chapter 1

Introduction
1.1 Concept of business
Business includes all the activities aimed towards providing goods and
services to the members of an economic system to earn profit. Some
businesses are involved with providing goods or products as furniture,
soap, machinery, etc.while others are involved in providing services as
barber shop, banks, insurances company, law firms, etc. Some others
businesses are involved in distribution as wholeshalers and retailers.
1.2 Forms of Business Organization
There are different types of organizations in our society. Some
of them are established for earning profits whereas some are
not. The organizations which are established for earnings
profits through productions and distribution of goods and
services are business organizations. Non business
organizations are different to business organizations since
they are established for providing services not for profits.
Business organizations are established on different forms.
They are as follows:
1. Sole Proprietorship (Sole trading concern): The oldest
form of the business organization is sole trading concern,
in which, a single person or family invest capital and runs
the business. Many small businesses are organized as
sole trading. The activities of the business and owner
should be separated since they have close relationship.
 Hence, the business entity concept is very worthful to
depict the true and fair view of the business while
maintaining the accounting records. It is simple to
establish and control a sole trading concern. A sole
trading concern suffers from the drawbacks of limited
capital, managerial skills and unlimited liability. However,
it enjoys tax advantages.
2. Partnership: Another form of business organization is
partnership. A certain number of persons join together
for their mutual benefits and combine their financial,
managerial and technical resources for the purpose of
operating a business which is called partnership. A
partnership organization is formalized with written
agreement called partnership deed. Like a sole trading
concern, a partnership is simple to establish and enjoys
shared control. It also revolves around some limitations
as unlimited liability, limited capital, difficult to transfer
ownership, etc.
3.Corporation(Company): A corporation is developed form of
business organization which has involved to overcome the
limitations of sole trading and partnership organizations. It is
established and terminated by law only. It collects huge
amount of capital by issuing shares to the public and has
perpetual existence. The liability of the shareholders is limited
to extent of their investment. It is very easy to transfer the
ownership of a corporation. It runs with a professional
management. Corporation has a separate legal existence,
therefore, it is a taxable entity.
1.3 Business Activities
All the business activities are involved in three types of
activities namely financing, investing, operating. The details of
each activities are given below:
Financing Activities
All businesses get started with financing. More precisely
money is needed to start a business. Thus, financing activities
are related to managing funds for business. There are two
sources of accumulating funds for business.
I. Equity: A business may obtain funds by selling its shares
to investors called stockholders/shareholders. The
stockholders do not have legal right to expect any
payments of dividend before the creditors are satisfied.
II. Debt: A business may also borrow money required in
different ways as bank loan, issue of bond or debenture.
The person or organizations to whom the business owes
money are called creditors. The creditors have a legal
right to be paid at the agreed time before the
stockholders.
Financing activities results in change in the size and
composition of the equity, capital, and borrowing of the
enterprises.
Investing Activities
There is a natural progression in a business from financing
activities to investing activities. It means once funds are
generated from creditors and stockholders, money is available
to invest. Investing activities involve the purchase of the
resources needed for the smooth operation of the
firm.Besides acquaring assets, investing activities also involve
investment in securities. This is done if firm has excessive
amount of cash. “Investing activities are the acquisition and
disposal of long term assets and other investments not
included in cash equivalents”.
Operating activities
Once a business generates funds and invests in various
assets, it begins to work. It starts generating revenues from
sale of goods and services. Likewise, it incurs expenses in a
number of heading that assist to generate the revenues.
Finally, the revenues are matched with the expenses for the
determination of operating profits and loss.