INTRODUCTION TO

FINANCIAL ACCOUNTING:

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 What is Financial Accounting?
♦ Financial Accounting is a way of recording, analyzing
and summarizing financial data.

♦ Financial data is the name given to the actual

transactions carried out by a business e.g. sale of
goods, purchase of goods, payment of expenses etc.

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 What is Financial Accounting?
- continued
♦ The transactions are first recorded in source
documents, analyzed in the books of prime entry and
the totals are posted to the ledger accounts, finally, the
transactions are summarized in the financial
statements.

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 Outline
Business Entity

Branches of Accounting

Users & Stakeholder Needs

Elements of Financial Statements

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BUSINESS ENTITY:

Lecture 2

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 Outline
Key term - Business

Forms of Business Entity

Business Entity Concept

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Key term – Business

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 What is a Business?
♦ A business is a commercial or industrial concern
which exists to deal in the manufacture, re-sale or
supply of goods and services.

♦ A business is an organization which uses economic

resources to create goods or services which customers
buy.

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Forms of Business Entity

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 Types of Business Entity
♦ There are three main types of business entity.
a) Sole Proprietorship
b) Partnerships
c) Limited liability companies

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 (a) Sole Proprietorship
♦ This is the oldest and most straightforward structure for
a business. Sole traders are people who work for
themselves.

♦ Of course, it doesn’t necessarily mean that the

business has only one worker. The sole trader can
employ others to do any or all of the business.

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 (a) Sole Proprietorship – Cont’d
♦ Sole traders tend to operate in industries where the
barriers to entry are low and where limited capital is
required on start up. In law, a sole trader is not legally
separate from the business they operate. The owner is
legally responsible for the business.

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 (a) Sole Proprietorship – Cont’d
♦ A sole trader must maintain financial records and
produce financial accounts. However, there is no legal
requirement to make these accounts publicly available;
they are usually only used to calculate the tax due to
the tax authorities on the profits of the business. Banks
and other financiers may request to see the financial
accounts of the business when considering
applications for loans and overdraft facilities.

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 (a) Sole Proprietorship – Cont’d
♦ Exam focus point:
In preparation for exams, candidates need to
demonstrate knowledge of the following;
(i) Meaning of a sole trader,
(ii) Advantages of a sole proprietorship,
(iii) Disadvantages of a sole proprietorship

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 (b) Partnership
♦ Partnerships occur when two or more people decide to
run a business together. Examples include an
accountancy practice, a medical practice.

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 (b) Partnership – cont’d
♦ Partnerships are generally formed by contract. Partnership
agreements are legally binding and are designed to outline
the proportionate amount of capital invested, allocation of
profits between parties, the responsibilities of each of the
parties, allocation of salary and procedures for dissolving
the partnership.

♦ Some countries have specific legislation for partnerships

and thus the provisions of the country’s Partnership Act
applies where no partnership agreement exists.

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 (b) Partnership – cont’d
♦ Like sole traders, partnerships are not separate legal
entities from their owners. To overcome the problematic
risk factors associated with unlimited personal liability for
the debts of the business a new form of limited liability
partnership (LLP) has been created in some countries.

♦ As with sole traders, partnerships must maintain financial

records and produce financial accounts. However, there is
no legal requirement to make these accounts publicly
available, unless the partnership has LLP status.

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 (b) Partnership – cont’d
♦ Exam focus point:
In preparation for exams, candidates need to demonstrate
knowledge of the following;
a) Meaning of a partnership as a form of business,
b) Advantages of a partnership business,
c) Disadvantages of a partnership business

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 (c) Limited Liability Company
♦ Limited liability companies are incorporated to take
advantage of ‘limited liability’ for their owners
(shareholders).

♦ This means that, while sole traders and partners are

personally responsible for the amounts owed by their
businesses, the shareholders of a limited company are
only responsible for the amount paid for their shares.
They are not responsible for the company’s debts
unless they have invested in the company if it fails.
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(c) Limited Liability Company – Cont’d
♦ Shareholders may be individuals or other companies.

♦ Limited liability companies are formed under specific

legislation for example in Uganda, the companies Act
2012.

♦ A limited liability company is legally a separate entity

from its owners, and can confer various rights and
duties.

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(c) Limited Liability Company – Cont’d
♦ There is a clear distinction between shareholders
and directors of limited companies:
a) Shareholders are the owners, but have limited rights,
as shareholders, over the day-to-day running of the
company. They provide capital and receive a return
(dividend).

b) The Board of Directors are appointed to run the

company on behalf of shareholders. In practice, they
have a great deal of autonomy. Directors are often
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(c) Limited Liability Company – Cont’d
♦ The reporting requirements for limited liability companies are
much more stringent than for sole traders or partnerships. In
Uganda, there is a legal requirement for a company to:
a) Be registered with the registrar of companies.
b) Complete a Memorandum of Association and Articles of
Association to be deposited with the Registrar of Companies.
c) Have at least one director (two for a public limited company
(PLC) who may also be a shareholder.
d) Prepare and have their financial accounts audited (larger
companies only).
e) Distribute the financial accounts to all shareholders.
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(c) Limited Liability Company – Cont’d
♦ Exam focus point:
In preparation for exams, candidates need to
demonstrate knowledge of the following;
a) Meaning of a partnership as a form of business,
b) Advantages of a partnership business,
c) Disadvantages of a partnership business

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Business Entity Concept

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 Business Entity Concept
♦ Financial statements always treat the business as a
separate entity.

♦ This means that the transactions of the owner should

never be mixed with the business’ transactions.

♦ This applies whether or not the business is recognized

in law as a separate entity.

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BRACHES OF
ACCOUNTING:

Lecture 3

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