What is Business?

Accounting is defined as the language of business. It is the means by which business information is communicated to the stakeholders.

Here are some examples on how accounting communicates business financial information to stakeholders:

  • Accounting report helps business management to decide whether to continue or discontinue the sale of their products or services.
  • Financial analysts or future investors use accounting reports in deciding if they will invest in the business or not.
  • The government, on the other hand, uses accounting reports to determine if the company is paying the right tax dues.
  • Banks also use accounting reports to determine if they will extend loan or credit to the business.

Before you can fully understand the basics of accounting, the terms, principles and procedures, you first need to understand the client it serves, which is the business.  You need to know what is business.

 Definition and Nature of Business

In your day to day life, you make a couple of transactions with businesses, whether you are aware of it or not. From the meals that you eat, beverages you drink and transportation you ride, in those moments, you are already dealing and transacting with a business establishment as a consumer.

From the grocery items and stores, gasoline stations, restaurants, medical offices, law firms, clothing stores or boutiques, or any place where we buy products or consume services, all these are engaged in what we call business.

You may be asking what is business.  In general, a business can be defined as follows:

Business consist of an individual, group of individuals or organizations engaged in the trade of goods, services, or both to consumers, in exchange for money or other items of equivalent value, and for profit.

Business is an organization in which basic resources, called inputs, are assembled and processed to provide goods or services, called outputs, to customers.  People who are engaged in business activity are called Entrepreneurs or Businessman.

A business’s customers are individuals or organizations who purchase goods or services in exchange for money or other items of equivalent value.

After knowing that business is an exchange of product or service for money, you may be asking what is business purpose.  Keep in mind that the motive of most business is to earn and maximize profit.

Profit is the difference between the amount received from the customers for goods or services provided, and the amount paid to suppliers for the inputs used to deliver the goods or services.

However, there are also some businesses that operate with an objective other than to earn and maximize profits. And these are called Non-profit organizations. The objective of such nonprofit business is to provide some benefit to the society. Nonprofit organizations can be private, government or both.

For the purpose of better discussion and understanding, the topics you will learn in here are applicable to business whose objective is to earn and maximize profit. It is then safe to presume that all businesses that will be illustrated in here are those who operate for profit.  Other terms for business are enterprise, firms, company or organizations.

5 Characteristics of Business

  1. It consists of an individual, group of individuals or organizations.
  2. Engaged in buying or processing inputs such as material, capital and labor.
  3. Trade or sell outputs to customers, such as products or services.
  4. Transactions involve exchange of money or other equivalent value.
  5. Goal is to earn and maximize profit.

Sample Illustration and Exercise

Identify if stated organization and activity is considered business or not.

Question: Church who receive donations from devotees.

Answer: Not a business because devotees are not obligated to pay the church in exchange for the mass or service rendered.

Question: Cooperatives which receives contribution from its members to be used in the betterment of the organization.

Answer: Nonprofit business. Organization which is not engaged in trading or selling products or services for purpose of profit is not considered as business. Cooperatives are formed for the equal rights and benefits of its members.

Question: Government unit, such as the municipal or city, received money to operate highway improvements and works.

Answer: Not a business because government units are engaged in providing services for the benefit of the community or society in which they serve.

Question: Disneyland is an open to Public Park which provides amusement and entertaining services to the guests in exchange for money and profit.

Answer: Yes, it’s a business because it provides products and services to people in exchange for money and profit.

I hope you were able to gain valuable insight in this article. You may share your thoughts, additional knowledge or questions/concerns via comment box below.

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  1. Hi! May I ask, what are the types of business activities? Thank you for your response.

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