Forms of business organization

Learning objectives
Upon completion you will be able to understand:
 Economic and non economic activities.  Various forms of business organisation.  Features, merits and demerits of organisation.  Key accounting concepts.  Methods of accounting.


 Economic and non economic activities Forms of business organization  Comparative study on different forms  Basic accounting concepts  Methods of accounting

Types of activities  Two type of activities based on nature of activities. a) Economic activities b) Non-economic activities .

An employee going to his office. 3. Teacher working in the school. .Economic activities Economic activities: Activities which are undertaken by human beings for earning money. 2. Examples 1. doctor working in the hospital.

 Examples. but not for earning. The house wife working for the family. social obligation. physical requirement etc. 1. . Children going to the school and playing games. 2. 3. patriotism. People going to the temple.Non-economic activities Non-economic activities: activities which are undertaken by human beings due to love and affection.

Agenda  Economic and non economic activities Forms of business organization  Comparative study on different forms  Basic accounting concepts  Methods of accounting .

Business An activity carried primarily with the object of earning profit can be called a business activity. Our future discussion only on business activities .  Therefore.  The objective of earning profit is achieved by production and/or exchange of want satisfying goods and services. we can define business as “ an activity concerned with the production and/or exchange of want satisfying goods and services carried with a view of earning profit.

Various forms of business organization Forms of Business organization Non-corporate forms Corporate forms Sole trader Organization Partnership Organization Company Organization Cooperative Organization Private Company Public Company .

Sole trader organization  One man business in which an individual produces independently with his own capital. skill and intelligence and is entitle to receive all the profits and assume all risks of ownership.  The person generally manages business on his own.  What is required is that an individual decides about the type of business to started and arranges the necessary capital. .

Sole trader organization .features  One man show  No separation of ownership and management  No separate entity  All profits to proprietor  Individual risk  Unlimited liability  Less legal formalities .

merits  Easy formation  Direct motivation  Full control  Quick decision  Flexibility in operation  Secrecy  Personal touch  Dissolution easy .Sole trader organization .

Sole trader organization – demerits  Limited resources  Limited managerial capabilities  Not suitable for large scale operation  Unlimited liability  Less stability  No check and control  Less scope for economies of scale .

1932 .Partnership form of organization  An association of two or more person.  Partner: A person who is the member in a partnership firm  Partnership deed: A written agreement entered into by partners specifying the constitution rules and regulation of the partnership. who join together to share the profits of business carried on by all or any of them acting.  Partnership organisation is regulated by The Indian Partnership Act.

features  Plurality of person  Contractual relationship  Profit sharing  Existence of business  Principle-agent relationship  Unlimited liability  Good faith and honesty  Restriction on transfer of share .Partnership form of organization .

Partnership form of organization .merits  Easy formation  More capital available  More devise skills and expertise  Flexibility  Secrecy  Keen interest  Protection  Check and controls over careless decision  Diffusion of risk .

demerits  Limited capital  Unlimited liability  No public confidence  Non-transferability of interest  Uncertainty  Conflicts among partners  Risk of implied authority .Partnership form of organization .

It is an artificial person created by law.Company form of organization  Company: an association of persons registered under the Companies Act. 1956 regulates the functioning of the companies . 1956. a common seal and perpetual succession of its members. with distinctive name.  Companies Act.

.Company form of organization  Private limited company: A company which by articles (a)Limits the maximum number of members to 50 excluding its employees. (b) Restricts the right to transfer its shares.  Public limited company: a company which is not a private limited company. and (c)Prohibits the invitation to the public to subscribe to its share and debentures.

features  Incorporation  Artificial person  Separate legal entity  Common seal  Perpetual succession  Separation of ownership and management  Number of members  Limited liability Transferability of shares .Company form of organization .

merits  Large capital  Limited liability  Stability of existence  Economies of scale  Scope of expansion  Public confidence  Transferability of shares  Professional management  Tax benefits  Risk diffused .Company form of organization .

Company form of organization .demerits  Difficulty in formation  Lack of secrecy  Delay in decision making  Neglect of minority interest  Concentration on economic power  Lack of personal interest  More government restriction  Fraudulent management .

Cooperative form of organization  A voluntary association of persons established under the co operative societies act. .  The primary objective of any cooperative organisation is to render services to its members.

Agenda  Economic and non economic activities Forms of business organization  Comparative study on different forms  Basic accounting concepts  Methods of accounting .

Comparative study of business organization  Please refer the hand out .

Agenda  Economic and non economic activities Forms of business organization  Comparative study on different forms  Basic accounting concepts  Methods of accounting .

4. Going concern concept Accounting period concept Matching concept Conservatism concept Consistency concept Full disclosure concept Materiality concept . 7. 3. 6. 5.Basic accounting concepts  accounting concepts are broad working rules adopted by the accounting profession as a guides for recording and reporting the affairs and activities of the business.  These concepts are 1. 2.

.Going Concern concept  Normally the business is started with the intention of continuing it indefinitely or at least for the foreseeable future. The investors lend money and the creditors supply goods and services with the expectation that the enterprise would continue for long. Hence financial statements are prepared on a going concern basis and not on liquidation (closure) basis.

 So. . Profit and loss and the financial position at the end of each accounting period is regularly assessed. but. the life of the business enterprise is divided into what are called ‘accounting periods’. Therefore.  This will also enable other interested parties such as owners. tax authorities to make periodic assessment of its performance. creditors. he prepares them periodically to find out the profit or loss and financial position of the business.Accounting period concept  The going concern concept assumes that the business will continue for a long period. the businessmen cannot postpone the preparation of financial statements indefinitely. almost indefinitely. investors.

To work out profit or loss of an accounting year. expenses incurred in an accounting year should be matched with the revenues earned during that year. is that appropriate costs must be matched against appropriate revenues. The crux of the problem. . therefore. In other words.Matching concept  This is called ‘Matching of costs against Revenue Concept’. it is necessary to bring together all revenues and costs pertaining to that accounting year.

This concept tries to ensure that all uncertainties and risks inherent in business are adequately provided for. This is in accordance with the traditional views which states anticipate no profits but anticipate all losses. .Conservatism concept  This is also known as Prudence concept.

For example. .Consistency concept  The principle of consistency means conformity from period to period with unchanging policies and procedures. the principle of valuing closing stock at const price or market price whichever is lower should be followed year after year.  It means that accounting method adopted should not be changed from year to year.

Full disclosure concept  The financial statements are the basic means of communicating financial information to all interested parties. suppliers. These statements are the only source for assessing the performance of the enterprise for investors. Therefore. lenders. financial statements and their accompanying footnotes should be completely disclose all relevant information of a material nature which relate to the profit and loss and the financial position of the business . and others.

An item is considered material if there is reasonable expectation that the knowledge of it would influence the decision of the users of the financial statements. All such material information should be disclosed through the financial statements and the accompanying notes. .Materiality concept  This concept is closely related to the full disclosure concept. Full disclosure does not mean that everything should be disclosed. It only means that all relevant and material information must be disclosed. Materiality primarily relates to the relevance and reliability of information.

Agenda  Economic and non economic activities Forms of business organization  Comparative study on different forms  Basic accounting concepts  Methods of accounting .

 Cash basis of accounting. .Methods of accounting  Accrual basis of accounting.

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