Discharge of Contracts

 

DISCHARGE OF CONTRACTS

Discharge of contracts implies a termination of the contractual agreement and the contract obligations come to an end.

·         Discharge by performance

·         Discharge by breach

 

Discharge by performance is where all parties to a contract have fulfilled their part of the terms to the contract agreement, so all primary obligations will cease.

Discharge by breach is where a party to a contract does not fulfill their part of the terms to the contract agreement. In the business environment, this is commonly seen when a credit customer doesn’t comply with the credit terms and doesn’t make the needed payments at the due date. In the situation of a breach of contract, legal action can be taken against the defaulting party.

 

Remedies for Breach of Contract

REMEDIES FOR BREACH OF CONTRACT

Remedies for breach of contract include:

·         Action for price

·         Action for damages

 

Action for price:

Where there has been a breach of a contract of sale, the seller can sue the buyer for the price of the goods.

Action for damages:

Where there has been a breach of a contract, a defaulting party may be asked to pay some money to the other party due to the loss or injury they may have suffered due to none completion of the contractual arrangement.

Other equitable remedies that could be sought may include:

·       Rescission is where both parties to the contract are restored back to the position they were in before they entered into a contract. So, a withdrawal which brings them to the pre-contractual position.

·       Quantum meruit is where the law requires the defaulting party to pay duly for the part of the contract obligation which has been performed to date.

·       Injunction is where the court orders the defaulting party to do or not to do a specific thing. This could be for the person to do or refrain from specific actions which could lead to removing something that is in breach of the contract.

·       Specific performance is where the court orders the defaulting party to positively complete his obligations to the contract.

·       Rectification is where the words of a document is altered due to the fact that it didn’t originally express the true intentions of the parties to the contract, so correcting an error.

What are pre-incorporation contracts?

WHAT ARE PRE-INCORPORATION CONTRACTS?

These are contracts entered into by a third party on behalf of a company which has not yet been formed. A pre-incorporation contract is binding on the third party who is acting on behalf of the unformed company.

·        A pre-incorporation contract is a contract entered into on behalf of a company before its incorporation

·       Until the company is incorporated, the company is therefore non existent

·        A non existent company is incapable to enter into contracts by itself and is unable to hire agents on its accord

Types of a Contract

 

WHAT ARE THE TYPES OF CONTRACTS?

There are different types of contracts and these include:

·         Void contracts

      Contract that cannot be enforced by law because it involves an illegal act or an agreement which is impossible to execute

·         Voidable contracts

      Contract that is valid but can be nullified because one of the parties is not bound to the contract legally, which can range from misrepresentation of facts, non-disclosure of key facts, agreement with a minor, coercion etc.

·         Valid contracts

      Contract that has all key elements of a contract correctly complied with by both parties to the contract and can be enforced by law

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