Business Types & Accounting Assumptions | Answers

One person selling fruits in a stall
➛ Sole Proprietorship

A law firm with five partners
➛ Partnership

Safaricom PLC
➛ Corporation | Public Limited Company

A family-owned restaurant run by a husband and wife
➛ Partnership | if both owners share control

Advantages

Easy to raise capital
➛ Advantage of Corporation

Easy to set up
➛ Advantage of Sole Proprietorship

Limited liability
➛ Advantage of Corporation

Disadvantages

Possibility of partner conflict
➛ Disadvantage of Partnership

Unlimited liability
➛ Disadvantage of Sole Proprietorship/Partnership

Ends when owner dies
➛ Disadvantage of Sole Proprietorship

The owner uses his personal money to buy food for his home - not recorded in business books.
➛ Business Entity Assumption

Financial reports are prepared every month.
➛ Periodicity | Time Period Assumption

A business records transactions only in Kenya Shillings.
➛ Monetary Unit Assumption

Assets are not listed at liquidation value because the business will continue next year.
➛ Going Concern Assumption

A new electronics shop is being created by three friends. They plan to contribute money equally and share profits.

Questions

What type of business is this?
➛ Partnership

Name two advantages and two disadvantages.

Advantages
➛ More capital available | three people contribute.
➛ Shared skills and expertise.

Disadvantages
➛ Possible conflicts between partners.
➛ Unlimited liability for partners.

Which accounting assumptions apply when they prepare their first financial reports?

Possible correct answers

Business Entity Assumption
the business is separate from the partners' personal finances.

Going Concern Assumption
they expect the business to continue operating.

Monetary Unit Assumption
they record transactions in money | e.g., KES.

Periodicity Assumption
they prepare financial statements regularly.

Accrual Assumption
record revenues/expenses when earned/incurred.

You only need any two or three for full marks.

What is a sole proprietorship?
➛ A business owned and operated by one person.

Who owns a partnership?
➛ Two or more people who share ownership.

What does limited liability mean?
➛ Owners are not personally responsible for business debts beyond their investment.

A corporation is a separate legal entity.
➛ True

Name one accounting assumption.

Possible answers
➛ Business Entity
➛ Going Concern
➛ Accrual
➛ Monetary Unit
➛ Periodicity
➛ Consistency
➛ Matching
➛ Materiality

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Accounting Principles ➧ Here