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![](/i/favi32.png) Financial Accounting for Decision Makersfinancial-accounting-for-decision-makers-ninthnbsped-9781292251356-1292251352 compress22
CHAPTER 1
INTRODUCTION TO ACCOUNTING
As we saw earlier, the main disadvantage of a partnership compared with a limited com-
pany is that it is not normally possible to limit the liability of all of the partners. There is,
however, a hybrid form of business ownership that is referred to as a Limited Liability Partner-
ship (LLP). This has many of the attributes of a normal partnership but is different insofar that
the LLP, rather than the individual partners, is responsible for any debts incurred. Accoun-
tants and solicitors often use this type of partnership.
This book concentrates on the accounting aspects of limited liability companies because they
are, by far, the most important in economic terms. The early chapters will introduce accounting
concepts through examples that do not draw a distinction between the different types of busi-
ness. Once we have dealt with the basic accounting principles, which are precisely the same for
all three types of business, we go on to see how they are applied to limited companies.
HOW ARE BUSINESSES ORGANISED?
Most businesses involving more than a few owners and/or employees are set up as limited
companies. Finance will come from the owners (shareholders) both in the form of a direct
cash investment to buy shares (in the ownership of the business) and through the sharehold-
ers allowing past profits, which belong to them, to be reinvested in the business. Finance will
also come from lenders (banks, for example), who earn interest on their loans. Further
finance will be provided through suppliers of goods and services being prepared to supply
on credit.
In larger limited companies, the owners (shareholders) tend not to be involved in the daily
running of the business; instead they appoint a board of directors to manage the business on
their behalf. The board is charged with three major tasks:
1 setting the overall direction and strategy for the business;
2 monitoring and controlling the activities of the business; and
3
communicating with shareholders and others connected with the business.
Each board has a chairman, elected by the directors, who is responsible for running the board
in an efficient manner. In addition, each board has a chief executive officer (CEO) who is
responsible for running the business on a day-to-day basis. Occasionally, the roles of chair-
man and CEO are combined, although it is usually considered to be a good idea to separate
them to prevent a single individual having excessive power. We shall consider the relationship
between directors and shareholders in more detail in Chapters 4 and 12.
The board of directors represents the most senior level of management. Below this level,
managers are employed, with each manager being given responsibility for a particular part of
the business’s operations.
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