Unit I Understanding the environment within which the business has to operate is very important for running a business

s unit successfully at any place. Because, the environmental factors influence almost every aspect of business, be it its nature, its location, the prices of products, the distribution system, or the personnel policies. Hence it is important to learn about the various components of the business environment, which consists of the economic aspect, the socio-cultural aspects, the political framework, the legal aspects and the technological aspects etc. In this chapter, we shall learn about the concept of business environment, its nature and significance and the various components of the environment. In addition, we shall also acquaint ourselves with the concept of social responsibility of business and business ethics. Meaning of Business Environment Environment of a business means the external forces influencing the business decisions. They can be forces of economic, social, political and technological factors. These factors are outside the control of the business. The business can do little to change them. Following features: 1. Totality of external forces: Business environment is the sum total of all things external to business firms and, as such, is aggregative in nature. 2. (Specific and general forces: Business environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly and immediately in their day-to-day working. General forces (such as social, political, legal and technological conditions) have impact on all business enterprises and thus may affect an individual firm only indirectly. 3. Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market.
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4. Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings, especially when environment changes are taking place too frequently as in the case of information technology or fashion industries. 5. Relativity: Business environment is a relative concept since it differs from country to country and even region to region. Political conditions in the USA, for instance, differ from those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France. Importance of Business Environment 1. firm to identify opportunities and getting the first mover advantage: Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors. For example, Maruti Udyog became the leader in the small car market because it was the first to recognize the need for small cars in India. 2. firm to identify threats and early warning signals: If an Indian firm finds that a foreign multinational is entering the Indian market it should gives a warning signal and Indian firms can meet the threat by adopting by improving the quality of the product, reducing cost of the production, engaging in aggressive advertising, and so on. 3. Coping with rapid changes: All sizes and all types of enterprises are facing increasingly dynamic environment. In order to effectively cope with these significant changes, managers must understand and examine the environment and develop suitable courses of action. 4. Improving performance: the enterprises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.

Dimensions of Business Environment What constitutes the general environment of a business? The following are the key components of general environment of a business. 1. Economic environment economic environment consists of economic factors that influence the business in a country. These factors include gross national product, corporate profits, inflation rate, employment, balance of payments, interest rates consumer income etc. 2. Social environment It describes the characteristics of the society in which the organization exists. Literacy rate, customs, values, beliefs, lifestyle, demographic features and mobility of population are part o the social environment. It is important for managers to notice the direction in which the society is moving and formulate progressive policies according to the changing social scenario. 3. Political environment It comprises political stability and the policies of the government. Ideological inclination of political parties, personal interest on politicians, influence of party forums etc. create political environment. For example, Bangalore established itself as the most important IT centre of India mainly because of political support. 4. Legal environment This consists of legislation that is passed by the parliament and state legislatures.Examples of such legislation specifically aimed at business operations include the Trade mark Act 1969, Essential Commodities Act 1955, Standards of Weights and Measures Act 1969 and Consumer Protection Act 196. 5. Technological environment It includes the level of technology available in a country. It also indicates the pace of research and development and progress made in introducing modern technology in production. Technology provides capital intensive but cost effective alternative to traditional labor intensive methods. In a competitive business environment technology is the key to development.
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Economic Environment in India In order to solve economic problems of our country, the government took several steps including control by the State of certain industries, central planning and reduced importance of the private sector. The main objectives of Indias development plans were: 1. Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty; 2. Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries; 3. Reduce inequalities of income and wealth; 4. Adopt a socialist pattern of development based on equality and prevent exploitation of man by man.

As a part of economic reforms, the Government of India announced a new industrial policy in July 1991. The broad features of this policy were as follows: 1. The Government reduced the number of industries under compulsory licensing to six. 2. Disinvestment was carried out in case of many public sector industrial enterprises. 3. Policy towards foreign capital was liberalized. The share of foreign equity participation was increased and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted. 4. Automatic permission was now granted for technology agreements with foreign companies. 5. Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign investment in India.

Liberalization: The economic reforms that were introduced were aimed at liberalizing the Indian business and industry from all unnecessary controls and restrictions. They indicate the end of the licence-pemit-quota raj. Liberalization of the Indian industry has taken place with respect to: 1. Abolishing licensing requirement in most of the industries except a short list, 2. Freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities, 3. Removal of restrictions on the movement of goods and services, 4. Freedom in fixing the prices of goods services, 5. Reduction in tax rates and lifting of unnecessary controls over the economy, 6. Simplifying procedures for imports and experts, and 7. Making it easier to attract foreign capital and technology to india.

Privatisation: The new set of economic reforms aimed at giving greater role to the private sector in the nation building process and a reduced role to the public sector. To achieve this, the government redefined the role of the public sector in the New Industrial Policy of 1991 The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernization. It was also observe that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs. The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions.

Globalisation: Globalizations are the outcome of the policies of liberalisation and privatisation. Globalisation is generally understood to mean integration of the economy of the country with the world economy, it is a complex phenomenon. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries. Globalisation involves an increased level of interaction and interdependence among the various nations of the global economy. Physical geographical gap or political boundaries no longer remain barriers for a business enterprise to serve a customer in a distant geographical market. Impact of Government Policy Changes on Business and Industry 1. Increasing competition: As a result of changes in the rules of industrial licensing and entry of foreign firms, competition for Indian firms has increased especially in service industries like telecommunications, airlines, banking, insurance, etc. which were earlier in the public sector. 2. More demanding customers: Customers today have become more demanding because they are well-informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services. 3. Rapidly changing technological environment: Increased competition forces the firms to develop new ways to survive and grow in the market. New technologies make it possible to improve machines, process, products and services. The rapidly changing technological environment creates tough challenges before smaller firms. 4. Necessity for change: In a regulated environment of pre-1991 era, the firms could have relatively stable policies and practices. After 1991, the market
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forces have become turbulent as a result of which the enterprises have to continuously modify their operations. 5. Threat from MNC Massive entry of multi nationals in Indian marker constitutes new challenge. The Indian subsidiaries of multi-nationals gained strategic advantage. Many of these companies could get limited support in technology from their foreign partners due to restrictions in ownerships. Once these restrictions have been limited to reasonable levels, there is increased technology transfer from the foreign partners

Elements of Business Environment Main Elements or factors of Business Environment

A Micro business Environment:

This is also known as internal business environment because business has power to control them. In this environment, factors can be divided with following way.

1st Supplier

A supplier provides raw material to business. This is also main factor of business environment because, it affects business very closely. If supplier delay to supply raw material or stop to supply. At this time production of business can be stopped due to not getting raw material. So, for controlling this factor, it is the duty of businessman to make good relation with more than one supplier so that, if one stop or delay at this time, goods can be purchased from other supplier.

2nd Customers

Customers are those people or companies which buy goods from our business. Business sells them his finished product. But time to time tastes of customers also change. So, according to the taste of business customers, new products must be supplied by business. That is the formula for living long life of business.

3rd Market Intermediaries

For promoting sale, it is required to ads by different way, so market intermediaries include sales man and middle man. This environment is under control of business because, if business starts selling with more ads, his selling will surely increase.

4th Competitors

Competitors of business also create internal business environment. According to competitors, policies, business changes his policies for winning in competition.

5th Financial Intermediaries

As business grows, it needs more money for his growth; either this money can be gotten by issuing new shares or by borrowing money from financial intermediaries. So, financial intermediaries plays a vital role in business environment. If they provides loan at very low rate, at that time business can get and grow fastly but, if they increase in interest rate, at that time business will not get at this rate and its growth may decrease due to lack of fund.

Macro Business Environment or External Factors of Business Environment:-

1. Economical Environment

Economic environment is main element of business environment. Economy is factor which affects business with following way:-

A) Economic policies

Economic policies related to budget , industrial policy , fiscal policy , export and import policy and business should see what changes are done in these and business has to changes their business policies according to these changes .

B) Economic regulation

Different laws and regulations are at international level and national level . These are all called economic regulation and business has to respect all of these while it is operating business .

2. Natural Environment

Natural environment is also external factor of business . Because , business can not fully control on natural environment . Many points like season , raining , floods , earth quake are natural and happens according to fluctuation in it . These

are also main element of business because business has to face all these factors . But some of loss from these factors can be transferred with effective schemes of insurance .

3. Demo graphic Factors

Size of population and their growth rate includes in demo graphic element and factor of business environment. Increasing trend of population will increase demand of products and support business to produce more products. But if death rate is increasing or demo graphic factor like religion are preventing to use the products of business. At that time business has to change their business or make other plans according to situation.

4. Technological Environment : -

This is fully concerned with changing of technology and its effect on product . Many technical products are fastly changed by coming new technology .At that time business also have to cover new products according to changes in technology .

5. Political Environment

Political environment is composition of three factors which are following a) legislature

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b) executive c) judiciary

All above factor affects business and business has to make rules and regulation according to Govt. and political rules and regulation.

6. International Environment

International environment includes WTO, IMF, WB, SARC and G20 meetings and their rules and regulations can effect on any type of business. Business has to exist in world market, and then it should understand their effect and take action according to these rules and regulation

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Unit II

Basic Accounting Concepts

There are a few (and only a few) things you need to understand in order to make setting up your accounting system easier. Debits and Credits

These are the backbone of any accounting system. Understand how debits and credits work and you'll understand the whole system.Every accounting entry in the general ledger contains both a debit and a credit. Further, all debits must equal all credits.If they don't, the entry is out of balance.

Debits and Credits vs. Account Types

Account Type Assets Liabilities Income Expenses

Debit Increases Decreases Decreases Increases

Credit Decreases Increases Increases Decreases

Accounting is based on 5 basic account types:

Assets Liabilities Equity Income and

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Expenses

Balance Sheet Accounts

The three so-called Balance Sheet Accounts are Assets, Liabilities, and Equity. Balance Sheet Accounts are used to track the changes in value of things you own or owe. Assets is the group of things that you own. Your assets could include a car, cash, a house, stocks, or anything else that has convertible value. Convertible value means that theoretically you could sell the item for cash.

Liabilities is the group of things on which you owe money. Your liabilities could include a car loan, a student loan, a mortgage, your investment margin account, or anything else which you must pay back at some time.

Equity is the same as "net worth." It represents what is left over after you subtract your liabilities from your assets. It can be thought of as the portion of your assets that you own outright, without any debt.

Income and Expenses Accounts

The two Income and Expense Accounts are used to increase or decrease the value of your accounts. Income is the payment you receive for your time, services you provide, or the use of your money.

Expenses refer to money you spend to purchase goods or services provided by someone else.
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Concept Of Capital And Revenue The main objective of accounting is to ascertain the true profit or loss and to reveal the financial position of a business at the end of financial year. To achieve the objectives, the business must take a clear distinction between its capital and revenue items. The distinction between capital and revenue items is essential for their correct treatment in the final accounts. Any incorrect treatment of those two items in the final accounts adversely affects the operating results and financial position of the business. Capital is the wealth invested by an investor for producing additional wealth. The original figure of wealth is known as capital. Making of additional wealth with the investment of original capital is known as revenue. Thus, capital is the source of the basis of revenue. In other words, capital is invested in the business to earn revenue. For example, a trader has started a business with $ 1,00,000 and earns a profit of $ 30,000 during the year. The original investment of the trader, i.e $ 1,00,000 is the capital and the profit of $ 30,000 earned by the investor out of the investment is the revenue. Capital items concerned with the payment for assets and receipt from the owners and outsiders. It is the item of the balance sheet. It is of long-term nature and its benefit is long-lasting. In fact, capital items are assets, liabilities and capital that determine the financial strength of the business. Revenue item is concerned with the payment for producing or buying goods and receipt from sale of goods and services. Those revenue incomes and expenditures are the items of trading and profit and loss accounts. It is of short-term nature. Its benefit expires within the year. In fact, revenue items are incomes and expenses, which determine the operating result (profit or loss) of the business. The following capital and revenue concepts are relevant for accounting purpose * Capital and revenue expenditures * Capital and revenue receipts * Capital and revenue losses * Capital and revenue profits * Capital and revenue reserves

A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. In British Englishincluding United Kingdom company lawa financial statement is often referred to as an account, although the term financial statement is also used, particularly by accountants. For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include four basic financial statements, accompanied by a management discussion and analysis:[1] 1. Statement of Financial Position: also referred to as a balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time. 2. Statement of Comprehensive Income: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. A Profit & Loss statement provides information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. 3. Statement of Changes in Equity: explains the changes of the company's equity throughout the reporting period

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4. Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities. For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements[2] and explanation of financial policies and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.

ADMISSION OF A PARTNER
Kapil and Krish are running a partnership firm dealing in toys. They are one of the most successful businessmen in the locality. They now decide to start manufacturing toys that are electronically operated to diversify their business. For this they need more capital and also technical expertise. Mohit; their friend is an electronic engineer and has capital also. They have persuaded him to join their firm. In case, he joins the partnership firm, this will be a case of admission of a partner. As a result, he may need to bring in capital and share of goodwill. In this lesson, you will learn about goodwill and other ajustments at the time of admission of a partner. Mohit will bring in capital and share of goodwill. Some changes in the value of some assets and liabilities of the existing firm are need to bring them at their realistic value, on his admission. There may be other issues involing finance on his admission. All this need accounting treatment. In this lesson you will learn accounting treatment and adjustments to be made on the admission of a partner.

Retirement If you look around, you must have noticed people in your relation and in your neighbourhood running business in partnership. You must have seen people quitting partnership firm or a person dies while in partnership. These are the events that take place during the lifetime of a partnership firm. Some issues arise on the happening of these events involving finance. Some assets and liabilities may need revaluation, goodwill is to be treated and amount of joint life policy is distributed and soon accounting adjustment are required to be made. Whenever such events take place, the firm has to calculate the dues of a partner leaving the firm or that of the deceased. In this lesson you will learn the accounting treatment in the books of the firm in these two cases i.e. retirement of a partner and death of a partner. 20.1 RETIREMENT MEANING, CALCULATION OF NEW PROFIT SHARING RATIO AND GAINING RATIO When one or more partners leaves the firm and the remaining partners continue to do the business of the firm, it is known as retirement of a partner. Amit, Sunil and Ashu are partners in a firm. Due to some family problems, Ashu wants to leave the firm. The other partners decide to allow him to withdraw from the partnership. Thus, due to some reasons

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like old age, poor health, strained relations etc., an existing partner may decide to retire from the partnership. Due to retirement, the existing partnership comes to an end and the remaining partners form a new agreement and the partnership firm is reconstituted with new terms and conditions. At the time of retirement the retiring partners claim is settled. A partner retires either : (i) with the consent of all partners, or (ii) as per terms of the agreement; or (iii) at his or her own will. The terms and conditions of retirement of a partner are normally provided in the partnership deed. If not, they are agreed upon by the partners at the time of retirement. At the time of retirement the following accounting issues are dealt : (a) New profit sharing ratio and gaining ratio. (b) Goodwill (c) Adjustment of changes in the value of Assets and liabilities (d) Treatment of reserve and accumulated profits. (e) Settlement of retiring partners dues, (f) New capital of the continuing partners.

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