A business is an organisation that regularly enters into transactions that are expected to provide a reward measurable in monetary terms. It is thus obvious from everyday life that many business organisations exist; what is less obvious is that their organisational (legal) structure and therefore their accounting requirements may differ.
There are two main reasons for the different organisational structures that exist – the nature of their activities and their size.
1.7.1 Profit-making organisations
Some organisations are formed with the intent of making profits from their activities for their owners:
(a) Sole traders (sole proprietors). These are organisations that are owned by one person. They tend to be small because they are constrained by the limited financial resources of their owner.
(b) Partnerships. These are organisations owned by two or more persons working in common with a view to making a profit. The greater number of owners compared with a sole trader increases the availability of finance and this is often the reason for forming such a structure.
(c) Limited companies. These are organisations recognised in law as ‘persons’ in their own right. Thus a company may own assets and incur liabilities in its own name.
The accounting of these organisations must meet certain minimum obligations imposed by legislation, for example, via company law and other regulations. Some of these requirements constitute recommended accounting practice for other types of organisation. Two types of limited companies can be identified: private limited companies; and public limited companies.
Public limited companies can be further divided according to their size, and whether they are ‘listed’ on a stock exchange. These distinctions can be important when considering the accounting requirements. A common feature of private limited companies is that their owners are actively involved in running the business. In this way they are similar to sole traders and partnerships. This is rarely true of public companies, where the owners may not become involved in the day-to-day activities of the business. Listed companies may have many thousands of owners (shareholders) who are even further removed from the running of the business.
1.7.2 Non-profit-making organisations
Other organisations are formed with the intent of providing services, without intending to be profitable in the long term:
(a) Clubs and societies. These organisations exist to provide facilities and entertainments for their members. They are often sports and/or social clubs and most of their revenue is derived from the members who benefit from the club’s facilities. They may carry out some activities that are regarded as ‘trading’ activities, in which profits are made, but these are not seen as the main purpose of the organisation.
(b) Charities. These exist to provide services to particular groups, for example people with special needs and to protect the environment. Although they are regarded as non-profit-making, they too often carry out trading activities, such as running shops.
(c) Local and central government. Government departments are financed by members of society (including limited companies). Their finances are used to provide the infrastructure in which we live, and to redistribute wealth to other members of society. You will not look at the accounts of government bodies in this Learning System.