BPP PCO ASSIGNMENT 2015-2016

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