Introduction to Accounting-Part

Part 1: Basics of Financial

Statements
Prof. R. Narayanaswamy
Business Organization

Hello,

Accounting helps us to tell stories of human beings and organizations. An organization is a set of
human beings who have come together to accomplish something. We deal with organizations all the
time. Neighborhoods, grocery stores, petrol stations, taxi companies,
companies, mobile phone companies, car
dealers, drug stores, airlines, hospitals, schools, colleges, political parties, religious and charitable
institutions, governmentsthe the list is quite long. All these organizations need accounting to carry on
their activities.
ities. We will begin with business organizations.

What do business organizations do? We regularly use things such as butter, soaps, medicines,
gadgets, cars, and electricity. Though business organizations offer various products and services, the
core of allll of them is the same. They are machines that receive cash from customers and pay
suppliers, employees, government, and others.

What do typical business activities look like? Some business organizations manufacture products.
Manufacturing organizations byy raw materials and convert them into finished goods by applying
production processes. Some business organizations provide services. A service results in a personal
or professional experience. Unlike a product, it does not have physical form. Other busines
business
organizations buy and sell goods. These are merchandising or trading organizations.

Business organizations can take many legal forms. We will take three of them. Sole proprietorship,
partnership, and limited company. The most common form is sole proprietorship.
proprietorship. Here, a single
individual owns a business. Businesses that we often deal with such as grocery stores, watch repair
services, and restaurants are usually proprietorships. The proprietor takes all the risks and gets all
the rewards. Therefore, he gets ts to keep all the profits the business makes and bears all the losses it
incurs. Besides, the proprietor has unlimited liability for the amounts owed by the business. This is
what it means, if the business does not have sufficient cash or other assets to pay off its obligations,
the proprietor has to make good the shortfall from his personal assets. If the proprietor has
insufficient assets, he will be declared insolvent. This is because the law considers the proprietor and
the business to be one and the same.
s

In partnership, two or more individuals come together to do a business. The partners share the
profits and losses equally unless they agree otherwise. Each partner has unlimited liability for the
debts of the firm and is also responsible for the share of liabilities of the other partners. Professional
practices of lawyers, architects, and accountants are often organized as partnerships.

Limited company is a legal entity, unlike a proprietorship or partnership. It can do most things that a
natural person
on can do. It can enter into contracts, appoint employees, acquire property, borrow
money, and so on. A company's shareholders have limited liability. This means that liability is limited
to the amount they agreed to contribute to the company's capital. A shareholder is not liable for the
actions of the company's employees or the company's other shareholders.

All Rights Reserved. This document has been authored by Prof. R. Narayanaswamy and is permitted for use only within the course
"Introduction to Accounting -Part
Part I: Basics of Financial Statements" delivered in the online course format by IIM Bangalore. No part of this
document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any
form or by any means electronic, mechanical,
nical, photocopying, recording or otherwise without the prior permission of the author.
 Introduction to Accounting-Part
Part 1: Basics of Financial
Statements
Prof. R. Narayanaswamy
Business Organization

Now, let us compare the three forms of business organization. The proprietor has complete freedom
to make decisions about purchases, sales, employees,
employees, factory location, and so on. Partners can bring
in complementary skills. For instance, a law firm can have specialists in business law, tax law,
criminal law, patent law, constitution law, and healthcare law, and can, therefore, offer better
services thann an individual lawyer can. Proprietorships and partnerships have less government
regulation and greater flexibility in doing business. But they cannot grow much because of the
limited capital available to the owner or the partners. Since companies can raise
raise capital from the
public, large businesses are generally organized as companies. Also, because of limited liability, a
company's shareholders are not exposed to the risk of personal insolvency for no fault of theirs.

Before, you choose a form of business

business organizations, you should consider a number of factors such
as the owner's need for control, growth plans, capital requirements, government regulation and
taxation. Businesses often start as proprietorships or partnerships and grow to become large
corporations.
ations. Two college dropouts came up with a way to implement the programming language
basic for the Altair microcomputer and earned a revenue of $16,005 in 1976. That venture is now an
iconic company. Do you know its name? Here's a hint, if you need any, one
one of them was Paul Allen.

All Rights Reserved. This document has been authored by Prof. R. Narayanaswamy and is permitted for use only within the course
"Introduction to Accounting -Part
Part I: Basics of Financial Statements" delivered in the online course format by IIM Bangalore. No part of this
document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any
form or by any means electronic, mechanical,
nical, photocopying, recording or otherwise without the prior permission of the author.