PRINCIPLES OF
ACCOUNTING
By
Sara Munir
Lahore Garrison University
Department of Management Sciences
2nd Lecture
• Business
• Types of Business
What is a business?
• Individuals or organizations trying to earn a profit by
providing products that satisfy people's needs.
The Primary Goal of Business
• Earn a Profit
• The difference between what it costs to make and sell a
product and what a customer pays for it.
The Primary Goal of Business
PROFIT --
• The reward for the risks that businesses take in providing
products.
Non-Profit Organizations
• Nonprofit organizations provide goods and services but do
not have the fundamental purpose of earning profits.
Types of Business
• Sole proprietorship
• Partnership
• Corporation
• Cooperative
Comparison of types of business
Comparison of types of business
Important terms related to business
• A shareholder (also known as stockholder) is an
individual or institution (including a corporation) that
legally owns one or more shares of stock in a public or
private corporation. Shareholders may be referred to as
members of a corporation
• A stakeholder is a party that has an interest in a
company and can either affect or be affected by the
business. The primary stakeholders in a typical
corporation are its investors, employees, customers, and
suppliers.
Sole Proprietorship
Businesses owned and operated by one individual; the
most common form of business organization in the United
States. Examples including
• Many restaurants
• Hair salons
• Flower shops
• Independent grocery stores etc
Sole Proprietorship -- Facts
• 15-20 million in the U.S.
• 80% of all businesses
• Men 2x more likely than women to start own business
Advantages of a Sole Proprietorship
• Ease of formation
• Secrecy
• Distribution and use of profits
• Flexibility and control of the business
Disadvantages of a Sole Proprietorship
• Unlimited liability
• Limited sources of funds
• Limited skills
• Lack of continuity
• Lack of Qualified Employees
• Taxation
Partnership
• A form of business organization defined by the Uniform
Partnership Act as “an association of two or more persons
who carry on as co-owners of a business for profit”
Types of Partnerships
General partnership
A partnership that involves a complete sharing in both the
management and the liability of the business
Limited partnership
A business organization that has at least one general
partner, who assumes unlimited liability, and at least one
limited partner whose liability is limited to his or her
investment in the business.
Partnerships Advantages &
Disadvantages
Advantages
Ease of organization
Capital & credit
Knowledge & skills
Decision making
Disadvantages
Unlimited liability
Distribution of profits
Limited sources of funds
Taxation of partnerships
Disadvantages
• The life of a partnership may be established as a certain
number of years by the agreement. If no such agreement
is made, the death, inability to carry out specific
responsibilities, bankruptcy, or the desire of a partner to
withdraw automatically terminates the partnership.
Corporations
• Legal entities created by the state whose assets and
liabilities are separate from its owners..
• Typically owned by many individuals and/or organizations
who own shares of the business – stock (shareholders or
stockholders)
About Corporation
Stock & Dividends
• Stock – shares of a corporation that may be bought or
sold
• Dividends – profits of a corporation that are distributed in
the form of cash payments to stockholders.
Creating a Corporation
• A Corporation is created (incorporated) under the laws of
the state in which it incorporates. The individuals creating
the corporation are called incorporators.
Types of Corporations
• Private corporation
• Public corporation
• Quasi-public corporation
• Non-profit corporation
Types of Corporations
• Private corporation – a corporation owned by just one or
a few people who are closely involved in managing the
business
• Public Corporation– a corporation whose stock anyone
may buy, sell, or trade.
Public Sector and Private Sector
Corporations
Types of Corporations
• Quasi-public corporation – Corporation owned and
operated by the federal, state, or local government -- e.g.
US Postal Service
• Non-profit corporation – focuses on providing a service
rather than earning a profit but are not owned by a
government entity
e.g. (American Red Cross)
a humanitarian organization that provides emergency
assistance, disaster relief, and disaster preparedness
education in the United States
Corporations
Advantages:
• Limited liability
• Transfer of ownership
• Perpetual life i.e. meaning that the corporation will
continue to exist regardless of the life or death of the
shareholders of the corporation.
• External sources of funds
• Expansion potential
Disadvantages
• Double taxation
• Disclosure of information
Cooperative
• An organization composed of individuals or small
businesses that have banded together to reap the benefits
of belonging to a larger organization. A business
cooperative is a private group of small businesses that opt
to pool their resources to benefit all members. It is a group
of independent businesses working together to achieve
common goals.
• A Cooperative is an organization owned and operated by
its members. Groups of businesses, such as small farms,
pool their resources and form a cooperative. The purpose
is to save money on the purchase of certain goods and
services. A cooperative can make marketing of goods
and services more efficient and profitable.
Cooperative
A cooperative (also known as co-operative, co-op, or coop)
is "an autonomous association of persons united voluntarily
to meet their common economic, social, and cultural needs
and aspirations through a jointly-owned enterprise“.
Cooperatives may include:
Cooperative
• Advantages
• All members are considered to be equal when it comes to
decision making regardless of their more or fewer shares
• As the name suggests, cooperation is the biggest advantage of
cooperative business. A workplace where members put their
effort both at an individual and collective level
• Disadvantages:
As we have discussed in the advantages that collective
decision making is helpful but it is a disadvantage at the same
time as collective decision making can be time-taking. If few of
the members lose interest in the organization, all the burden of
progress will be on the rest of the members
Next Lesson Preview
• Nature & Classification of Business
