Business Organizations....!

Unit 03

Business Organizations

• Business organizations are organizations that are involved in the production and distribution of goods and services to satisfy the needs and wants of people.

• The parties who carry out these business organizations are individuals, groups of individuals, or the government.

Characteristics of business organizations

Have a name

Have a purpose.

Meet the needs and wants of people.

Engage in management activities

Use resources.

Classification of business organizations

Business organizations can be classified on the following basis.

1. Ownership basis

2. Purpose basis

3. Size/quantity basis Management basis

Classification of business organizations on the basis of ownership.

• The parties who invest the necessary funds for the business are called owners

Based on this ownership, business organizations are classified as follows.

Business Organizations (Based on Ownership)

Sole Proprietorship	Organizations operating under the Central Government
Partnership	Organizations operating under the Provincial Council
Incorporated Company	Organizations operating under the Local Government Councils
Cooperative Society
Associations, Clubs

Private Sector Enterprise

• Enterprises owned by individuals / groups of individuals are called private sector enterprises.

• Enterprises whose capital is invested by individuals / groups of individuals and whose management activities are carried out by them are private sector business organizations.

Sole Proprietorship/Private Ownership

A business owned by an individual is a sole proprietorship.

• A business whose capital is invested by an individual and whose management activities are carried out by him and whose profit and loss are borne by him is a sole proprietorship.

Eg:- Pillayar Sources, Keertika Sariwaiyagam, Dhanusa Bookstore,

Ganapathi Bakeary.

Characteristics of a Sole Proprietorship Business

• Capital is invested. The owner will enjoy the profit / loss as an individual owner

• Unlimited liability of the owner

When a sole proprietorship business incurs a large loss, the owner may have to lose his own assets as well.

• Lack of legal personality.

This is a situation where the legal status of a person is not seen before the law. That is, legal actions cannot be taken in the name of the business. (The owner can make assets, purchases in his own name)

• Non-continuous operation.

• Registration is not mandatory.

Advantages of a sole proprietorship business

• Easy to start.

• Easy to start because there are fewer legal restrictions. Initial costs are low

• All profits belong to the owner

• The confidentiality of the business organization can be maintained.

• Decisions can be made independently and quickly.

• The owner can use his skills to the fullest

Disadvantages of a sole proprietorship business

• Unlimited liability of the owner.

• Inability to raise a large amount of capital

• Lack of continuity

• Lack of legal personality

• Individual decision-making becomes ineffective

Registration of a sole proprietorship business

• When the owner of a sole proprietorship business starts a business in his full name, it is not necessary to register

• When carrying on a business under a common name other than his own name

• The business name should be registered based on the relevant Provincial Council Business Name Act as per the Business Name Registration Ordinance No. 6 of 1918.

• Application forms for this registration can be obtained from the relevant Divisional Secretariats

• The application form for registration should be submitted within 14 days of starting the business.

Procedures for registering a sole proprietorship business

• Obtain the relevant application form from the relevant Pradeshiya Sabha office where the business is expected to start. Two forms are used for this

• Application form for registration of a sole proprietorship business

• Application form for obtaining a report from the Grama Niladhari.

• Submit the completed application form and the Grama Niladhari report along with the registration fee to the Divisional Secretariat. (District Secretary)

• After the above documents are verified by the Divisional Secretariat, a certificate of registration of the business name will be issued.

• This certificate should be displayed for public viewing

Benefits of registering a business name

• Obtaining an identity.

• Being able to confirm the ownership of the business name.

• Eligibility to receive incentives and concessions provided by the government

• Being able to easily obtain loans from financial institutions.

Partnership Business

• A partnership business is a business in which individuals come together to run a business with the aim of earning profit.

• The relationship between the partners in this business is a partnership.

• The owners of a partnership are called partners

• The Partnership Act of 1890 is found in relation to this partnership.

Characteristics of a partnership business

• The number of members is found in 2-20.

• Partnership agreements can be made and executed

• Liability is not limited. But the loss. is spread.

• No legal personality.

• No continuous operation.

Note-

The maximum number of partners of a partnership is limited to 20 by the 7-digit Companies Act of 2007

Things covered in the Partnership Act of 1890.

• The capital must be invested by the partners in equal amounts.

• Profits and losses must be divided equally.

• Partners of a partnership can make debts and take out loans and cannot charge interest.

• 5% interest is charged on partner loans

• Partners can participate in the management of the company but cannot receive a salary.

Partnership Agreement

• An agreement made between partners regarding the administrative matters of a partnership and the method of resolving disputes that may arise between the partners is called a partnership agreement.

• This partnership agreement can be made in the following ways

1. Orally

2. By conduct

3. In writing

Written partnership agreement / partnership agreement

• Regarding the administrative matters of a partnership If the partnership agreement is prepared in writing and signed by all the partners and maintained as a document, it is called a partnership agreement.

Note

• According to the Prevention of Frauds Ordinance, 1940, when the initial capital of a partnership is more than Rs. 1000, the partnership agreement must be made in writing.

Matters included in the partnership agreement (written)

• The ratio of capital to be invested

• The ratio of profit and loss to be shared

• The ratio of interest on the debts of the partners

Salary details of the partners involved in the management

• The ratio of interest on the loans received by the partners in the partnership.

The partnership and its registration.

• The name of a partnership business does not need to be registered when carrying on the business in the full name of the partners.

• It can be carried on in a common name other than its own name. Registration is mandatory as per the Business Names Registration Ordinance No. 6 of 1918.

Advantages of Partnership Business

• Easy to start

Like a sole proprietorship business, it can be started easily with fewer legal restrictions.

• More capital can be raised.

Since there are 2-20 partners, more capital can be raised.

• It can be operated successfully using the various skills found among the partners.

• Liability is shared among the partners.

• Better decisions can be made as the partners make decisions collectively.

Disadvantages of Partnership Business

• Unlimited liability.

• No legal personality

• No ability to continue as a going concern.

• Profits are shared among the partners.

• Conflicts may arise among the partners

• Decision-making by the partners will lead to delay in decision-making.

Laws to be followed by a partnership business

• Companies Registration Act No. 6 of 1918

• Partnership Act No. 1890

• Prevention of Fraud Ordinance No. 1940

• Companies Act No. 7 of 2007 (maximum number of partners in a partnership is 20)

Incorporated Company

• A company is a profit-oriented business organization that is registered under the Companies Act No. 7 of 2007 and is started by raising capital by issuing shares, has limited liability and has legal personality.

• The owners of this company are the shareholders by purchasing shares.

• Their liability will be limited to the value of the shares they have purchased

 Keertika pvt Ltd

 Efron Company Limited

Characteristics of an incorporated company

• It will be registered under the Companies Act No. 7 of 2007.

• Liability is limited.

• It has legal personality.

• It will be managed by a board of directors/board of directors.

• Capital will be raised by issuing shares

Registration of an incorporated company

• It is mandatory to register with the Registrar of Companies, Department of Companies, as per the Companies Act No. 7 of 2007.

Documents to be submitted to the Registrar of Companies regarding company registration.

• Affidavit that the name of the company does not contain any official words similar to the name of an existing company

• Consent letter of the person elected as a director.

• Company constitution (internal administration matter)

• Company secretary's consent letter.

Advantages of an incorporated company

• Ability to raise more capital.

Since capital is raised by issuing shares, more capital can be raised.

• Legal personality.

• Limited liability.

The liability of the company's shareholders is limited to the capital they have paid up.

• Going concern.

• Management is carried out by the board of directors.

The management is carried out by directors elected by the votes of the company's shareholders.

Disadvantages of an incorporated company

• Greater legal influence.

Legal requirements regarding the establishment, management, and dissolution of the company are more similar to other businesses.

• Sharing of ownership and profits.

Since the number of shareholders of the company is large, profits and rights are shared among the shareholders.

Cooperative Society

• Institutions established under the Cooperative Society Act No. 5 of 1972 with the aim of meeting the general need with democratic management and independent activities and enjoying equal rights are called Cooperative Societies.

• The minimum number of members to establish these cooperative societies is 10.

 Multipurpose Cooperative Society

 Thrift Credit Cooperative Society

 Sea Workers Cooperative Society

Characteristics of a Cooperative Society

• Having common needs and objectives

• Democratic management system.

The Board of Directors for the management of the cooperative society will be elected by all the members by voting

• Equal rights for the members

The rights of the cooperative society belong to the members and the assets found there also belong to the members.

• Free and open membership

Anyone has the right to join the association at their own discretion and to withdraw from the association at any time.

Advantages of the cooperative society.

• Democratic management system

• Acting for the benefit of the members.

• Surpluses are shared among the members

Disadvantages of the cooperative society

• Capital is limited.

Since capital is raised based on the membership money of the members, it is not possible to raise more capital.

Cooperative policies must operate in accordance with the Cooperative Act

Associations, Clubs

• Associations are organizations that operate based on social welfare and member welfare.

• These social organizations operate to provide social services, charity work, educational assistance, etc.

• These associations must register with the responsible officer at the relevant divisional secretariats.

 Sports clubs

 Community centers.

 Agricultural clubs

Public sector business organizations / Government sector business organizations

• Business organizations that are owned by the government with capital provided by the government are public sector business organizations

• The following business organizations are found under this public sector.

 Government corporation

 Government department.

 Government company

Government corporation

• An organization that is fully owned by the government / majority owned by the government is called a government corporation.

• These organizations are created based on general laws | special laws passed by Parliament

• These government corporations are also called bureaus, commissions, councils, boards, etc.

 Rupavahini Corporation

 Ceylon Electricity Board

 Central Environmental Authority

 Foreign Employment Bureau

 University Grants Commission

 Consumers Authority

Characteristics of a Corporation

• Ownership and management are vested in the government.

• Individual status before the law (legal personality)

• Created through a special law / existing general law

• Continuous operation.

Advantages of a Corporation.

• Suitable for essential needs.

Since the private sector does not come forward to provide most of the services needed by the public, the public corporation system is suitable for fulfilling them

 Electricity Board

 Water Supply and Drainage Board

• Helps reduce the monopoly of the private sector

A competitive environment can be created by using a public corporation to reduce the adverse impacts caused by the power of the private sector.

 Transport Board

• Surpluses reach the general public.

A portion of the surpluses earned by corporations are added to the government's consolidated fund and then used for social welfare projects.

 Consumer Affairs Authority

Disadvantages of a public corporation

• The government finance law is subject to regulations

• No independence in decision-making

• Influence of relevant ministries is seen

Government Department

• An institution is a government department that is fully funded by the government and operates under government administration under the ministry to provide various services needed by the people

 Sri Lanka Postal Department.

 Auditor General's Department

 Election Department

Note;-The Elections Department and the Auditor General's Department operate as departments operating under the ministry.

Disadvantages of Government Departments

• There will be a delay in decision-making as they operate under the administration of Parliament and the Ministry.

• They cannot function independently as they have to carry out various activities in accordance with government financial regulations, administrative regulations, various regulatory bodies, etc.

Government Companies

• Commercial organizations that are registered and started under the Companies Act No. 7 of 2007 by raising capital by selling shares and more than 51% of the capital is owned by the government are called government companies.

Classification of business organizations based on purpose

Business organizations (purpose)

Profit-oriented business Non-profit

organization business

Private sector

Private sector Public sector

• Private ownership *Public company Cooperative

Public corporation

• Partnership

• Associations, * Government departments and associations

Profit-oriented businesses

• Business organizations that operate with the main objective of earning profit are profit-oriented business organizations

Non-profit business organizations

• Business organizations that operate with the main objective of benefiting members and society are non-profit business organizations

Classification of business organizations based on size

Business organizations

1. Small and medium-sized enterprises

2. Large/large-scale enterprises

Generally followed rules for classifying business organizations based on size

• Amount of capital invested

• Number of employees.

• Size of the market / market for the business

• Amount of energy used.

Note - SANA | Department of Population and Statistics Enterprises with less than 25 employees are classified as small/medium enterprises.

Small and medium-sized enterprises

• Enterprises with relatively small capital, fewer employees and less market share are small and medium-sized enterprises.

Large enterprises

• Enterprises with large capital, more employees and more market share are large enterprises

• A factory that dominates a particular industry is a large enterprise.

Classification of business organizations on the basis of management.

Management

• Management is the process of planning, organizing, directing and controlling a business so that it can achieve its objectives.

On the basis of this management, business organizations can be classified as follows

1. Companies managed by an individual owner

 Sole proprietorship

2. Companies managed by partners

 Partnership business organization

3. Companies managed by a board of directors, a director or a company.

 Incorporated company

4. Companies managed by the government

 Public corporation, government department

Unit 04

Introduction to Accounting

Accounting

• Accounting is the process of providing information useful to stakeholders in a business for making decisions

Types of Accounting

1. Financial Accounting

2. Management Accounting

3. Cost Accounting

Financial Accounting

• Financial accounting is the accounting used to provide financial information to stakeholders in a business

Need/Use of Accounting

1. To know the profit and loss of a business

2. To know the financial position

3. To avoid misstatements and frauds

4. To fulfill legal requirements

5. It is also mandatory for small businesses to keep accounts

Financial Statements

• Financial statements are prepared to meet the requirements of accounting and to provide information to stakeholders

 Profit and Loss Statement

 Statement of Financial Position

 Cash Flow Statement

Note

• The main purpose of accounting is to provide information to interested parties in the business

Business Transactions

• Business transactions are the transactions that a business undertakes with other parties

• Changes in the resources of a business are also transactions

• Different types of business transactions are as follows

1. Measurable in terms of money

2. Not measurable in terms of money

However, only transactions that can be measured in terms of money are recorded in the accounts

• Purchase of furniture 50000

• Purchase of goods 30000

• Rent paid 20000

• Sale 100000

Events arising from unusual circumstances are considered business transactions

• Destruction of goods worth 10000

• Theft/destruction by fire of goods worth 20000

• 12000 Valued Goods Bad Debt Write-off

Characteristics of Business Transactions

• Can be measured in terms of money

Transactions have two outcomes and two impacts

Helps in management decisions

Cash debt arises in unusual circumstances

Created as a result of transactions

1. Assets

2. Liabilities

3. Ownership

4. Income

5. Expenses

Assets

• Resources that are controllable by the business and that provide future economic benefits to the business as a result of a past transaction/event

 Land, building

 Machinery

 Furniture

 Delivery vehicle

 Inventory

 Debtors

 Income receivable

 Prepaid expenses

 Bank balance

 Cash balance

Characteristics of Assets

• Created as a result of past transactions/events

 Future economic benefits in the business Assets that are controllable by the acquiring company

are of two types:

1. Non-current assets / long-term assets / fixed assets

2. Current assets / short-term assets

Non-current assets

• Non-current assets are assets that are not included in the current assets of a business and are not subject to change due to the day-to-day operations of the business.

 Land, building, machinery, furniture, delivery vehicles, motor vehicles

Current assets

• Assets that are expected to be used for resale/converted into cash within a short period of time, usually 12 months

• Current assets are assets that are found in a business that can be changed due to the day-to-day operations of a business

 Inventories

 Debtors

 Accounts receivable

 Prepaid expenses

 Bank balances

 Cash Remaining

Liabilities

• A liability is an amount that a business must pay as a result of a past transaction/event

 Bank loan

 Lenders

 Expenses to be paid

Characteristics of liabilities

• A result of a past transaction

• A flow of resources when paid or settled

• A current obligation

Types of liabilities

1. Non-current liability / Long-term liability

2. Current liability / Short-term liability

Non-current liability

• Non-current liabilities are liabilities that are not considered current liabilities and are due to be paid within a period of more than one year.

 Bank loan

 Block loan

 Home loan

Current liability

• Liabilities that are due to be paid within a short period of time, usually 12 months, are current liabilities.

 Lenders (providers of goods for resale)

 Expenses to be paid

Equity / Ownership / Net Assets

• Equity is the amount of assets owned by the owner of a business

• Equity is the amount of assets left over after the liabilities of the business have been paid

• It includes the following

 Capital

 Net Profit

Equity = Assets - Liabilities

01. Assets 500000 Liabilities 300000 As on 31.03.2024, find the equity

Equity = Assets - Liabilities

= 500000 – 300000

= 200000

02. The information obtained for the year ended 31.03.2024 is as follows

 Land Building 480000

 Debtors 70000

 Bank Loan 150000

 Furniture 90000

 Bank balance 25000

 Lenders 42000

 Payable Rent 15000

 Cash balance 31000

 Inventory 38000

I. Value of non-current assets?

Land building + furniture

= 480000 + 90000

= 570000

II. Value of non-current liabilities?

Bank balance = 25000

III. Value of current assets?

= Debtors + Bank balance + Cash balance + Inventory

= 70000 + 25000 + 31000 + 38000

= 164000

IV. Value of current liabilities?

= Creditors + Rent payable

= 42000 + 15000

= 57000

V. Find the ownership?

Ownership = Asset – Liability

= 734000 – 207000

= 527000

Income

• Increases in equity other than increases in equity due to capital invested by the owner are called income

• Increases in equity due to this increase in income Increases in equity due to increase in profit

 Sales

 Rent received

 Commission received

 Interest received

 Depreciation received

Expenses

• Decreases in equity other than decreases in equity due to accruals are called expenses

• Decreases in equity due to this expenditure Decreases in equity due to decrease in profit

 Salaries and wages

 Insurance premiums

 Cost of goods sold

 Interest expense

 Depreciation paid

Profit

• Profit is the amount obtained by deducting expenses from the income earned by the business during a financial year

• Profit is the difference between income and expenses.

Profit = Income – Expenses

01. For a business in the year ended 31.03.2024,

 Earned income – 232500

 Expenses – 165700

Calculate the profit

Profit = Income – Expenses

232500 – 165700

66800

02. For a business in the year ended 31.03.2024, the information obtained is as follows

 Sales – 162000

 Cost of sales – 145000

 Rent received – 15000

 Salary – 18000

 Insurance – 6000

 Deduction received – 4000

 Deduction given – 3000

How to calculate the profit for the year 2024?

Profit = Income – Expenses

181000 – 172000

9000

Debit / Credit

Equity also decreases due to the owners receiving money or goods from the business for personal use. It is called debit.

01. Equity in a business company named Kajiba on 01.04.2023 350000 Additional capital 50000 Profit for the year 75000 Debts for the year 20000 Find the ending equity for the year 31.03.2024?

31.03.2024 Ending equity = Beginning equity + Net profit + Additional capital – Debts

= 350000 + 75000 + 50000 – 20000

= 475000 – 20000

= 455000

02. The information obtained for the year ended 31.03.2024 of a sole proprietorship named Suresh is as follows

 Capital 275000

 Surplus capital 62000

 Income for the year 83000

 Expenses for the year 38000

 Debit for the year 19000

I. To calculate the equity as on 31.03.2024

Profit = Income – Expenses

= 83000 – 38000

= 45000

31.03.2024 Final equity = Initial equity + Net profit + Surplus capital – Debits

= 275000 + 45000 + 62000 – 19000

= 363000

03. The information obtained for the year ended 31.03.2024 of a sole proprietorship named Kamal is as follows

 Capital 415000

 Additional capital 103000

 Annual income 147000

 Annual expenses 118000

 Annual debits

Cash 15000

Material 10000

I. To calculate the equity as on 31.03.2024

Profit = Income – Expenses

= 147000 – 118000

= 25000

31.03.2024 Final equity = Initial equity + Net profit + Additional capital – Debits

= 415000 + 25000 +103000 – 25000

= 522000

04. The information obtained for the year ended 31.03.2024 of a sole proprietorship named Kumaran is as follows

 31.03.2024 Equity 515000

 Additional capital 63000

 Annual income 98000

 Annual expenses 46000

 Annual withdrawal 17000

I. Equity calculation

31.03.2024 Final equity = Initial equity + Net profit + Additional capital – Debit

515000 = Initial equity + 63000 + 52000 - 17000

515000 = Initial equity + 98000

Initial equity = 515000 – 98000

Initial equity = 417000

05. The information obtained from a sole proprietorship named Amalan is as follows:

 Bank loan

 Investment

 Rent received

 Bank loan interest

 Capital

 Sales

 Creditors

 Debit

 Furniture and equipment

 Motor repair charges

 Investment income

 Paid Brokerage

Categorize the above items as assets, liabilities, rights, income, and expenses?

1. Asset

• Furniture

• Investment

2. Liability

• Creditors

• Bank loan

3. Ownership

• Debit

• Capital

4. Income

• Sales

• Investment income

• Rent received

5. Expenses

• Insurance premiums

• Commission paid

• Bank loan interest

• Motor vehicle repair charges

06. The information obtained from a sole proprietorship named Dhanusa is as follows:

 Purchase of goods sold

 Depreciation received

 Depreciation paid

 Furniture

 Cash

 Salary

 Interest received

 Bank loan

 Investment

 Rent received

 Bank loan interest

 Capital

Business Organizations....!

Business Organizations....!

No comments