Assignment # 01

Fundamentals Of Accounting

Submitted To:
Mr. Rauf A. Sheikh

Submitted By:
Syed Nayyar Sajjad
4253-FMS/MBA/F09

Submission Date: 10th Sep 2009.

International Islamic University Islamabad

1) Different types of Business:There are many types of businesses, and because of this, businesses are classified in many ways. One of the most common focuses on the primary profit-generating activities of a business:

Agriculture and mining businesses are concerned with the production of raw material, such as plants or minerals.

Financial businesses include banks and other companies that generate profit through investment and management of capital.

Information businesses generate profits primarily from the resale of intellectual property and include movie studios, publishers and packaged software companies.

Manufacturers produce products, from raw materials or component parts, which they then sell at a profit. Companies that make physical goods, such as cars or pipes, are considered manufacturers.

Real estate businesses generate profit from the selling, renting, and development of properties, homes, and buildings.

Retailers and Distributors act as middle-men in getting goods produced by manufacturers to the intended consumer, generating a profit as a result of providing sales or distribution services. Most consumer-oriented stores and catalogue companies are distributors or retailers. See also: Franchising

Service businesses offer intangible goods or services and typically generate a profit by charging for labor or other services provided to government, other businesses or consumers. Organizations ranging from house decorators to consulting firms to restaurants and even to entertainers are types of service businesses.

Transportation businesses deliver goods and individuals from location to location, generating a profit on the transportation costs

Utilities produce public services, such as heat, electricity, or sewage treatment, and are usually government chartered.

2) Types of Business:From ownership point of view following is the classification of business

Unincorporated firms
An unincorporated firm is one that is not registered with Companies House as a business and there are two main types - sole trader and partnership.

1) Sole trader
A sole trader is the simplest form of business organization. There are no legal requirements - you simply set up and get on with trading. Any income or profit that you earn is yours and yours alone and you pay income tax on that income. There are few legal constraints and you have what is called unlimited liability. This means that any debts are your debts and so if you stop trading with large debts, you will be personally responsible for these debts. Creditors will have a claim on your house, yacht or any other personal assets you may have.

2) Partnership
This is, in essence, like a sole trader but with the ownership shared between partners. However, a partnership should have a partnership agreement (a legal document) drawn up to show the rights and responsibilities of all the partners. There may also be 'sleeping partners' who own a share of the business but are not involved in the day-to-day running of the business. A partnership also has unlimited liability. Partnerships are common in the professions such as accountancy and law. N.B. Since April 2001 there has been a new form of partnership called a limited liability partnership (llp). This is like a cross between a partnership and a limited company as it has limited liability (like a limited company), but has to be owned by at least two members - being a partnership!

Incorporated firms
The next step up in terms of legal structure is to form an incorporated firm. That is a firm that is a registered firm at Companies House (who are the government registrar of companies). There are two main types - a private limited firm and a public limited firm.

1) Private limited company

A private limited company is one where the liability is limited. Unlike a sole trader where the liability is unlimited, with a limited company the liability is limited to the value of the shares issued. This means that any debts are debts of the company and not of the owners. To form a limited company it must be registered at Companies House and the firm must have various legal documents including a Memorandum and Articles of Association. There need only be one director and they have to prepare annual accounts and submit

them to Companies House. Private limited companies can range significantly in size. They may consist of a small family based business or they could be the Virgin group (which is a private limited company majority owned by Richard Branson).

2) Public limited company

Like a private limited company, a plc has shares, but the key difference is that these shares can be bought by anyone freely on a stock exchange. Ownership is therefore open to anyone who wants to buy shares. PLCs have legal requirements in that they have to produce annual reports and accounts and file them with Companies House. There are various other requirements including:

3)

Advantages and disadvantages of types of business:-

There are advantages and disadvantages of sole proprietorship, partnership and corporation. However, if you are ready to operate your business, just go ahead and get the required documents:

Advantages

Sole Proprietorship

Low start-up costs Greatest freedom from regulation Direct control by owner Minimum working capital requirements Tax advantage to small owner All profits to owner

Disadvantages

Lack of continuity More difficult to raise capital

Partnership
Advantages

Ease of formation Low start-up costs Additional sources of venture capital Broader management

Limited outside regulation

Disadvantages

Unlimited personal liability Lack of continuity Divided authority Difficulty in raising additional capital Hard to find suitable partners

Corporation Advantages

Limited liability Specialized management Ownership is transferable Continuous existence Legal entity Easier to raise capital Unity of action account having centralized authority in board of directors

Disadvantages

Closely regulated Most expensive to organize Charter restrictions Extensive record-keeping necessary Double taxation, except when organized as an "S Corporation" Difficult to liquidate investment