Elements of a Contract

WHAT ARE THE ELEMENTS OF A CONTRACT?

For a contract to be established, the following have to be existing:

·         Offer and acceptance (an agreement)

·         Consideration

·         Intention to create legal relations

·         Capacity

OFFER:

A definite expression of willingness to be held accountable on specified terms without any further changes to the agreed terms, which can be written or verbal.

ACCEPTANCE:

Consent to the specified terms without varying the offeror’s terms, which can be written or verbal and must be absolute and made while the offer can still be executed.

CONSIDERATION:

Something of value which is given or promised to be done in exchange for the action of the other party to the contract and must be sufficient but doesn’t have to be adequate. It must not be made after the other party may have carried out the agreed action, i.e. it must not be past consideration.

INTENTION TO CREATE LEGAL RELATIONS:

Mutual understanding by both parties to a contract that they intend the agreement to be legally binding and enforceable.

CAPACITY:

Both parties to the contract are competent people who have the ability to carry out the required tasks or actions to fulfill the contract being entered into and are not under any undue duress.

Note:

A seller or a buy can make an offer and a counter-offer.

What are the financial statements?

 

WHAT ARE THE FINANCIAL STATEMENTS IN ACCOUNTS?

Transcending from the trial balance, the financial statements will need to be prepared using the closing balances derived from the trial balance. The two main financial statements are the:

·         Statement of profit or loss (profit or loss account) and the

·         Statement of financial position (balance sheet)

Then there are also the following financial statements prepared by large companies:

·         Statement of cash flows

·         Statement of change in equity

 

Statement of profit or loss

This is a financial statement which summarises the total income and the total expenses in a business over a period of time and it reflects whether the business made a profit or a loss for that period.

Statement of financial position

This is a financial statement which summarises all the assets and liabilities of a business as at the end of an accounting period. It represents the financial position of the business shown in terms of the assets owned by the business and the liabilities owed by the business as at the end of a set accounting period.

Statement of cash flows

This is a financial statement which summarises the movement of money in and out of a business over a period of time showing what the business has received money for and what the business has spent money on. It shows the amount of money maintained by the business at the beginning and at the end of an accounting period.

Statement of change in equity

This is a financial statement which summarises the changes in the capital and reserves which are attributable to the shareholders. It shows the amount of equity maintained by the business at the beginning and at the end of an accounting period and the movements which would have taken place during the year, including dividends distribution.

The Entity Concept

 

WHAT IS THE ENTITY CONCEPT?

This is where a business is usually seen and treated as a separate party from the business; so, the records of the business must be kept separate from the personal records of the owner of the business. The entity concept states that business transactions must be separately recorded from those of its owners.

Your task:

Connect the treatment for drawings to the entity concept

What are Features of Incorporated and Unincorporated Businesses?

 

Your task:

Identify 3 features of an unincorporated business

Hints:

·         Limited liability status and what this means

·         Type of tax payments

·         Which tax returns should be filed (self-assessment tax return or corporation tax return)

·         What the owners are called

What are Unincorporated Businesses?

Unincorporated businesses are businesses that are not set up with Companies House, so these are classed as businesses and cannot be called companies.

 

The unincorporated businesses have less stringent rules to comply with along with the tax requirements and only need to file annual tax returns with HMRC. The owners do not have separate legal entity, hence there is no limited liability status; so, if the business goes bust, the owners will be personally responsible for the entire business debts. They would be expected to use their personal assets to pay off the business debts if the business doesn’t have sufficient resources to pay off its existing debts.

 

Unincorporated businesses include

·         Sole traders

·         Partnerships

Your task:

Identify 3 features of an unincorporated business

Hints:

·         Limited liability status and what this means

·         Type of tax payments

·         Which tax returns should be filed

·         What the owners are called

What are Incorporated Businesses?

WHAT ARE INCORPORATED BUSINESSES?

Incorporated businesses are set up with Companies House and are governed by the Companies Act; and these require more stringent rules to be complied with along with the tax rules to comply with. The incorporation process establishes a company which becomes a separate legal entity from its owners.

They are required to file annual returns and annual company accounts with Companies House and also file annual tax returns with HMRC. These will include the different types of companies.

·         Private limited companies (LTD)

·         Public limited companies (PLC)

·         Limited liability partnerships (LLP)

Your task:

Identify 3 features of an incorporated business

Hints:

·         Limited liability status and what this means

·         Type of tax payments

·         Which tax returns should be filed

·         What the owners are called

 What is the make up of their accounts and financial statements

What is Legal Structure?

WHAT IS A LEGAL STRUCTURE?

Legal Structure is how an organisation is set up to operate in the eyes of the law, which affects how it pays its taxes, the degree of liability on the owners and restrictions on how it is able to operate.

Your task:

Identify 3 differences between incorporated businesses and unincorporated businesses

Hints:

·         Limited liability status

·         Type of tax payments

·         Number of owners

·         What the owners are called

·         Business names and what appears at the end of the names to differentiate them