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

RECORDING BUSINESS TRANSACTIONS
Recording Business Transactions
Assessment 1 Part 1

2
RECORDING BUSINESS TRANSACTIONS
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.

3
RECORDING BUSINESS TRANSACTIONS
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.