UNDERSTANDING THE BUSINESS SYSTEM
What is Business?
1. Business is an organisation that provides goods or services to earn profit. Profit is the difference between business revenue and its expenses.
2. Is the organised effort of individuals to produce and sell, for a profit, the goods & services that satisfy society's needs.
In general terms, businesses refer to all such efforts within a society or within an industry.
ECONOMIC SYSTEM AROUND THE WORLD
· Business operators are different from one country to another countries.
· The major factors that influence these business operators are economic system.
· Economic system is a nation's system for allocating its resource among its citizen, either individual or organisation.
FACTORS OF PRODUCTION
· The key difference between economic systems is the way they manage the factors of production which is the basic resources that businesses use to produce goods and services. It can be divided into:
a. Labour: Is the people who work for businesses. It’s also called human resource, which includes the physical and mental contribution. I.e. manager and workers.
b. Capital: It is the funds needed to operate an enterprise. Capital is needed both to start a business and to keep it operating and growing. I.e. facilities, equipment, machinery and money.
c. Entrepreneurs: Those who start new businesses and who make the decision that expand small businesses into larger ones. These people embrace the opportunities and accept the risk inherit in creating and operating businesses and know how to use the other factors of production efficiently.
d. Natural Resources: It is the material supplied by nature. The most common natural resources are land, water, mineral and forests or elements in their natural state that can be used in production.
TYPES OF ECONOMIC SYSTEM
· Economics is the study of how wealth is created and distributed by wealth - anything of value, including the products produced and sold by business.
· Different types of economic system manage the factors of production differently. Economic system also differs in the way decisions are made about production and allocation.
It is the economy that relies on a centralised government to control all or most factors of production and to make all or most of the production and allocation decisions.
The 2 most basic forms of planned economies are:
Communism - In theory, communism is described as a socialist economy ruled by a single political party. It means that the public at large or the state owns property and that the benefits are distributed for the common good.
It is the system in which the government owns and operates all sources of production.
Socialism – It is a partly planned economic system in which the government owns and operate only selected major sources of production.
Socialism also refers to an economy in which the government is heavily involved in economic design. The government owns and controls important economic resources, such as factories, mines, banks, stores, transport system and farms, for the benefit of society as a whole.
b It is the economy in which individuals control production and allocation decisions through demand and supply mechanism.
b It is a mechanism for exchange between the buyers and sellers of a particular goods or services. Vendors are free to charge what they want, and customers are free to buy the cheaper ones.
Capitalism - Is an economic system in which individuals own and operate the major of business that provide goods and services.
b Market economies which are based on the principles of capitalism, rely on markets, not governments, to decide what, when and for whom to produce.
b It provides for the private ownership the factors of production. It also encourages entrepreneurship by offering profits as an incentive. Business can provides whatever goods and services and charges whatever price they choose.
3 basic Freedom of capitalism is:
a. Private property - Individuals or businesses must have the right to purchase, own and sell property including land, building, machinery and equipment. Businesses also have the right to sell goods they produce and to keep the after-tax-profit for these sales.
b. Private enterprise - Most businesses are owned by individuals rather then by federal, state or local government.
c. Freedom of choice - especially in a country with a democratic form of government, businesses are free to choose their type of business, can combine the factors of production - land, labour, capital and management to generate profit, freedom to select the customers, customers are free to buy goods and services they wish and firms are free to use their judgement.
MIXED MARKET ECONOMIES
· It is a system featuring characteristics of both planned and market economies, having a mix of government ownership and private enterprise.
· Most countries are now adopting market mechanisms through a process called privatisation. Privatisation is the process of converting government enterprises into privately owned companies.
THE LAW OF DEMAND AND SUPPLY
On all economic levels, primarily the forces of demand and supply determine decisions about what to buy and what to sell.
DEMAND - is the willingness and ability of buyers to purchase a product (a good or a service).
SUPPLY - is the willingness and ability of producers to offer goods or services for sale.
BASIC LAW FOR SUPPLY AND DEMAND
The Law of Demand: - Buyers will buy (demand) more of a product as its price drops and buy less of a product as its price increases.
The Law of Supply: - Producer will offer (supply) more of a product for sale as its price rises and less as its price drops.
The Demand and Supply Schedule - Is assessment of the relationship between different level of demand and supply at different price level. E.g. Pizza, if everyone is willing to pay RM 25 for a pizza (high price), the pizza operator will produce a large supply. If everyone is willing to pay RM 5 for a pizza (a low price), the operator will make fewer pizzas.
The Demand curve
QD1 QD QD2
The price increase (P1), quantity demanded will decrease (QD1).
However when the price decreased (P2), quantity demanded will increase (QD2)
Demand curve shows that there is an inverse relationship between price and quantity demanded.
The supply curve
QS2 QS QS1
As the price increase (P1), quantity supplied will increase (QS1) and when the price decreased (P2) quantity supplied will decrease (QS2)
Supply curve shows that there is a direct relationship between price and quantity supplied.
Equilibrium Price - is the price at which the quantity supplied is equal to the quantity demanded or a profit maximising price at which the quantity of goods demanded and the quantity of goods supplied are equal.
· If the actual market price is different from the equilibrium price, people tend to make economic choice that return to prevailing price and the equilibrium amount.
· If seller lower their price below equilibrium, buyers are likely to shop up all of the available supply quickly. As sellers get more of the items, they are likely to make up the price so they can increase their profits.
· On the other hand, if sellers mark their prices too high, buyers will purchase less of the product. Sellers will end up by lowering their prices to the point where they can sell all of their supply, which is the equilibrium price.
Surpluses and Shortages.
Surpluses - a situation in which quantity supplied exceed quantity demanded.
Shortages - Situation in which quantity demanded exceed quantity supplied.
TYPES OR DEGREE OF COMPETITION
Not all industries are equally competitive. There are four basic degrees of competition exist in a private enterprise system:
a. Pure Competition
b. Monopolistic Competition
a. Pure Competition
· It is a market or industry characterised by numerous small firms producing an identical product.
· It is a situation in which there are many firms in an industry and none can individually influence market price.
· It involves similar products that cannot be differentiated from those of competitors.
· It is easy for firms to enter or leave the market.
For pure competition to exist, two conditions must prevail:
- All firms in a given industry must be small
- The number of firms in the industry must be large
Under such condition, no single firm is powerful enough to influence the price of its product or service in the marketplace. In turn, these condition reflect 4 important principles:
1. The product offered by each firm is so similar that buyer view them as identical to those offered by other firms.
2. Both buyers and smaller knows the price that others are paying and receiving in the marketplace.
3. Because each firms is small, it is easy for any single firm to enter or leave the market.
4. Price are set exclusively by supply and demand and accepted by both sellers and buyers.
b. Monopolistic Competition
· Fewer sellers are involved in monopolistic competition.
· Monopolistic competition is a market or industry characterised by numerous buyers and relatively numerous sellers trying to differentiate their products from those of competitors.
· Is a situation in which firms differentiate their product from those of competitors.
· Monopolistic competition can be seen through commercial in TV, which they try to persuade people to choose one brand after another.
· It gives a firm some power over the price it charges. E.g. Brand names, design style and advertising.
· It occurs when an industry has a few sellers. The entry of new competitors is difficult because large capital investment is necessary e.g. the automobile, airline and steel industries.
· The limited numbers of sellers gives the oligopolies more control over price.
· A monopoly exists when an industry or market has only one producer and there is no competition.
· In pure monopoly, a firm would have substantial control over pricing, but in regulated monopoly, pricing is subject to rules imposed by the regulators.
· There are few directly competitive products in a regulated monopoly, and the government restricts entry into the industry.
It is a system that allows individual to pursue their own interests without restriction. Private enterprise requires the present of 4 elements:
a. Private Property Right
The right to buy, own, use & sell almost any form of property.
b. Freedom of Choice
- It enjoys the right to sell the labour to any employer.
- Can buy any product (means that producer can usually choose whom to hire and what to produce).
A business that fails to make a profit will eventually close its doors.
It occurs when two or more businesses have the same resource or customers.
Every economic system has 3 broad goals:
b. Full Employment
c. Economic Growth
Different systems place different emphasis and their approach to achieve these goals.
- Stability is the condition in which the money available in the economy and the goods produced remains about the same.
- Its helps to maintain predictable conditions in which management, consumer and workers can analyse the business environment, project goals and assess performance.
- Stability can cause stagnation and decline in innovation.
· Is a situation in which there are price increases that affect all goods and services. It can be caused by many factors; the most important factor is economic slump such as recession.
· The onset of inflation is a sign of economic growth.
· The damaging trend is the increase in wages resulting in sellers rising prices even more.
Is a period characterised by decrease in employment, income & production.
Depression - Particularly severe and long-lasting recession
Full Employment - Its means that everyone who wants to work has an opportunity to do so.
It is the level of joblessness among people actively seeking jobs.
It is important elements in the health of a nation's economy.
It is an increase in the amount of goods & services produced by a nation's resources.
Monetary and Fiscal Policy
The government can use monetary or fiscal policy or both to combat inflation and unemployment.
Monetary policy refers to government policies and actions concerning the regulation of the nation's money supply.
Fiscal policy concerns government revenues and expenditures.
ORGANISING THE BUSINESS ENTERPRISE
What is Organisation Structure?
A specification of the job to be done within an organisation and the ways in which they are related to one another
Determinants of organisational structure
Many elements work together to determine an organisation structure, i.e. purpose, mission and strategy.
Size, technology and change in environment also affect the structure. Most organisations change their structure on an almost continuing basis.
Chain of Command
Organisation chart is used to clarify the structure and show employees where they fit into firms operation. The chain of command can be defined as reporting relationship within a company.
The Building Block of Organisation Structure
It includes 2 activities: Specialisation & Departmentalisation.
Specialisation: determining who will do what.
The process of identifying the specific job that needs to be done & designation of the people who perform them leads to job specialisation.
In order to perform the overall job, management actually break it down or specialise it into several smaller job.
Specialisation & Growth
In very small organisation, the owner may perform every job. As the firm grows, the organisation needs to specialise jobs so that others can perform them.
Advantages of Job Specialisation
a. Can learn more easy
b. Can perform more efficiently
c. Easier to replace people who leave.
Departmentalisation: Determine How People Performing Certain Tanks Can Best Be Grouped Together.
After jobs are being specialised, they must be grouped into logical units. The general types of departmentalisation are;
a. Customer Departmentalisation
Customer departmentalisation makes shopping easier by providing identifiable store segments or departmentalisation accordingly to types of customers likely to buy given product.
· More efficient
· Get better service
· Sales persons tend to be specialised.
b. Product Departmentalisation
Product departmentalisation is dividing an organisation according to the specific product or service being created, e.g. Bank - may have consumer loans & Commercial loans.
c. Process Departmentalisation
Process departmentalisation is in which the organisation is divided according to production process
d. Geographical Department
It is the division of a firm according to the area of the country or world that they serve.
e. Functional Departmentalisation
It is a service & manufacturing companies, which develop department according to a group's factors and activities. Some firms typically have production, marketing and sales, human resource and accounting & finance department.
Many Japanese companies maintain a tall, hierarchical and mechanistic organisation structure. It have a detail rules, regulation & procedures. This structure keeps the firm efficient and cost controlled, it also promotes individual creativity & initiative.
The development of this hierarchy generally result from a 3 step process:
1. Assigning task: Responsibility & Authority
Individuals must work at an agreement about responsibilities & authorities.
Responsibility is a duty to perform an assigned task. Authority is the power to make the decision necessary to complete the task.
2. Performance Task: Delegation & Accountability
Trouble occurs when responsibility and authority are not clear delineated in the working relationship between managers & subordinates.
Delegations began when a manager assigns a task to a subordinate. Accountability falls to the subordinate, who must than complete the task. If fail, he may be punished / dismissed.
3. Distribution Authority: Centralised and Decentralised.
· Most decision-making authority is held by upper level managers.
· Upper level management must approve most of lower level decision before they can be implemented.
· Centralised authority is also typical of small businesses.
· Most decision-making authority is delegated to levels of management at various points below the top.
· Purpose of decentralisation is to make company more responsible to its environment by breaking it into more manageable units.
· Reducing top-heavy bureaucracies is also a common goal.
THREE FORMS OF AUTHORITY
In reality, like departmentalisation, line staff, committee and team authority may be found in a given company, especially large one.
· Line authority is the authority that flows up and down the chain of command.
· Most company rely heavily on line department those directly linked to the production and sales of specific products.
· Each line department is essential to an organisation success.
· Line employees are important in a company. If they fail to complete their task, the company cannot sell and deliver finished goods.
· Most company also rely on staff authority, which is based on special expertise and usually involves counselling and advising line manager.
· Staff member therefore, aid lines dept. in making decision - do not have the authority to make authority & staff responsibilities.
· The separation between line authority & staff responsibility is clear delineated.
· It may help to understand this separation by remembering that staff members generally provide services to management, whereas line managers are directly involved in providing the firm product.
Committee & Team Authority
· Authority granted the committees or work teams that play central roles in the firm's daily operations.
· A committee may consist of top managers for several major areas.
· Many firm are also using work teams where groups of operating employees who are empowered to plan & organise their own work & to perform that work with a minimum of supervision.
BASIC FORM OF ORGANISATION STRUCTURE
There are 4 basic forms of organisation structure that reflect the general trend followed by most firms:
a. Functional Organisation
The authority is determined by the relationship between group functions & activities. In large company, co-ordination across functional department became more complicated.
· It is the approach to organisation structure used by most small to medium size firms.
· Usually structured around basic business functions.
b. Divisional Organisation
· A divisional organisation relies on product departmentalisation.
· If there is a product-based division, it will then be managed as separate enterprise.
· Divisional organisation is an organisational structure in which corporate division operates as autonomous business under the larger corporate umbrella.
c. Matrix Organisation
· Teams are formed in which individual reports to two or more managers usually, including a line manager & a staff manager.
· Matrix structure relies heavily on committee & team authority.
d. International Organisation
· International Organisation structure is the approaches to organise structural development in response to the needs to manufacture, purchase and sales in global markets.
Informal organisation is an organisation within which people do their jobs in different ways and interact with other people in way that do not follow line of communication.
Formal Versus Informal Organisation System
· The formal organisation of a business is the part that can be seen & represented in chart form.
· The structure of a company, however, is by no meaning limited to the organisation chart and the formal assignment of authority.
· Informal organisation is a network, unrelated to the firm's formal authority structure, off everyday social interactions among company employees.
· On the negative side, the informal organisation can be reinforced by office politics that put the interests of individuals a head of those of the firm.
Intrapreneuring is a process of creating and maintaining the innovation & flexibility of a small business environment within the confines of a large organisation.
Some organisations actually take steps to encourage the informal organisation. Reason why this happen:
1. Most experienced managers recognise that the informal organisation exists whether they want it or not.
2. Many managers know how to use the informal organisation to reinforce the formal organisation.
3. The energy of the informal organisation can be harnessed to improve productivity.
7 Steps in decision making check list for resolving ethical dilemmas:
1. Recognise & clarify the dilemma
2. Get all possible facts
3. List all your options
4. Test each option by asking
a. Is it legal
b. Is it right
c. Is it beneficial
5. Make your decision
6. Double check your decision
7. Take action.
UNDERSTANDING MARKETING PROCESS AND CONSUMER BEHAVIOUR
Marketing is the process of planning & executing the conception, pricing, promotion & distribution of ideas, goods & services to create exchanges that satisfy individual & organisational objective.
Consumer goods are any goods or products that you, the consumer, may buy for personal used.
· Firms that sell product to consumers for personal consumption are engaged in consumer marketing.
Industrial goods are products used by companies to produce other product.
· Firm that sell their product to other manufacturer are engaged in industrial marketing.
Marketing techniques can also be applied to service. Service is intangible product such as time, expertise or an activity that can be purchase
· Airlines, health clinics, insurance co. etc.
Relationship marketing is a strategy that emphasises lasting relationship with customers & suppliers.
· Strong relationship together with strong economic & social can result in greater long-term satisfaction & retention of customers.
The Marketing Mix
Marketing mix is often called the "Four Ps"; the combination of product, pricing, promotion & distribution (place) strategies used to market products.
· Product is a good, a service, or an idea designed to fulfil a consumer needs & wants.
· Developing new product is a challenge for marketers who must always consider the factors of change, e.g. changing technologies, changing consumer wants & needs & changing economic conditions.
· Meeting consumer needs means changing existing product. Manufacturer must be alert to changes, which often occur rapidly and unpredictably.
· Product differentiation is a creation of a product or product image that differs from existing products to attract consumers.
Pricing a product - selecting the most appropriate price. Price must be able to cover up a variety of costs, e.g. administrative, organisational operating, research cost, & marketing costs.
· Price cannot be so high that consumer turn to competitors.
· Successful pricing means finding a profitable middle ground.
· It is the most highly visible component of the marketing mix. It refers to techniques for communicating information about products.
· The most important promotion tools are:
a. Advertising - any form of paid non-personal communication used by an identified sponsor to persuade or inform potential buyers about a product.
b. Personal selling - many products are best promoted through personal selling or person-to-person sales. E.g. Insurance, clothing etc.
c. Sales Promotion – usually for relatively inexpensive items. It involves one-time direct inducement to buyers. E.g. premiums (free gifts) & packaging.
Placing a product in the proper outlet required decision about several distribution activities that can bring product from the producer to the consumer.
E.g. Railroad, truck, air fright, pipe-line, warehouse and inventory control.
Channel Distribution Style.
TARGET MARKETING AND MARKET SEGMENTATION
Identifying of different needs for specific groups or segments of customers, & deciding which of these groups the organisation should be targeted or served, & the designing of marketing mix programmes so that the needs of these target groups can be met.
· Target markets are group of people with similar wants & needs.
· Target market clearly requires market segmentation. It is a process of dividing a market into categories of customer types or segments.
Advantage of Target Market
1. Marketing opportunities & gaps may be more accurately identified & appraised.
2. Product and market appeals (the marketing mix) can be more finely tuned to the needs of the markets.
3. Marketing efforts can be focused for those market segment(s), which offer the greatest potential for the company to achieve its objective.
Steps in Target Marketing
1. Dividing the market into segment; selecting bases for segmentation
2. Evaluating & apprising the market segments resulting from the above
3. Selecting overall targeting strategy
4. Selecting specific targets inline with the previous step
5. Developing product positioning strategies for each target segment
6. Developing an appropriate marketing mix for each target segment in order to support the positioning strategies.
Identifying Market Segments
The members of a market segment must share some common traits that will affect their purchasing decisions. To identify market segments, researchers look at several different factors on consumer behaviour such as:
a. Geographical Variables
b. Demographic Variables
c. Psychographic Variables
d. Product Use Variables
a. Geographical Variables.
Consists of dividing a market based on different geographical units. In international marketing, different countries may be seemed to constitute different market segments. Similarly within a country a market may be segmented regionally into north or south segments.
b. Demographic Variables.
Demographic based is probably the most popular for segmentation in consumer product market because they are often associated with differences in consumer demands.
· The focusing traits are age, income, gender, ethnic, background, marital status, race, religion & social class.
· Depending on the marketer's purpose, a segment could be a single classification or a combination of categories.
· Marketer's can use demographics to identify trends that might shape future spending patterns.
c. Psycho graphic Variables.
· The consumer characteristics e.g. lifestyle, opinions, interests and attitudes.
· They can sometime be changed by marketing efforts.
· E.g. Changing consumers' opinions by running ads highlighting products that have been improved directly in response to consumer desires.
d. Product Use Variables.
· The way in which consumer use a product, their brand loyalty to it and their reasons for purchasing it or possibly to certain retail outlets.
UNDERSTANDING CONSUMER BEHAVIOUR
Consumer behaviour is a various facets of the decision process by which customers come to picture & consume products.
Influences of Consumer Behaviour
Based on the fields of psychology & sociology, four major influences on consumer behaviour are:
By identifying the influences, marketers try to explain consumer choices & predict future purchasing behaviour.
· Psychological influences include an individual's motivations, perceptions, ability to learn & attitude.
· Personal influences include lifestyle, personality & economic status.
· Social influences include family, opinion leaders (people whose opinion are sought by others) and such references group as friends, co-workers & professional association.
· Cultural influences include culture (the way of living, that distinguishes large group from another), sub-culture (smaller groups, such as ethnic groups, with shared values) and social class (the cultural ranking of group according to such criteria as background, occupation & income).
THE CONSUMER BUYING PROCESS
1. Problem/need recognition
· The buying process begins when the consumer recognise a problem or need.
· Need recognition also occurs when you have a chance to change your purchasing habits.
2. Information seeking
· Once the need has been recognised, consumer often seek information.
· Before making major purchase, most people seek information from personal sources, marketing sources, public sources & experience.
· Some seller's treats information as a value to be added to their products e.g. prepare web site.
3. Evaluation of Alternatives
· If you are in the market for a product, you probably have some ideas of who makes the product and how they differ. You may have accumulated some of this knowledge during the information seeking stage & combined it with what you know previously.
· By analysing the product attributes that apply to a given product (colour, taste, price, prestige, quality, services record) you will consider your choices & decide which product best meets your needs.
4. Purchase decision
· Consumers may decide to defer a purchase until a later time or they may decide to buy now.
· Buying decision may be based on rational motives, emotional motives or both.
Rational motives are the reasons for purchasing a product based on a logical evaluation of product attributes: cost, quality & usefulness.
Emotional motives involve non-objective factors & lead to irritation decision. They include sociability, imitation of others and aesthetics - motives that are common.
5. Post Purchase Evaluations
· Marketing does not stop with the sale of a product. It includes the process of consumption e.g. what happen after the sales.
· Marketers wants consumer to be happy after the consumption of products so that they are likely to buy them again.
· Not all consumers are satisfied with their purchases. Dissatisfied consumer may:
a. Make complain
b. Criticise products publicly
c. Not likely to purchase the same product again
UNDERSTANDING ACCOUNTING &
Accounting is comprehensive system for collecting, analysing & communicating financial information.
· It is a system for measuring business performance by translating those measures into information for management decision.
· It is also used to prepare performance reports for owners, the public and regulatory agencies.
To meet this objective, accountants should:
a. Keep records of such transactions as taxes paid, income received and expenses incurred.
b. Analyse the effect of these transactions on particular business activities.
Bookkeeping: Bookkeeping is the recording of accounting transactions.
Accounting System: an organised procedure for identifying, measuring, recording and retaining financial information. This information can be used in accounting statement & management report.
Controller (head of the accounting system) - who manages the firm's accounting activities.
· As chief accounting officer, the controller ensures that the accounting system provides the reports & statements needed for planning, controlling & decision making activities.
USERS OF ACCOUNTING INFORMATION
1. Business Managers: to set goals, develop plans, set budgets & evaluate future prospects.
2. Employees & Unions: to get paid & to plan for and receive such benefits as health care, insurance, vacation time & retirement pay.
3. Investors & Creditors: to estimate returns to stockholders, determine a company's growth prospects & determine whether it is a good credit risk before investing or lending.
4. Tax Authorities: to plan for tax inflow, determine the tax liabilities of individual & businesses & ensure that correct amounts are paid on time.
5. Government regulatory agency: to fulfil their duties.
TWO MAIN FIELDS OF ACCOUNTING
1. Financial Accounting
· It concerns with external users of a company's financial information e.g. Consumer group, unions, stockholders and government agencies.
· It prepares & publishes income statements and balance sheets at regular intervals, as well as other reports for shareholders & the general public.
· All of this documents focus on the activities of the company as a whole.
2. Managerial Accounting
· Managerial or management accounting serves internal users.
· Managers at all level need information to make decision for their departments, to monitor current projects & to plan for future activities.
Certified Public Accountants (CPAS) - is accountant licensed by the state and offer accounting services to the publics. It provides service such as auditing, tax and management services.
AUDITING - is a systematic examination of a company's accounting system to determine whether its financial reports fairly represent its operations.
The auditor must also ensure that the client's accounting system follows generally accepted accounting principles (CAAP) e.g. rule and procedures governing the context and form of financial reports.
· Tax laws are very complex. Tax services thus include assistance not only with tax return preparation but also with tax planning.
· A CPA'S advice can help a business to structure operations & investment & perhaps save millions of dollar in taxes.
TOOLS OF THE ACCOUNTING TRADE
All accounts rely on record keeping, either manual or electronic, to enter and track business transactions.
1. Journal & Ledger
· As initial records, the info are stored and entered into a journal (a chronological record of financial transactions, including a brief description of each).
· Some companies keep specialised journals for different transactions, such as cash receipts, sales and purchases.
· It will be summarised, usually on a monthly basis in a final record called ledger.
· Ledger is a record, divided into accounts such as cash, inventories & receivables and usually compiled on a monthly basis, containing summary of all journal transactions.
2. Financial Reports & the Fiscal Year
· At the end of the year, all the accounts in the ledger are totalled and the firm's financial status is assessed. This summary is the basic for annual financial reports.
· With the preparation of report, the old accounting cycle ends and a new cycle begins. The accounting cycle is called the fiscal year (12-month).
THE ACCOUNTING EQUATION
Accounting uses the following equation to balance the data in journal & ledgers.
ASSET = LIABILITIES + OWNERS' EQUITY
Asset is any economic resource expected to benefit a firm or individual who owns it e.g. land, building, equipment, inventory & payment due to company (account receivable).
Liabilities are debts owned by a firm to an outside organisations or individuals.
Owners' Equity is the amount of money that owners would receive if they sold all of a firm’s assets and paid all of its liabilities.
ASSET - LIABILITIES = OWNERS' EQUITY
· If company assets exceed its liabilities, owner equity is positive.
· If company goes out of business, the owners will receive some cash after selling assets & paying of liabilities.
· If liabilities outweigh assets, owners' equity is negative. This shows that the assets are insufficient to pay of all debts.
Owner Equity consists of two source of capital:
a. The amount that the owners originally invested
b. Profit earned & reinvested in the company.
· When company operate profitable, its assets increase faster than its liabilities.
· Owner equity therefore will increase if profit is retained in the business instead of paid out as dividend to stockholders.
· Owner equity can also increase if owners invest more of their own money to increase assets.
· However owners' equity can shrink if the company operates at a loss or if the owners withdraw assets.
DOUBLE ENTRY ACCOUNTING
· Double entry accounting system is a bookkeeping system that balances the accounting equation by recording the dual effects of every financial transaction.
· Recording dual effect ensures that the accounting equation is always balance. This double entry system requires at least two bookkeeping entries for each transaction.
DEBITS & CREDITS: THE T. ACCOUNT
Another accounting tools use debits & credits as a universal method for keeping accounting records. To understand debit & credits, we should understand the T. account, which divided the account into two sides.
Left side Right side
Debit: Bookkeeping entry in a T account that records increase in asset
Credit: Bookkeeping entry in a T account that records decrease in asset.
· Debit & Credit provide a system of check & balance
· Every debit entry in a journal must have an offsetting credit entry.
· It provides an important method of accounting control. At the end of the accounting cycle, debit & credit must balance; total debits must equal total credits in the account balance recorded in the general ledger.
It falls into two broad categories:
1. Balance Sheets
2. Income Statement
1. Balance Sheets
· Supply details information about the accounting equation factors: assets, liabilities & owners' equity
a. Current Assets
· The asset that can be converted into cash within the following year. They are normally listed in order of liquidity: the ease on which asset can be converted into cash.
· By definition, cash is completely liquid.
b. Fixed Asset
· The asset for long-term use or value, such as land, building & equipment.
· Most of the asset become obsolete so that their values decrease or in accounting is called depreciation.
· Depreciation means the process of distributing the cost of an asset over its life.
c. Intangible Asset
· It is non-physical assets or usually includes the cost of obtaining rights or privilege such as patterns, trademarks, copyrights & franchise fee.
· Current Liabilities: are debts that must be paid within 1 year. This includes accounts payable; unpaid bill to suppliers for materials as well as wages and taxes that must be paid in the coming year.
· Long term liabilities: are debts that are not due for at least a year. These normal represent borrowed funds on which the company must pay interest.
· It sometime called a profit & loss statement because its descriptions of revenue & expenses result in a figure showing the firm's annual profit or loss. In other words:-
REVENUE - EXPENSES = PROFIT (LOSS)
· Like the balance sheet, the income statement is divided into 3 major categories.
b. Cost of goods sold
c. Operating expenses.
· It is the funds that flow into a business from the sale of goods or services.
b. Cost of goods sold
· It is the total costs of obtaining materials for making the product sold by a firm during a year.
Gross profit (or gross margin)
· Is a revenue from goods sold minus cost of goods sold
· If company has a high gross margin, it probably has low cost of goods sold but high selling & administration expenses.
Definition: Ethics is the guiding principles that help us deciding between what is right and what is wrong.
An individual personal values and moral and the social context in which it occurs determine whether a particular behaviour is ethical or unethical.
ETHICAL BEHAVIOUR is a behaviour that conforms to individual belief and social norms about what is right and good.
UNETHICAL BEHAVIOUR is behaviour that individual beliefs and social norms define as being wrong and bad.
Business ethics refers to ethical or unethical behaviour by managers or employees of an organisation.
ETHICAL are based on both individual believes & social concepts, they vary from person to person, situation-to-situation and culture-to-culture.
ETHICAL JUDGEMENT OF BUSINESS ACTIVITIES
1. Gather the relevant factual information
2. Determine the most appropriate moral value
3. Make an ethical judgement based on the rightness or wrongs of the proposed activity or policy,
The ethical judgement does not always work as smoothly due to trust is impossible. Many businesses are concerned about the various influences on the ethical behaviour of their personnel.
COMPANY POLICIES AND BUSINESS ETHICS
· Most companies encourage ethical behaviour in the workplace. The most effective step is to demonstrate top management support.
· To demonstrate an attitude of honesty and openness by using adopting written codes and instituting ethics programs.
Adopting Written Codes
Many companies have adopted written codes of ethics that formally acknowledge their intention to do business in an ethical manner. Most code are designed to perform one or more of these 4 functions:
a. To increase public confidence in a firm
b. To stem the tide of government regulation
c. To improve internal operations by providing consistent standards of both ethical and legal conduct.
d. To respond to problem that arises as a result of unethical or illegal behaviour.
Ethics affect individual behaviour in the workplace. Social responsibility however refers to the way in which a business tries to balance its commitments to groups & individual in its social environment; customers, other business, employee & investors.
Social responsibility is influenced by many factors such as government agency, customers, the demand of investors and behaviour of other firms in the same industry & same country.
Area of social responsibility
When defining its sense of social responsibility, a firm typically confronts 4 areas of concern:
a. Responsibility towards the environment
b. Responsibility towards its customers
c. Responsibility towards its employee
d. Responsibility towards its investors
RESPONSIBILITIES TOWARDS ENVIRONMENT.
The injection of harmful substances into the environment is a significant challenge to contemporary business. Most of pollution occurs need solution from government & business alike.
Air pollution results when several factors are combined to lower air quality.
Who contribute to air pollution?
a. Carbon monoxide by automobiles
b. Smoke & other chemicals from manufacturing plants.
· Air quality is usually worse in certain geographical location.
· Companies must install special devices to limit the pollution they expel into the air.
· Air pollution can cause acid rain, which occurs when sulphur is pumped into the atmosphere, mixed with natural moisture and fall to the ground as rain.
Water becomes polluted primarily from chemical and waste dumping. Some businesses & cities dumped waste into rivers, streams & lakes with little regard to its consequences.
There are 2 key issues in land pollution
a. How to restore the quality of land that has already been damaged
b. Concern how to prevent future contamination
· Toxic waste disposal - is a dangerous chemical and need to have a special place to be disposed.
· Recycling - of waste materials into useful product, has become a priority not only for municipal & state government but also for many companies.
RESPONSIBILITIES TOWARDS CUSTOMERS
A company, which does not act responsibly towards its customers, will ultimately lose its business. Social responsibility toward customers generally falls into 2 categories:
a. Providing quality product
b. Pricing product fairly
The current interest in business responsibility toward customers can be traced to the rise of consumerism: social activism dedicated to protect the right of consumers in their dealing with businesses.
The consumer right protection is as follows:
a. Consumers have a right to safe product
b. Consumers have a right to be informed about all relevant aspect of a product
c. Consumers have a right to be heard
d. Consumers have a right to choose what they buy.
· Interfering with competition can take the form of illegal pricing practices.
· Collusion occurs when two or more firms agree to collaborate on wrongful acts as price fixing.
· Under some circumstances, firms can also come under attack for price gouging - responding to increase demand with overly steep price increase.
Responsibility Toward Employees
· A number of human resource management activities are essential to a smoothly functional business.
· These activities such as recruiting, hiring, training, promoting & compensation are also the basic for social responsibilities towards employee.
· A company that provides its employees with equal opportunities for rewards & advancement without regards to race, sex or other irrelevant factors is meeting its social responsibilities.
· Firm that ignore their responsibilities run the risk of losing productive, high motivated employee.
Responsibility Toward Investors
· Shareholders are the owners of a company. It may sound odd to say that a firm can act irresponsibly toward its investor.
· Manager can abuse their responsibilities to investors in several ways.
· Irresponsible behaviour towards shareholders means abuse of a firm's financial resource.
· Companies can also act irresponsibly toward shareholder - owner by misrepresenting company resource.
a. Improper financial management - organisation are guilty of financial mismanagement - offences that are unethical but not necessarily illegal.
b. Check kiting - is a illegal practice of writing a check against money that has not yet arrived at the bank on which it is drawn.
c. Insider Trading - is someone use confidential information to gain from the purchase / sale of stock, that person is practising insider trading.
d. Misrepresentation of business –
· Certain behaviour regarding financial representation is also illegal. In maintaining and reporting its financial status, every corporation must conform to generally accepted accounting practices.
· Sometime, managing project profit far in excess of what they actually expect to earn. When the truth comes out, investors are disappointed.
IMPLEMENTING SOCIAL RESPONSIBILITY PROGRAMS.
Approaches to social responsibility
3 most common approaches:
a. Social Obligation Approach
· A company meets only minimum legal requirement in its commitments to groups and individuals in its social environment.
· It is a fairly conservative concept, where the profit should not be spent on social programs.
· Companies adapting this approach tend to meet the minimum requirement of government regulation & standard business practices.
b. Social Reaction Approach
· A company, if specifically asked to do so, exceeds legal minimum in its commitments to groups & individuals in its social environment.
c. Social Response Approach
· A firm that adopt the most liberal approach to social responsibility.
· A company actively seeks opportunities to contribute to the well being of groups & individual in its social environment.
MANAGING SOCIAL RESPONSIBILITY PROGRAMS.
Social responsibility must start from the top.
· Without top mgt support, no program can succeed.
· Top mgt must embrace a strong stand on social responsibility & develop a policy statement outlining that commitment.
A committee of top managers must develop a plan detailing the level of mgt support.
One executive will monitor the program & ensure that its implementation is consistent with the firm's policy statement & strategic plan.
The company must conduct occasional social audit: systematic analyses of its success in using funds earmarked for its social responsibly goals.
"A document sent to the customer by the supplier, giving full details of the goods sold including descriptions, quantity, price etc."
The invoice serves the following functions:
a. It is a supplier's bill of goods & services.
b. It is a detail list showing unit prices, totals, weight & other specifications and contains other elements of the total price such as packaging & delivery charges.
c. It provides a checklist for the customer and generally enables a particular consignment to be identified against a specific order.
d. In occasions it may be a key documentation as much as it will be used as evidence of value.
e. Although the invoice may not be a contract of sale, it can in certain instances act as evidence of the contract.
The main categories of information in the invoice:
a. Importer (name & address)
b. Purchaser (name & address)
c. Description of the imported/exported goods, including marks & number, packages.
e. Total weight (Net & Gross weight)
f. Unit selling price
g. Condition of Sale & Term of Payment
h. Currency of settlement
i. Transport Charge, Expenses, and Insurance.
Receipts are acknowledgements in writing of the receipt of money or property.
3. Debit Note
· A document giving particulars of the amount charged to another person’s account.
· This is similar to the invoice; it also tells the purchaser how much he owes the supplier.
· Debit note is used to make adjustments. For instance, if the supplier has undercharged on the invoice, he will send a debit note for the difference.
4. Credit Note
· A document sent to customers giving particulars of the amount they are entitled to be credited with respect to overcharges, returned goods, allowances, etc.
· Credit note are usually printed and typed in red, so that they will not be confused with invoice and debit notes.
· They are issued when the seller owes the purchaser some money and are usually deducted from the invoice before it is paid.
· Credit note should be issued by a seller to correct an overcharge, or to allow for the return of faulty goods, or empty crates & containers which had been returned and for which the purchaser had paid.
5. Bill of Lading
· This document is a receipt given by the shipping company to the shipper for goods accepted for carriage by sea.
· If in negotiable form it also conveys title to the goods, and the goods will only be released by the shipping company at destination against surrender of a signed original bill of lading.
· The bill of lading evidences a contract of carriage.
· Bill of lading are prepared by the exporter or freight forwarder and then presented to the shipping company for completion and signature.
· If the goods have been received in apparent good order, a ‘clean’ bill of landing will be given.
· Otherwise, the shipping company will indicate on the bill of lading what it considers to be defective in respect of the goods and/or their packaging. Such bills are known as ‘claused’ or ‘dirty bill of lading’.
· The consignees are usually anxious to ensure that the goods they have ordered are actually on the way to them when documents are tendered for payment.
· This would be indicated in the bills of lading by the word “shipped”; then there is a little risk that the goods are just lying at the port of loading waiting for the next vessel.
6. Bill of Exchange
§ Bill of Exchange is an unconditional order in writing, addressed by one person (drawer) to another (drawee), signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee) to pay on demand or at a fixed or determinable future time, a certain sum of money to, or to the order of, a specified person (payee) or to bearer.
a. Channel for collecting debts from traders
b. As a basic for legal action
c. After payment, the discharge Bill of Exchange is retained by the drawee as evidence of payment.
7. Promissory Note
· Whilst not bill of exchange, it is largely subject to the same rules & is used for a somewhat similar purpose. A simple way of looking at a promissory note is to consider it as an IOU.
· Voucher is a document that shows the vendor name, invoice date, terms & amount owned.
· The approved voucher serves as the authorisation to make payment.
Steps in preparing Vouchers.
a. Check that all the documents related to the purchase are present.
b. Prepare the voucher, checking every detail required on the form.
c. Obtain the authorised signature.
d. File the vouchers appropriately.