Accounting and Law Learning Guide

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Accounting Standards

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Learning Objects and Outcomes

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Accounting and Law

 

Rationale

The aim of this course is to increase your awareness of the interaction between legal and accounting regulation in a commercial environment and provide students with a knowledge of the general principles of law which they are expected to build upon. The learning materials have been designed to give students the "big picture" and to explain the theoretical as well as the commercial and practical aspects of corporate law.

Topics covered include: theories of the corporation; aspects company law and accountancy; regulating and auditing principles, (regulatory institutions, directors, auditors, shareholders, creditors, and the 'public interest', form and substance in law and accounting, the auditing process); accounting for and regulating corporate groups and networks, smaller organisations; the public/private company divide.

AICPA

Learning Objectives and Outcomes

This is a non-taught unit designed for self-directed study by those intending to enhance their professional or managerial competence, knowledge, understanding, and skills in business finance.

Knowledge

After completing the course, students will understand

1. the main concepts and principles of accountancy

2. the companies law and formation of a limited company

3. corporate governance and business ethics

4. company finance, financial reporting, taxation and audits

5. principles of corporate insolvency law

6. principles of foreign direct investment

 

Skills

After completing the course, students will be able to

1. apply the principles of business ethics to a company's domestic and international operations

2. participate in a company formation process

3. participate in business and financial planning processes

 

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Learning Contents Tutorials and Lectures Assignments Recommended Texys Readings Learner Support Discussion Forums Workshops Web Cases Case Studies Resources Staff Development Subject Reviews

Company Accounting Overview. Incorporation

Tutorials

 

Readings

Accountancy is the art of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the financial´s form statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable.[2]

 

Accounting Standards in India

 

Accountancy is a branch of mathematical science that is useful in discovering the causes of success and failure in business. The principles of accountancy are applied to business entities in three divisions of practical art, named accounting, bookkeeping, and auditing.[3]

Accounting is defined by the AICPA as "The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."[4]

Accounting is thousands of years old; the earliest accounting records, which date back more than 7,000 years, were found in the Middle East. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced.[5]

Early accounts served mainly to assist the memory of the businessperson and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information.[6] This development resulted in a split of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.[7]

Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting and is used to provide information to employees, managers, owner-managers and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called financial accounting and provides information to present and potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP.[8]

 

Limited Company Formation - Company Formation & Setup

 

OECD

Corporate Constitution

Tutorials

 

Readings

In relation to artificial persons, the constitutional documents (sometimes referred to as the charter documents) of the entity are the documents which define the existence of the entity and regulate the structure and control of the entity and its members. The precise form of the constitutional documents depends upon the type of entity.

 

Rights!

 

Companies law (or the law of business associations) is the field of law concerning companies and other business organizations. This includes corporations, partnerships and other associations which usually carry on some form of economic or charitable activity. The most prominent kind of company, usually referred to as a "corporation", is a "juristic person", i.e. it has separate legal personality, and those who invest money into the business have limited liability for any losses the company makes, governed by corporate law. The largest companies are usually publicly listed on stock exchanges around the world. Even single individuals, also known as sole traders may incorporate themselves and limit their liability in order to carry on a business. All different forms of companies depend on the particular law of the particular country in which they reside.

The law of business organizations originally derived from the common law of England, but has evolved significantly in the 20th century. In common law countries today, the most commonly addressed forms are:

 

 A new dawn in Irish company law - The new Company Law Reform and Consolidation Bill

 

The proprietary limited company is a statutory business form in several countries, including Australia.

Many countries have forms of business entity unique to that country, although there are equivalents elsewhere. Examples are the Limited-liability company (LLC) and the limited liability limited partnership (LLLP) in the United States.

Other types of business organizations, such as cooperatives, credit unions and publicly owned enterprises, can be established with purposes that parallel, supersede, or even replace the profit maximization mandate of business corporations.

For a country-by-country listing of officially recognized forms of business organization, see Types of business entity.

There are various types of company that can be formed in different jurisdictions, but the most common forms of company are:

a company limited by guarantee. Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise they have no economic rights in relation to the company .

a company limited by guarantee with a share capital. A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return.

a company limited by shares. The most common form of company used for business ventures.

an unlimited company either with or without a share capital. This is a hybrid company, a company similar to its limited company (Ltd.) counterpart but where the members or shareholders do not benefit from limited liability should the company ever go into formal liquidation.

There are, however, many specific categories of corporations and other business organizations which may be formed in various countries and jurisdictions throughout the world.

 

See also

 

External links

 

 

Corporate Governance

Tutorials

 

Readings

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large.

Corporate governance is a multi- faceted subject.[1] An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world (see section 9 below).

There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance.

 

See also

 

External links

 

Corporate Governance System

Corporate Liability

Tutorials

 

Readings

In the criminal law, corporate liability determines the extent to which a corporation as a legal person can be liable for the acts and omissions of the natural persons it employs. It is sometimes regarded as an aspect of criminal vicarious liability, as distinct from the situation in which the wording of a statutory offence specifically attaches liability to the corporation as the principal or joint principal with a human agent.

 

 

Corporate bodies and guilty minds

 

 

Corporate Liability

 

Members, Consolidation

Tutorials

 

Readings

In accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings.

Retained earnings are reported in the shareholders' equity section of the balance sheet. Companies with net accumulated losses may refer to negative shareholders' equity as a shareholders' deficit. A complete report of the retained earnings or retained losses is presented in the Statement of retained earnings or Statement of retained losses.

 

Profit distribution

 

Company Finance

Tutorials

 

Readings

Shareholder value is a business buzz term, which implies that the ultimate measure of a company's success is to enrich shareholders. It became popular during the 1980s, and is particularly associated with former CEO of General Electric, Jack Welch. In March 2009, Welch openly turned his back on the concept, calling shareholder value "the dumbest idea in the world".[1]

The term used in several ways:

To refer to the market capitalization of a company (rarely used)

To refer to the concept that the primary goal for a company is to increase the wealth of its shareholders (owners)

To refer to the more specific concept that planned actions by management and the returns to shareholders should outperform certain bench-marks such as the cost of capital concept. In essence, the idea that shareholders' money should be used to earn a higher return than they could earn themselves by investing in other assets having the same amount of risk. The term in this sense was introduced by Alfred Rappaport in 1986.

 

See also

 

External Links

 

Equity Financing Alternatives for Small Business

 

Measuring performance of passive investments

 

 

Financial Reporting, Taxation

Tutorials

 

Readings

In general usage, a financial plan is a series of steps which are carried out, or goals that are accomplished, which relate to an individual's or a business's financial affairs. This often includes a budget which organizes an individual's finances and sometimes includes a series of steps or specific goals for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan sometimes refers to an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.

In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan. Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department.[1] A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.[2]

While the common usage of the term "financial plan" often refers to a formal and defined series of steps or goals, there is some technical confusion about what the term "financial plan" actually means in the industry. For example, one of the industry's leading professional organizations, the Certified Financial Planner Board of Standards, lacks any definition for the term "financial plan" in its Standards of Professional Conduct publication. This publication outlines the professional financial planner's job, and explains the process of financial planning, but the term "financial plan" never appears in the publication's text.[3]

Textbooks used in colleges offering financial planning-related courses also generally do not define the term 'financial plan'. For example, Sid Mittra, Anandi P. Sahu, and Robert A Crane, authors of Practicing Financial Planning for Professionals[4] do not define what a financial plan is, but merely defer to the Certified Financial Planner Board of Standards' definition of 'financial planning'.

Because of the lack of a formal definition in industry literature, and in major textbooks on the subject, the term 'financial plan' is merely inferred from the defined process of 'financial planning'.

See also

 

External links

Prospective Analysis: Guidelines for Forecasting Financial Statements, Ignacio Velez-Pareja, Joseph Tham , 2008

To Plug or Not to Plug, that is the Question: No Plugs, No Circularity: A Better Way to Forecast Financial Statements, Ignacio Velez-Pareja, 2008

A Step by Step Guide to Construct a Financial Model Without Plugs and Without Circularity for Valuation Purposes, Ignacio Velez-Pareja, 2008

Long-Term Financial Statements Forecasting: Reinvesting Retained Earnings, Sergei Cheremushkin, 2008

 

 

Financial reporting is the process of preparing and distributing financial information to users of such information in various forms. The most common format of formal financial reporting are financial statements. Financial statements are prepared in accordance with rigorously applied standards defined by professional accounting bodies developed according to the legal and professional framework of a specific locale.

 

Shareholders Report

 

Financial Reporting & Company Law

 

Financial Reporting

 

 

External Administration and Corporate Insolvency

Tutorials

 

Readings

 

Principles of Corporate Insolvency Law (3rd edn Thomson, London 2005) by Roy Goode of the University of Oxford is a leading textbook on UK insolvency law. The forthcoming edition in 2009 will be taken over by Professor Robert Stevens, of University College London.

 

See also

 

External links

 

Corporate

 

Audits

Tutorials

 

Readings

A financial audit, or more accurately, an audit of financial statements, is the review of the financial statements of a company or any other legal entity (including governments), resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete, and fairly presented. Financial audits are typically performed by firms of practicing accountants due to the specialist financial reporting knowledge they require. The financial audit is one of many assurance or attestation functions provided by accounting and auditing firms, whereby the firm provides an independent opinion on published information. Many organisations separately employ or hire internal auditors, who do not attest to financial reports but focus mainly on the internal controls of the organization. External auditors may choose to place limited reliance on the work of internal auditors.

 

See also

 

 

Foreign Direct Investment and Capital Movements

Tutorials

 

Readings

 

Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and "know-how". There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative).

 

External links

 

 

Recommended Texts

 

References

 

 

Statutes

 

 

Resources

 

Bookkeeping Laws

 

 

 

 

International Accounting Standards Board

 

International Financial Reporting Standards

 

 

GTZ Advisory Service to the Legal Reform in China