Fundamentals of Accounting part 1

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Business Organizations and Activities

Module 002 Business Organizations and

Activities
This module covers an introduction to different business organizations
according to ownership– sole proprietorship, partnership, and corporation.
Relative to the business organizations, we will also cover the different types
of business according to activity or business lines such as service concern,
merchandising, and manufacturing. The basic categories of business
activities – operating activities, investing activities, and financing activities
will also be introduced in this module.
At the end of the module, the students should be able to
1. Enumerate, define, and differentiate the different business organizations
as to ownership.
2. Understand the different types of business according to activity.
3. Define and understand the concepts relative to the categories of business
activities.

Introduction

A business organization pertains to a group of people or individuals who systematically

come together for the accomplishment of a purpose – profit - in any the ways allowed and
regulated by the law.

A business can take one of the three forms of organization. The would-be investors should
understand each form because the accounting process depends on what form the
organization has.

Types of Business Organizations

Business Entities According To Ownership

1. Sole Proprietorship or Proprietorship

This is a form of organization that is owned by only one person, called proprietor, who
usually manage the same. Proprietorship examples include small retail businesses or
individual professional businesses such as physicians, accountants, and lawyers.
Sole proprietorship is very easy to organize and the sole owner needs not to separate
himself from the business. The proprietor has a direct and sole responsibility on all the
assets, liabilities, and capital, even the profits and losses of the business. The business
can also be called by other names (not the proprietor’s name).
Proprietorship is not suitable for high risk business simply because the personal assets
of the owner will also be at risk. For tax purposes, the owner will pay taxes on his
income from the business.

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Business Organizations and Activities

2. Partnership
Partnership is a business organization that is formed by two or more persons who
contribute their resources – money, property, and services to a common fund (of the
partnership). There owners are called partners.
The most common kinds of partnership are:
a. General partnership – one that is composed of general partners who are liable for
the partnership debts (to the extent of their personal properties). Any partners can
be totally responsible for the business and can make decisions that might affect the
entire business.
b. Limited partnership – one consists of at least one limited partners and at least one
general partner. Limited partner is liable for the partnership debts to the extent only
of his personal contribution to the partnership.
Partnership is more advantageous than sole proprietorship in terms of capital and
management.
3. Corporation
Corporation is a business organization, owned by shareholders (or stockholders) or
members (for non- stock corporations), whose existence of being a corporation will
commence after the state or the government approves its articles of incorporation. It is
a legal entity, an artificial being in the sense of the law.
It differs from the sole proprietorship and partnership in that if both the latter cannot
pay their business obligations to creditors, the owners are held liable to the extent of
their personal properties while in corporations, the shareholders ‘ personal assets are
not answerable to the debts of the corporations in cases of bankruptcy. Shareholders
have limited personal risk in investing their money in corporations.
Sole
Proprietorship Partnership Corporation
Ownership One owner, Two or more
called owners, called Many (at least five) owners, called
proprietor partners shareholders

Limited, depends
Organization's Limited, on the owner's Indefinite life ( in the Philippines, 50
life span depends on the decision or death years renewable
owner's
decision or
death
Owners'
personal Owner
liability for the personally Partners
business liable personally liable Shareholders are not personally liable
obligations or
debts
Organization's
accounting Separate from Separate from the
status the proprietor partners Separate from the corporation

Exhibit 1. Comparison of the Three Business organizations

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Business Organizations and Activities

Business Firms According to Activity or Nature of Business

1. Service concern
A service type of business deals with rendering services to clients. Examples of this
business are beauty parlor or shops, dressmaking or tailoring shops, schools,
accounting/auditing firms, law offices, hospitals, repair shops.
2. Merchandising or trading.
This business involves buying goods and selling them in the same form, changing
nothing but the selling price. Examples are sari-sari stores, department stores, grocery
stores, and stores selling auto supplies, etc.
3. Manufacturing concern
Manufacturing involves converting of materials into finished products to be sold in the
market. Aside from raw materials, labor and other overhead costs are added to
production. Examples are steel manufacturing company, candy manufacturing
company, bakeshops, textile manufacturing company, etc.

Categories of Business Activities

Every business engages in three basic kinds of business activities. These are the following:
1. Operating activities
Operating activities are the most important activities. These involve the generation of
revenues and incurrence of expenses in the company’s main line of business. In the long
run, these activities are considered and should be the main source of the business’ most
liquid asset- cash. Operating activities affect the bottom line figure of the income
statement.
Examples of operating activities are:
 Collections from customers (upon sales or collection of Accounts Receivable)
 Interest received on Notes Receivable
 Dividends received on investments in stocks
 Payments to suppliers
 Payments to employees
 Payments for interest
 Payments for income taxes

2. Investing Activities
Investing activities are those related to buying and selling of the long-term assets
(plant, property, and equipment, stocks, bonds) for business use.
Examples are:
 Sale of plant assets
 Sale of investments that are not cash equivalent (shares of stocks)
 Receipts on loans receivable
 Acquisition of plant assets

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Business Organizations and Activities

 Purchase of investments that are not cash equivalents (stocks or bonds)

 Making loans

3. Financing activities
Financing activities involves getting hold of funds from prospective investors and
creditors needed by the firm to start or to sustain the business. These activities pertain
to long-term liability accounts and owner’s equity accounts.
Examples of financing activities are:
 Issuance of stocks
 Selling treasury stocks
 Borrowing funds
 Payment of dividends
 Purchase of treasury stocks
 Payment of principal amount of long-term debts

Please take note of the inclusion of receipts of interest and dividends in the operating
activities, so with the payment of interest. Interest received comes from investing activity
(investment in loans) and dividends from investments in stocks. Interest expense or
payments of interest results from borrowing money which is a financing activity.

Deliberations have been made by the Financial Accounting Standards Board (FASB) until it
finally ruled that these three items be included in operating activities. The Board reasoned
out that these items affect income- receipts of interest and dividend increase income while
payments of interest decrease income, therefore, they should be reported as operating
activities.

The foregoing theories on business activities are discussed in relation the third important
financial statement – the statement of cash flows-which will be discussed in details in one of
the courses in accounting.

Glossary
Business organization: an entity for the purpose of doing business for profit.
Business activities: are events or transactions that occurred in the normal course of the
business.
Corporation: An organization of more than five persons for business and profit.
Partnership: An entity composed of at least two individuals called partners.
Sole Proprietorship: a business owned by one person who usually manages it.

References and Supplementary Materials

Books and Journals
Cabrera, ME. B. (2010). Fundamentals of Accounting 1.Manila, Philippines: GIC
Enterprises and Co., Inc.
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Business Organizations and Activities

Horngren, C. T., Harrison, W. T. Jr., Bamber, L. S., (2002). Accounting (International

Edition). New Jersey, USA: Prentice Hall

Garcia, P.C., Mojar, B.Q. & Gemanil, B. A. (2006).Basic Accounting Concepts and
Procedures. Quezon City, Philippines: Rex Book Store, Inc.

Kimwell, M. B. (2009). Fundamentals of Accounting (Second Edition). Manila, Philippines.

GIC Enterprises and Co., Inc.

Online Supplementary Reading Materials

Basic Definition of Organization - Management Library
managementhelp.org/organizations/definition.htm
Accessed: March 16, 2017

Lesson: Three Types of Business Organizations | Econedlink

www.econedlink.org/teacher-lesson/533/Three-Types-Business-Organization
Accessed: March 16, 2017

Preparation-of-the-statement-of-cash-flows-in-accordance-with-ias...
www.scribd.com/document/194400576/preparation-of-the...
Accessed: March 17, 2017

Online Instructional Videos

Types of Business Organizations - YouTube
www.youtube.com/watch?v=aWpsAGCQ840
Accessed: March 12, 2017

Types of Business Organizations - Videos & Lessons | Study.com

study.com/academy/topic/types-of-business-organizations.html
Accessed: March 12, 2017

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