UNIT 1 NATURE OF BUSINESS

Structure
1.0 1.1 1.2 1.3 Objectives Introduction Nature of Business Classification of Business Activities
1.3.1 Industry 1.3.2 Commera

1.4 Forms of Business Organisation

1.4.1 Sole Proprietorship 1.4.2 Partnership 1.4.3 company

1.5 Let Us Sum Up 1.6 Key Words 1.7 Some Useful Books 1.8 Answers to Check Your Progress 1.9 Terminal Questiom

1.0 OBJECTIVES
The study of this unit should help you to:
a explain what a business activity is

classify business activities identify different forms of business organisation

1.1 INTRODUCTION
This is an introductory unit for the preparatory course in Commerce. This course essentially consists of accounting. In this unit, we intend to explain the nature of business activities and the various forms in which they can be organised. This serves as background for proper understanding of the need for ~ccounting.

1.2 NATURE OF BUSINESS

The basic cause of all productive activities is the unlimited wants of human beings and the need to satisfy them. Human wants are many and also complex in nature. Though the basic requirements of human beings are three viz., food, clothing and shelter, we are not satisfied with them alone. We are consuming or using many other things which have to be generally paid for. For example, take your own case. Try to recall your daily routine from the time you get up from bed, till the time you go to bed. During this geriod, jlou consume or use many things. The tooth paste and soap you use, the bread you eat, the tea you use, the furniture (table, chair, etc.) you use, the dress you wear, the television you see, are some of the examples. Have you ever thought of how these things are made available to you?

Badc Concepts o f Accounting

Each one of them has a long process behind it. Take for example, a toilet soap. It is manufactured or produced by some company say Tata Oil Mills Limited or Hindustan Lever Limited. They procure the oils, tits, etc., which are the basic raw materials b e d in the soap. These raw materials are processed into soap cake with the help of men and machines. Then these cakes are packed or wrapped in attractive printed paper. Though the soap is ready, it is not available to you at this stage, because it is still in the factory. The soaps are shifted from the factory and stored in company's warehouse. The producer sells the soap to wholesalers who buy it in large quantities and move them to their places and keep them in their warehouses. The wholesale trader, in turn, sells in smaller quantities to the retail traders. The shop in your locality, from which you purchase your soap, is one such retail outlet. In simple terms, this is the story of your soap reaching you. The story is more or less the same in case of almost all the items we have listed in the beginning. The manufacturer produces goods for the consumer. Sometimes there may not be anybody between the two, but often the manufacturer may take the help of middlemen like the wholesalers and retailers to distribute the goods to the consumers. Chart 1.1 shows such arrangements.

CHART 1.1
FLOW OF GOODS

Certain other agencies like banks, insurance companies, transportation firms, warehouses, advertising agencies, etc., also aid the functioning nf manufacturers and traders. You will learn more about their activities later in this unit. You may be wondering why they are doing all this? You are right. That is their business. They are doing all this or each one of them is doing his bit of activity with an intention or a motive. The intention is to earn something more than what they spend in carrying out the activity. That something more is profit. The intention is technically called 'profit motive'. Therefore, 'any activity canied with profit motive is business'. It may be a soap manufacturer or an aircrafi manufacturer or a provision store or a pan shop or a cloth shop or a medical store or a hotel. They are all engaged in a business activity. In other words, the term business can be defined as production of gooh and services and all those activities that are involved inflow of gooh from the point of production to the point of conrumption or final use with a view to earn profit. A person who is engaged in business is called a businessman or an entrepreneur, and a unit f~med for the purpose of carrying on some business activity is called a business firm or a business enterprise. Generally, the business firm has a name such as Rekha Cloth Emporium or Sabariwala & Company or Bajaj Auto Ltd.

Check Your Progress--A

1 Tick the correct alternative. Example: Human wants are limited/unlimited. The place where goods are stored is called house/warehouse. i) Consumer is the producer/user of the goods. ii) iii) Business activity is carried on primarily with the intention of making profit/rende~g Sf3'ViCe. Middlenien involved between the manufacturer and the consumers are iv) traders/ transporters.

2 What is business?

3 Who is a businessman?

................................................................................................ ................................................................................................ ................................................................................................ ................................................................................................. ................................................................................................ ................................................................................................ ................................................................................................

4 What do you mean by a business f i r m ?

...............................................................................................

1.3 CLASSIFICATION OF BUSINESS ACTMTIES

Business activities may be broadly classified into two categories: (i) Industry, and (ii) Commerce. Industry is concerned with the production of goods and materials, while commerce is mainly concerned with their distribution.

1.3.1 Industry
The term industry refers to that part of the business activity which is concerned with: a) extracting materials like coal, iron ore; petroleum (called extractive industry);

Basic Concepts of Accounting

b) processing and converting raw materials into finished products like soap, bread, fans, machines, cement (called manufacturing industry); and c) construction activity like buildings, dams, bridges, roads (called construction indusr I

Thus, the activities of human beings engaged in extraction, production, processing, construction and fabrication of goods come under industry. In another sense, industry means a group of factories usually specialising in a particular product line. For example, all those factories which produce cotton textiles together constitute cotton textile industry. All the cement factories together constitute cement industry.

K . 3 . 2 Commerce
While industry is concerned with the production of goods, commerce is concerned with making ihe same available to those who need them. In other words, commerce is mainly concerned with distribution of goods. It embraces all those functions which are essential for maintaining a free and uninterrupted flow of goods. Therefore, the term commerce includes 'trade' and 'aids to trade'. Trade The term 'trade' is used to denote buying and selling. Therefore, one who buys and sells is a trader. A trader is a middleman between the producer and the consumer. Trade may be wholesale trade or retail trade. A wholesale trader purchases in large quantities from the producers, and sells in small quantities to the retail traders. A retail trader is one who purchases from the wholesale trader or sometimes directly from the producer, and sells in smaller quantities to the ultimate consumers.

Aids to Trade All activities that facilitate smooth flow of goods from manufacturing centres to the consumption centres are called aids or auxiliaries to trade. Aids to trade may be classified into five categories: (i) transportation, (ii) warehousing, (iii) insurance, (iv) advertising, and (v) banking. These are briefly explained below.
Transportation: Selling all the goods produced at or near the production centres is not possible. Hence, goods are to be sent to different places where they are demanded. The medium which moves men and materials from one place to another is called transport. Transport can be of three types: i) Land transport ii) Air transport iii) Water transport
-

road, rail aeroplane boat, ship

Warehousing: Storage is indispensable in these days of mass production. The goods should be stored carefully from the time they are produced till the time they are sold. Hence, the need for warehousing. Warehouses are also called godowns. Insurance: The goods may be destroyed while in production process or in transit due to accidents, or in storage due to fire or theft, etc. The businessmen would like to cover these risks. Insurance companies come to their rescue in this regard. They undertake to compensate the loss suffered due to such risks. For this purpose, the business has to take an 'insurance policy' and pay a certain amount regularly, called 'premium'. Advertising: Advertising is an effective aid in selling the goods. The producer, through advertisement, communicates all information about his goods, to the prospective consumers and create in them a strong desire to buy the product. Advertising can be carried in different ways. It can be indoor or outdoor. Communicating with people through advertising, when they are in their homes, is called indoor advertising. Examples of this type are advertising through newspapers, radio, 'television, etc. Communicating with people, when they go out from their homes, is called outdoor advertising. Examples of this type are advertisements in cinema theatre, wall posters, and hoardings at prominent places. Banking: Now-adays we cannot think of business without banks. To start the business or to run it smoothly we require money. Banks supply money. A bank is an organisation which accepts deposits of money from the public, withdrawable on demand or otherwise, and lends the same to those who need it. Banks also provide many services required for the business

Here. we have attempted to give just an overview of various business activit~es. You will learn more about these in a separate course on Business Organisation. Chart 1.2 ir~dicates various business activities in a summarised fonn,
CHART 1.2
BUSINESS
.. .

Nature or Business

Industry

I
Commerce

F-l olesa sale [TT-Ldg

I
I
Construction Trade
Aids to Tkade

Manufacturing

RetaiJ
Eddvc

Advertising Insurance. I Warehousing Transportation

Check Your Progress-B

1 Tick the correct alternative. Industry is concerned with production/distribution. i) Commerce is mainly concerned with production/distribution. ii) iii) One who buys and sells in large quantities is a wholesaler/retailer. iv) The medium which moves men, materials from one place to another is called

insurance/transport. 2 Some names are given below. Classify them as business units and non-business units. i) Laxmi Traders ii) Ramakrishna Matt iii) Osmania University Vijaya Commercial Corporation iv) v) Government Hospital vi) Modem Foot Wear Industries
Business Units Non-business Units

3 Kapadia Oil Mills produce refined oil. The entire production is lifted by Poonam Oil Depot, who in turn sell it to various retailers. Mrs. Latha purchased 2 kg of oil from Balaji Groceries. Name the following: Name
i)

Manufacturer WhoIesaler Retailer Consumer

............................................................
...........................................................
............................................................
............................................................

ii) iii)

iv)

Basic Concepts of Accounting

1.4 FORMS OF BUSINESS ORGANISATION

You have learnt that business is of many types. It may be an industrial activity, a trading activity, a transport activity or a banking activity. Whatever be the nature of business activity, money is required to start it and also to maintain it. First of all you need a place to work or to carry out the activity. Then you need men and material. Let us take the case of a retail cloth shop. You need a place to locate the shop. You can hire it by paying rent. You need showcases or shelves where cloth can be displayed. Then you have to purchase the cloth. either from the kholesaler or directly from the manufacturer. You also need salesmen to sell the cloth to customers entering into your shop. All these things require money, and somebody has to provide it. One who provides this amount initially is the one who would normally own the business and as such is called the owner. The amount contributed by the owner is called ownership capital or simply capital. The owner, besides providing capital. bears the risk of the business. Though the aim of the business is to make profit, there is no guarantee-that the business always makes profit. Sometimes, it may incur loss. The possibility of incurring loss is called risk. He also has the right to organise his business and run it the way he likes it. Business may be owned by an individual as sole proprietor or by a group of persons as a partnership firm or as a company. Partnership firm is formed by a group of two or more persons by mutual agreement, whereas a company is formed by a group of persons under the Companies Act. From this it is clear that, sole proprietorship organisation is owned by one person, whereas a partnership firm or a company is owned by a group of persons. Thus, the main forms of business organisation (or ownerships) are:

1 Sole pr~prietorship 2 Partnership firm 3 Company Let us now briefly, discuss these organisations.

1.4.1 Sole Proprietorship

Sole proprietorship form of organisation is t k oldest, and even today, the most common form of organisation for small business. As the n a v e implies, it is owned by one person. That is why it is also called individual proprietorship or sole trader organisation. He supplies the capital required for the business. If necessary, he borrows funds from his friends, relatives and banks. He manages the business himself or may take the help of his family members. If necessary, he may employ people to assist him. He enjoys all the profits earned by the business. In case of loss, naturally, he alone has to bear it.

1.4.2 Partnership
When the business grows in size, it needs more capital. If the sole proprietor is not in a position to supply all the capital required, he may admit one or more persons as partners into his business. Sometimes, two or more persons come together, combine their capital and skills. and carry on business as partners.
A partnership h the relationship between persons who have agreed to share the profits of a business, carried on by all or any of them acting for all.

From the above definition, it can be observed that partnership is formed by an agreement. In the agreement, all the issues relevant to the partnership are written. The issues are: name of the business, duration of partnership, proportion in which capital is to be contributed by the partners, proportion in which profits or losses are to be shared by the partners, person(s) who has (have) to manage the business and so on. The persons who own the partnership business are individually called 'partners' and collectively known as 'firm' or 'partnership firm'. The name under which their business is carried on is called 'firm name'. In partnership, there should be at least two persons and the number of partners should not exceed twe~;l. :$. tuever, in case of banking business, the number of partners should not exceed tell

1.4.3 Company

When thc business requlrcs capital on a large scale, say in lakhs or crores of rupees, a sole proprietor or a few partners may not be able to provide the entire capital. Even if they are able
lo

to, somehow, provide it, the risk involved is great. Generally, therefore, when the funds required for the business are large, company form of business organisation is preferred. For a large sized business it is a convenient form of business organisation. A company is an association of persons who contribute money or money's worth tg a common stock (called capital) and employ it for a common purpose. The persons who contribute it or to whom it belongs are called members or shareholders. A company has to be registered under the Indian Companies Act, 1956, and function within the framework of the Companies Act. Since there is a large number of shareholders, the company cannot be managed by all the shareholders. The shareholders elect their representatives, called the directors. They guide and direct the destiny of the company. Generally, the day-to-day conduct of business is entrusted to paid or salaried managers. Companies can b e classified in many ways. One way of classifying them is private limited companies and public limited companies. In case of a private limited company, the minimum number of shareholders is two and maximum is fifty. Whereas in case of public limited company, the minimum number of shareholders is seven and there is no maximum limit. In case of private limited companies, the word Private (or Pvt.) must be used along with their names. Examples of private limited companies are-Refco Icematic Company Private Limited, Diners Business Services Pvt. Ltd., Eagle Flask Private Limited, ABC Consultants Private Limited. Examples of public limited companies are-Crompton Greaves Limited, Graver & Weil (India) Ltd., Bajaj Auto Ltd., Elecon Engineering Company Ltd. There is another form of business organisation called co-operative society. You wi!! learn more about all forms of business organisation in a separate course. You must have realised by now that, whatever be the nature of business activity and whatever the form of business organisation, money is required to start and run the business. It is also necessary that the money received and the money spent is properly accounted for, so that profit or loss can be duly ascertained. Hence, the need for accounting.

Nature nf Business

Check Your Progress-C

1 What are the owners of a partnership firm known as? ......................................................................................... 2 What are the owners of a company known as .........................................................................................................

3 Give the minimum and maximum number of members in each of the following cases:

.
i)

Form of Organisation
Sole Proprietorship

Minimum

Maximum

..............................................

ii) Partnership : a) 'Banking business b) Any other business

,

..............................................
.............................................

iii) Company: a) Private Limited b) Public Limited

.............................................

4 Give three examples of a private limited company:

5 Give three examples of a public limited company:

Ba\ic Concepts of Accounting

-.

1.5 LET US SUM

UP

1 Human wants are many. All activities are directed towards satisiying these wants, either directly or indirectly.

2 Any activity urried with the intention of making profit is called business. A person engaged in business IS called a businessman.
3 Business activities may be broadly classified into two categories--industry and commerce Indcstry is concerned with the processing of materials and production of goods. Commerce is r~i.!:illg ancerned with the distribution of those materials and goods.
$

c'c;i;::nerce is a broad term which conventionally includes trade and aids to trade. Trading is

on ;\l..:ivi:y of buying and selling. In order to help or facilitate trade, activities like

transportation, warehousing, insurance, advertising, banking, etc., are necessary. These are d i e d aids 0 7 a.uxi!iaries to trade.
::

5 business may be organised by one individual, in which case it is called a sole proprietorship It n a y be organised by two or more individuals as a partnership, or it may be organised by
people as a company. '?i'iratc,ver be the business activity and whatever be the form of business organisation, money
,. 4.

: . ~ iF O U ' of ;~

i;

r-:*dother economic resources are required. These resources have to be properly accounted for.
: :?

t!~eneed for accounting.

1.6 KEY WORDS

Ad\ertising : A kind of business where the p r o d ~ ~ 2r.d a its qua!ities are made known to public for stimulating demand. Aids to Trade : Activ~tieslike transporta:an, insurance, warehousing, banking, and advertising which facilitate smooth operation of trade. Bank : An organisation which accepts deposits of money from the public and gives loan Business : Any activity carried on with profit as the motive. It includes industry and commerce. Businessman : The person who provides capital and bears all the risks connected with the business. Business Unit : A unit formed for the purpose of carrying on some kind of business activity. Commerce :A business activity in the form of trade and aids to trade. Company : An association of persons registered under the Con~panies Act. Industry : A business activity concerned with the processing of materials and production of goods. Insurance Company :A company which agrees to compensate the insured in the event of his suffering a specified loss, in return for the payment of a premium. Middleman :A business unit which acts as an intermediary in the distribution of goods. These iriclude wholesalers and retailers. Partnership : It is formed by an agreement between two or more persons to carry on business and share its profit/loss. RetaiIer :A trader who buys goods from the wholesalers (or directly from the manufacturers) and sells them to the consumers. Sole Proprietorship :Single owner organisation. Trade :I3uy.n:. a : i : seliing Y C ~ I V I ~ ~ . Transportation :The a~tivity of moving men and materrals from one place to ~inuther
12

Warehouse : A place where goods are <tored.It is also elled godowns

Wholesaler : A trader who buys goods in large quantities from the manufacturers and sells them in small quantities to retailers.

Nature of Rudness

1 . 7 SOME USEFUL BOOKS

Acharya, B.K. & Govekar, P.B. Principles of B~siness Organisation (Allahabad: Kitab Mahal,
1982).

Bhushan, Y .K. Fundamentals of Business Organisation and Management (New Delhi: Sultan Chand & Sons, 1986). Spriegel, William, R. Principles of Business Organisation and Operation (Bombay; Asia Publishing House, 1962). Stephenson, James. Principles and Practice of Commerce (London: Issac Pitman & Sons. 1965). Wheeler, Bayard, 0 . Business: An lnfroductory Analysir (New York: Harper & Rpw Publishers, 1964).

1.8 ANSWERS TO CHECK YOUR PROGRESS

A 1 (i) Warehouse (ii) User (iii) Making protit (iv) Traders B 1 (i) Production (ii) Distribution (iii) Wholesaler (iv) Transport

Business Units: (i), (iv) and (vi) Non-business Units: (ii), (iii) and (v)

3 (i) Kapadia Oil Mills, (ii) Poonam Oil Depot (iii) Balaji Groceries, (iv) Mrs. Latha
C 1 2 3 i) ii) iii) Partners Shareholders

Minimum
a) 1 2

Maximum
1

b)
a) b)

2
2 7

10 20 50 no limit.

1.9 TERMINAL QUESTIONS

1 What do you mean by business? Briefly explain the various types of business activities.

2 Explain briefly, the different forms of business organisation. 3 Name various parties who assist in the flow of goods from producer to the consumers.

Note : These questions will help you to understand the unit better. Try to write answers for them. But, do not submit your answers to the University for assessment. These are for your own practice only.