Course Code: PCO- 01
Assignment Code:
PCO-01/TMA/2015-16
1.
What do you mean by
business? Explain various forms of business organization.
Answer: The term ‘Business’ can be defined as production of
goods and services that are involved in flow of goods from the point of
consumption or final use with a view to earn profit.
So we can say that any activity carried with profit motive is
business.
The
various forms of organization are as follows:
1) Sole proprietorship
2) Partnership
3) Company
These are explained in
brief as follows:-
SOLE
PROPRIETORSHIP:
The sole proprietorship
is a form of business that is owned, managed and controlled by an individual.
He has to arrange capital for the business and he alone is responsible for its
management. He is therefore, entitled to the profits and has to bear the loss
of business. This type of business organisation is also called single ownership
or single proprietorship. If the business primarily consists of trade, the
organization is a sole trading organization. Small factories and shops are
often found to be sole proprietorship organisations.
Features
of Sole Proprietorship:
The important features
of a sole-proprietary organization include the following:
(i) Individual Initiative: One person is the owner in sole proprietary forms of
organization.
(ii) Risk Bearing: The proprietor is the sole beneficiary of profits in
this form organisation. If there is a loss he alone has to bear it. Thus the
risks of business are borne by the proprietor himself.
(iii) Management and control: Management and control of this type of organization
is the responsibility of the sole proprietor. He may, however, employ a manager
or other people for the purpose.
(iv) Minimum government regulations: The government does not
interfere with the working of the sole proprietorship organization. However,
they have to comply with the general laws and rules laid down by government.
(v) Unlimited liability: The sole proprietor has to bear the losses and is
responsible for the liabilities of the business. If the business assets are not
sufficient to meet the liabilities, he may also have to sell his personal
property for that purpose.
Merits
of Sole Proprietorship:
A sole proprietary organization
has the following advantages:
(i) Easy formation: A sole proprietorship business is easy to form where
no legal formality involved in setting up this type of organization. It is not
governed by any specific law. It is simply required that the business activity
should be lawful and should comply with the rules and
Regulations lay down by
local authorities.
(ii) Better Control: In sole proprietary organization, all the relating
to business operations is taken by and easy. The sole proprietor can also bring
about changes in the size and nature of activity. This gives better control to
business.
(iii) Sole beneficiary of profits: The sole proprietor is
the only person to whom the profits belong. There is a direct relation between
effort and reward. This motivates him to work hard and bear the risks of
business.
iv) Inexpensive Management: The sole proprietor does not appoint any specialists
for various functions. He personally supervises various activities and can avoid
wastage in the business
Limitations
of Sole Proprietorship:
A sole proprietor
generally suffers from the following limitations:
(i) Limitation of management skills: A sole proprietor may
not be able to manage the business efficiently as he is not likely to have
necessary skills regarding all aspects of the business. This poses difficulties
in the growth of business also.
(ii) Limitation of Resources: The sole proprietor of a
business is generally at a disadvantage in raising sufficient capital. His own
capital may be limited and his personal assets may also be insufficient for
raising loans against their security. This reduces the scope of business
growth.
(iii) Unlimited liability: The sole proprietor is personally liable for all
business obligations. For payment of business debts, his personal property can
also be used if the business assets are insufficient.
(iv) Lack of continuity: A sole proprietary organization suffers from lack of
continuity. If the proprietor is ill this may cause temporary closure of
business. And if he dies the business may be permanently closed.
PARTNERSHIP
Partnership is an
association of persons who agree to combine their financial resources and
managerial abilities to run a business and share profits in an agreed ratio.
Since the resources of a sole proprietor to finance, and his capacity to manage
a growing business are limited, he feels the need for a partnership firm.
Partnership business, therefore, usually grows out of the need for expansion of
business with more capital, better supervision and control, division of work
and spreading of risks.
Features
of Partnership:
The features of
partnership are as follows:
(i) Existence of an agreement: Partnership is formed on the basis of an agreement
between two or more persons to carry on business. The terms and conditions of
partnership are laid down in a document known as Partnership Deed.
(ii) Engagement in business: A partnership can be formed only on the basis of a
business activity. Its business may include any trade, industry or profession.
Thus, a partnership can engage in any occupation – production and/or
distribution of goods and services with a view to earning profits.
(iii) Sharing of profits and losses: In a partnership firm,
partners are entitled to share in the profits and are also to bear the losses,
if any.
(iv) Agency relationship: The partnership business may be carried on by all or
any of the partners acting for all. Thus, each partner is a principal and so
can act in his own right. At the same time he can act on behalf of other firm
by his acts.
(v) Unlimited Liability: The liability of partners is unlimited as in the
case of sole proprietorship. In case some obligation arises then not only the
partnership assets but also the private property of the partners can be taken
for the payment of liabilities of the firm.
Merits
of Partnership
A partnership form of organization
offers the following
Advantages:
(i) Ease in formation: A partnership is very easy to form. All that is
required is an agreement among the partners. Even the expenses to be incurred
for registration are-not much.
(ii) Pooling of financial resources: A partnership commands
more financial resources compared to sole proprietorship. This helps in
expanding business and earning more profits. As and when a firm requires more
money, more partners can be admitted.
(iii) Pooling of managerial stalls: A partnership
facilitates pooling of managerial skills of all its partners. This leads to
greater efficiency in business operations. For instance, in a big partnership
firm, one partner can handle production function, another partner can look
after all marketing activity, and still another can attend to legal and
personnel problems, and so on.
(iv) Balanced business decisions: In a partnership firm,
decisions are taken unanimously after considering all the major aspects of a
problem. This ensures not only balanced business decisions but also removes
difficulties in the smooth implementation of those decisions.
Limitations
of Partnership
A partnership form of
organization suffers from the following major limitations:
(i) Uncertainty of existence: The existence of a partnership firm is very
uncertain. The retirement, death, bankruptcy or lunacy of any partner can put
an end to the partnership.
Further, the partnership
business can come to a close if any partner demands it.
(ii) Risks of implied authority: It is true that like the sole proprietor each
partner has unlimited liability. But his liability may arise not only from his
own acts but also from the acts and mistakes of co-partners over whom he has no
control. This discourages many persons with money and ability, to join a
partnership firm as partner.
(iii) Risks of disharmony: In partnership, since decisions are taken
unanimously, it is essential that all partners reconcile their views for the
common good of the organisation. But lack of harmony may paralyze the business
and cause conflict and mutual bickering.
(iv) Difficulties of expansion: It is difficult for a partnership firm to undertake
modernization of expansion of its operations. This is because of its inability
to raise adequate funds for the purpose. Limited membership (restricted to 20)
and their limited personal resources do not permit large amounts of capital to
be raised by the partners.
COMPANY
A company is defined as
a voluntary association of persons having separate legal existence, perpetual
succession and a common seal. As per the definition, there must be a group of
persons who voluntarily agree to form a company. Once formed the company
becomes a separate legal entity with a distinct name of its own. Its existence
is not affected by change of members. It must have a seal to be imprinted on
documents whenever required. The capital of a company consists of transferable
shares, and members have limited liability.
Features
of a Company
The following are the
chief characteristics of the company form of organisation:
(i) Registered body: A company comes into existence only after its
registration. For that purpose, necessary legal formalities have to be
completed as prescribed under the
Companies Act.
(ii) Distinct legal entity: A company is regarded as a legal entity separate
from its members. Thus a company can carry on business in its own name, enter
into contracts, sue, and be sued.
(iii) Artificial person: A company is the creation of law and has a distinct
entity. It is therefore, regarded as an artificial person. The business is run
in the name of the company. But because it is an artificial person, its
functions are performed by the elected representatives of members, known as
directors.
(iv) Perpetual succession: A company has continuous existence independent of
its members. Death, insolvency, or change of members has no effect on the life
of a company. The common saying in this regard is that members may come;
members may go, but the company goes on forever.
(v) Common seal: Since a company is an artificial person, it has no physical
existence. The activities of the company are carried through a group of natural
persons elected by its members (called directors). Every company must
therefore, have a common seal with its name engraved on it. Anyone acting on
behalf of the company must use the common seal to bind the company.
Merits
of Company
The most important
advantages of a company organization may be stated as follows:
(i) Collection of huge financial resources: The biggest advantage of
a company organization is that it has the ability to collect large amounts of
funds. This is because a company can raise capital by issuing shares to a large
number of persons.
(ii) Limited liability: Another advantage of the company form of organization
is the limited liability of members. With the liability of members limited to
the value of their shares, company is able to attract many people to invest in
its shares. It is thus in a position to undertake business ventures involving
risks.
(iii) Free transferability of shares: A company permits its
members to transfer their shares. Free transferability of shares provides
liquidity of the member’s investment. Thus, if a member needs cash he can sell
his shares. Or, he can use the same amount to buy shares of another more
profitable company.
(iv)Durability and stability: A company is the only form of organization which
enjoys continuous existence and stability. The funds invested in a company by
shareholders are not withdrawal until it is wound up.
Limitations
of Company Organisation:
A company organisation
suffers from the following limitations:
(i) Lengthy and expensive legal procedure: The registration of a
company is a long-drawn process. A number of documents are to be prepared and
filled . For preparing documents experts are to be hired who charge heavy fees.
Besides, registration fees have also to be paid to the Registrar of Companies.
(ii) Excessive government regulations: A company is subject to
government regulations at every stage of its working. A company has to file
regular returns and statements of its activities with the Registrar
iii) Lack of incentive: The company is not managed by shareholders but by
directors and other paid officials. Officials do not have investment in the
company and also do not bear the risks. As such, they may not be as much
motivated to safeguard the interests of the company as the shareholders.
iv) Growth of monopolistic tendencies: A company because of its
large size has the tendency to grow into a monopoly so as to eliminate competition,
control the market and charge unreasonable prices to maximize profits.
2.
a)
What do you understand by ‘Accounting Equation’? Give suitable illustrations.
Answer: An accounting equation is a statement of equality
between the resources and the sources which finance the resources and is
expressed as follows:
Resources = Sources of finances
Resources mean the Assets: The assets refer to the tangible
objects (e.g. Land and Building, Plant and Machinery, Furniture, stock,
Debtors, Bank balance etc.) or intangible rights (e.g. Patents, trademark, Copyright)
owned by an enterprise and carrying probable future benefits.
Sources of finance mean
equities: it includes internal sources (or internal equity) i.e. Capital and
external sources or external equity i.e. liabilities. Capital refers to the
amount invested in an enterprise by its owners. Liabilities are the financial
obligations of an enterprise other than owners’ funds. Thus aforesaid
accounting equation may be expressed as follows:
Total Assets = Total Equities
Or
Assets = Internal Equity + External Equity
Or
Assets = Capital + Liabilities
Since the liability
holders have a definite and prior claim against the assets, the capital is also
called a residual of assets over liabilities and may be expressed as follows:
Capital = Assets – Liabilities
Example
– 1
Mr. Ram starts his
business and the following transactions take place:
He started business with
cash Rs. 5,00,000 have been introduced
Mr. Ram in terms of cash, which is the capital for the business concern, hence
on one side the assets( cash) has been created to the extent of Rs.5,00,000
Assets
|
=
Capital
|
+
Liabilities
|
Cash = 5,00,000
|
5,00,000
|
Nil
|
Example
– 2
He purchased furniture
for cash worth Rs. 50,000.
The transaction has its
effect only on the assets, as one asset has been purchased against the other.
In this transaction, furniture is purchased against cash given, Furniture and
Cash both are assets. Hence furniture is introduced by Rs.50,000.
Assets
|
=
Capital
|
+
Liabilities
|
Cash = 5,00,000 – 50,000
=4,50,000
Furniture = 50,000
|
5,00,000
|
Nil
|
Example
– 3
Rent paid Rs. 10,000
This transaction has its
effect on cash and capital since rent is express and all the expenses directly
effects capital.
Assets
|
=
Capital
|
+
Liabilities
|
Cash = 4,50,000 – 10,000
= 4,40,000
Furniture = 50,000
|
5,00,000 – 10,000 = 4,90,000
|
Nil
|
Example
– 4
Goods purchased on
credit Rs. 10,000.
This transaction has its
effect on stock and creditors. Goods purchased are assets and since cash is not
paid, the amount of goods purchased is shows as liability.
Assets
|
=
Capital
|
+
Liabilities
|
Cash = 4,50,000 – 10,000
= 4,40,000
Furniture = 50,000
Stock= 10,000
|
5,00,000 – 10,000 = 4,90,000
|
10,000
|
