Finance General

Disadvantages of Proprietary Firms:

1. Unlimited Liability : In such firms the liability of the owner is unlimited as the owner takes more risk to earn more profits and increase the volume of his business by supplying his personal assets to the business.

2. Limited Financial Resources : Being the single owner of the business, the availability of funds from various sources is limited.

3. No Legal Status : The existence of business is due to the existence of sole proprietor. Death or insolvency of the sole proprietor brings an end to the business.

4. Limited Capacity of Individual : An individual has limited knowledge, set of skills due to which his capacity to undertake responsibilities, his capacity to take quick decisions and bear risks are also limited.

5.Transferring of business is not easy in the case of Proprietary Firm.

6. Higher Taxes: As the sole proprietor is the direct person enjoying the profits thus he needs to pay higher taxes.

Advantages of proprietary firms:

1. Easy Formation : Proprietary firm is easiest and economic form to create and operate as it can be started by any person without any legal formalities. Also there is no set limit of minimum or maximum number of persons to start the business as it can be started by a single person.

2. Better Control : As the owner is the single person so he has full control over his business. His total authority over his business gives him the power to plan, organize, co-ordinate the various activities. The sizes of such firm are generally small which also makes it better to control.

3. Quick Decision Making : Being the only owner of the business the sole trader takes all the decisions himself. He evaluates all the opportunities available and finds the solution to problems which makes decision making quick.

4. Flexibility in Operations : One man ownership makes it possible to bring flexibility in the operations of the business.

5. Personal attention to customer needs : Due to the small geographical area it becomes easy for the sole proprietor deal with all its customers personally and knows their needs. Thus it makes easy for him to pay special attention to consumer needs.

6. Creation of Employment : Proprietor firm facilitates self employment and also employment for many others. It promotes entrepreneurial skill among the individuals.

7. Equal Distribution of Wealth : Proprietary firm is generally a small scale business. Hence there are many opportunities for individuals to start their own business enabling widespread dispersion of economic wealth.

8.No Legal Formalities required : A proprietary firm is not required to comply with all the legal and procedural formality.

There are two systems of Accounting:

1) Cash System of Accounting: This system records only cash receipts and payments. This system assumes that there are no credit transactions. In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received. This system is used by the organizations which are established for non profit purpose. But this system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization.

2) Mercantile or Accrual System of Accounting: In this system, expenses and incomes are considered during that period to which they pertain. This system of accounting is considered to be ideal but it may result into unrealized profits which might reflect in the books of the accounts on which the organization have to pay taxes too. All the company forms of organization are legally required to follow Mercantile or Accrual System of Accounting.

For the accounting purpose expenditures are classified in three types:

* Capital Expenditure is an amount incurred for acquiring the long term assets such as land, building, equipments which are continually used for the purpose of earning revenue. These are not meant for sale. These costs are recorded in accounts namely Plant, Property, Equipment. Benefits from such expenditure are spread over several accounting years.

E.g. Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage and commission paid.

* Revenue Expenditure is the expenditure incurred in one accounting year and the benefits from which is also enjoyed in the same period only. This expenditure does not increase the earning capacity of the business but maintains the existing earning capacity of the business. It included all the expenses which are incurred during day to day running of business. The benefits of this expenditure are for short period and are not forwarded to the next year. This expenditure is on recurring nature.

Eg: Purchase of raw material, selling and distribution expenses, Salaries, wages etc.

* Deferred Revenue Expenditure is a revenue expenditure which has been incurred during an accounting year but the benefit of which may be extended to a number of years. And these are charged to profit and loss account. E.g. Development expenditure, Advertisement etc.