CSW Session I

7/29/2019 CSW Session I

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Forms of business organization


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Upon completion you will be able to understand:

Economic and non economic activities.

Various forms of business organisation.

Features, merits and demerits of businessorganisation.

Key accounting concepts.

Methods of accounting.

Learning objectives


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Agenda

Economic and non economic activities


Comparative study on different formsBasic accounting concepts

Methods of accounting


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Types of activities

Two type of activities based on nature of activities.

a) Economic activities

b) Non-economic activities


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Economic activities

Economic activities:

Activities which are undertaken by human beings forearning money.

Examples

1. doctor working in the hospital.

2. Teacher working in the school.

3. An employee going to his office.


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Non-economic activities

Non-economic activities: activities which areundertaken by human beings due to love andaffection, social obligation, patriotism, physicalrequirement etc, but not for earning.

Examples;

1. People going to the temple.

2. The house wife working for the family.

3. Children going to the school and playing games.


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Agenda






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Business

An activity carried primarily with the object ofearning profit can be called a business activity.

The objective of earning profit is achieved by

production and/or exchange of want satisfying goodsand services.

Therefore, we can define business as an activity

concerned with the production and/or exchange of

want satisfying goods and services carried with aview of earning profit.

Our future discussion only on business activities


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Various forms of business organization

Forms of Business

organization

Non-corporate forms Corporate forms

Sole trader

OrganizationCooperative

Organization

Partnership

OrganizationCompany

Organization

Private

Company

Public

Company


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Sole trader organization

One man business in which an individual producesindependently with his own capital, skill andintelligence and is entitle to receive all the profitsand assume all risks of ownership.

What is required is that an individual decides aboutthe type of business to started and arranges thenecessary capital.

The person generally manages business on his own.


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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


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Sole trader organization - merits

Easy formation

Direct motivation

Full control

Quick decision Flexibility in operation

Secrecy

Personal touch

Dissolution easy


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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


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Partnership form of organization

An association of two or more person, who jointogether to share the profits of business carried onby all or any of them acting.

Partner: A person who is the member in apartnership firm

Partnership deed: A written agreement entered intoby partners specifying the constitution rules and

regulation of the partnership. Partnership organisation is regulated by The Indian

Partnership Act, 1932


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Partnership form of organization - 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


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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


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Partnership form of organization - demerits

Limited capital

Unlimited liability

No public confidence

Non-transferability of interest Uncertainty

Conflicts among partners

Risk of implied authority


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Company form of organization

Company: an association of persons registeredunder the Companies Act, 1956. It is an artificialperson created by law, with distinctive name, acommon seal and perpetual succession of itsmembers.

Companies Act, 1956 regulates the functioning ofthe companies


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Company form of organization

Private limited company: A company which byarticles

(a)Limits the maximum number of members to 50excluding its employees.

(b) Restricts the right to transfer its shares, and

(c)Prohibits the invitation to the public to subscribeto its share and debentures.

Public limited company: a company which is not aprivate limited company.


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Company form of organization - features

Incorporation

Artificial person

Separate legal entity

Common seal Perpetual succession

Separation of ownership and management

Number of members

Limited liability

Transferability of shares


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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


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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


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Cooperative form of organization

A voluntary association of persons establishedunder the co operative societies act.

The primary objective of any cooperative

organisation is to render services to its members.


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Agenda






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Comparative study of business organization

Please refer the hand out


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Agenda






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Basic accounting concepts

accounting concepts are broad working rulesadopted by the accounting profession as a guides forrecording and reporting the affairs and activities ofthe business.

These concepts are1. Going concern concept

2. Accounting period concept

3. Matching concept

4. Conservatism concept5. Consistency concept

6. Full disclosure concept

7. Materiality concept


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Going Concern concept

Normally the business is started with the intentionof continuing it indefinitely or at least for theforeseeable future.

The investors lend money and the creditors supplygoods and services with the expectation that theenterprise would continue for long.

Hence financial statements are prepared on a goingconcern basis and not on liquidation (closure) basis.


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Accounting period concept

The going concern concept assumes that the businesswill continue for a long period, almost indefinitely, but,the businessmen cannot postpone the preparation offinancial statements indefinitely. Therefore, he prepares

them periodically to find out the profit or loss andfinancial position of the business.

This will also enable other interested parties such asowners, investors, creditors, tax authorities to makeperiodic assessment of its performance.

So, the life of the business enterprise is divided into whatare called accounting periods. Profit and loss and thefinancial position at the end of each accounting period isregularly assessed.


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Matching concept

This is called Matching of costs against Revenue

Concept. To work out profit or loss of an accounting

year, it is necessary to bring together all revenuesand costs pertaining to that accounting year.

In other words, expenses incurred in an accountingyear should be matched with the revenues earned

during that year. The crux of the problem, therefore,is that appropriate costs must be matched againstappropriate revenues.


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Conservatism concept

This is also known as Prudence concept. Thisconcept tries to ensure that all uncertainties andrisks inherent in business are adequately providedfor.

This is in accordance with the traditional views whichstates anticipate no profits but anticipate all losses.


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Consistency concept

The principle of consistency means conformity fromperiod to period with unchanging policies andprocedures.

It means that accounting method adopted shouldnot be changed from year to year.

For example, the principle of valuing closing stock atconst price or market price whichever is lower should

be followed year after year.


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Full disclosure concept

The financial statements are the basic means ofcommunicating financial information to all interestedparties. These statements are the only source forassessing the performance of the enterprise forinvestors, lenders, suppliers, and others.

Therefore, financial statements and theiraccompanying footnotes should be completely

disclose all relevant information of a material naturewhich relate to the profit and loss and the financialposition of the business


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Materiality concept

This concept is closely related to the full disclosureconcept; Full disclosure does not mean thateverything should be disclosed. It only means that allrelevant and material information must be disclosed.

Materiality primarily relates to the relevance andreliability of information.

An item is considered material if there is reasonableexpectation that the knowledge of it would influence

the decision of the users of the financial statements.All such material information should be disclosedthrough the financial statements and theaccompanying notes.


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Agenda






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Accrual basis of accounting.

Cash basis of accounting.


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Contact details

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CSW Session I

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