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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-31
DIFFERENT BUSINESS ENTITIES
There are two types of entities:
 Commercial organizations
 Non-commercial organizations
COMMERCIAL ORGANIZATION
Commercial organization is the entity that is working to earn profit. At the end of the financial year, the
profit is distributed among the owners of the business. Normally, commercial organizations include:
 Sole proprietorship
 Partnership, and
 Limited Company
NON COMMERCIAL ORGANIZATION
Non Commercial organization is the entity that is not working to earn profit. At the end of the financial year,
the profit is not distributed among the owners, but is used for the objective of the organization. Normally,
commercial organizations include:
 Co-operative institutions
 NGO's
 Trusts
COMMERCIAL ORGANIZATION
Sole proprietorship business
It is a business that is owned by an individual. He may have employed any number of persons to work for
him, but he is the sole owner of the business.
Partnership
Partnership is the type of business where more than one person (called partners) enters into a legal
agreement to run a business on a profit and loss sharing basis.
Limited Company
Limited company is a legal entity, separate from its owners (called shareholders). The basic difference
between a partnership and a limited company is the concept of limited liability.
 If a partnership business runs into losses and is unable to pay its liabilities, its partners will have to
pay the liabilities from their own wealth.
 Whereas, in case of limited company, the shareholders don't lose anything more than the amount of
capital they have contributed in the company. i.e., their personal wealth is not at stake and their
liability is limited to the amount of share capital they have contributed.
The concept of limited company is to mobilize the resources of a large number of people for a project,
which they would not be able to afford independently and then, get it managed by experts.
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Financial Accounting (Mgt-101)
VU
ACCOUNTING REQUIREMENTS
Sole Proprietorship
In case of sole proprietor, he is the sole owner of the business. So, there is no restriction on him for drawing
money for his personal use.
For accounting purposes, an account titled Proprietor's Drawings is opened in the General Ledger and all
payments and receipts, if any, from the proprietor are recorded in this account.
Accounting Entries
Cash Drawn by Proprietor
Debit
Proprietor's drawing
Credit
Cash
Amount paid in by proprietor through cheque
Debit
Bank
Credit
Proprietor's drawing
The balance in drawings account is transferred to Capital Account at the year end.
The sample of general ledger of Capital account, in case of profit earned by the business, is as follows:
Capital Account
Debit Side
Credit Side
Date
No Narration
Dr. Rs.
Date
No Narration
Cr. Rs.
Jun 30
Drawings
45,000 Jul 01
Balance B/F
100,000
Jun 30
P & L Account
50,000
Jun 30
Balance C/F
105,000
Total
150,000
Total
150,000
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Financial Accounting (Mgt-101)
VU
The sample of general ledger of Capital account, in case of loss sustained by the business, is as follows:
Capital Account
Debit Side
Credit Side
Date
No Narration
Dr. Rs.
Date
No
Narration
Cr. Rs.
Jun 30
P & L Account
10,000 Jul 01
Balance B/F
100,000
Jun 30
Drawings
45,000
Jun 30
Balance C/F
45,000
Total
100,000
Total
100,000
The balance sheet of sole proprietor is as follows:
Name of Business
Balance Sheet As At ----
Particulars
Amount Rs.
Amount Rs.
ASSETS
Fixed Assets
X
Long Term Assets
X
Current Assets
X
TOTAL
X
LIABILITIES
Capital
X
Add: Profit / Loss For The Year
X
Less: Drawings
(X)
X
Long Term Liabilities
X
Current Liabilities
X
TOTAL
X
PARTNERSHIP
There are two types of capital accounts in partnership:
 Fixed capital
 Fluctuating capital
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Financial Accounting (Mgt-101)
VU
Fixed Capital
In this case, capital account shows movement in capital only i.e. actual increase or decrease in capital, by
partners and all other transactions, such as Drawings and Profit etc. are not recorded in capital account.
Fluctuating capital
In fluctuating capital account, all transactions relating to partners, such as drawings, salaries etc. are recorded
in capital account, in addition to entries relating to capital account.
Current Account
In case of fixed capital accounts, other transactions such as Drawings and Profit etc. are recorded in a
separate account called Current Account.
JOURNAL ENTRIES
Capital Introduced by Partner
Debit
Cash / Bank
Credit
Partner's Capital Account
Separate capital account is opened in general ledger for each partner.
Drawing by Partner
Debit
Individual Partner's Current Account
Credit
Cash / Bank
Excess Drawn Amount Returned by Partner
Debit
Bank / cash
Credit
Individual Partner's Current Account
Profit Distribution
Debit
Profit and Loss Appropriation Account
Credit
Partner A's Current Account
Credit
Partner B's Current Account
Credit
Partner C's Current Account
204
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Financial Accounting (Mgt-101)
VU
BALANCE SHEET OF PARTNERSHIP ACCOUNTS
Name of Business
Balance Sheet As At ----
Particulars
Amount Rs.
Amount Rs.
ASSETS
Fixed Assets
X
Long Term Assets
X
Current Assets
X
TOTAL
X
LIABILITIES
Capital
A
X
B
X
C
X
X
Current Account
A
X
B
X
C
X
X
Long Term Liabilities
X
Current Liabilities
X
TOTAL
X
LIMITED COMPANIES
There are two types of companies:
 Public Limited Companies
 Private Limited Companies
Public Limited Companies
In public limited companies, there is no restriction on number of persons to be its members. There is one
restriction. i.e., there should be a minimum of three members to form a public limited company.
Private Limited Companies
Two to fifty persons can form a private limited company. Minimum two members are elected to form a
board of directors. This board is given the responsibility to run day to day business of the company.
SHARE CAPITAL
Capital of the company is divided into small units / denominations. These units / denominations are called
shares and the capital is called share capital. Owners purchase these shares and are, therefore, called
shareholders. As, there are so many shareholders in a company, profit is distributed among the
members/shareholders of the company on the basis of number of shares held by each shareholder. The
profit distributed among shareholders is called DIVIDEND.
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Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES