Professional Documents
Culture Documents
Asif Mohammed
Table of Contents
Principles of Business............................................................................................................................2
Chapter 1...........................................................................................................................................2
Chapter 2.........................................................................................................................................10
Chapter 3.........................................................................................................................................20
Chapter 6.........................................................................................................................................23
Chapter 7.........................................................................................................................................32
Chapter 11.......................................................................................................................................38
Principles of Accounts...........................................................................................................................0
Principles of Business
Notes for Revision
Chapter 1 – Background to Business
Advantages of Bartering
1. Barter makes is possible to dispose of extra surplus and obtain
things they needed.
Public Sector
Public sector businesses are the various forms of enterprise in public
ownership, which are owned by the public, through the government
ownership.
Municipal Undertakings
Municipal Undertakings are enterprises operated on a commercial
basis by local government authorities.
Key Points:
Financed by local taxation
Subsidised by grants from central government
Examples: theatres, bus services, art galleries and conference halls.
State Undertakings
State Undertakings refer to a variety of enterprises operated by the
government on behalf of the public.
Limited Liability
Limited liability allows people to invest in a business without having
to face the risks of unlimited liability. With limited liability, the
investor is only liable to lose the amount they have put into the
business.
If the name of a business has the abbreviation ‘Ltd’ meaning
‘limited’, this indicated that the business has limited liability.
Unlimited Liability
If a business has unlimited liability. The owners of the business are
not only liable to lose the money they have invested but they can
also lose personal assets.
Sole Traders
The sole trader is a form of business ownership where:
A personal service is provided
Limited capital is available to start up the business
Large-scale production is not required
This type of business may be operated by the owner alone, or
employees and is usually a small business.
Their market tends to be less diversified than larger businesses
because their level of operations limits their output.
Partnerships
A partnership involves 2-20 people where an exception is banks
which are only allowed to have 10 partners. However, firms such as
accountants, solicitors and stockbrokers can have more than 20
partners.
Disadvantages of Partnerships:
1) Partners are fully liable for the debts of a business should
it go bankrupt due to having unlimited liability.
A partnership deed sets out the right of each partner regarding the
division of the profits. If this deed does not exist, then the profits are
shared equally.
A sleeping partner is one who may be willing to introduce capital to
the business but may not want to be active in its operation.
Advantages Disadvantages
Easily formed Generally unlimited liability
More people to contribute Possible disagreements between
capital than a sole trader partners
Greater continuity than a sole Each partner is liable for the
trader debts of the business
Expenses and management of Twenty-person membership
the business are shared limit restricts capital resources.
Co-operatives
Co-operatives are a special form of business organisation where they
are incorporated businesses that are owned and controlled by
groups with special interests.
The public limited company must include the letters ‘PLC’ in its title.
It takes a minimum of two people to form this company and there is
no maximum membership.
Multinationals
A multinational company is a business operating internationally,
although its ownership is usually based in one country.
Economic Systems
The term economy is used to define a country in terms of the total
composition of its economic activities.
The process of producing the things we all want goes through the
decision of what produce is limited by the resources a country has.
Countries all have to solve the following problems:
1) Deciding on what should be produced.
2) Deciding on how production should be organised.
3) Finding the best ways to combine factors of production (land,
labour, capital, enterprise).
4) Deciding if automated or manual methods should be used.
5) Deciding if technological equipment is required.
6) Deciding where the production should take place.
7) Deciding for whom the production should take place.
Types of Economic Systems
Subsistence Economy
A subsistence economy is one where there is little specialisation of
labour and little trade.
Command Economy
In a Command Economy all the economic decisions are made by the
government. The state decides what will be produced, how it will be
produced, and how it should be allocated to the consumers.
China and Cuba are examples of a command economy.
Globalisation
Globalisation is the intensification and spread of worldwide social
economic, cultural and political relationships among countries.
Production
Production is the process and methods used by producers to
transform raw materials, ideas, information or knowledge into goods
and services.
Marketing
Marketing refers to all the processes involved in promoting and
selling goods or services in the most profitable and efficient manner.
Human Resources
Human Resources are concerned with managing people within the
organisation.
This refers to the glue that holds the organisation together. There
are six areas:
Recruitment
Safety
Employee Relations
Compensation and benefits
Compliance
Training and Development
Research and Development
Research and Development is the investigative activity a business
carries out with the aim of getting new knowledge that it can use to
create new products or systems.
Stakeholders of a Business
A stake holder is any person or group of people that has an interest
in the business and its activities.
Characteristics of an Entrepreneur
1) Creative – Must have a vision, imagination and originality.
2) Innovative – Can think of and develop new ideas.
3) Flexible – Can adapt to new challenges and changes and adapts
their original business plan as circumstances require.
4) Goal-orientated – Must work towards clear, realistic and
measurable targets that they have set for the business and all
of its employees.
5) Persistence – must be resilient and will not be put off by any
setbacks. They learn from their mistakes and strive to do better
when something goes wrong.
6) Persevering – must be committed and self-motivated.
7) Risk taker – Able to risk their own money, sometimes money of
others, to set up and run a business.
Leadership Qualities in an Entrepreneur
A successful entrepreneur requires leadership qualities that inspire
others to work hard and support their drive to achieve the desired
success. These include:
Planning
In order to achieve its objectives, a business needs a plan. A
feasibility study provides an investigation, backed by data, to
demonstrate that what is planned is really possible.
Long term planning is about what the firm plans to do rather what it
is currently doing.
Accessing Financing
The entrepreneur needs to access whether or not the new venture
will be financially viable.
Capital Requirements
Capital refers to the wealth, in the form of money or other assets,
used to start and operate a business.
Sources of Capital
Entrepreneur’s savings
Bank loan
Partners
Investors
Organising the Factors of Production
The factors of production are the various elements needed to
produce goods or services.
Land: all natural resources, including farmed land, and the natural
resources in the land and sea.
Evaluating
Evaluating is necessary to extend the life of a business and to
evaluate the outcome of events once it has been established.
Risk Bearing
If entrepreneurs did not face risks, new businesses would not be
started, innovation opportunities would be missed and there
would be a reduces contribution to general economic
development.
Entrepreneurs and Economic Development
Entrepreneurs collaborate when they create new businesses that
provide goods and services to satisfy citizens. They also create
jobs and contribute to nation building.
Research
Research is carried out to find out if there is a definite need for the
product or service, and to collect information about the potential
market.
Identification of Resources
Identifying resources needed to operate the business venture.
Acquisition of Funds
Funds to start a business usually comes from the entrepreneur’s own
resources. Using funds from other will incur a cost of borrowing
which is basically interest.
Operational Plan
This describes the business’s physical location, legal structure,
facilities, equipment and labour the business employs.
Financial Forecast
This can be seen as turning the plan into numbers, projecting a
forecast for the next three to five years. The forecast should include:
A cashflow statement and the first 12 months cash-flow pattern
including working capital, salaries and sales.
A profit and loss forecast on projected scales.
A sales forecast
Planning Ahead
Short Term Plans are those that are undertaken on a daily or weekly
basis and include factors such as what to purchase. In a small
business this would be carried out by the owners, and lower
management employees in a large business.
Medium Term Plans are those effected for one or two years and
include implementing procedures that increase the effectiveness of
the business.
Long Term Plans are those that establish the course of the business
over a three-to-five-year period, which set out ways the business
intends to develop from its existing position to where it aims to be in
the long term.
Government Regulator Practices
The regulatory practices governing the establishment of a business
refer to the legislative rules by which persons who wish to establish a
business should be guided.
When starting up the business the entrepreneur must apply to the
minister of small businesses who is charged with checking and
approving their application.
Needs are things that are essential to human survival. The 3 primary
needs are:
Food
Clothing
Shelter
Wants are things that people desire to make the quality of life better
but is not necessary for survival.
Land
Land does not include the land itself, but also all the natural
resources found in the earth and sea. Land can have all sorts of
mineral deposits, nature and even life.
Therefore, land includes:
The geographical surface area
Rivers, lakes and seas
Minerals and chemicals
The workers wages remain the same, the input of materials is the
same, but output has been doubled.
Example:
Deep-sea drilling is a classic example where labour alone could not
achieve its output. The equipment (capital) needed makes deep-sea
drilling possible. Such activities are capital-intensive.
Primary Production
Primary production is the extraction of basic raw materials provided
by nature, which are either above or below the Earth’s surface.
The extractive industries are: agriculture, fishing and mining.
Tertiary Production
Tertiary Production are also a form of production because they
enable change of ownership of goods and services.
Tertiary activities begin when goods leave the producer and have to
be transported, stored, insured and sold by traders on the open
market.
Subsistence Level
This level of production meets only the basic needs of the country in
which it takes place.
Domestic Level
At the domestic level of production everything is produced locally
within the home country. This level does not involve any imports
from foreign countries or exports to other countries.
Some developed countries try to grow all the food they need
because they have the resources to do so.
Surplus Level
Developed countries have a wide variety of resources and exploit
these to the full. They also have advanced technology which enables
them to take full advantage of their resources.
Business Risk
The main risk a business faces is that it will fail to make a profit
which can possibly lead to the stop of trading.
What is Book-Keeping?
Book-keeping is the process of recording business transactions and
managing such records in the books of accounts or by using a
computerised software accounting package.
Examples: sales book, purchases book etc.
Users are divided into Internal and External users. Users may need
the accounting information for a range of reasons.
Internal Users
1. Owner – they want to know whether or not the business is
profitable. In addition, they want to know what the financial
resources of the business are such as: assets, cash in hand and
money in the bank.
2) People other than the owner may supply some assets. The
amount owed to these people for these assets are called
liabilities. The accounting equation is now:
Liabilities
Liabilities are that the business is owing for goods and
services which are supplied to them, and for expenses
incurred by the business but still outstanding.
Long-term Liabilities
Long-term Liabilities are loans or funds borrowed by the
business that will be paid beyond one year.
Capital
Capital is often called the owners’ equity or net worth. This
comprises of funds invested in the business by the owner
plus any profits retained for use in the business less any
share of the profits paid out to the business to the owner.
The Accounting System
The bank will need to know the financial stability of the
business and if it is feasible to lend the business (a loan) and
how much money to lend.
Current Assets
Current Assets are assets used in the business for profit making
capacity. They do not last beyond the accounting year (no more than
1 year) and easily converted to cash within the year.
Example: cash in hand, cash in the bank, debtors, pre-payment.
Current Liabilities
Current Liabilities are debts owed by the business that will be settled
within the accounting year.
Example: creditors, accruals, short-term bank loan, bank overdraft.
Long-term Liabilities
Long-term Liabilities are debts owed by the business that will be
settled beyond 1 year.
Example: long-term loan, mortgage loan.
The Accounting Period
The accounting year is a period of time usually 12 months, during
which businesses calculate their accounts and organise their financial
activities, mainly their financial statement.
The accounting year usually starts on any date but most businesses
start on January 1st and finish on December 31st.
Accounting Formats