Principles of Accounting: Types of Business Organisations

• A business can be defined as an economic or commercial activity
• All business activity can be subdivided into individual and separate transactions
• A transaction is an event that results in a change in an asset, liability, or net worth of a business
• In accounting various words are used to refer to a business these include:
  • Entity
  • Organisation
  • Concern
  • Corporation
  • Firm
  • Enterprise
  • Venture
  • Company
• It is important to note that some of these have very specific meanings
• There are different types of businesses and businesses can be divided in a number of ways
• In accounting the most important way to view businesses is by grouping them using:
  1. The ownership structure of the business
  2. The economic sector or type of the business
  3. Size
  4. Purpose

The ownership structure of the business

• Businesses can classified according to who owns and operates them
• This results in various forms of business:
• Sole Trader Business/Sole Proprietor
•  Partnership
• Limited Liability Companies (Companies) which come in the form of:
  • A Private Limited Company (PVT LTD)
  • A Public Limited Company (PLC)

Sector or type of business

• There are generally two types of business:
  1. Those that sell goods and
  2. Those that sell services
• Goods are tangible items that are sold in order to satisfy human needs and wants examples of goods include food, furniture etc
• Services are intangible items that are sold in order to satisfy human needs and wants examples of services include accommodation, hair cut, teaching, medical check up, car repair etc
• Examples of business that offer services include hospitals, hotels and garages
• Businesses especially those that sell goods can also be divided into:
  1. Trading businesses
  2. Manufacturing businesses
• Trading businesses purchase goods, keep and maintain them as stock and sell them to consumers/other businesses
• A manufacturing business is any business that uses components, parts or raw materials to make a finished/semi-finished good
• Business can also be grouped according to the sector they are found in:
• Primary sector businesses for example mines
• Secondary sector businesses such as factories
• Tertiary sector business that sell services for example schools and hospitals
• These goods are then sold either directly to consumers or other businesses
• Each type of business demands a different approach in accounting

Size

• Businesses can also be grouped according to their size
• There are small simple business operations for example a street vendor
• There are Small and medium-sized enterprises (SMES)
• An SME in Zimbabwe is defined as a registered business whose total assets does not exceed US$100 000 or
• Whose annual turnover/sales does not exceed US$240 000
• There are large enterprises whose size range from being merely larger than SMEs to being multinational entities
• Accounting operations vary according to size
• In large entities accounting is divided into various branches/departments

Purpose

• Businesses can be divided into two:
• For profit businesses i.e. businesses that exists primarily to make a profit and
• Not for profit businesses i.e. non profit organisations whose overriding aim is usually to provide a service to its members
• Examples of non profits include charities and foundations

NB It is not uncommon for a business to be in more than one class e.g. a business that offers both services, manufactures goods and carries out trading (buying and selling)

To access more topics go to the Principles of Accounts Notes.