2.2. Businesses' objectives
A business firm or enterprise or commercial undertaking is
floated by its owners with the following goals in mind:
a. Maximizing profits and ultimately
b. Maximizing shareholders' wealth.
2.3. Forms of business organizations
Business organizations can be classified according to: the
ownership and the nature of business.
a) Ownership: Using this basis , the following
are the types of business:
Single or sole proprietorship: This type of
business is owned only by one person. Usually the owner is also the manager of
the business.
Partnership: This business organization with
two or more owner. The owners are called partners; agree on the capital
contributions, management of the firm, sharing of profits or loss, and other
matters pertaining to the operation of the business.
Limited company: This is a legal entity
established by operation of law.
Ownership is divided into shares and the owners are called
shareholders.
Cooperatives: This is a business formed,
owned by a group of people who agree to follow special rules in running it. It
has open and voluntary membership and democratic control with every member
entitled only to one vote.
b) Nature of business: According to this basis,
the following are the types of business.
Service entity (business): This deals with the
rendering of services to the customers such as tailoring shops, garages,
auditing and accounting firms, doctors, advocates, etc.
Trading or merchandising firms: This type of
business deals with the buying and selling of tangible goods for a profit.
Examples are groceries, supermarkets.
Manufacturing firm: This business involves
purchase of raw materials and converting these materials into finished products
for sale. Examples are textiles, manufacturing, breweries and plastic company,
etc.
2.4. Types of business transactions and bases of
accounting
a) types of business transactions
Investment transaction
These are transactions by which the firm receives amounts of
economic resources or benefits from the owner (owner's capital) and the loan
holders(loan capital) so as to fund its activities and realize its goals.
Trading or revenue transactions
These are business transaction by which the firm earns its
revenues and incurs expenditures associated with those revenues, day to day and
continuously throughout the accounting period. It is from these transactions
that summaries are extracted and reports made so that total revenues are
matched with total expenditure incurred in securing that revenue to ascertain
profit for the year on trading activities. The proprietary capital owner
expects to share in the firm's profits in successful years whereas the loan
capital investor gets a return on his investments in the form of interest
whether the firm is making profits or losses.
Examples:
Buying (purchases) and selling (sales) of the firm's goods and
services plus purchases and sales returns.
Meeting the operating expenses of the business such as
administration expenses, selling and distribution expenses.
Capital transactions:
These are non routine financial activities in the firm that
create major permanent resources used to produce or finance the firm's main
revenues. Capital expenditure for instance, is expenditure of a long term
nature whose object is the acquisition of a long term benefit for the
business.
Cash and credit transactions
A cash transaction is one in which there is an immediate
exchange of money for value such as a cash sale or cash purchase whereby cash
is received or paid for value exchanged respectively.
A credit transaction is an economic event in which there is no
simultaneous exchange of cash for value received or given. It involved the
immediate or postponed transfer of the subject matter of the transaction and a
promise to pay at a future date after the transaction has taken place, example
of a credit sale, credit purchase, etc.
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