Mgt101 Lecture No2 Different Types of Business Entities: • Commercial Organizations (Profit Oriented) o Sole proprietor o Partnership o Limited companies • Non-Commercial Organizations (Non-Profit Oriented) o NGO’s (Non-government Organizations) o Trusts o Societies Problems in Maintaining Diary of Transactions: • How will we come to know the income and expenses from various sources? • We only have a sheet / page on which daily transactions are listed. • We do not know which product is selling better and which is not. Diary of Transactions: Transactions of Jan 20-- P a r t i c u l a r s Rs. Sold 5 nos. of Item A 1,000 Purchased 10 nos. of Item B ( 15,000 ) Sold 1 no. of Item C 2,000 Electricity bill paid ( 1,500 ) Sold 1 no. of Item A 500 Sold 2 nos. of Item B 4,000 Sold 5 nos. of Item A 1,000 Purchased 10 nos. of Item B ( 15,000 ) Sold 1 no. of Item C 2,000 Telephone bill paid ( 1,000 ) Salary paid ( 1,500 ) Now try to go through these transactions and separate, transactions of different types. But when number of transactions is large: Is it really possible to go through hundreds or thousands of transactions at the month end and analyze them to obtain required results. This diary that we have discussed above, records cash transactions only. Cash and Credit Transactions: Sales and purchase are not always for cash. Some times the payment / receipt is delayed to a future date (Sale/purchase for “UDHAR”) Remember: The problems keep on increasing with the size or volume of business. But one thing is becoming certain and that is that an accurate reflection of business transacted can only be obtained if both cash and credit transactions are recorded in such a manner that there is no duplication and yet the transactions are completely recorded. This is possible only under Commercial Accounting. Commercial Accounting: Commercial Accounting is done through a system that is known as Double entry book keeping. Single entry accounting/Cash accounting: This system records only cash movement of transactions. This means that only receipt or payment of cash is recorded and no separate record is maintained as to from whom the cash was received or to whom it was paid. Double entry book keeping/Commercial accounting: Double entry or commercial accounting system records both aspects of transaction, receipt or payment and source of receipt or payment. It also records credit transactions. Example of Electricity Bill. Capital: 1. When money or resources from ones’ own pocket are put in a business is referred to as CAPITAL. 2. No business can run without money or resources being invested therein. 3. This capital or investment must earn a return or profit on its use even if it is coming out of ones pocket. 4. This return is also known as PROFIT. Money Value of Time: The time of the proprietor or business persons spent on the business is also a business cost and must be paid for by the business in addition to the profit. Because if the business person had employed somebody else in his place, the person would be paid a salary. Goodwill: This is simply the value attached to the good reputation earned through good, clean conduct of business over a number of years. This good reputation also has a value and becomes part of investment in business. Cash in Hand: Cash in hand is not our profit because we have deducted from it all the credit transaction. Profit: The simple equation for calculation of profit would thus be: Cash Sale-Cash Payment + (Credit Sale-Credit Expense) Remember: The certain items have a long life and will be used during that time to earn more money for business. The cost of such items will as be spread over their life and also accounted for accordingly in the above equation. Budget: 1. Budgeting is another important aspect of business planning. 2. The budget is made to ensure that there is at least a balance between Income earned and the expenses incurred on earning this income in the first instance, and to provide a reasonable return on the capital used in the business. 3. However, if there is a shortfall between of Income as against expense, it means that more is being spent and less earned. 4. Decisions will be required to bring the situation to balance or if it cannot be so then to arrange for loans or more capital to ensure business continues. 5. But business cannot be run on loans and these must be repaid. 6. Budget Is an Organization’s Plan of a Future Period Expressed in Money Terms. Precious Pearl
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