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A business refers to a firm, company or enterprise. It also refers to commercial activity undertaken by one of these business organizations which are legally set up with the sole purpose of making profit by providing goods or services to consumers and other businesses or organizations.

Examples of a business are retail business, wholesale business, banking business, catering business, investment business, etc. Businesses can be international, local, private or state-owned businesses. Most of the businesses are privately owned and like all other businesses run the risk of failing if they do not attract a sufficient number of customers to whom their goods can be sold or their services provided at a profit.

All businesses require some form of initial investment. If a business is to be set up and start operation, it requires resources. If the owner supplies the resources, the amount of resources is known as capital in the business. These resources that are now owned by the business are called assets so that:

Assets = capital

Assuming that the capital introduced is insufficient to meet the requirement of the business, and other sources of funds are sought. These sources can be financial institutions or persons. Whatever money they lend adds to the assets of the business and they remain lenders to the business. The amounts owing to these lenders become what are known as liabilities. The equation now becomes:

Assets = capital + liabilities

The above accounting equation shows the business owns the assets and at the same time owes the capital to the owner and the debts to external parties. The two sides of the equation will always have the same totals.

Last Updated (Friday, 29 October 2010 10:00)