ACCOUNTING AND BUSINESS

Types of
Businesses

Coal

Telecom &

Financial Services
 Types of Businesses
Merchandising
Merchandising Business
Business

Product
Product
Big
Big Bazaar,
Bazaar, Wal-Mart
Wal-Mart General
General merchandise
merchandise
Fisher
Fisher Price,
Price, Hot
Hot Wheels
Wheels Toys
Toys
Samsung,
Samsung, Voltas
Voltas Consumer
Consumer electronics
electronics
Grasim,
Grasim, Raymond's
Raymond's Apparel
Apparel
Bata,
Bata, Liberty
Liberty Shoes
Shoes & & leather
leather goods
goods
Amazon.com
Amazon.com Internet
Internet books,
books, music,
music,
video,
video, apparel
apparel retailer
retailer
 Types of Businesses
Service
Service Business
Business

Product
Product
Appu
Appu Ghar,
Ghar, Disney
Disney Entertainment
Entertainment
Indian
Indian Air
Air Lines
Lines Transportation
Transportation
Taj
Taj &
& Oberoi
Oberoi Hotels
Hotels Hospitality
Hospitality and
and lodging
lodging
Deloitte
Deloitte Consulting
Consulting Financial
Financial Consultancy
Consultancy
Bharti
Bharti Airtel
Airtel Telecommunication
Telecommunication
HDFC
HDFCLifeLife Insurance
Insurance
Form of Business Organization

 Sole Proprietor/Sole Trader

 Partnership
 Companies
 Co-operative

Short Assignment

1.Briefly explain for all stated form

of business.
Sole Proprietor

 Coca Cola Started as a Sole Proprietorship in 1980’s

 Apple, Hewlett-Packards, Amazon, Google, Mattel and
Walt Disney etc all started their company as either Sole
Proprietorship or partnership
 Flipkart, snapdeal etc started a business as sole
proprietorship in India.
Sole Proprietor or Sole Trader

 Business ownership is a single business carried on by

individuals and owned by individual full.
 Business owner have a power to control the business
operations.
 Owners and business is referred to as one of the same
entity. No separation between them.
 Owners will received all the profits and bear for all
losses from business.
 Unlimited liabilities
Advantages

 Easy to set up.

 The owner has absolute power to control the business.
 Fast decision make by the owner of the business.
 Individual Tax.
 No need the complex financial reports.
Disadvantages

 Difficult to grow because of the

limited capacity of capital
 Difficult to get capital financing from
the financial institution because they
need a strong assurance from the
business.
 Liability is unlimited.
 Business will disband itself if the
owner died.
Partnerships
 A partnership is defined as the relationship that exist
between person carrying on business. These person
agree to combine some or all their property, labor and
skill. This relationship is based on contract.

 Business owned by minimum of two persons and

maximum of 20 persons. In case of Banks, the maximum
number of partners is 10
 Professional service partnerships consist of maximum 50
persons.

 There are two types of partners:

-Active partner -Sleeping partner
Partnerships

 Strictly follow the Partnerships Act

1932 and partnerships contract of
agreement for profit and loss
distribution.
 Liability for partnerships is unlimited
except for the limited partnerships.
 General partners have unlimited
liability for partnerships debts, and
the partnerships terminates when a
general partner wishes to sell out or
dies.
Advantages

 Partnerships allow for a greater amount

of money, skill and other resources to be
pooled.
 They are relatively easy to organize.
 They are subject to limited government
regulations and do not face high tax
rates.
Disadvantages

 Partnerships have a limited life.

 Each partner is subject to unlimited
liability. This means that if the
company fails, creditors can take
action against both the partnership
and the persons who are in it.
 Partners have mutual agency. This
means that one partner can make
decisions without consulting to
other(s).
Limited Liability Partnership
 LLP has a legal existence under MCA only, just like a company. So it’s a
perfect mix of ‘corporate structure’ and ‘partnership firm’. It can be said
that LLP is a hybrid of a company and a partnership firm.

 The major advantage of LLP registration is flexibility with legal enactments.

LLP Act is more flexible for conducting business over Companies Act.
 A partner is not liable on account of any decision or action taken by other
partners jointly.
 LLP cannot be made for a charitable or non-profit organization. It has to be
the objective of profit earning only.
 As in company, where every director should have DIN , in the case of LLP,
every partner needs to take a DPIN (Designated Partner Identification
Number).
 Firm/Private Limited/ Unlimited Public Limited Company can be converted
to LLP.
Difference between General
Partnership & LLP
Difference between General
Partnership & LLP
Recent changes

 Ministry of Corporate Affairs has provided us

four entities, namely One Person Company,
Private Limited Company, Limited Liability
Partnership and Public Limited Company.

 Every entity has its own merits and demerits.

The biggest drawback with LLP registration is
that it cannot be converted to Private
Limited Company due to which it cannot
raise the fund from public as it has no equity
which it can distribute in public.
Co-operative

 It is a business organization owned and

operated by a group of individuals for
their mutual benefits.
 A community based business

 Eg: Amul Dairy, IFFCO, Mother Dairy,

Indian Coffee House, Pratibha Mahila
Sahakari Bank etc
 Corporation

 A business created as a distinct legal entity

composed of one or more individuals or entities.
 In India, companies are registered under India
Company Act 1956 and are governed by its
regulations.
 Advantage: The ability to obtain large amounts of
resources by issuing stocks.
 Disadvantage: Double taxation, complication in set
up, Legal requirements.
Different Types of
Companies:
 Private company
 One Person Company
 Public company
 Holding company and subsidiary company
 Departmental undertakings
 Government Company
 Public corporation
 PSU (Public Sector undertakings)
Accounting
Accounting Definition

 “Accounting maybe define as “A systematic

recording of information which involves analyzing,
classifying, summarizing and interpreting business
transactions”

 Accounting is an art as well as science of recording

classifying, summarizing, preparing final
statements, analyzing the same and communicating
the analysis to the users of accounting for better
decision making.
 What are the purpose of
Accounting
Purpose of Accounting

i. Planning how you are going to use your money

ii. Recording accounting data.
iii.Keeping specific records of information in
specific manual.
iv. Enabling circulating information.
v. Use accounting data to make decision.
Accounting Vs Finance

 Accounting:
Systematic recording of information Involves:

1) Analyzing
2) Classifying
3) Summarizing
4) Interpreting business transaction.
 Accounting Vs Finance
Finance:

“A process involved in an attempt to obtain and allocate financial

resources effectively and efficiently to achieve the firm’s goal: that
is to maximize the shareholder’s wealth by maximizing the share
price”.
Accounting Vs Finance

The management of the firm has the

primary goal of maximizing the wealth
of its shareholders by maximizing the
common stock share price

i. Maximization of profit
ii. Ensuring the firm’s survival in the long
run
-Time Horizon
-Timing of Returns
-Distribution of Returns
-Risk orientation
 Sub field of Accounting

Accounting can be sub-classified as to:

 Financial Accounting
 Management Accounting
 Auditing
 Taxation
Thank you ….
Accounting theory
Accounting Concepts
 Identify the users of annual reports and
describe their information needs.
Who are the users of annual reports?

1. The equity investor group, including existing and potential

shareholders.
2. The loan creditor group, including existing and potential
holders of debentures and loan stock, and providers of short-
term secured and unsecured loans and finance.
3. The employee group, including existing, potential and past
employees.
4. The analyst-adviser group, including financial analysts and
journalists, economists, statisticians, researchers, trade
unions, stockbrokers and other providers of advisory services
such as credit rating agencies.
 Identify the users of annual reports and
describe their information needs.
Who are the users of annual reports?

5. The business contact group, including customers, trade

creditors and suppliers and, in a different sense, competitors,
business rivals and those interested in mergers,
amalgamations and takeover.
6. The government, including tax authorities, departments and
agencies concerned with the supervision of commerce and
industry, and local authorities.
7. The public, including taxpayers, ratepayers, consumers and
other community and special interest groups such as political
parties, consumer and environmental protection societies and
regional pressure groups.
Users of annual reports and their information
needs.

Why these users need the financial information?

1. The equity investor group (The shareholders of the company)

They want to know how effectively management is
performing and how much profit they can withdraw from the
business for their own use.

2. The loan creditor group (The providers of finance to the

company, example: banks)
Users of annual reports and their information
needs.

Why these users need the financial information?

3. The employee group

4. The financial analysts-adviser group

Need information for their clients. For example, stockbrokers
need information to advise investors, credit agencies want
information to advise potential suppliers of goods to the
company, journalists need information for their reading
public.
Users of annual reports and their information
needs.

Why these users need the financial information?

5. The business contact group (Example: suppliers, customers)

Suppliers want to know about the company’s ability to pay its
debts. The customers need to know that the company is a
secure source of supply and is in no danger of closing down).

6. The government
Users of annual reports and their information
needs.
Why these users need the financial information?

7. The public
Want information because enterprises affect them in many
ways, eg by providing jobs and using local suppliers, or by
affecting the environment (eg pollution)

8. The Inland Revenue

Thanks you ……
Accounting theory

 Accounting principles
 Accounting concepts
 Accounting Conventions

 Accounting bases
 Accounting policies

 Accounting standards
Accounting Theory

 Principles
 Fundamental assumptions (Concepts) and the
tradition/ customs/usages (Conventions)
underlying the preparation of financial
statements

 Bases
 Methods developed to apply the principles to
specific transactions

 Policies
 Specific to a particular organization
 Chosen on the basis of suitableness
Accounting theory
(Example ...)

CONCEPT – Matching principle

BASES – Methods of depreciation (application of

matching principle in accounting for non-current assets)

POLICY – Specific choice of method: straight line or

reducing balance
Accounting Principles

 Accounting Concepts
 Accounting Conventions
Accounting Concepts

1. Business entity concept.

 The business is a separate entity
distinct from its owners or
managers.
 Thisconcept requires the careful
separation of the financial affairs
of the business from its owners
and other businesses.
 Accounting Concepts

2. Going concern

 An enterprise is normally viewed as a

going concern, that is, as continuing in
operations for the foreseeable future.

 Itis assumed that the enterprise has no

intention to curtail the scale of its
operations.
Accounting Concepts

3. Money Measurement / Monetary principle

 Accounting will deal only with those

items to which a monetary value can
be attributed.

 Financial statements do not reflect

factors that cannot be measured in
monetary terms: good management,
hardworking members of staff, etc.
Accounting Concepts

4. Historical cost

 Assets should be recorded initially at cost.

 Main limitation of using historical cost:

 In times of inflation, historical costs figures lack

relevance and can mislead users of financial information.

 In order to overcome this limitation, revaluation of assets

is allowed as an alternative to historical cost accounting.
Accounting Concepts

Advantages of using historical cost:

 Historical costs are perceived to be
more reliable because they can be
verified.
 The use of historical cost is cost-
effective.
 To use current market value means
spending money each time an asset is
revalued
Accounting Concepts

5. Duality concept/ Accounting equation 

Total assets equal total
liabilities plus owners' equity; Also
known as Double entry concept
6. Accounting period concept  
Financial records pertaining only to a
specific time period are to be
considered in preparing accounts for
that period; 
Accounting Concepts

7. Matching concept
 Revenue earned must be matched
against the expenditure incurred in
generating it for an accounting period.

8. Accrual basis of accounting

 Income is recognized when earned and
not when it is received in cash;
 Expenses are recognized when
incurred and not when they are paid in
cash.
Accounting Concepts

9. Revenue realization concept.

A sale should be recognized when:

 the event from which it arises has taken place;

 Sale is recognized when goods are delivered, or when

invoice is prepared.
 Sale is not recognized when an order is received.

 the receipt of cash is reasonably certain.

 Sale on credit should be recognized as income even if

cash has not yet been received.
 Accounting Conventions
1. Full Disclosure

 The full disclosure principle requires a company to

provide the necessary information so that the people
who are accustomed to reading the financial
information can make informed decisions concerning
the company.
 This information can be included in a variety of places
in the financial statements, such as within the line
item descriptions in the income statement or balance
sheet, or in foot notes or in the accompanying
disclosures.
Accounting Conventions

2. Materiality.
 Information is material if its omission or
misstatement could influence the economic
decisions of users taken on the basis of the
financial statement.

 To reduce the amount of disclosure, it is

customary to only disclose information about
events that are likely to have a material
impact on the entity's financial position or
financial results.
Accounting Conventions

3. Prudence/ Convention of Conservatism

 Where alternatives exist, one should select the

alternative that gives the most cautious
presentation of the financial position or result
of the business.

 Assets and profits should not be overstated, but

a balance must be achieve to prevent the
material overstatement of liabilities and losses.

 Where a loss is foreseen, it should be

anticipated and taken immediately into account.
Accounting Conventions

4. Consistency

 The items in the financial statement should be presented and

classified in the same manner from one period to the next

 Except under the following cases:

 There is a significant change in the nature of the operations

of the business

 A review of its financial statement presentation

demonstrates that relevance is better achieved by
presenting items in a different way

 A change is required by a new accounting standard.

Accounting Conventions

5. Substance over form.

 Some transactions have a real nature that differs

from their legal form.

 Whenever it is legally possible, the real substance

should prevail over the legal form.

 An example is a hire purchase transaction.

 Legal ownership of an asset on a hire purchase

does not pass until the last instalment is paid, but
it could be misleading to present a balance sheet
in which such assets did not appear until the end
of the contract.
Key Characteristics of
Accounting Information
 Before it can be regarded as useful in
satisfying the needs of various user
groups, accounting information should
satisfy the following criteria:

 Understandability
 Relevance
 Consistency
 Comparability
 Reliability
 Objectivity
 Understandability
This implies the expression, with clarity, of accounting
information in such a way that it will be understandable
to users - who are generally assumed to have a
reasonable knowledge of business and economic
activities

 Relevance
This implies that, to be useful, accounting information
must assist a user to form, confirm or maybe revise a
view - usually in the context of making a decision (e.g.
should I invest, should I lend money to this business?
Should I work for this business?)
 Consistency
This implies consistent treatment of similar items and
application of accounting policies

 Comparability
This implies the ability for users to be able to compare
similar companies in the same industry group and to
make comparisons of performance over time. Much of
the work that goes into setting accounting standards is
based around the need for comparability.
 Reliability
This implies that the accounting information that is
presented is truthful, accurate, complete (nothing
significant missed out) and capable of being verified
(e.g. by a potential investor).

 Objectivity
This implies that accounting information is prepared and
reported in a "neutral" way. In other words, it is not
biased towards a particular user group or vested
interest