Recording Business Transactions: Advantages and Disadvantages of For-Profit Business Structures and Main Users of Accounting Information

This document explains the advantages and disadvantages of for-profit business structures and the main users of accounting information. It also discusses the use of accounting information by different users.

RECORDING BUSINESS TRANSACTIONS
Recording Business Transactions
Assessment 1 Part 1

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Assessment 1 Part 1
a. Explain three advantages and disadvantages of for-profit business structures
Three advantages of profit business structures are:
1. The owner has control over the firm (Cole & Avery, 2017)- In a for-profit organisation, the
owner controls the business. The primary goal of investment decisions of the business is to
maximise profits and enhance value to the owners. Further, profit could be distributed to
owners or ploughed back to the business as per the owner’s preference. Hence, the more
successful a for-profit firm, the more monetary gains the owner achieves.
2. Ability to serve any function they want to pursue- There are no legal restrictions as to what
function or purpose the for-profit business structure serves unless it is illegal. Hence, revenue
can be generated from a wide range of activities.
3. Resource allocation is decided by management team- Strategic decisions are made by
internal management and board of directors of the business. Where the owners are separate
from the management as in a corporation, the owners have the right to elect and control the
board of directors.
Disadvantages of profit business structures are:
1. They need to pay taxes, unlike not-for-profit organisations (Whittington & Delaney, 2007)-
For-profit organisations do not get the benefit of tax exemptions, unlike not-for-profit
organisations. For-profit businesses have to pay all the taxes, whether federal or state,
property taxes, sales tax etc. without fail and this expense reduces their bottom line. Further,
they need to provide proper financial documents to the regulators as and when needed.
2. They need to meet incorporation and operating requirements set forth by regulators and
investors/creditors- For-profit businesses have to meet stricter norms during incorporation.
Various laws restrict the ability of for-profit organisation in their functioning, for example,
they cannot indulge in any activities which monopolise their business. The for-profit
businesses have to maintain greater transparency by making their financial documents
available to the investors and creditors at regular intervals.

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3. They are not eligible for any public or private grants, or other discounts/preferential
treatments- For-profit organisations are not eligible for any grants or concessions, in general.
For example, unlike non-profit organisations, advertisements of for-profit organisations on
media are never free of cost. Any funds the for-profit organisations invest has to come from
owners or creditors at a fair cost, hence investment decisions have to be made very carefully.
The for-profit firm, in turn, has to abide by the regulations imposed upon by the creditors and
investors. Unlike not-for-profit organisations, any contribution made to for-profit firms is
taxable with respect to the firm, and also not allowed as a deduction on returns filed by
investors.
b. Who are the main users of accounting information? Explain what use the users are
making on the information.
The main users of accounting information are:
1. Government- Government uses accounting information of an organisation to ensure that
the organisation is abiding by the regulations which safeguard interests of the various
stakeholders affected by the organisation like investors, creditors, employees, consumers etc
(Accounting-simplified.com, 2019). Further, various regulatory departments like the
Competition Commission, Income-tax authorities, Environment regulations department etc.
require accounting information to monitor the activities of the organisation. For example,
Income tax department needs information on business profits for tax calculating taxes which
the company will have to pay. Environment regulations department seek accounting
information to gauge whether the company is abiding by the required sustainable practices.
2. Investors/ Analysts-Investors and analysts require accounting information to do risk-return
analysis on their investments (Mehta, 2016). They need to decide whether the company stock
is a good buy as per the preferences of the investor, whether the management is performing
well, or whether the dividend and interest commitments are met comfortably. Investors and
analysts want to know about sales growth, margins vis-à-vis industry standards, cash flow
status, customer acquisition costs, customer churn rates, the level of financial leverage,
operating cycle details etc. All this information would require detailed reporting by the
company.

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3. Suppliers- Suppliers need accounting information to decide whether the company is
creditworthy and has enough liquidity to honor cost commitments (Kayode, 2015). It is a part
of due diligence process for the supplier to analyse the financial information of the company
and identify any risks associated with establishing business relationship with the company.
For suppliers which cater to few customers, the former need to ensure that the company is in
good financial health as the sustenance of the supplier is dependent on the sustenance of the
company.
4. Customers- Customers and debtors require accounting information to analyse whether the
company would sustain in future (Forssbaeck & Oxelheim, 2014). Customers, especially
industrial buyers, may be dependent on the company’s products and/or services and hence
may have a long-term interest in those offerings for their own survival. Further, they would
want to review the accounting information to ensure that the company is having the resources
needed for completing the customer’s projects.
5. Employees- Employees and trade unions are interested in accounting information to ensure
that the company would survive and prosper in future so that their future pay and
employment prospects stay certain (toppr, 2019). A prospering company will also be able to
honor pension and retirement benefits comfortably and increase the pay of employees as per
requirement. Further, employees are also interested in senior management pay to make sure
that lower levels of the hierarchy are not exploited at the expense of higher levels.
6. Financial Institutions/Creditors- Banks and other creditors investing money in the company
would want to know that their funds are in safe hands and generating enough profits to ensure
the fixed commitments that are to be paid back to the creditors (tutor2u, 2019). The financial
institutions also use accounting information to estimate the risk associated with future lending
decisions in favour of the company.
7. Internal users- Internal users like the various management levels need to analyse
accounting information for aiding their strategic and operational plans (Accounting-
simplified.com, 2019). For example, top management has to take strategic decisions like
selecting between various investment proposals which would require a feasibility study. The
inputs for this feasibility study would be available from accounting information of the
company.

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References
Accounting-simplified.com, 2019. 11 Users of Accounting Information. [Online]
Available at: https://accounting-simplified.com/financial/introduction/users-of-accounting-
information.html
[Accessed 28th Jan 2019].
Cole, L. J. & Avery, D. M. D., 2017. Freestanding Birth Centers: Innovation, Evidence,
Optimal Outcomes. New York City: Springer Publishing Company.
Forssbaeck, J. & Oxelheim, L., 2014. The Oxford Handbook of Economic and Institutional
Transparency. Oxford: Oxford University Press.
Kayode, M. K., 2015. The Users of Accounting Information and their Needs. An Introduction
to Accounting and its Branches. Munich: GRIN Verlag.
Mehta, D. B. K., 2016. Cost and Management Accounting: Latest Edition. Agra: SBPD
Publications.
toppr, 2019. Accounting as a Source of Information. [Online]
Available at: https://www.toppr.com/guides/accountancy/introduction-to-accounting/
accounting-as-a-source-of-information/
[Accessed 28th Jan 2019].
tutor2u, 2019. Users of Financial Accounts. [Online]
Available at: https://www.tutor2u.net/business/reference/users-of-financial-accounts
[Accessed 28th Jan 2019].
Whittington, O. R. & Delaney, P. R., 2007. Wiley CPA Exam Review 2008: Business
Environment and Concepts. Hoboken: John Wiley & Sons.