Business Studies: Definition and Purpose

Business Entities

• A business is a commercial or industrial concern that exists to deal in the manufacture, resale, or supply of goods and services.
• A business is an organization that uses economic resources to create goods or services that customers will buy.
• A business is an organization that provides jobs for people.
• A business invests money in resources (e.g., buildings, machinery, employees) to make more money for its owners.

Types of Business Entities

• Three main types of business entities:
  • Sole Trader
  • Partnership
  • Limited Liability Company

Sole Trader

• A sole trader is a business owned and run by one individual, perhaps employing one or two assistants.
• The sole trader owns and runs the business, contributes the capital to start the enterprise, and earns the profits or stands the loss of the venture.
• Typical sole trading organizations include small local shops, hairdressers, plumbers, and IT repair services.
• In law, a sole trader is not legally separate from the business they operate.
• The owner is legally responsible for the business.
• A sole trader must maintain financial records and produce financial accounts, but there is no legal requirement to make these accounts publicly available.

Advantages of Being a Sole Trader

• Ideal for simple businesses that do not require a great deal of outside capital.
• Advantages include:
  • Limited paperwork and cost in establishing the business structure.
  • The owner has complete control over the business.
  • The owner is entitled to profits and ownership of assets.
  • Less stringent reporting obligations compared to other business structures.
  • Can be highly flexible.

Disadvantages of Being a Sole Trader

• Disadvantages include:
  • Owner is personally liable for all debts (unlimited liability).
  • Personal property may be vulnerable for debts and other business liabilities.
  • Large sums of capital are less likely to be available to a sole trader.
  • May lead to long working hours without normal employee recreation leave and benefits.
  • May be issues of continuity of business in the event of death or illness of the owner.

Partnership

• A partnership occurs when two or more people decide to run a business together.
• Examples include an accountancy practice, a medical practice, and a legal practice.
• Partnerships are generally formed by contract.
• Partnership agreements are legally binding and outline the proportionate amount of capital invested, allocation of profits, responsibilities, and procedures for dissolving the partnership.
• Partnerships are not separate legal entities from their owners.

Stakeholders' Needs

• Various stakeholders interested in financial information about a company:
  • Managers of the company
  • Shareholders
  • Trade contacts (suppliers and customers)
  • Providers of finance (banks, loan providers)
  • Taxation authorities
  • Employees
  • Financial analysts and advisers
  • Government and their agencies
  • The public

Financial Statements

• Financial statements are prepared for the benefit of various user groups, including:
  • Management
  • Shareholders
  • National taxation authorities
  • Banks
  • IASB (International Financial Reporting Standards)
  • The public

Example of a Statement of Cash Flows (Direct Method)

• A statement of cash flows shows the inflows and outflows of cash and cash equivalents over a period.
• The statement includes:
  • Cash flows from operating activities
  • Cash flows from investing activities
  • Cash flows from financing activities
  • Net increase in cash and cash equivalents

Governance

• Governance refers to the system by which companies and other entities are directed and controlled.
• Those charged with governance of a company are responsible for the preparation of financial statements.