CAT Paper 1 Recording Financial Transactions - The Law Of Contract

WHAT IS A CONTRACT?

A contract is a legally enforceable agreement between two or more parties for performing or refraining from performing an act of exchange.

WHO NEED TO KNOW THE LAW?

Buyers, sellers, owners, customers, accountants and employees etc., all need to know some aspects of the law of contract.    Customers need to know their rights and employees need to know their role in the exchange process.

The law of contract is a very complex. The following area of contract law will be discussed in this article:

       I.            does an enforceable agreement exist

    II.            terms and condition of an enforceable agreement

 III.            breaching an enforceable agreement.

I.  DOES AN ENFORCEABLE AGREEMENT EXIST?

Let’s go back to partnership accounting; a partnership business can be formed without having a written contract. A verbal agreement between potential partners forms a legally enforceable contract.  This is true for so many other types of verbal agreements.  Before a contract can be labeled as legally binding, there are some factors that should be considered.

(a)    Intentions – there has to be an intention from all parties involved that the business transaction agreement should be enforceable.

(b)   Offer and Acceptance – an offer by one party must be accepted by the other party without any condition. 

(c)    Capacity – a party must have the legal power to enter into an enforceable agreement.  Minors or parties under the age of 18 cannot participate in contract agreements.

(d)   Consideration – goods or services are given exchange for money or another good or service.

An invitation to treat is invitation to a party to make an offer on (a) the display of goods (b) the advertisement of a price or an auction and (c) an invitation for tenders.

Advertisement and shop window displays does not signify an offer.  These are known as invitation to treat.

II. TERMS AND CONDITION OF AN ENFORCEABLE AGREEMENT

 Conditions are terms which go to the very root of a contract. Breach of these terms or the refusal, of one party to acknowledge a contract, allows the other party to discharge the contract. A warranty is not necessary so the contract will keep going after a warranty breach. Breach of either will give rise to damages.

 

III. BREACHING AN ENFORCEABLE AGREEMENT

A contract is in violation (breach) when one party does not fulfill his/her side of the agreement.  How these remedies are dealt with depends on the jurisdiction of the court. Some common remedies are:

Repudiation	- The refusal, of one party to acknowledge a contract or debt.
Action for price	- The court order the buyer to pay money owed for goods or services       provided.
Damages	- The court awards the damaged party the benefit of the bargain or     expectation damages.
Specific performance	- The court order to fulfill his/her side of the agreement.

Money

MONEY

Money is defined as anything that is acceptable in exchange for goods and services.  This has solved all of the past problems of barter (exchange in goods or services without notes and coins).  In the past, fur from animals, shells, certain fruits and grains were the main forms of money.  Today, in a more modern society, money takes the form of notes, coins, current account balances, postal orders and credit cards.

QUALITIES OF MONEY

Portable – easy to carry.

Acceptable – people must agree to its useDurable – will last a long time

Divisible – easily divided into smaller units

FUNCTIONS OF MONEY

Measure of Value – to price the value of goods or services

Medium of Exchange – permits goods and services to be easily sold

                                  or bought

Means of Deferred Payments – allows goods and services to be

                                              bought now and paid for later

Store of Wealth – can be stored for use at a later time

MONEY AND LEGAL TENDER

Legal Tender is money that can be used as an official medium of payment of a debt.  Paper currency is the most common form of legal tender.  Coins are also considered legal tender but only up to certain amounts. Cheques are not legal tender; they can legally be refused by creditors as a form of debt settlement.

The Need for Bookkeeping and Accounting

Imagine that you are a business owner trading in used car parts. Your sales and purchases are on a cash basis only. This would be simple as there would be no need to keep a record of who owes you or which suppliers you owe.

The reality is, even the smallest business is a bit more complicated than that. Other than having to keep a record of the amount of cash collected, the business owner have to keep a record of the things he owns such as stock, credit customers, building and other assets. Similarly he has to record the business expenses, amount owed to his suppliers and other debts of the business.

The aim of any business is to make a profit. It would not be possible for the owner to know the financial position of the business if no records are kept.

Book-keeping, is the systematic recording of a business financial transactions. The two most common bookkeeping methods are double-entry and single-entry. The information is entered in the books by a bookkeeper.

Bookkeeping is the first stage in the accounting process therefore it is very important that the information entered is free from errors.

Accounting involves the recording, classifying and summarizing of information from book-keeping records to produce financial statements that is prepared by the accountant.

The difference between bookkeeping and accounting is that book-keeping involves record keeping of all business transactions. Whereas accounting uses the information compiled in the book-keeping process to prepare financial statements that can be analyzed and interpreted.

These financial statements are not prepared for the owner alone, but for other users of financial information such as investors, shareholders, managers, creditors, and the government.