (including amount reserved to proposed dividend) Capital decreased by Drawings None (Dividend for the year has been deducted from retained profit balance) Capital (Closing) Closing Capital Topic A 02 Financial Reporting l. Retained Closing Capital Equity 21 BAFS Elective Part Learning and Teaching Example
Summary of differences in Capital Equity of Sole Proprietorship, Partnership and Limited Company Sole Proprietorship Form of Capital Partnership In terms of money Limited Company In terms of shares -Ordinary Shares -Preference Shares Changes in Capital (Opening) Capital increased by Opening Capital Net Profit Opening Capital Equity l. Interest l. Retained on Capital l. Salary l. Share of Profit profit after dividend l. Reserves Capital decreased by Drawings Interest on Drawings None (Dividend has been deducted in retained profit balance) Capital (Closing) Topic A 02 Closing Capital Equity Financial Reporting 22 BAFS Elective Part Learning and Teaching Example
Regulatory Framework After reviewing the differences of profit appropriation and owner’s equity in different business ownerships, Ming was so interested in accounting that he wanted to know more about the regulatory framework. Topic A 02 Financial Reporting 23 BAFS Elective Part Learning and Teaching Example
Activity 5: Quiz l l Ming prepared a list of questions about the regulatory framework of accounting. Can you answer his questions? Topic A 02 Financial Reporting 24 BAFS Elective Part Learning and Teaching Example
Activity 5: Suggested Answer 1. The accounting practices used in Hong Kong are known as Generally Accepted Accounting Practices (GAAP) 2. Can you list some ordinances promulgated by the Hong Kong Government to legislate the public section? The Companies Ordinance, the Inland Revenue Ordinance Topic A 02 Financial Reporting 25 BAFS Elective Part Learning and Teaching Example
Activity 5: Suggested Answer 3. The principal private sector regulatory body in Hong Kong is Hong Kong Institute of Certified Public Accountants (HKICPA). 4. Principles include l l l Topic A 02 Financial Reporting Preface Framework HKFRSs 26 BAFS Elective Part Learning and Teaching Example
Activity 5: Suggested Answer 5. The HKFRSs comprises of l l l Hong Kong Financial Reporting Standards (HKFRS) Hong Kong Accounting Standards (HKAS) Interpretations Topic A 02 Financial Reporting 27 BAFS Elective Part Learning and Teaching Example
Activity 5: Suggested Answer 6. The requirements of the Companies Ordinance are applicable only to limited companies incorporated under the Companies Ordinance. 7. The requirements of the Inland Revenue Ordinance are applicable to every business organisation with assessable profit. Topic A 02 Financial Reporting 28 BAFS Elective Part Learning and Teaching Example
Conclusion l l Differences of financial statements under different types of business ownership Regulatory framework of activity Topic A 02 Financial Reporting 29 BAFS Elective Part Learning and Teaching Example
The End Topic A 02 Financial Reporting 30 BAFS Elective Part Learning and Teaching Example
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