1.

Nature of a Business
A business is an organization in which basic resources (inputs),
such as materials and labor, are assembled (bring together) and
processed to provide goods or services (outputs) to customers .
Businesses come in all sizes, from a local coffee house to
a DaimlerChrysler, which sells several billion dollars’ worth of cars and
trucks each year
The objective of most businesses is to maximize profits.

1.2 The Role of Accounting in Business

What is the role of accounting in business? Accounting provides information for managers to
use in operating the business. Accounting can be defined as an information system that
provides reports to stakeholders about the economic activities and condition of a
business. Individuals, governments, and other types of organizations. For example, individuals
must account for activities such as hours worked, checks written, and bills due. Stakeholders for
individuals include creditors, dependents, and the government. A main interest of the
government is making sure that individuals pay the proper taxes. You may think of accounting as
the “language of business.” This is because accounting is the means by which business
information is communicated to the stakeholders.

1.3. The profession of accounting

If you just joined the accounting profession, you may be wondering what job you will be doing
in the future. You probably would apply your expertise in one of three major fields:
 Public Accounting
 Private Accounting or
 Not – for – profit Accounting
i) Public accounting
In Public Accounting you would offer expert service to the general public in much the same way
that a doctor serves patients and a lawyer serves clients. A major portion of public accounting
practice is involved with Auditing. In this area, a certified Public Accountant (CPA) examines
the financial statements of companies and expresses opinion as to the fairness of presentation.
When presentation is fair, users consider the statements to be reliable.
Management consulting is another area of public accounting. In this case, the accountant
consults the management generally about the growth and development of the business enterprise.
ii) Private Accounting
Instead of working in public accounting, an accountant may be an employee of a business
enterprise. In private accounting, you would be involved in one of the following activities:
 1. Cost Accounting: Determining the cost of producing specific products.
2. Budgeting: Assisting management in quantifying goals concerning revenues, costs of
goods sold, and operating expenses.
3. General Accounting: recording daily transactions and preparing financial statements
and related information.
4. Accounting information systems: designing both manual and computerized data
processing systems.
5. Tax Accounting: preparing tax returns (-forms to be filled by a company and returned to
a taxing authority) and engaging in tax planning for the company.
6. Internal Auditing: reviewing a company’s operations to determine compliance with
management policies and evaluating efficiency of operations.
iii) Not for Profit Accounting
Like businesses that exist to make a profit, not - for-profit organizations also need sound
financial reporting and control. Donors to such organizations want information about how well
the organization has met its objectives and whether continued support is justified. In each of
these cases, accounting expertise is highly valued.

Specialized Accounting Fields

The two most common are financial accounting and managerial
accounting.
 Financial accounting is primarily concerned with the recording
and reporting of economic data and activities for a business
 Managerial accounting, or management accounting, uses both
financial accounting and estimated data to aid management in running day-to-day
operations and in planning future operations

1.4. Types of Business Organizations

The common forms of business organization are proprietorship, partnership, corporation, or
Limited Liability Corporation.
1. A proprietorship is owned by one individual. The popularity of this form is due to the ease
and the low cost of organizing. The primary disadvantage of proprietorships is that the financial
resources available to the business are limited to the individual owner’s resources. Small local
businesses such as hardware stores, repair shops, laundries, restaurants, and maid services are
often organized as proprietorships.
2. A partnership is owned by two or more individuals. A Partnership is like a sole proprietorship
in most ways except that it has more than one owner. A partnership is not a legal entity separate
from the owners but an association that brings together the talents and resources of two or more
people. The owners of a partnership are known as partners.
The partners share the profits and losses of the partnership according to an agreed –on formula.
The personal resources of each partner can be called on to pay the obligations of the partnership.
That is, each partner is personally responsible for the debts of the partnership. From an
accounting standpoint, however, a partnership is a business entity separate from the personal
activities of the partners.
3. Corporations
A business organized as a separate legal entity with ownership divided into transferable units of
capital is called a corporation. The owners of a corporation are called stockholders or
shareholders. The corporation issues capital stock certificates to each stockholder showing the
number of shares (or stock) he or she owns. The stockholders are free to sell all or part of these
shares to other investors at any time. This ease of transfer of ownership adds to the attractiveness
of investing in a corporation. Since a corporation is a separate legal entity, the owners
(stockholders) are not personally liable for the debts of the corporation. Their risk of loss is
limited to the amount they paid (invested). Because of this limited liability in a corporation
shareholders are willing to invest in riskier, but potentially more profitable, activities.
Even though corporations are fewer in number than proprietorships and partnerships, they
contribute a lot to the economies of many countries in monetary terms.
A limited liability corporation combines attributes of a partnership and a corporation in that it is
organized as a corporation, but it can elect to be taxed as a partnership. Thus, its owners’ (or
members’) liability is limited to their investment in the business, and its income is taxed when
the owners report it on their individual tax returns.

1.5. Accounting principles and practices (IFRS)

Accounting, as it is true for other disciplines, has got its own principles and practices. One must
be able to understand these principles and practices to understand and prepare financial
statements and reports. The principles and concepts used in accounting are called Generally
Accepted Accounting Principles (GAAP). These principles guide accountants how to record and
report business activities.
Currently, the Financial Accounting Standards Board (FASB) is the authoritative body having the
primary
responsibility for developing accounting principles. The FASB publishes Statements of Financial
Accounting Standards and Interpretations to these Standards. Because generally accepted accounting
principles impact how companies report and what they report, all stakeholders are interested in the setting
of these principles.

1. Business Entity Concept

Under the business entity concept, the activities of a business are recorded separately from the activities
of the stakeholders. The individual business unit is the business entity for which economic data
are needed. This entity could be an automobile dealer, a department store,
or a grocery store. The business entity must be identified, so that the accountant can determine which
economic data should be analyzed, recorded, and summarized in reports.
The business entity concept is important because it limits the economic data in the accounting system to
data related directly to the activities of the business. In other words, the business is viewed as an entity
separate from its owners, creditors, or other stakeholders. For example, the accountant for a business with
one owner (a proprietorship) would record the activities of the business only, not the personal activities,
property, or debts of the owner.

2. The Cost Concept

The cost principle states “properties and services acquired by business enterprises must be
recorded at actual amounts paid or assumed in acquiring the properties.”
For example, Modern Advertising Company is considering the purchase of a building. The
seller of the building offered a price of Birr 10,000 while the buyer first offered a price of Birr
8000. However, after certain bargaining, the seller agreed to sell the building for Birr 9000 and
the buyer paid that amount. According to the “cost principle” the buyer has to record the building
in its records at birr 9000- the actual amount paid to get the building.

The buyer may receive an offer of Birr 12,000 for the building a month after if has been
acquired. This has no effect on the accounting records because it doesn’t originate from an
actual exchange. It is simply a mere offer.
If the buyer sells the building for Birr 20,000 after purchasing it, a gain of Birr. 11,000 would be
realized. The new owner would use Birr 20,000 as the cost of the building.

In an exchange between a buyer and a seller, both attempt to get the best price. Only amounts
agreed up on and paid are objective enough for accounting purposes.