Forms of business organization

Learning objectives
Upon completion you will be able to understand:
Economic and non economic activities. Various forms of business organisation. Features, merits and demerits of organisation. Key accounting concepts. Methods of accounting.

business

Agenda
Economic and non economic activities Forms of business organization Comparative study on different forms Basic accounting concepts Methods of accounting

Types of activities
Two type of activities based on nature of activities. a) Economic activities b) Non-economic activities

Economic activities
Economic activities: Activities which are undertaken by human beings for earning money.
Examples 1. doctor working in the hospital. 2. Teacher working in the school. 3. An employee going to his office.

Non-economic activities
Non-economic activities: activities which are undertaken by human beings due to love and affection, social obligation, patriotism, physical requirement 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.

Agenda
Economic and non economic activities Forms of business organization Comparative study on different forms Basic accounting concepts Methods of accounting

Business
An activity carried primarily with the object of earning profit can be called a business activity. The objective of earning profit is achieved by production and/or exchange of want satisfying goods and services. Therefore, we can define business as an activity concerned with the production and/or exchange of want satisfying goods and services carried with a view of earning profit.

Our future discussion only on business activities

Various forms of business organization

Forms of Business organization

Non-corporate forms

Corporate forms

Sole trader Organization

Partnership Organization

Company Organization

Cooperative Organization

Private Company

Public Company

Sole trader organization

One man business in which an individual produces independently with his own capital, skill and intelligence and is entitle to receive all the profits and assume all risks of ownership. What is required is that an individual decides about the type of business to started and arranges the necessary capital. The person generally manages business on his own.

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

Sole trader organization - merits

Easy formation Direct motivation Full control Quick decision Flexibility in operation Secrecy Personal touch Dissolution easy

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

Partnership form of organization

An association of two or more person, who join together to share the profits of business carried on by all or any of them acting. Partner: A person who is the member in a partnership firm Partnership deed: A written agreement entered into by partners specifying the constitution rules and regulation of the partnership. Partnership organisation is regulated by The Indian Partnership Act, 1932

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

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

Partnership form of organization - demerits

Limited capital Unlimited liability No public confidence Non-transferability of interest Uncertainty Conflicts among partners Risk of implied authority

Company form of organization

Company: an association of persons registered under the Companies Act, 1956. It is an artificial person created by law, with distinctive name, a common seal and perpetual succession of its members. Companies Act, 1956 regulates the functioning of the companies

Company form of organization

Private limited company: A company which by articles (a)Limits the maximum number of members to 50 excluding its employees. (b) Restricts the right to transfer its shares, and (c)Prohibits the invitation to the public to subscribe to its share and debentures.
Public limited company: a company which is not a private limited company.

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

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

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

Cooperative form of organization

A voluntary association of persons established under the co operative societies act. The primary objective of any cooperative organisation is to render services to its members.

Agenda
Economic and non economic activities Forms of business organization Comparative study on different forms Basic accounting concepts Methods of accounting

Comparative study of business organization

Please refer the hand out

Agenda
Economic and non economic activities Forms of business organization Comparative study on different forms Basic accounting concepts Methods of accounting

Basic accounting concepts

accounting concepts are broad working rules adopted by the accounting profession as a guides for recording and reporting the affairs and activities of the business. These concepts are
1. 2. 3. 4. 5. 6. 7. Going concern concept Accounting period concept Matching concept Conservatism concept Consistency concept Full disclosure concept Materiality concept

Going Concern concept

Normally the business is started with the intention of continuing it indefinitely or at least for the foreseeable future.
The investors lend money and the creditors supply goods and services with the expectation that the enterprise would continue for long. Hence financial statements are prepared on a going concern basis and not on liquidation (closure) basis.

Accounting period concept

The going concern concept assumes that the business will continue for a long period, almost indefinitely, but, the businessmen cannot postpone the preparation of financial statements indefinitely. Therefore, he prepares them periodically to find out the profit or loss and financial position of the business. This will also enable other interested parties such as owners, investors, creditors, tax authorities to make periodic assessment of its performance. So, the life of the business enterprise is divided into what are called accounting periods. Profit and loss and the financial position at the end of each accounting period is regularly assessed.

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 revenues and costs pertaining to that accounting year.
In other words, expenses incurred in an accounting year should be matched with the revenues earned during that year. The crux of the problem, therefore, is that appropriate costs must be matched against appropriate revenues.

Conservatism concept
This is also known as Prudence concept. This concept tries to ensure that all uncertainties and risks inherent in business are adequately provided for. This is in accordance with the traditional views which states anticipate no profits but anticipate all losses.

Consistency concept
The principle of consistency means conformity from period to period with unchanging policies and procedures. It means that accounting method adopted should not be changed from year to year. For example, the principle of valuing closing stock at const price or market price whichever is lower should be followed year after year.

Full disclosure concept

The financial statements are the basic means of communicating financial information to all interested parties. These statements are the only source for assessing the performance of the enterprise for investors, lenders, suppliers, and others. Therefore, financial statements and their accompanying footnotes should be completely disclose all relevant information of a material nature which relate to the profit and loss and the financial position of the business

Materiality concept
This concept is closely related to the full disclosure concept; Full disclosure does not mean that everything should be disclosed. It only means that all relevant and material information must be disclosed. Materiality primarily relates to the relevance and reliability of information. An item is considered material if there is reasonable expectation that the knowledge of it would influence the decision of the users of the financial statements. All such material information should be disclosed through the financial statements and the accompanying notes.

Agenda
Economic and non economic activities Forms of business organization Comparative study on different forms Basic accounting concepts Methods of accounting

Methods of accounting
Accrual basis of accounting. Cash basis of accounting.

Contact details
www.vcsin.co.in contactus@vcsin.co.in

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