1. Service Sector Service sector includes commercial firm engaged in banking. communication. transport, insurance, warehousing etc. The service sector constitutes the basic infrastructure which is a must for smooth flow of business activities.
2. Nature of Services
Basic features of services are
(i) Intangible (ii) Lack of Inconsistency (iii) Inventory (iv) Non-transferability or Inseparability (v) Involvement
3. Classification or Types of Services
Services can be broadly categorised into three categories
(i) Business Services Business services are these services which are used by business enterprise to carryon business activities more smoothly, e.g., banking, insurance, transportation warehousing, communication etc.
(ii) Social Services Social services are carried voluntarily to achieve social goal to the society at large.
(iii) Personal Services Personal services are experienced by different customers. These depends upon the customer demands and preferences. Example: Tourism, Restaurants etc.
4. Various Categories of Business Services
(i) Banking (ii) Insurance (iii) Communication (iv) Warehousing (v) Transportation
5. Banking A bank is an institution which attracts money on deposits for the purpose of being lent to industry or trade.
According to Indian Banking Regulation Act, 1949, “Banking means accepting deposits of money from the public for the purpose of lending or investment”.
Banks can be classified into following categories
(i) Commercial Banks Commercial banks are governed and regulated by Indian Banking Regulation Act, 1949 and according to it banking means accepting deposits from public for the purpose of lending investment.
There are Two Types of Commercial Banks
(a) Public Sector Banks (b) Private Sector Banks
(ii) Co-operative Banks These banks are governed by provisions of state Co-operative Societies Act and are formed to provide loan and advances to its members on easy terms.
(iii) Specialised Banks These banks are formed to cater to specific needs of industries, export units. There are foreign exchange banks, industrial development bank, export-import banks etc.
(iv) Central Banks Central bank of any country controls regulates and supervises the activities of commercial banks, it is known as banker of banks.
6. Functions of Commercial Banks The main functions of commercial banks are
(i) Collection of Deposits Commercial banks is that they accept deposits from their clients. The common types of deposits accepted by bank are
(a) Saving account deposits (b) Current account deposits (c) Recurring deposits (d) Fixed term deposits
(ii) Lending of Funds The commercial bank is to provide loans and advances out of the money received through deposits. These advances can be made in the form of overdraft cash credit etc.
(iii) Cheque Facility The banks collect the cheques for their customers drawn on other banks. To collect cheques banks have clearing houses.
(iv) Agency Functions Bank pay insurance premium on behalf of their clients. Bank also collect divided premium, interest, pension etc.
(v) Allied Services In addition to above functions bank also provide allied services such as bill payments, locker facilities etc.
7. e-banking Internet banking means any user with a PC and a browser can get connected to the banks website to perform any of the virtual banking functions and avail of any of the bank’s services.
There are various benefits of e-banking provided to customer which are
(i) e-banking provides 24 hours. 365 days a year services to the customer of the bank. (ii) Customers can. make some of the permitted transactions from office or house. (iii) Greater Customer satisfaction by offering unlimited access to the bank.
The banks also stand to gain bye-banking
(i) e-banking provides competitive advantage to the bank. (ii) e-banking provides unlimited network to the bank.
8. Insurance Insurance is a contract between the insurer and insured in which insurer agree to make good the loss of insured on happening of an event in consideration of a regular payment called premium.
(i) Functions
(a) Protection (b) Distribution of risk (c) Competitiveness (d) Specialisation (e) Beller utilisation of capital (f) Promotes foreign trade (g) Credit facility (h) Capital formation (i) Social welfare
(ii) Principles
(a) Principle of utmost. good faith (b) Principle of insurable interest (c) Principle of indemnity (d) Principle of contribution (e) Principle of subrogation (f) Principle of causa proxima (g) Principle of mitigation of loss
9. Types of Insurance
Insurance contracts are of following types
(i) Life Insurance It may be defined as a contract in which the insurer in consideration of a certain premium either is a lump-sum or by other periodical payments. agree to pays to the assured or the person for whose benefit the policy is taken. The life insurance lli related with two types of risks
(a) Risk of dying to early (b) Risk of dying to late
Types of life insurance policies are given below
(a) Whole Life Policy Under this policy the insured sum is paid only on the death of the insured Which means the policy is to run for the whole life of assured,
(b) Endowment Life Assurance Policy Under this policy the insurer pays a particular sum at the death of the person or on attaining a particular age.
(c) Joint Life Policy This policy is taken up by two 01′ more persons. The premium IS paid jointly or by either of them in instalments.
(d) Annuity Policy Under this policy the assured sum or policy a certain money is payable after the assured a attains age in monthly. quarterly. half yearly.
(e) Children’s Endowment Policy This policy is taken by a person for his/her children to meet the expenses of their education or marriage.
(ii) General Insurance
(a) Fire Insurance Fire insurance is a contract under which one party in return for a consideration agrees to indemnity the other party for the financial loss.
Kinds of fire insurance policies are as follows
Specific Policy
Double Insurance
Reinsurance
(b) Marin Insurance Marine Insurance is a contract between the insured and the insurer. The insured may be cargo owner or ship owner or fright receiver.
The different types of marine insurance are
Cargo Insurance
Hull Insurance
Freight Insurance
10. Communication Services Communication refers to exchange of ideas, views or message between two or more persons.
According to William H Newman, “Communication is an exchange of facts ideas, opinion or emotions by two or more persons”.
11. Postal Services The government at national and international level provides postal services.
(i) Features
(a) All the postal services arc controlled by the government.
(b) The postal department provides services at national as well as international level. (c) Post offices also started speed post service to compete with courier service.
(ii) Drawbacks
(a) Slow in speed (b) Bureaucratic in nature
12. Telecom Services Telecom services are the backbone of every business activity. In the absence of Telecom service every business activity will remain as a dream only.
The various types of telecom services are
(i) Cellular mobile phone (ii) Radio paging services (iii) Fixed line service (iv) Cable service (v) VSAT services (vi) DTH services
13. Transportation It refers to physical movement of goods from one place to other. Transportation comprises of freight services.
The transportation services is necessary to remove the place gap between the producer and consumer.
14. Warehousing Services Warehousing means holding and preservation of goods from the time of their production or purchase and until their sale or use.
(i) Functions
(a) Consolidation (b) Break the bulk (c) Stock pilling (d) Value added service (e) Price stabilisation (f) Financing (g) Risk Bearing
(ii) Types of Warehouses
Warehouses may broadly be classified into five categories
(a) Private warehouse (b) Public warehouse (c) Co-operative warehouse (d) Government warehouses (e) Bonded warehouses
Private, Public and Global Enterprises class 11 Notes Business Studies
PRIVATE SECTOR ENTERPRISES
The private sector consists of business owned by individuals or a group of individuals. The varios forms of organisation are- sole proprietorship, partnership, joint hindu family, cooperative and company.
PUBLIC SECTOR ENTERPRISES
Meaning: The public sector consists of various organizations owned and managed by central or State or by both governments. The govt. participates in economic activity of the country through these enterprises.
FEATURES:
1. Capital is contributed by central or state or both govts. 2. Public welfare or Service is the main objective. 3. Management & control are in the hands of govt. 4. It is accountable to the public.
I. DEPARTMENT UNDERTAKING
These are established as departments of the ministry and are financed, managed and controlled by either central govt. or state govt.
Examples: Indian Railways, Post & Telegraph departments.
FEATURES
1. No Separate Entity: It has no Separate legal entity. 2. Finance: It is financed by annual budget allocation of the govt. and all its earnings go to govt. treasury. 3. Accounting &Audit: The govt. rules relating to audit & accounting are applicable to it. 4. Staffing: Its employees are govt. employees & are recruited & appointed as per govt. rules. 5. Accountability: These are accountable to the concerned ministry.
MERITS
1. It is more effective in achieving the objective laid down by govt. as it is under the direct control of govt. 2. It is a source of govt. income as its revenue goes to govt. treasury. 3. It is accountable to parliament for all its actions which ensures proper utilization of funds. 4. It is suitable for activities where secrecy and strict control is required like defence production.
DEMERITS
1. It suffers from interference from minister and top officials in their working. 2. It lacks flexibility which is essential for smooth operation of business. 3. It suffers from red tapism in day to day Work. 4. These organizations are usually insensitive to consumer needs and do not provide goods and adequate service to them. 5. Such organization are managed by civil servants and govt. officials who may not have the necessary expertise and experience in management.
SUITABILITY:
(i) Where full Govt. control is needed. (ii) where secrecy is very important such as defence.
STATUTORY CORPORATIONS
It is established under a special Act passed in parliament or state legislative assembly. Its objectives, powers and functions are clearly defined in the special Act.
Examples: Unit Trust of India, Life Insurance Corporation.
FEATURES
1. It is established under a special act which defines its objects, powers and functions. 2. It has a separate legal entity. 3. Its management is vested in a Board of directors appointed or nominated by government. 4. It has its own staff, recruited and appointed as per the provisions of act. 5. This type of enterprise is usually independently financed. It obtains funds by borrowing from govt. or from public or through earnings. 6. It is not subject to same accounting & audit rules which are applicable to govt. department.
MERITS
1. Internal Autonomy: It enjoys a good deal of autonomy in its day to day operations and is free from political interference. 2. Quick decisions: It can take prompt decisions and quick actions as it is tree from the prohibitory rules of govt. 3. Parliamentary control: Their performance is subject to discussion in parliament which ensures proper use of public money. 4. Efficient Management: Their directors and top executives are professionals and experts of different fields.
DEMERITS
1. In reality, there is not much operational flexibility. It suffers from lot of political interference. 2. Usually they enjoy monopoly in their field and do not have profit motive due to which their working turns out to be inefficient. 3. Where there is dealing with public, rampant corruption exists. Thus public corporation is suitable for undertaking requiring monopoly powers e.g. public utilities.
SUITABILITY: It is suitable for organizing public enterprise when,
(i) The enterprise requires special power under an Act. (ii) The enterprise requires a huge amount of capital investment.
GOVERNMENT COMPANY
A government company is a company in which not less than 51% of the paid up share capital is held by the central govt. or state govt. or jointly by both.
Examples: Hindustan Insecticides Ltd., State Trading Corp. of India, Hindustan Cables Ltd.
FEATURE
1. It is registered or Incorporated under companies Act1956. 2. It has a separate legal entity. 3. Management is regulated by the provision of companies Act. 4. Employees are recruited and appointed as per the rules and regulations contained in Memorandum and Articles of association. 5. The govt. Co. obtains it funds from govt. shareholdings and other private shareholdings. It can also raise funds from capital market.
MERITS
1. It can be easily formed as per the provision of companies Act. Only an executive decision of govt. is required. 2. It enjoys autonomy in management decisions and flexibility in day to day working. 3. These are able to control the market and curb unhealthy business practices.
LIMITATIONS
1. It suffers from interference from govt. officials, ministers and politicians. 2. It evades constitutional responsibility which a company financed by the govt. should have as it is not directly answerable to parliament. 3. The board usually consists of the politicians and civil servants who are interested more in pleasing their political bosses than in efficient operation of the company.
SUITABILITY:
(i) Where the private sector is also needed along with in govt. (ii) Where activities related to finance are to be encouraged.
CHANGING ROLE OF PUBLIC SECTOR
Public sector in India was created to achieve two types of objective – (1) to speed up the economic growth of the country and (2) to achieve a more equitable distribution of income and wealth among people. The role and importance of public sector changed with time. Its role over a period of time can be summarized as following:
1. Development of Infrastructure: At the time of independence, India suffered from acute shortage of heavy industries such as engineering, iron and steel, oil refineries, heavy machinery etc. Because of huge investment requirement and long gestation period, private sector was not willing to enter these areas. The duty of development of basic infrastructure was assigned to public sector which it discharged quite efficiently.
2. Regional balance: Earlier, most of the development was limited to few areas like port towns. For providing employment to the people and for accelerating the economic development of backward areas many industries were set up by public sector in those areas.
3. Economies of scale: In certain industries (like Electric power plants. natural gas, petroleum etc) huge capital and large base are required to function economically. Such areas were taken up by public sector.
4. Control of Monopoly and Restrictive trade Practices – These enterprises were also established to provide competition to pvt. Sector and to check their monopolies and restrictive trade practices.
5. Import Substitution – Public enterprises were also engaged in production of capital equipments which were earlier imported from other countries. At the same time public sector Companies like STC and MMTC have played an important role in expending exports of the country. Very important role was assigned to public sector but is performance was far from satisfactory which forced govt. to do rethinking on public enterprises.
PUBLIC SECTORY REFORMS
In the industrial policy 1991, the govt. of India introduced four major reforms in public sector.
(I) Reduction in No. of industries reserved for public sector: This no. is reduced from 17 to 8 and to 3 only in 2001. These three industries are atomic energy arms and rail transport.
(II) Memorandum of Understanding (MOU): Under this govt. lays down performance target for public sector and gives greater autonomy to hold the management but held accountable for the specified results.
(III) Disinvestment: Equity shares of public sector enterprises were sold to private sector and the public. It was expected that this would lead to improved managerial performance and better financial discipline.
(IV) Restructural and Revival: All public sector sick units were referred to Board of Industrial and Financial Re-construction (BIFR). Unite which were potentially viable were restructured and which could not be reviewed were closed down by the board.
MULTINATIONAL COMPANIES/GLOBAL ENTERPRISES
Multinational company may be defined of a company that has business operations in several countries by having its factories, branches or offices in those countries. But is has its headquarter in one country in which it is incorporated.
Examples: PHILIPS, Coca Cola etc.
FEATURES
1. Huge Capital Resources: MNCs possess huge capital resources and they are able to raise lot of funds from various sources.
2. International Operations: A MNC has production, marketing and other facilities in several countries.
3. Centralized control: MNCs have headquarters in their home countries from where they exercise control over all branches and subsidiaries. It provides only broad policy framework to them and there is no interference in their day to day operations.
4. Foreign Collaboration: Usually they enter into agreements relating to sale of technology, production of goods, use of brand name etc. with local firms in the host country.
5. Advanced technology – These organisation possesses advanced and superior technology which enable them to provide world class products & services.
6. Product Innovations: MNCs have highly sophisticated research and development departments. These are engaged in developing new products and superior design of existing products.
7. Marketing Strategies – MNCs use aggressive marketing strategies. Their brands are well known and spend huge amounts on advertising and sale promotion.
JOINT VENTURES
Meaning: When two or more independent firms together establish a new enterprise by pooling their capital, technology and expertise, it is known as a joint venture.
Example: Hero Cycle of India and Honda Motors Co. of Japan jointly established Hero Honda. Similarily, Suzuki Motors of Japan and Maruti of Govt. of India come together to form Maruti Udyog.
FEATURES 1. Capital is provided jointly by the Government and Private Sector Entrepreneurs. 2. Management may be entrusted to the private entrepreneurs. 3. It combines both social and profit objectives. 4. It is responsible to the Government and the private investors.
BENEFITS
1. Greater resources and Capacity – In a joint venture the resources and capacity of two or more firms are combined which enables it to grow quickly and efficiently
2. Access to advanced technology – It provides access to advanced techniques of production which increases efficiency and then helps in reduction in cost and improvement in quality of product.
3. Access to New Markets and distribution network – A foreign co. gain access to the vast Indian market by entering into a joint venture with Indian Co. It can also take advantage of the well established distribution system of local firms.
4. Innovation – Foreign partners in joint ventures have the ideas and technology to develop innovative products and services. They have an advantage in highly competitive and demanding markets.
5. Low Cost of production – Raw material and labour are comparatively cheap in developing countries so if one partner is from developing country they can be benefitted by the low cost of production.
6. Well known Brand Names: When one party has well established brands & goodwill, the other party gets its benefits. Products of such brand names can be easily launched in the market.
Public Private Partnership (PPP):
It means an enterprise in which a project or service is finance and operated through a partnership of Government and private enterprises.
FEATURES: 1. Facilitates partnership between public sector and private sector. 2. Pertaining high priority project. 3. Suitable for big project (capital intensive and heavy industries). 4. Public welfare example Delhi Metro Railway Corporation. 5. Sharing revenue – Revenue is shared between government and private enterprises in the agreed Ratio.
Forms of Business Organisation class 11 Notes Business Studies
Meaning A business enterprise is an institutional arrangement to form any business activity.
Classification On the basis of ownership business enterprises can broadly be classified into the following categories:
In case of CORPORATE FORM of private enterprises the identity of the enterprise is separate from that of the owner and in case of NON CORPORATE FORM, the identity of the enterprise is not different from that of its owners.
Sole Proprietorship
Sole proprietorship means a business owned, financed and controlled by a single person who is recipient of all profit and bearer of all risks.
It is SUITABLE IN AREAS OF PERSONALISED SERVICE like beauty parlour, hair cutting saloons & small scale activities like retail shops.
Features
1. Single ownership: It is wholly owned by one individual. 2. Control: Sole proprietor has full power of decision making. 3. No separate legal entity: Legally there is no difference between business& businessmen. 4. Unlimited liability: The liability of owner is unlimited. In case the assets of business are not sufficient to meet its debts, the personal property of owner can be used for paying debts 5. No legal formalities: Not required to start, manage and dissolve such business organization. 6. Sole risk bearer and profit recipient: He bears the complete risk and there is no body to share profit/loss with him.
Merits
1. Easy to start and close: It can be easily started and closed without any legal formalities. 2. Quick decision making: As sole trader is not required to consult or inform anybody about his decisions. 3. Sense of accomplishment: There is a sense of personal satisfaction. 4. Unlimited liability: The liability of owner is unlimited. In case the assets of business are not sufficient to meet its debts, the personal property of owner can be used for paying debts 5. No legal formalities: are required to start, manage and dissolve such business organization. 6. Sole risk bearer and profit recipient: He bears the complete risk and there is no body to share profit/loss with him.
LIMITATIONS
1. Limited financial resources: Funds are limited to the owner’s personal savings and his borrowing capacity. 2. Limited Managerial ability: Sole trader can’t be good in all aspects of business and he can’t afford to employ experts also. 3. Unlimited liability: Ofcourse, sole trader compels him to avoid risky and bold business decisions. 4. Uncertain life: Death, insolvency, lunacy or illness of a proprietor affects the business and can lead to its closure. 5. Limited scope for expansion:- Due to limited capital and managerial skills, it cannot expand to a large scale.
SUITABILITY:
Sole tradership is suitable- • Where the personal attention to customer is required as in tailoring, beauty parlour. • Where goods are unstandardized like artistic jewellery. • Where modest capital and limited managerial skills are required as in case of retail store • Business where risk is not extensive i.e. lesser fluctuation in price and demand i.e. stationery shop.
JOINT HINDU FAMILY BUSINESS
It is owned by the members of undivided joint Hindu family and managed by the eldest member of the family known as KARTA. It is governed by the provisions of Hindu law. The basis of membership is birth in a particular family.
FEATURES
1. Formation – For a joint Hindu family business there should be at least two members in the family and some ancestral property to be inherited by them.
2. Membership by birth – There are two systems which govern membership Dayabhaga System- It prevails in west Bengal and allows both male and female member to co-parcencers. Mitakshara System- It prevails all over India except West Bengal and allows only male members to be coparceners.
3. Liability – Liability of Karta is unlimited but of all other members is limited to the extent of their share in property
4. Continuity – The business is not affected by death or incapacity of Karta in such cases the next senior male member becomes the Karta.
5. Minor members – A minor can also become full fledged member of Family business.
MERITS
1. Effective control- The Karta can promptly take decisions as he has the absolute decision making power. 2. Continued business existence- The death, Lunacy of Karta will not affect the business as next eldest member will then take up the position. 3. Limited liability – The liability of all members except Karta is limited. It gives them a relief. 4. Secrecy – Complete secrecy regarding business decisions can be maintained by Karta. 5. Loyalty and Co-operation: It helps in securing better co-operation and greater loyalty from all the members who run the business.
LIMITATION
1. Limited capital: There is shortage of capital as it is limited to the ancestral property. 2. Unlimited liability of karta – It makes him less enterprising. 3. Dominance of karta – Karta manages the business and sometimes he ignores the valuable advice of other members. This may cause conflict among the members and may lead to break down of the family limit. 4. Hasty decisions: As karta is overburdened with work, he may take hasty and unbalanced decisions. 5. Limited managerial skills of karta also pose a serious problem. The Joint Hindu family business is on decline because of the diminishing no. of joint Hindu families in the country.
PARTNERSHIP
Meaning: Partnership is a voluntary association of two or more persons who agree to carry on some business jointly and share its profits and losses.
FEATURES
1. Two or more persons: There must be at least two persons to form a partnership. The maximum no. of persons is 10 in banking business and 20 in non-banking business. 2. Agreement: It is an outcome of an agreement among partners which may be oral or in writing. 3. Lawful business- It can be formed only for the purpose of carrying on some lawful business. 4. Decision making & control – Every partner has a right to participate in management & decision making of the organisations. 5. Unlimited liability – Partners have unlimited liability. 6. Mutual Agency – Every partner is an implied agent of the other partners and of the firm. Every partner is liable for acts performed by other partners on behalf of the firm. 7. Lack of continuity – Firms existence is affected by the death, Lunacy and insolvency of any of its partner. It suffers from lack of continuity.
MERITS
1. Ease of formation & closure – It can be easily formed. Only an agreement among the partners is required. 2. Larger financial resources – There are more funds as capital is contributed by no. of partners. 3. Balanced Decisions – As decisions are taken jointly by partners after consulting each other. 4. Sharing of Risks – In it, risk get distributed among partners which reduces anxiety, burden and stress on individual partner. 5. Secrecy – Secrecy can be easily maintained about business affairs as they are not required to publish their accounts or to file any report to the govt.
LIMITATIONS
1. Limited resources – There is a restriction on the number of partners and hence capital contributed by them is also limited. 2. Unlimited liability- The liability of partners is unlimited and they are liable individually as well as jointly. It may prove to be a big drawback for those partners who have greater personal wealth. They will have to repay the entire debt in case the other partners are unable to do so. 3. Lack of continuity – Partnership comes to an end with the death, retirement, insolvency or lunacy of any of its partner. 4. Lack of public confidence – Partnership firms are not required to publish their reports and accounts. Thus they lack public confidence.
TYPES OF PARTNERS
1. General / Active Partner – Such a partner takes active part in the management of the firm. 2. Sleeping or Dormant Partner – He does not take active part in the management of the firm. Though he invested money, shares profit & Loss and unlimited liability. 3. Secret Partner – He participates in business secretly without disclosing his association with the firm to general public. His liability is also unlimited. 4. Nominal Partner – Such a partner only gives his name and goodwill to the firm. He neither invests money nor takes profit. But his liability is unlimited. 5. Partner by Estoppels – He is the one who by his words or conduct gives impression to the outside world that he is a partners of the firm whereas actually he is not. His liability is unlimited towards the third party who has entered into dealing with firm on the basis of his pretensions. 6. Partner by holding out – He is the one who is falsely declared partner of the firm whereas actually he is not. And even after becoming aware of it, he-does not deny it. His liability is unlimited towards the party who has deal with firm on the basis of this declaration.
Minor as a Partner
A minor is a person who has not attained the age of 18 years. Since a minor is not capable of enlarging into a valid agreement. He cannot become partner of firm. However, a minor can be admitted to the benefits of an existing partnership firm with the mutual consent of all other partners. He cannot be asked to bear the losses. His liability will be limited to the exilent of the capital contributed by him. He will not be eligible to take an active part in the management of the firm.
Types of Partnership
A. Classification on the Basics of Duration
Partnership at will- This type of partnership exists at the will of partners. Particular Partnership-This type of partnership is formed for a specified June period to accomplish a particular project (consolation of building)
B. Classification on the basis of Liability
General partnership-This liability of partners is limited and joint. Registration of firm is optional. Limited Partnership-The liability of at least one partner is unlimited whereas the other partners may have limited. Registration of firm is compulsory.
PARTNERSHIP DEED
The written agreement on a stamped paper which specifies the terms and conditions of partnership is called the partnership deed.
It generally includes the following aspects – • Name of the firm • Location / Address of the firm • Duration of business. • Investment made by each partner. • Profit sharing ratio of the partners • Terms relating to salaries, drawing, interest on capital and interest on drawing of partners. • Duties & obligations of partners. • Terms governing admission, retirement & expulsion of a partner, preparation on of accounts & their auditing. • Method of solving dispute
REGISTRATION OF PARTNERSHIP
Registration is not compulsory it is optional. But it is always beneficial to get the firm registered. The consequences of non-registration of a firm are as follows:
• A partner of an unregistered firm cannot file suit against the firm or the partner.
• The firm cannot file a suit against third party.
• The firm cannot file a case against its partner.
Co-operative Society
A co-operative society is a voluntary association of persons of moderate means who unite together to protect & promote their common economic interests.
FEATURES
1. Voluntary association: Every one having a common interest is free to join a co-operative society and can also leave the society after giving proper notice.
2. Legal status: Its registration is compulsory and it gives it a separate legal identity.
3. Limited liability: The liability of the member is limited to the extent of their capital contribution in the society.
4. Democratic control: Management & Control lies with the managing committee elected by the members by giving vote. Every member has one vote irrespective of the number of shares held by him.
5. Service motive: The main aim is to serve its members and not to maximize the profit.
6. Bound by govt.’s rules: They have to be tide by the rules and regulations framed by govt. for them.
7. Distribution of surplus: The profit is distributed on the basis of volume of business transacted by a member and not on the basis of capital contribution of members.
MERITS
1. Excise of formation: It can be started with minimum of 10 members. Registration is also easy as it requires very few legal formations.
2. Limited Liability: The liability of members is limited to the extent of their capital contribution.
3. Stable existence: Due to registration it is a separate legal entity and is not affected by the death, luxury or insolvency of any of its member.
4. Economy in operations: Due to elimination of middlemen and voluntary services provided by its members.
5. Government Support: Govt. provides support by giving loans at lower interest rates, subsidies & by charging less taxes.
6. Social utility: It promotes personal liberty, social justice and mutual cooperation. They help to prevent concentration of economic power in few hands.
LIMITATIONS
1. Shortage of capital – It suffers from shortage of capital as it is usually formed by people with limited means.
2. Inefficient management – Co-operative society is managed by elected members who may not be competent and experienced. Moreover, it can’t afford to employ expert and experienced people at high salaries.
3. Lack of motivation – Members are not inclined to put their best efforts as there is no direct link between efforts and reward.
4. Lack of Secrecy – Its affairs are openly discussed in its meeting which makes it difficult to maintain secrecy.
5. Excessive govt. control – it suffers from excessive rules and regulations of the govt. It has to get its accounts audited by the auditor and has to submit a copy of its accounts to registrar.
6. Conflict among members – The members are from different sections of society with different viewpoints. Sometimes when some members become rigid, the result is conflict.
TYPES OF CO-OPERATIVE SOCIETIES
1. Consumers co-operative Society – It formed to protect the interest of consumers.It seeks to eliminate middleman by establishing a direct link with the producers. It purchases goods of daily consumption directly from manufacturer or wholesalers and sells them to the members at reasonable prices.
2. Producer’s Co-operative Society – The main aim is to help small producers who cannot easily collect various items of production and face some problem in marketing. These societies purchase raw materials, tools, equipments and other items in large quantity and provide these things to their members at reasonable price.
3. Marketing Co-operative Society – It performs various marketing function such as transportation, warehousing, packing, grading, marketing research etc. for the benefit of its members. The production of different members is pooled together and sold by society at good price.
4. Farmer’s Co-operative Society – In such societies, small farmers join together and pool their resources for cultivating their land collectively. Such societies provide better quality seeds, fertilizers, machinery and other modern techniques for use in the cultivation of crops. It provides them opportunity of cultivation on large scale.
5. Credit co-operative Society – Such societies protect the members from exploitation by money lenders. They provide loans to their members at easy terms and reasonably low rate of interest.
6. Co-operative Housing Society – The main aim is to provide houses to people with limited means/income at reasonable price.
JOINT STOCK COMPANY
Meaning – Joint stock company is a voluntary association of persons for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.
FEATURES
1. Incorporated association – The company must be incorporated or registered tender the companies Act 1956. Without registration no company can come into existence.
2. Separate Legal Existence – It is created by law and it is a distinct legal entity independent of its members. It can own property, enter into contracts, can file suits in its own name.
3. Perpetual Existence – Death, insolvency and insanity or change of members as no effect on the life of a company. It can come to an end only through the prescribed legal procedure.
4. Limited Liability – The liability of every member is limited to the nominal value of the shares bought by him or to the amt. guaranteed by him. Transferability of shares – Shares of public Co. are easily transferable. But there are certain restrictions on transfer of share of private Co. Common Seal- It is the official signature of the company and it is affixed on all important documents of company.
5. Separation of ownership and control – Management of company is in the hands of elected representatives of shareholders known individually as director and collectively as board of directors.
MERITS
1. Limited Liability – Limited liability of shareholder reduces the degree of risk borne by him.
2. Transfer of Interest – Easy transferability of shares increases the attractiveness of shares for investment.
3. Perpetual Existence – Existence of a company is not affected by the death, insanity,
Insolvency of member or change of membership. Company can be liquidated only as per the provisions of companies Act.
4. Scope for expansion – A company can collect huge amount of capital from unlimited no. of members who are ready to invest because of limited liability, easy transferability and chances of high return.
5. Professional management – A company can afford to employ highly qualified experts in different areas of business management.
LIMITATIONS
1. Legal formalities – The procedure of formation of Co. is very long, time consuming, expensive and requires lot of legal formalities to be fulfilled.
2. Lack of secrecy – It is very difficult to maintain secrecy in case of public company, as company is required to publish and file its annual accounts and reports.
3. Lack of Motivation – Divorce between ownership and control and absence of a direct link between efforts and reward lead to lack of personal interest and incentive.
4. Delay in decision making – Red papism and bureaucracy do not permit quick decisions and prompt actions. There is little scope for personal initiative.
5. Oligarchic management – Co. is said to be democratically managed but actually managed by few people i.e. board of directors. Sometimes they take decisions keeping in mind their personal interests and benefit, ignoring the interests of shareholders and Co.
TYPES OF COMPANIES On the basis of ownership, companies can be divided into two categories – Private & Public.
Difference between Private Company & Public Co.
Private Co.
Public Co.
It has minimum 2 and maximum 50 members.
It has minimum 7 and maximum unlimited.
It cannot invite general public to buy its shares and debentures.
It invites general public to buy its shares and debentures.
There are certain restrictions on transfer of its shares.
Its shares are freely transferable.
It can commence business after incorporation.
It can commence business after obtaining certificate of commencement of business.
It has to write Private Ltd. After its nameEx- Tata Sons, Citi Bank, Hyundai Motor India.
It has to write only limited after its nameEx- Reliance Industries Ltd., Wipro Ltd. , Raymond’s Ltd.
In its minimum capital required is one lakh.
In its minimum capital required is five lakhs.
FORMATION OF A COMPANY
Formation of a company means bringing a company into existence and starting its business. The steps involved in the formation of a company are:
(i) Promotion
(ii) Incorporation
(iii)Capital subscription
(iv) Commencement of business.
A private company has to undergo only first two steps but a public company has to undergo all the four stages.
1. Promotion:
Promotion means conceiving a business opportunity and taking an initiative to form a company.
Step in Promotion:
1. Identification of Business Opportunity : The first and foremost function of a promoter is to identify a business idea e.g. production of new product or service.
2. Feasibility Studies: After identifying a business opportunity the promoters undertake detailed studies of technical, Financial, Economic feasibility of a business.
3. Name Approval: After selecting the name of company the promotors submit an application to the Registrar of companies for its approval.
4. Fixing up signatories to the Memorandum of Association: Promotors have to decide about the director who will be signing the memorandum of Association.
5. Appointment of professional: Promoters appoint merchant bankers, auditors etc.
6. Preparation of necessary documents: The promoters prepare certain legal documents such as memorandum of Association, Articles of Association which have to be submitted to the Registrar of the companies.
2. Incorporation
Incorporation means registration of the company as body corporate under the companies Act 1956 and receiving certificate of Incorporation.
Steps for Incorporation
1. Application for incorporation: Promoters make an application for the incorporation of the company to the Registrar of companies.
2. Filing of necessary documents: Promoters files the following documents:
(i) Memorandum of Association. (ii) Articles of Association. (iii) Statement of Authorized Capital (iv) Consent of proposed director. (v) Agreement with proposed managing director. (vi) Statutory declaration.
3. Payment of fees: Along with filing of above documents, registration fee has to be deposited which depends on amount of the authorized capital.
4. Registration: The Registrar verifies all the document submitted. If he is satisfied then he enters the name of the company in his Register.
5. Certificate of Incorporation: After entering the name of the company in the register. The Registrar issues a Certificate of Incorporation. This is called the birth certificate of the company.
III. Capital Subscription:
A public company can raise funds from the public by issuing shares and Debentures. For this it has to issue prospectus and undergo various other formalities:
Step required for raising funds from public:
1. SEBI Approval: SEBI regulates the capital market of India. A public company is required to take approval from SEBI.
2. Filing of Prospectus: Prospectus means any documents which invites offers from the public to purchase share and Debenture of the company.
3. Appointment of bankers, brokers, underwriters: Banker of the company receive the application money. Brokers encourage the public to apply for the shares, underwriters are the person who undertake to buy the shares if these are not subscribed by the public. They receive a commission for underwriting.
4. Minimum subscription: According to the SEBI guide lines minimum subscription is 90% of the issue amount. If minimum subscription is not received then the allotment cannot be made and the application money must be returned to the applicants within 30 days.
5. Application to Stock Exchange: It is necessary for a public company to list their shares in the stock exchange therefore the promoters apply in stock exchange to list company shares.
6. Allotment of Shares: Allotment of shares means acceptance of share applied. Allotment letters are issued to the shareholders. The name and address of the shareholders submitted to the Registrar.
IV. COMMENCEMENT OF BUSINESS:
To commence business a public company has to obtain a certificate of commencement of Business. For this the following documents have to be filled with the registrar of companies.
1. A declaration that 90% of the issued amount has been subscribed. 2. A declaration that all directors have paid in cash in respect of allotment of shares made to them. 3. A statutory declaration that the above requirements have been completed and must be signed by the director of company.
Important documents used in the formation of company:
1. Memorandum of Association – It is the principal document of a company. No company can be registered without a memorandum of association and that is why it is sometimes called a life giving document.
Contents of Memorandum of Association:
1. Name clauses – This clause contains the name of the company. The proposed name should not be identicator similar to the name of another exiting company.
2. Situation clauses – This clause contains the name of the state in which the registered office of the company is to be situated.
3. Object clause – This clause defines the objective with which the company is formed. A company is not legally entitled to do any business other than that specified in the object clause.
4. Liability Clauses – This clause limits the liability of the members to the amount unpaid on the shares held by them.
5. Capital clause – This clause specifies the maximum capital which the company will be authorized to raise tough the issue of shares called authorized capital.
2. Articles of Association:
The articles of Association are the rules for the internal management of the affairs of a company the articles defines the duties, rights and powers of the officers and the board of directors.
Contents of the Article: 1. The amount of share capital and different classes of shares. 2. Rights of each class of shareholders. 3. Procedure for making allotment of shares. 4. Procedure for issuing share certificates. 5. Procedure for forfeiture and reissue of forfeited shares. 6. Rules regarding casting of votes and proxy voting 7. Procedure for selection and removal of directors 8. Dividend declaration and payment related rules 9. Procedure for capital readjustment 10. Procedure regarding winding up of the company.
2. Prospectus:
Prospectus means any document which invites deposits from the public to purchase share or debentures of a company.
Main contents of the Prospectus: 1. Company’s name and the address of its registered office. 2. The main object of the company 3. The number and classes of shares. 4. Qualification shares of the directors 5. The name and addresses of the directors, managing director or manager. 6. The minimum subscription which is 90% of the size of the issue. 7. The time of opening and closing of the subscription list. 8. The amt. payable on the application and allotment of each class of share. 9. Underwriters to the issue. 10. Merchant bankers to the issue.
2. Statement is Lieu of Prospectus:
A public company having a share capital may sometimes decide not to raise funds from the public because it may be confident of obtaining the required capital privately. In such case it will have to tile a statement in lieu of prospectus with the Registrar of companies. It Contains information much similar to that of a prospectus.
CHOICE OF FORM OF BUSINESS ORGANISATION
The following factors are important for taking decision about form of organization:
1. Cost and ease in setting up the organization: Sole proprietorship is least expensive and can be formed without any legal formalities to be fulfilled. Company is also expensive with lot of legal formalities.
2. Capital consideration: Business requiring less amount of finance prefer sole proprietorship & partnership form, where as business activities requiring huge financial resonances prefer company form.
3. Nature of business: If the work requires personal attention such as tailoring unit, cutting saloon, it is generally setup as a sole proprietorship. Unit engaged in large scale manufacturing are more likely to be organized in company form.
4. Degree of control desired: A person who desires full and exclusive control over business prefers proprietorship rather than partnership or company because control has to be shared in these cases.
5. Liability or Degree of Risk: Projects which are not very risky can be organized in the form of sole proprietorship partnership whereas the risky ventures should be done in company form of organization because the liability of shareholders is limited.
Notes of Ch 1 Business, Trade and Commerce | Class 11th Business Studies
• All Human beings have different types of needs. To fulfill these needs, they perform certain activities.
• Business is a major economic activity as it is concerned with the production and sale of goods and services with the purpose of earning money by meeting people’s demands for goods and services.
• The chapter is divided into two sections.
→ Section I deals with the history of trade and commerce in ancient India.
→ Section II deals with the concept, nature and purpose of business.
Section – I – History of trade and commerce in ancient India
History of Trade and Commerce
• Indian subcontinent has Himalayas in the North and bordered by water in the South.
• Silk Routes, a network of roads helped in establishing commercial and political contacts with
adjoining foreign kingdoms and empires of Asia and the world.
• With the help of wealth earned through trade, the chief kingdoms, important trade centres and the industrial belt flourished that helped ancient India in progress of domestic and international trade.
Indigenous Banking System
• Metals came to be used as money as the economic life of the people progressed as they are durable and divisible.
→ This accelerated economic activities.
• Documents such as Hundi and Chitti were in use for carrying out transactions in which money passed from hand to hand.
→ Hundi involved a contract which — (i) warrant the payment of money, the promise or order which is unconditional (ii) capable of change through transfer by valid negotiation.
• With the development of banking, people began to deposit precious metals with lending individuals functioning as bankers or Seths.
→ Money became an instrument for supplying the manufacturers with a means of producing more goods.
• Agriculture and the domestication of animals were main part of the economic life of ancient people.
→ Also, weaving cotton, dyeing fabrics, making clay pots, utensils, and handicrafts, sculpting, cottage industries, masonry, manufacturing, transports (i.e., carts, boats and ships), etc., helped in generating surpluses and savings for further investment.
Rise of Intermediaries
• Intermediaries provided considerable financial security to the manufacturers by assuming responsibility for the risks involved, especially in foreign trade.
• During the Mughal period and the days of the East India Company, the institution of Jagat Seths also developed and exercised great influence.
• Commercial and Industrial banks later evolved to finance trade and commerce and agricultural banks to provide both short-and long-term loans to finance agriculturists.
Transport
• Transport by land and water was popular in the ancient times that helped in maintaining trade.
• Trade routes were structurally wide and suitable for speed and safety.
• Maritime trade was another important branch of global trade network. → Malabar Coast has a long history of international maritime trade going back to the era of the Roman Empire.
• An alternate route to India for spices that led to the discovery of America by Columbus in the closing years of 15th century and also brought Vasco da Gama to the shores of Malabar in 1498.
Trading Communities Strengthened
• In different parts of the country, different communities dominated trade. → Punjabi and Multani merchants handled business in the northern region. → The Bhats managed the trade in the states of Gujarat and Rajasthan.
• Other urban groups included professional classes, such as hakim and vaid (physician), wakil (Lawyer), pundit or mulla (teachers), painters, musicians, calligraphers, etc.
Merchant Corporations
• Guilds were autonomous corporations formed to protect the interests of the traders through which merchant community also derived power and prestige.
• Traders had to pay octroi duties that were levied on most of the imported articles at varying rates.
• Customs duties varied according to the commodities and from province to province.
• The ferry tax was another source of income generation which had to be paid for passengers, goods, cattle and carts.
• The guild chief dealt directly with the king or tax collectors and settled the market toll on behalf of its fellow merchants at a fixed sum of money.
Major Trade Centres
• In ancient India, the leading trade centres in ancient India were:
→ Pataliputra: Known as Patna today was a commercial town and also a major centre for export of stones.
→ Peshawar: It was an important exporting centre for wool and for the import of horses.
→ Taxila: It served as a major centre on the important land route between India and Central Asia. It was also a city of financial and commercial banks. The famous Taxila University flourished here.
→ Indraprastha: It was the commercial junction on the royal road where most routes leading to the east, west, south and north converged.
→ Mathura: Many routes from South India touched Mathura and Broach.
→ Varanasi:It grew as a major centre of textile industry and became famous for beautiful gold silk cloth and sandalwood workmanship.
→ Mithila: It established trading colonies in South China, especially in Yunnan.
→ Ujjain: Agate, carnelian, muslin and mallow cloth were exported from Ujjain to different centres.
→ Surat: Textiles of Surat were famous for their gold borders (zari).
→ Kanchi: Known as Kanchipuram today where Chinese used to come in foreign ships to purchase pearls, glass and rare stones and in return they sold gold and silk.
→ Madura: It attracted foreign merchants, particularly Romans, for carrying out overseas trade.
→ Broach: It was situated on the banks of river Narmada and was linked with all important marts by roadways.
→ Kaveripatta: It was a convenient place for trade with Malaysia, Indonesia, China and the Far East. It was the centre of trade for perfumes, cosmetics, scents, silk, wool, cotton, corals, pearls, gold and precious stones; and also for ship building.
→ Tamralipti: It was one of the greatest ports connected both by sea and land with the West and the Far East. It was linked by road to Banaras and Taxila.
Major Exports and Imports
Exports
Spices, wheat, sugar, indigo, opium, sesame oil, cotton, parrot, live animals and animal products—hides, skin, furs, horns, tortoise shells, pearls, sapphires, quartz, crystal, lapis, lazuli, granites, turquoise and copper etc.
Imports
Horses, animal products, Chinese silk, flax and linen, wine, gold, silver, tin, copper, lead, rubies, coral, glass, amber, etc.
Position of Indians Subcontinent In World Economy (1 AD UP to 1991)
• Between the 1st and the 7th centuries CE, India is estimated to have the largest economy of the ancient and medieval world, controlling about one-third and one-fourth of the world’s wealth.
• The 18th century India was far behind Western Europe in technology, innovation and ideas.
• In the mid-18th century, the British empire began to take roots in India and used revenues generated by the provinces under its rule for purchasing Indian raw materials, spices and goods. → Hence, the continuous inflow of bullion that used to come on account of foreign trade stopped.
India begins to Reindustrialise
• After Independence, India went for centralised planning. → In 1952, the First Five Year Plan was implemented and importance was given to the establishment of modern industries, modern technological and scientific institutes, space and nuclear programmes. → However, the Indian economy could not develop at a rapid pace due to lack of capital formation, rise in population, huge expenditure on defence and inadequate infrastructure.
• Thus, India relied heavily on borrowings from foreign sources and finally, agreed to economic liberalisation in 1991.
• Today, Indian economy is one of the fastest growing economies in the world today and a preferred FDI destination.
• The recent initiatives of the Government of India such as ‘Make in India’, Skill India’, ‘Digital India’ and roll out of the Foreign Trade Policy (FTP 2015-20) is expected to help the economy in terms of exports and imports and trade balance.
Section II – Nature and Concept of Business
Concept of Business
• Business means being busy.
• Business refers to an occupation in which people regularly engage in activities related to purchase, production and/or sale of goods and services with a view to earning profits.
Characteristics of Business Activites
• An economic activity: Business in considered as an economic activity as it is undertaken with the objective of earning money.
• Production or procurement of goods and services: Business includes all the activities concerned with the production of procurement of goods & services for sales. Services include transportation, banking, Insurance etc.
• Sale or exchange of goods and service: There should be sale or exchange of goods and service between the seller & the buyer. If goods are produced not for the purpose of sale but say for internal consumption it cannot be called a business activity.
• Dealing in goods & services on a regular basis: There should be regularity of dealings or exchange of goods & services. One single transaction of sale or purchase does not constitute business.
• Profit Earning: The main purpose of business is to earn profit. A business cannot survive without making profits. So, a businessman try to maximize profit by increasing the volume of sales or reducing costs.
• Uncertainly of return: Every business invests money with the objective of earning profit but the amount of profit earned may very also there is always a possibility of losses.
• Element of Risk: All business activities carry some elements of risk because future is uncertain and business has no control over several factors like strikes, fire, theft, change in consumer taste etc.
Comparison of Business, Profession and Employement
• Employment: It Refers to those economic activities which are connected with purchase, production or sale of goods & services with the objective of earning profit. Examples: Fishing, Manufacturing Goods, Mining Producing or selling of electronic goods, Banking.
• Profession: It includes those activities which require special knowledge be skills in the occupation. Examples: Medical (Doctor), Legal (Lawyer), Accountancy (CA).
• It refers to the occupation in which people work for others and get remuneration in return. Examples: Worker, Employee, Salesman.
Basic
Business
Profession
Employment
1. Mode of establishment
Starts after completing some formalities if needed.
Membership of a professional body and certificate of practice.
Appointment letter and service agreement.
2. Nature of
work Provision of goods and services to the public.Personalized services of expert nature. Performing work alloted by the employer according to the contract. 3. Qualification No minimum qualification is necessary. Professional qualification and training required. Qualification and training as prescribed by the employer. 4. Reward and Return Profit earnedProfessional FeeSalary 5. Capital Investment Capital needed according to nature and size Limited capital for establishment. No Capital required. 6. Risk Involves high riskDegree of risk No risk 7. Transfer of Interest Transfer possible with some formalities. Not Possible Not Possible 8. Code of Conduct No Code of ConductProfessional code of conduct is to be followed. Terms and conditions of services contract are to be followed. 9. Examples Shop, Factory Legal, Medical Profession. Jobs in Banks, insurance companies.
Classification of Business Activities
• Industry deals with the production or processing of goods and materials.
• Commerce deals with distribution of goods and services.
Industry
• Primary Industry: The primary industry includes those activities through which the natural resources are used to provide raw material for other industries. It can be classified into two types:
(i) Extractive: Industry under which something is extracted out of earth, water or air such as Coal, Iron, gas. Examples are Mining, Lumbering, Hunting.
(ii) Genetic: Industries under which the breed of animals and vegetables are improved and made more useful. Examples are Poultry Farms, dairy Farming, Fishing Fish Hatching, cattle breeding etc.
• Secondary Industry: Under this industry, new products are manufacturing by using the previously produced things e.g. producing cotton is a primary industry and manufacturing cloth out of cotton is a secondary industry.
It is of two types.
(i) Manufacturing – These industries convert raw materials or semi-finished products e.g. paper from bamboo, sugar from Sugar cane. It is further divided into four parts.
→ Analytic: Different things are manufactured out of one material such as petrol, diesel, gasoline out of crude oil.
→ Synthetic: Many raw materials are mixed to produce more useful products such as cement.
→ Processing: Industries wherein useful things are manufactured by making raw material to pass through different production processes such as sugar and paper.
→ Assembling: Different component parts to make a new product, as in the case of television, car, computer, etc.
ii) Construction Industries – Industries that are involved in the construction of building, dams, bridge, roads as well as tunnels and canals.
iii) Tertiary or Service Industry – This includes those services which help business to move smoothly such as transport, bank, insurance, storage and advertising.
Commerce
Commerce refers to all those activities which are concerned with the transfer of goods and services from the producers to the consumers. It embraces all those activities which are necessary for maintaining a free flow of goods and services.
The function of commerce are:
• Removing the hindrance of person by making goods available to consumers from the producers. through trade.
• Transportation removes hindrance of place by moving goods from the place of production to the markets for sale.
• Storage and warehousing activities remove the hindrance of time by facilitating holding of stock of goods to be sold as and when required.
• Insurance removes hindrance of risk of loss or damage of goods due to theft. fire. accidents etc.
• Banking removes hindrance of finance by providing funds to a businessman for acquiring assets. purchasing raw materials and meeting other expenses.
• Advertising removes hindrance of information by informing consumers about the goods and services available in the market.
Make in India
• ‘Make in India’ is an initiative launched by the Government of India on 25 September 2014, to encourage national, as well as multinational companies to manufacture their products in India.
• Major Objective: Job creation and skill enhancement in 25 sectors of the economy.
Commerce includes two types of activities.
• Trade: Refers to buying and selling of goods and services with the objective of earning profit. It is classified into two categories :
(i) Internal Trade: Takes place within a country. Internal Trade is classified into two categories:
→ Wholesale Trade: Refers to buying and selling o goods in large quantities. A wholesaler buys goods in large quantities from the producers and sell them to other dealers. He serves as a connecting link between the producer and retailer.
→ Retail Trade: Refers to buying of goods and services in relatively small quantities & selling them to the ultimate consumers.
(ii) External Trade: Trade between two or more countries. External trade can he classified into three categories:
→ Import trade: If goods are purchased from another country. if is called import trade. Example: Buying soft toys from China and selling here in India.
→ Export Trade: If goods are sold to other countries it is called export trade. Example: Selling Basmati Rice to USA from India.
→ Enterpot: Where goods are imported for export to other countries. Example: Indian firms may import some goods from America and export the service to Nepal.
Auxiliaries to Trade
Those activities which are meant for assisting trade are known as auxiliaries to trade. These activities help in removing various hindrances which arise in connection with the production and distribution of goods. These are:
(i) Transportation and Communication: Production of goods generally takes place in particular locations. But these goods are required for consumption in different parts of the country. The obstacle of place is removed by the transport. Along with transport communication is also an important service. It helps in exchange of information between producers. consumers and traders. The common communication services are postal service, telephone, fax, Internet etc
(ii) Banking and Finance: Business needs funds for acquiring assets, purchasing raw materials and meeting other expenses. Necessary funds can be obtained from a bank.
(iii) Insurance: It provides a cover against the loss of goods, in the process of transit, storage, theft, fire and other natural calamities.
(iv) Warehousing: There is generally a time lag between the production and consumption of goods. This problem can be solved by storing the goods in warehouses from the time of production till the time they are demanded by customers.
(v) Advertising: Advertising is one of the methods of promoting the sale of products. It helps in providing information about available goods and services and inducing customers to buy particular items.
Objective of Business
• Market standing: Market standing refers to the position of an enterprise in relation to its competitors.
• Innovation: Innovation is the introduction of new ideas or methods in the way something is done or made.
• Productivity: Productivity is ascertained by comparing the value of output with the value of inputs.
• Physical and financial resources: Any business requires physical resources, like plants, machines, offices and financial resources, i.e., funds to be able to produce and supply goods and services to its customers.
• Earning profits: One of the objectives of business is to earn profits on the capital employed.
• Manager performance and development: Business enterprises need managers to conduct and coordinate business activity.
• Worker performance and attitude: Workers’ performance and attitudes determine their contribution towards productivity and profitability of any enterprise.
• Social responsibility: Refers to the obligation of business firms to contribute resources for solving social problems and work in a socially desirable manner.
Business Risk
It refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events.
Nature of Business Risks
(i) Business risks arise due to uncertainties.
(ii) Risk is an essential part of every business.
(iii) Degree of risk depends mainly upon the nature and size of business.
(iv) Profit is the reward for risk taking.
Cause of Business Risks
(i) Natural causes: Human beings have little control over natural calamities, like flood, earthquake,
lightning, heavy rains, famine, etc. property and income in business.
(ii) Human causes: Human causes include such unexpected events, like dishonesty, carelessness or
negligence of employees, stoppage of work due to power failure, strikes, riots, management inefficiency, etc.
(iii) Economic causes: These include uncertainties relating to demand for goods, competition, price,
collection of dues from customers, change of technology or method of production, etc.
(iv) Other causes – These include unforeseen events like political disturbances. fluctuation in exchange rates etc.
Starting a Business – Basic Factors
(i) Selecting the line of business: The first thing to be decided by the entrepreneur is the line and type of business to be undertaken.
(ii) Size of business: After deciding the line of business, the entrepreneur must decide whether he wants to set up large scale or small scale business.
(iii) Choice of form of Business organization: A business organisation may take the form of a sale proprietorship, partnership, or a joint stock company.
(iv) Location of Business Enterprise: The entrepreneur has to decide the place where the enterprise will be located. Before taking this decision he must find out availability of raw materials, power, labour, banking, transportation etc.
(v) Financing the proposition: It is concerned with providing the necessary capital for starting, as well as, for continuing the proposed business.
(vi) Physical facilities: Availability of physical facilities, including machines and equipment, building and supportive services is an important factor to be considered at the start of the business.
(vii) Plant layout: The entrepreneur should draw a layout plan showing the arrangement of physical facilities.
(viii) Competent and committed worked force: The entrepreneur must identify the requirement of skilled and unskilled workers and managerial staff to perform various activities.
(ix) Tax planning: The entrepreneur must try to analyze the types of taxes as there are a number of tax laws in the country which affect the functioning of business.
(x) Setting up of the Enterprise: After analyzing the above mentioned points carefully the entrepreneur can start the business which would mean mobilizing various resources and completing legal formalities.
Class 11 Accountancy Revision Notes for Computerised Accounting System of Chapter 13
Features of Computerised Accounting System Computerised accounting system is based on the concept of database. This system offers the following features:
Online input and storage of accounting data.
Printout of purchase and sales invoices.
Every account and transaction is assigned a unique code.
Grouping of accounts is done from the beginning.
Instant reports for management, for example: Stock Statement, Trial Balance, Income Statement, Balance Sheet, Payroll Reports, Tax Reports etc.
Automation of Accounting Process When accounting functions are done by computerised accounting software that is known as automation of accounting process under the automation of accounting process human activity is less but accounting software is more used. So, accounting functions like posting into ledger, Balancing, Trial Balance and Final Accounts are prepared by computer. Stages of Automation There are different stages of automation as:
Planning: Under this stage the assessment of size, and business transactions is done for which automation has to be made.
Selection of Accounting Software: As there are many accounting softwares available in the market. So, in this stage appropriate accounting software is to be selected according to company’s need.
Selection of Accounting Hardware: Under this stage of automation the computer hardware is selected. The hardware should be such that can fullfill the accounting requirement and support the accounting software.
Chart of Accounts: Under this stage list of required heads of accounts is prepared.
Grouping of Accounts: There are various transactions for Expenses, Income, Assets, Liabilities. All these transactions cannot be shown directly. So, these transactions are grouped as salary, wages, discount and commission etc.
Generation of Reports: This is final stage of automation under this final reports are prepared in from of Cash Book, Journal, Ledger, Trial Balance, P&L A/c and Balance Sheet etc.
Comparison of Manual and Compute red Accounting System
Base
Manual Accounting
Computerised Accounting
1.
Identifying Financial Transactions
In this system, it is done manually according to principles.
In this system, it is also done manually according to principles.
2
Recording
In this system, entries are recorded manually and other calculations also done manually.
In this, entries are recorded manually but other calculations are done by computers.
3
Adjustment Entries
In this system, all adjustments entries are done manually.
In this system entries related to posting are done by computers.
4
Financial statement
In this system, final statements is prepared manually
In this system final statement is prepared by computer with help of software.
Sourcing of Accounting Software India is one of software making country. So, accounting softwares are easily available in Indian Market. But it is more important to know what is your need of accounting software. Generally, Tally accounting software is used in India which is easily available in market. Accounting Softwares
Readymade Software: Readymade Softwares are the softwares that are developed not for any specific user but for the users in general. Some of the ready-made softwares available are Tally, Ex, Busy. Such softwares are economical and ready to use. Such softwares do not fulfill the requirement of very user.
Customised Software: Customised software means modifying the ready-made softwares to suit the specific requirements of the user Readymade softwares are modified according to the need of the business Cost of installation, maintenance and training is relatively higher than that of ready-made user. There packages are used by those medium or large business enterprises in which financial transactions are some what peculiar in nature.
Tailor-made Software: The softwares that are developed to meet the requirement of the user on the basis of discussion between the user and developers. Such softwares help in maintaining effective management information system. The cost of these softwares in very high and specific training for using these packages is also required.
Generic Considerations Before Sourcing Accounting Software
Flexibility: a computer software system must be flexible in respect of data handling and report preparing.
Maintenance Cost: The accounting software must be such which has less maintenance cost.
Size of organisation: The accounting software must be according to need and size of organisation.
Easy to adaptation: The accounting software must be such which is easy to apply in organisation.
Secrecy of data: The accounting software provide the secrecy of business data.
Preparation of Accounts Groups Groups of accounts means classifying the accounting transactions into different heads like Assets Group, Liabilities Group, Income Group and Expenses Group. By these grouping of accounts the final Accounts are meaningful for its users. Generation of Accounting Reports After collecting business data, it is converted into meaningful informations. Such summarised and converted information is known as a report. The report is more effective if it is based on accurate and timely data.
Applications of Computers in Accounting Notes Class 11 Accountancy Chapter 12
Computers are becoming indispensable in our day-to-day life. It has brought a complete revolution in every sphere of human activity. It becomes an essential tool of today’s society.
Examples of their increasing uses are; reservation in railway and air tickets, to forecast weather, preparing customer’s bill, diagnosing diseases, recording the monetary transaction of customers in the bank, etc. In fact, computers have become indispensable in almost every field of communication, commerce, industry, science and research, technology, transport.
Computers are not used only by engineers, scientists, and mathematicians but even in the typesetting for printing, TV programming, film editing, music composing, etc.
Both in the commercial and personal areas, there are so many works which we are not able to do. due to lack of time. The computer makes it possible by doing our work speedily and efficiently. Computers are nowadays being used on a large scale in business houses for a number of functions. They are used for recording and posting transactions, maintaining journals, ledgers, stock records, pay-rolls, wages records, purchases and sales records, etc. The computer performs all the accounting operations at a phenomenal speed and with a high degree of accuracy.
Limitations of a Computer System:
Lack of common sense.
Lack of feelings.
Lack of IQ (Intelligence Quotient).
Lack of decision-making.
Complex and rigid procedure.
Installation cost.
Frequent changes.
Costly maintenance.
Unemployment.
Loss of data: Backup required.
Difference between Human and Computer: Following are the differences between Human and Computer:
Memory: Human memory is limited however computer’s memory has no limits.
Speed: is faster than human.
Repetitive task: can be performed by computers errorlessly.
Computers do not possess mind and work as directed by a human. It has no impact of emotions however human is emotional and decides on its own, which computers cannot.
Difference between Hardware and Software: Difference between Computer and Calculator Components of Computer: The computer is an electronic device that stores and processes information to give meaningful results. It takes information from an input device and after processing the information, gives the processed information to an output device. Three basic components of a computer are:
Input Device
Central Processing Unit (CPU)
Output Device.
Need of Computer in Accounting or Evolution of Computerised Accounting: In past, the business transactions were limited so that they were handled manually. Trader himself or by taking the service of Accountant to maintain the books of accounts such as cashbook, journal, and ledger. As the economy starts growing, the trades also developed and the number of transactions starts increasing.
With the help of scientific development, new machines were invented which perform the large work in a short time, for e.g. billing the machine. With the substantial increase in the number of transactions, the technology advanced further. The success of a growing organization with the complexity of transactions tended to depend on resource optimization, quick decision-making, and control. Such a system of maintaining accounting records becomes convenient with the computerized accounting system.
Computers are required in accounting for the following tasks:
To note down business transactions.
Processing and maintaining payrolls.
Maintaining personal records.
Keeping effective stock control.
Invoicing of sales.
To maintain ledgers of creditors.
To make bills.
To prepare accounts of credit and debit.
Classification of accounting transactions through sorting; merging and updating.
Prepare reports in the form of ledger accounts and balance sheets.
Stores accounting.
Automation of Accounting Process: An organization is a col section of interdependent decision-making units that works for the achievement of common goals. Every organization, as a system, performs the same function that accepts inputs and transforms them into outputs. Information system facilitates the decision-making regarding allocation of resources.
The information thus becomes the most important resource in business. With the increasing use of information systems in organizations. Transaction Processing Systems (TPS) have started playing important role in supporting business operations. A large number of devices are now available to automate the input process for TPS.
Transaction Processing System: They can perform and records the daily routine transactions which are necessary to conduct the business.
Process of TPS
Collection of data.
Validation of data
Manipulation of data
Storage of data
Generation of output
Query support.
Features of Computerised Accounting System:
Online input and storage of accounting data.
Automatically update the ledger etc.
Printout of purchases and sales invoices.
Grouping of accounts.
Instant Reports like Stock Statement, Trial Balance, Trading and Profit, and Loss A/c, Balance Sheet, Value Added Tax (VAT), Payroll, etc.
Codification of accounts and transactions.
Management Information System (MIS) and Accounting Information System (AIS): Accounting information is one of the most important information used by the management in taking decisions. However, the scope of accounting information is limited. Accounting information when contained in a computerized environment is called an accounting information system.
However, management information system is a much broader term and incorporates many functional information systems like production, marketing, research, and development, etc., besides accounting information systems.
A management information system is an information system that generates, accurate, timely, and organized information to help managers make decisions, control processes, solve problems, supervise activities and track progress.
An accounting information system identifies, collects processes, and communicates the economic information of an organization to a wide variety of users. Every accounting system is a part of an accounting information system where AIS is part of a management information system.
Meaning of Computer: The dictionary meaning of computer is “an electronic calculating machine”. This meaning of computer does not reflect upon the true capabilities of a computer. A computer is a very versatile machine capable of performing diversified functions at an incredibly fast speed with accuracy.
It converts raw data into meaningful information. The data is fed into the computer and in case of need, it can be retrieved and converted into output.
A computer is an electronic machine that operates on given instruction and PROCESSES the INPUT DATA, to convert it into some OUTPUT.
“A computer is a data processor that can perform substantial computation, including numerous arithmetical and logical operations, without intervention by a human operator during the run.” – International Standards Organisation
‘‘A computer is a device capable of solving problems by accepting data, performing described operations on the data, and supplying the results of these operations. —U.S. Institute
Thus, a computer is an electronic device, in which a lot of information or data can be stored so Jhat the data can be used in the future. It can also perform various calculations at a very high speed.
Elements of Computer System A Computer System is a combination of six elements:
Hardware
Software
People.
Procedure
Data
Connectivity.
1. Hardware: The hardware of a computer may be classified under the following categories: They are further classified as follows: Input Devices
Keyboard
Mouse
Joystick
Touch Screen
Scanner
Voice Input System
Magnetic Ink Character Reader (MICR)
Bar Code Reader (BCR)
Output Devices:
Monitor or Visual Display Unit (VDU)
Printers
Voice Response System (VRS)
Central Processing Unit (CPU)
Storage Unit
Control Unit
Arithmetic Logic Unit (ALU)
Secondary Storage Devices
Hard Disk
Floppy Disk
Compact Disk
DVD (Digital Visual Disc)
2. Software: A set of programs, which is used to work with hardware is called its software. There are six types of software which are following:
Operating System
Utility Software
Application Software
Language Processors
System Software
Connectivity Software.
3. People: People are basically those individuals who use computers to develop, maintain and use the information system. They are also called live-ware of the computer. The main categories of people involved with the computer system are:
System Analysts
Computer Operators
Programmers.
4. Procedures: The procedures are the various operations performed in a certain way in order to achieve some desired results.
There are basically three types of procedures:
Software-oriented
Hardware-oriented
Internal procedure.
5. Data: The data is therefore processed and organized to create information that is relevant and can be used for decision-making.
6. Connectivity: The element of connectivity refers to the way in which a computer system is connected to other electronic devices and link-ups such as satellite links, internet, telephone lines, etc.
Capabilities or Features of a Computer System 1. High Speed: A computer can perform millions of operations in one second. The calculations will be error-free.
2. Automatic IHachine: Once the data are fed into the computer, it executes the instructed functions without human intervention.
3. Accuracy: This machine is extremely accurate. Its operations are error-free and the information derived from that is more reliable.
4. Reliability: Computer can perform jobs of repetitive nature any number of times. They are immune to tiredness, boredom, or fatigue. Therefore, they are more reliable than human beings.
5. Versatility: A computer can perform a wide variety of jobs simple as well as complex.
6. Storage: The storage capacity, of a computer, is so large that it can store any volume of information or data for being processed.
7. Scientific Approach: The computer operates scientifically and never gets emotional while solving problems.
8. Work on Special Language: A computer can perform many functions by giving or programming in any one language of computers, which are developed in order to feed the information and data into a computer.
9. Logical decision: Computer has the capability to make decisions that are based on certain conditions.
10. Use of Binary System: The computer uses a two-way system known as Binary System, not the decimal system.
Relationship of Management Information System with other functional Information Systems Designing of Accounting Reports: When the related information is summarised to meet a particular need it is called a report. It must be effective, efficient, and useful for decision-making.
Every accounting report must be able to fulfill the following features:
Relevance
Accuracy
Completeness
Timeliness
Summarisation.
Types of Reports
Summary Reports
Customer Reports
Supplier Reports
Demand Reports
Exception Reports
Responsibility Reports.
Steps in Designing Reports
Definition of objectives
Structure or format of the report
Querying with database
Finalizing the report.
Data Interface between the Information System: I. Relationship between Accounting Information System (AIS), Manufacturing Information System and Unman Resource Information System. II. Relationship between AIS and Marketing Information System: Marketing and Sales Department perform following activities:
Inquiry Process
Creating Contacts
Order Taking
Dispatching Goods
Billing
The accounting sub-system transaction cycle includes:
Processing of sales order
Credit Authorisation
Keeping custody of goods
Stock Position
Dispatch Details
Accounts Receivable etc.
III. Relationship between AIS and Manufacturing Information System: Production Department performs the following activities:
Preparing plans, schedules ‘
Issue of material requisition forms
Issue of job cards
Issue of stock
Handling of vendor invoices
Payment to vendors/suppliers
The accounting sub-system transaction cycle includes:
Processing purchases order
Advance payment
Stock Updation
Accounts payable etc.
Application of Computer in Accounting Although computers influence every field of accounting, however, its usage in normal modes is mentioned below: (a) Recording of Business Transactions (b) Accounting of Debtors (c) Stores Accounting (d) Pay-toll Accounting.
(a) Problems that arise due to manual accounting such as complexity, percentage of error, delayed work can be easily rectified using a computer in accounting. Computers can automatically generate ledger postings of business transactions. Using computers, can therefore completely maintain ledger accounts.
(b) Debtors account can easily be maintained via computers. Computers can generate accurate figures for the debtor’s account. They can also be used to prepare reminders to debtors in order to timely collect debt.
(c) Stores Accounting: In stores accounting, the contribution of computers is appreciable. They can be used for
Daily Stock Position
Price of Stock
Need of goods to be credited.
(d) Payroll Accounting: To generate pay of employees in an organization, wages, salary, bonus, allowances, etc. are calculated. Furthermore, employee provident fund, income tax, etc. is deducted from salary. Traditional manual accounting is difficult and bound to make errors that can be made easy, fast, and accurate through the use of payroll accounting. Components Of Computerised Accounting Software System
Accounts from Incomplete Records Notes Class 11 Accountancy Chapter 11
Generally, business transactions are recorded on the basis of the double-entry system of bookkeeping. Sometimes rules of the double-entry system are not followed for recording business transactions. When a double entry system is not followed for maintaining records, these records are turned into incomplete records. Many authors describe it as a Single Entry System.
However, Singe Entry System is a misnomer because there is no such system for maintaining accounting records. It is rather a mechanism of maintaining records in which rules of the double-entry system are not followed completely. There is the partial observance of rules of the double-entry system in this system.
This recording is done according to the convenience and needs of business entities and there is no uniformity in the maintenance of records by different entities. This system differs from concern to concern. In this, only records of cash and of personal accounts are maintained. It is always an incomplete double entry system, varying with circumstances. business, nature of business, prevailing circumstances, etc.; the procedure of recording followed by different business entities may vary’. Therefore, there is no uniformity in the maintenance of records under incomplete records.
→ Suitability: This system is suitable for a sole trader or partnership firms. Companies, because of legal provisions, cannot keep incomplete records.
→ Flexibility: This method is flexible as the recording procedure can be adjusted according to the information needs of a particular business enterprise. As rules of the double-entry system are not followed, knowledge of principles of the double-entry system of bookkeeping is not necessary.
→ Maintenance of Personal Accounts and Cash Book: Under this system mainly the personal and cash-book maintained which mixes up business as well as private transactions.
→ Variation of Recording Process: It is an incomplete double entry system, varying according to the information needs of business entities. There is no hard and fast rule for the maintenance of records under this system.
→ Dependence on Original Vouchers: Original vouchers play every important role as they provide all the information to be recorded.
→ Less Expensive: As complete records are not kept, the time and labor involved in maintaining accounting records are less in comparison to double entry.
Incomplete Records contain:
Both aspects of some of the transactions.
Only one aspect of some of the transactions.
No aspect of some of the transactions.
Reasons for Incompleteness: Accounting records may be incomplete due to any one or more of the following reasons:
The businessman may be ignorant of the separate legal entity assumption.
The businessman may be ignorant of the double-entry accounting principle.
The businessman may not intentionally maintain proper accounts to evade taxation.
Destruction of the books of accounts due to fire, flood, etc.
Limitations of Che Incomplete Records: → Unscientific: The absence of systematic recording of both aspects of a transaction under this, makes it unscientific.
→ No trial balance or arithmetical accuracy of accounts cannot be checked: The dual aspect of a transaction is not recorded under this system. As a result, the trial balance cannot be prepared from the accounting records maintained. Hence, the arithmetical accuracy of accounting records cannot be checked.
→ True profits cannot be known: Nominal accounts are not maintained and therefore it is not possible to prepare a trading account and Profit & Loss Account to calculate gross profit and net profit respectively. Although the amount of net profit is determinable the absence of details of revenue, other income, expenses, and losses affect sound decision making.
→ The finance position cannot be determined: As all the assets and liabilities and depreciation are not recorded, the Balance Sheet cannot be prepared and thus the true financial position cannot be ascertained.
→ Difficult to detect fraud: Trial balance cannot be prepared to check prima facia arithmetical accuracy of accounts. It encourages carelessness, misappropriation, and fraud because, in the absence of complete records, detection of fraud is very difficult.
→ Difficult to make planning and decision making: In the absence of reliable information about nominal and real accounts, effective planning and control over expenses, assets, etc. are not possible.
→ Not recognized by tax authorities: Accounts maintained based on this system are not accepted by sales-tax and income-tax authorities.
→ Interfirm comparison not possible: Because of variation in accounting procedure and rules, comparison of two or more businesses is not possible.
Advantages of Incomplete Records → Simple method: It is a very simple method of accounting. It can be maintained by anyone who does not have adequate knowledge of accounting.
→ Less time-consuming: It is less time-consuming since it requires a limited number of books.
→ Less costly: It is less costly because expenses related to the keeping of books are nominal.
→ Suitable-It is suitable for small shopkeepers who do not require an elaborate system of accounting.
Ascertainment of Profit and Loss: A profit or loss in the case of a Single Entry System can be ascertained by the following two methods:
Statement of Affairs Method (or Net Worth Method)
Conversion Method (or Final Account Method).
Statement of Affairs Method: A statement of affairs is a statement of assets and liabilities of a business as on a particular date. Under this method, profit is ascertained by comparing the capital at the beginning and capital at the end of the accounting period and necessary adjustments are made for drawings, fresh additional capital, drawings, and interest on capital.
The following steps are followed to ascertain the profit or loss: 1. Prepare a Statement of Affairs at the beginning (if not given) of the accounting period to ascertain the Opening Capital.
2. Ascertain drawings and capital introduced during the year.
3.Prepare a Statement of Affairs at the end of the accounting period to ascertain the Closing Capital (capital at the end) or Prepare a Statement for ascertaining the closing capital before making certain adjustments.
Format of Statement of Affairs Statement of Affairs of…………. as on ………….. 4. Prepare a Statement of Profit with the help of the following formula: Net Profit = Capital at the end Add: Drawings Less: Additional Capital introduced Less: Opening Capital Statement of profit is usually prepared as follows:
Statement of Profit for the year ended …………. If it is desired to calculate profit before certain adjustments separately the Statement of Profit should be prepared as follows:
Statement of Profit for the year ended………………. 5. Prepare Balance Sheet/Received or Final Statements of Affairs at the end after adjusting depreciation, provision for bad and doubtful debts, etc.
Difference between Balance Sheet and Statement of Affairs: Calculation of Missing Figures and Prepare Final Accounts: The following steps are followed while calculating the missing figures and preparation of final accounts: 1. Prepare cash and Bank Summary (if not available in proper form with both sides tallied) to ascertain the missing information (Such as opening and closing balances, cash sales/cash purchases, drawing, etc.).
If both the sides of the Cash Book are not tallied, then the difference in both sides may be treated as one of the following items:
If credit sides exceed debit side:
Opening Cash or Bank Balance or Closing Bank Overdraft
Cash sales
Collection from debtors
Bills Receivable collected
Additional Capital
Sale of fixed assets
Sundry Income.
If debit sides exceed credit side:
Closing Cash or Bank Balance or Opening Bank Overdraft
Cash purchases
Payment to creditors
Bills Payable discharged
Drawings
Purchase of fixed assets
Sundry expenses
Cash embezzlement by Cashier.
2. Prepare Total Debtors Account to ascertain the missing information (such as opening debtors, closing debtors, credit sales, collections, bills receivable drawn). If both sides of this account are not tallied, then the difference of both the sides may be treated as one of the following items:
If the credit side exceeds the debit side:
Opening Debtors
Credit Sales
Bills receivable dishonored
If the debit side exceeds the credit side:
Closing Debtors
Collection from debtors
Bills receivable drawn
Sales Returns
Discount allowed
Bad debts.
Format of Total Debtors Account Important: Provision for Doubtful Debts, Provision for Discount on Debtors, Bad Debts Recovered, Trade Discount Allowed, Bills Receivable Discounted do not affect the Total Debtors Account.
3. Prepare Bills Receivable Account to ascertain the missing information (such as Opening B/R, Closing B/R, B/R drawn, B/R collection, B/R endorsed).
If both the sides of this account are not tallied then the difference in both the sides may be treated as one of the following items:
If the credit side exceeds the debit side:
Opening B/R
B/R drawn
If the debit side exceeds the credit side:
Closing B/R
B/R collected
B/R dishonored
B/R discounted
Banker’s discount charges
B/R endorsed
Format of Bills Receivable Account Important: Provision for Doubtful Bills does not affect the Bill Receivable Account
4. Prepare Total Creditors Account to ascertain the missing information (such as Opening Creditors, Closing Creditors, Credit Purchases, Payment made, B/P accepted).
If both the sides of this account are not tallied, then the difference in both the sides may be treated as one of the following items:
If the credit side exceeds the debit side:
Closing Creditors
Payment to Creditors
B/P accepted
B/R endorsed to creditors
Purchase Return
Discount Received.
If the debit side exceeds the credit side:
Opening Creditors
Credit Purchases
B/P canceled
Endorsed B/R Dishonoured.
Format of Total Creditors Account Important: Reserve for Discount on Creditors does not affect the Total Creditors Account.
5. Prepare Bills Payable Account to ascertain the missing information (such as Opening B/P, Closing B/P, B/P accepted, B/P discharged). If both the sides of this account are not tallied, then the difference in both sides may be treated as one of the following items:
If the credit side exceeds the debit side:
Closing B/P
B/P discharged/canceled.
If the debit side exceeds the credit side:
Opening B/P
B/P accepted.
Format of Bills Payable Account: 6. Ascertain opening capital by preparing the statement of affairs at the beginning of the accounting period.
7. Prepare the Trial Balance to check the authentical accuracy.
8. Prepare Trading and Profit & Loss Account and the Balance Sheet.
Class 11 Accountancy Revision Notes for Financial Statements -II Adjustments of Chapter 10
Adjustment in preparation of financial statements of Sole-proprietor Meaning of Adjustment entries: Those entries which need to be passed at the end of the accounting year to show the accurate profit or loss and fair financial position of the business. Need of Adjustment: There are number of transactions that may not find the place in the Trial Balance due to any reason such as Closing Stock (because it is valued at the end of the year), Manager’s Commission based on Net profits (because its calculation requires preparation of Income Statement first). These transactions can only be taken into account by passing Adjustment entries so that their impact on the profitability and financial position can be shown. Closing Stock: the closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period. Outstanding Expenses: When expenses of an accounting period remain unpaid at the end of an accounting period, they are termed as outstanding expenses. As they relate to the earning of revenue during the current accounting year, it is logical that they should be duly charged against the revenue for computation of the correct amount of profit or loss. Prepaid Expenses: At the end of the accounting year, it is found that the benefits of some expenses have not yet been fully received; a portion of its benefit would be received in the next accounting year. This portion of expenses, is carried forward to the next year and is termed as prepaid expenses. Accrued Income: It may sometime happen that certain items of income such as a interest on loan, commission, rent, etc. are earned during the current accounting year but have not been actually received by the end of the same year. Such incomes are known as accrued income. . Income Received in Advance: Sometimes, a certain income is received but the whole amount of it does not belong to the current period. The portion of the income which belongs to the next accounting period is termed as income received in advance or an Unearned Income. Depreciation: It is the decline in the value of assets on account of wear and tear and passage of time. It is treated as a business expense and is debited to profit and loss account. This, in effect, amounts to writing-off a portion of the cost of an asset which has been used in the business for the purpose of earning profits.
Closing Stock
Closing Stock A/c
Dr.
(i) Credit side of Trading A/c.
To Trading A/c
(ii) Show on the assets side of BALANCE SHEET.
Outstanding/Unpaid Expenses
Expenses A/c
Dr.
(i) Add to the concerned item on the Debit side of Trading/Profit & Loss A/c.
Outstanding Expenses A/c
(ii) Shown on the liabilities side of BALANCE SHEET.
Prepaid expenses/Unexpired expenses
Prepaid Expenses A/c
Dr.
(i) Deduct from the concerned expenses on the debit side of Profit & Loss A/c
To Expenses A/c
(ii) Show on the assets side of BALANCE SHEET.
Accrued income/ Income due but not received
Accrued Income A/c
Dr.
(i) Add to the concerned income on Credit side of Profit and Loss A/c
To Income A/c
(ii) Show on the assets side of BALANCE SHEET.
Unearned income/Income received in Advance
Income A/c
Dr.
(i) Deduct from the concerned income on the credit side of Profit & Loss A/c
To Unearned Income A/c
(ii) Show on the liabilities side of Balance Sheet.
Depreciation
Depreciation A/c
Dr.
(i) Show on the debit side of Profit Loss A/c
To Asset A/c
(ii) Deduct from the concerned asset in the Balance Sheet.
Bad Debts : The debtors from whom amounts cannot be recovered are treated in the books of accounts as bad and are termed as bad debts. Further Bad Debts : These Bad debts is a loss that occurred after reparation of Trial Balance. Further bad debts be added in the bad debts already appearing in the Profit and Loss Ae and Debtors would be reduced with the same amount.
To write off bad debts
Bad Debts A/c
Dr.
(i) Debit side of P&L A/c.
To Debtors
(ii) Deduct from debtors on the as- sets side of Balance Sheet.
Provision for bad and doubtful debts
Provision for Doubtful Debts A/c
Dr.
(i) Debit side of P & L A/c.
To Debtors A/c
(ii) Deduct from debtors on the assets side of Balance Sheet.
Provision for discount on debtors
P & L A/c
Dr.
(i) Debit side of P & L A/c.
To Provision for Discount on Debtors Debtors A/c
(ii) Deduct from debtors on the assets side of Balance Sheet.
Manager’s Commission The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the commission is applied on the profit either before charging such commission or after charging such commission. In the absence of any such information, it is assumed that commission is allowed as a percentage of the net profit before charging such commission. 1. Commission on net profits before charging such commission
Interest on Capital
Interest on Capital A/c
Dr.
(i) Debit side of P & L A/c.
To Capital A/c
(ii) Add to capital on the liabilities side of Balance Sheet.
Interest on drawings
Capital/Drawings A/c
Dr.
(i) Credit side of P & L A/c.
To Interest on Drawings A/c
(ii) Deduct from capital on the liabilities side of Balance Sheet.
Interest payable on loan (borrowed)
Interest on Loan A/c
Dr.
(i) Debit side of P & L A/c.
To Loan A/c
(ii) Add to loan on the liabilities side of Balance Sheet.
Commission payable to manager
P& L A/c
Dr.
(i) Debit side of P & L A/c.
To Comm. Payable to manager A/c
(ii) Show on the liabilities side of Balance Sheet.
Adjustment in Respect of Goods Abnormal Loss : Sometimes losses occur due to some abnormal circumstances such as accident, fire, flood, earhquakes etc. Such losses are called Abnormal losses. These may be divided into two categories :- (A) Loss of Goods (B) Loss of fixed assets Good taken for personal use {Drawings in goods) : When the goods are withdrawn by proprietor for personal use the cost of such goods deduct from purchases and the amount should be deduct from capital in Balance Sheet. Goods distributed as free samples : Sometime goods are distributed as free sample by the businessman for the purpose of advertisement. The cost of free sample deduct from purchase and shown in Debit side of profit and loss account. Abnormal loss of goods by fire, theft, accident, etc.
Adjustment
Treatment in Trading & P & L A/c
Treatment in Balance Sheet
1) Loss of Goods (By accident, Fire, Theft)
1) Loss of … A/c
Dr.
(i) Gross Loss: Deduct from Purchases or show on the credit side of Trading A/c.
To Trading A/c (or)
To Purchases A/c
If goods were note insured
2) P & L A/c
Dr.
(ii) Net Loss: Debit side of P & L A/c.
To Loss by …… A/c
If goods were insured and full claim accepted by insurance company
2) Insurance company A/c
Dr.
(iii) Insurance claim: Assets side of Balance Sheet.
To Loss by … A/c
If full claim not accepted by Insurance Company
2) Insurance Company A/c
Dr.
Profit & Loss A/c
Dr.
To Loss By …. A/c
2) Goods taken by the proprietor for his personal use
Drawings A/c
Dr.
(i) Deduct the amount of goods from the purchases in Trading A/c.
To Purchases A/c
(ii) Deduct the amount from the capital on the liabilities side of Balance Sheet.
3) Goods distributed as free samples
Advertising A/c
Dr.
(i) Deduct the amount of goods from the purchases in Trading A/c.
To Purchases A/c
(ii) Show on the debit side of P & L A/c.
4) Goods given as charity
Charity A/c
(i) Deduct the amount from the purchases on the debit side of Trading A/c.
To Purchases a/c
(ii) Show on the debit side of P & L A/c.
Key Points:
If closing stock is shown in Trial Balance then it will be shown in balance sheet only. It is assumed that purchases amount already gets adjusted in trial balance.
Salary and wages will be shown in profit and loss A/c debit side (assuming that salary is prominent) while wages and salary will be shown in trading A/c debit side, (wages are prominent).
Freight, carriage, cartage will be shown in Dr. side of trading A/c. if inward word attached with these then it also debited to trading A/c, if outward word attached with these item then it will be debited to profit and loss account.
Any expenses related to factory are debited to trading account like factory lighting, factory rent if factory word is not given then lighting and rent will be debited to profit and loss account.
Trade expenses always debited to profit and loss A/c not as name indicate trading A/c.
Packaging material: cost of packaging material used in product are direct expenses as it refers to small containers which form part sold, it will debited to trading A/c.
Packing: the packing refers to the big containers that are used for transporting the goods and regarded as indirect expenses and debited to profit and loss account.
Adjusted purchases mean the amount of purchases is adjusted by way of adding opening stock and reduced by the amount of closing stock, e.g., purchases Rs. 1,00,000; opening stock Rs. 12,000, closing stock Rs. 8,000. Calculate adjusted purchases. Adjusted purchases = purchases + opening stock – closing stock = Rs. 1,00,000 + Rs. 12,000 – Rs. 8,000 = Rs. 1,04,000 When adjusted purchases is given in trail balance, then there is no need of debiting opening stock and crediting closing stock in trading A/c. In this case closing stock will be shown in balance sheet only.
Financial Statements 1 Notes Class 11 Accountancy Chapter 9
Meaning of Financial Statements: When the business enterprise satisfies itself with the agreement of trial balance, then they proceed to prepare the financial statements for their business. Now they are interested to know whether they have earned profit or incurred losses during the accounting period. They also want to ascertain the business position at the end of the accounting period for this purpose.
They prepare financial statements which are also called Final Accounts. It is the last phase of the accounting process. In our system of accounting, financial statements include a Balance Sheet, Trading Account and Profit and Loss Account, and explanatory schedules and notes. Financial statements are those statements that report the profitability and the financial position of the business at the end of the accounting period. The Statements are presented to users of accounting information for decision making.
According to John N. Myer “The financial statements provide a summary of accounts of the business enterprise, the balance sheet reflecting the assets, liabilities, and capital as on a certain date and the income statement showing the result of operations during a certain period.”
Need of Financial Statements: The main objective of financial statements is to communicate the financial position and performance of the business entities to the users of accounts. The financial position of the business entity is indicated through the Balance Sheet and performance is indicated through the Trading and Profit and Loss Account.
Users of Financial Statements:
Management use financial statements for their decision-making.
Investors use it to assess the financial soundness of the firm.
Potential investors use to know how safe their investment will be.
Lenders like debenture holders, suppliers of loans, etc. uses it to know the short-term and long-term financial soundness of the firm.
Creditors use it for knowing the ability of the enterprise to meet the debts when they fall due.
Employees use it to demand an increase in bonuses and wages.
The government uses it to regulate different policies.
Income Tax and Sales Tax Authorities use them to ascertain the tax liability of the firm.
The distinction between Capital and Revenue: It is a very important distinction in accounting between capital and revenue items. The revenue items form part of the trading and profit and loss account the capital items help in the preparation of a balance sheet.
The distinction between Capital Expenditure and Revenue Expenditure: Capital expenditure is the amount spent by an enterprise on the purchase of fixed assets that are used in the business to earn income and are not intended for resale. For example, expenditure incurred in acquiring assets, or erection of fixed assets, an extension of fixed assets, to acquire the right to carry on business, legal charges, etc.
Capital expenditure is debited to a fixed account which appears in the Balance Sheet.
Revenue expenditure is the amount spent on running a business. The benefit of revenue expenditure is exhausted in the accounting period in which it is incurred. For example rent, salaries, wages, power and fuel, carriage, freight, depreciation, cartage, etc.
Revenue expenditure appears in a Trading and-Profit and Foss Account. Capital expenditure increases the earning capacity of the business whereas revenue expenditure incurred for earning profits.
Capital Receipts and Revenue Receipts: Capital receipts are those receipts that imply an obligation to return the money. The amount received in the form of additional capital introduced, loan received and sale of fixed assets are capital receipts. These are shown in the Balance Sheet only. Revenue Receipts are those receipts that do not imply an obligation to return the money. The amount received in the normal and regular course of business mainly by the sale of goods and services. These are shown in the Profit and Loss Account.
Trading Account: Trading Account is prepared for calculating the gross profit or gross loss arising or incurred as a result of the trading activities of a business. Its main components are sales, services rendered, and the cost of goods sold.
Form of Trading Account Trading Account Profit and Loss Account It is prepared to calculate the net profit or net loss of the business of a given accounting period.
“Profit and Loss Account is an account into which all gains and losses are collected in order to ascertain the excess of gains over the losses or vice-versa.” – Prof Carter
Form of Profit and Loss Account Profit and Loss Account Operating Profit and Net Profit Operating Profit = Net Sales – Operating Cost = Net Sales – (Cost of Goods Sold + Administration and Office and Expenses + Selling and Distribution Expenses) Or Operating Profit = Net Profit + Non-Operating Expenses – Non-Operating Incomes
Gross Profit = Net Sales – Cost of Goods Sold. = Net Sales (Opening stock + Net purchases + Direct expenses – Closing stock)
Net Sales = Total Sales – Sales Return Net Purchases = Total Purchases – Purchase Returns Net Profit = Gross Profit + Revenue Receipts-Indirect Expenses
Balance Sheet: A statement that sets out the assets and liabilities of finner an institution at a certain date.
“Balance Sheet is an a.screen picture of the financial position of a going business at a certain moment.” – Francis R. Stead
It shows the financial position of the business at a certain date.
Form of Balance Sheet Balance Sheet as at………………. Grouping and Marshalling of Balance Sheets Grouping means putting items of similar nature under a common heading. The arrangement of assets and liabilities in a particular order in the Balance Sheet is called ‘Marshalling’.
Marshaling of Balance Sheet can be made in two ways: 1. In order of Liquidity: According to this method, an asset which is most easily convertible into cash such as cash in hand is written first and then will follow those assets which are comparatively less easily convertible, so that the least liquid assets such as goodwill, is shown last.
In the same way, those liabilities which are to be paid at the earliest will be written first. In other words, current liabilities are written, first of all, then fixed or long-term liabilities, and lastly, the proprietor’s capital. Proforma of a Balance Sheet in the order of liquidity will be the same as shown in the topic Balance Sheet.
2. In order of Permanence: This method is just opposite to the first method. Assets that are most difficult to be converted into cash such as Goodwill are written first and the assets which are most liquid such as cash in hand are written last.
Those liabilities which are to be paid last will be written first. The proprietor’s capital is written, first of all, then fixed or long-term liabilities, and lastly the current liabilities. The Proforma of the Balance Sheet in the order of Permanence will be just opposite to the above.
Bills of Exchange Notes Class 11 Accountancy Chapter 8
When goods are sold or bought for cash, payment is received immediately whereas when goods are sold or bought on credit the payment is deferred to a future date. In such a case, the seller would like to get a written undertaking from the buyer to get the payment after a fixed period. Nowadays these written undertaking is called bills of exchange or promissory notes. The bill of exchange contains an unconditional order to pay a certain amount on an agreed date while the promissory note contains an unconditional promise to pay a certain sum of money on a certain date.
Meaning of Bill of Exchange: “A bill of exchange is defined as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.” – Negotiable Instrument Act, 1881
Features of Bill of Exchange:
It must be in writing.
It is an order to make payment.
The order to make payment is unconditional’.
The maker of the bill of exchange must sign it.
The payment to be made must be certain.
The date on which payment is made must also be certain.
It must be payable to a certain person.
The amount mentioned in the bill of exchange is payable either on-demand or on the expiry of a fixed period of time.
It must be stamped as per the requirement of law.
Parties to a Bill of Exchange: 1. Drawer: The drawer is the maker of the bill of exchange. A seller/ creditor who is entitled to receive money from the debtor can draw a bill of exchange upon the buyer/debtor. The drawer of the writing the bill of exchange has to sign it as a maker of the bill of exchange.
2. Drawee: Drawee is the person upon whom the bill of exchange is drawn. Drawee is the purchaser or debtor of the goods upon whom the bill of exchange is drawn.
3. Payee: Payee is the person to whom the payment is to be made.
The drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment. The payee may change in the following situations: (a) In case the drawer has got the bill discounted, the person who has discounted the bill will become the payee; (b) In case the bill is endorsed in favour of a creditor of the drawer, the creditor will become the payee.
Promissory Note: “A promissory note is defined as an instrument in writing (not being a banknote or currency note), containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person.” -Negotiable Instrument Act, 1881
Features of Promissory Note:
It must be in writing;
It must contain an unconditional promise to pay;
The sum payable must be certain;
It must be signed by the maker;
The maker must sign it;
It must be payable to a certain person;
It should be properly stamped.
Parties to a Promissory Note: 1. Maker or Drawer: The maker or drawer is the person who makes or draws the promissory note to pay a certain amount as specified in the promissory note. He is also called the promisor.
2. Drawee or Payee: Drawee or payee is the person in whose favour the promissory note is drawn. He is called the promisee.
The distinction between a Bill of Exchange and Promissory Note Advantages of Bill of Exchange:
Goods can be sold and purchased easily on credit with the use of Bill of Exchange.
The drawer can discount the bill of exchange with the bank if the money is needed immediately.
When the bill is accepted by the drawee, it is proof of debt.
A bill of exchange can be endorsed to any third party for the settlement of the debt.
It is a legal document and a suit can be fed against the drawee if he refuses to pay it.
Bill of exchange payable on the due date and needs no remainder for payment.
In foreign, Trade Bills are generally used and facilitate payments.
Maturity of Bill: The term Maturity refers to the date on which a bill of exchange or a promissory note becomes due for payment. In arriving at the maturity date three days know as days of grace must be added to the date on which the period of credit expires instrument is payable.
Discounting of Bill: Sometimes the holder of the bill may need cash before the maturity of the bill. For this, he needs to hand over the bill to his bank. The bank charges a normal discount for its services. This process of encashing a bill any time before maturity is known as discounting a bill. In this case, the bank gets the amount from the drawee on the due date.
Endorsement of Bill: The transfer of a bill by the holder by putting his signature on its back is called Endorsing a Bill. In this way, the transferee becomes the holder of the bill of exchange. Now the bill of exchange would be payable to the endorsee instead of the transferer.
Accounting Treatment: 1. When the drawer retains the bill with him till the date of its maturity and gets, the same collected directly. 2. When the bill is retained by the drawer with him and sent to the bank for collection a few days before maturity. 3. When the drawer gets the bill discounted from the bank. 4. When the bill is endorsed by the drawer in favour of his creditor. Dishonour of a Bill: When the drawee refuses to pay the amount of the bill on the date of maturity or becomes insolvent, a bill is said to have been dishonoured. In case of dishonour, the holder of the bill can recover the amount of the bill from any of the endorsers or the drawer. For this purpose, the holder of the bill must serve a notice of dishonour to the drawer and each prior endorser whom he seeks to make liable for payment immediately of the dishonour or with a reasonable time.
Noting Charges: A bill of exchange should be duly presented for payment on the date of its maturity. The drawee is absolved of his liability if the bill is not duly presented. Proper presentation of the bill means that it should be presented on the date of maturity to the acceptor during business working hours. To establish, beyond doubt that the bill was dishonoured, despite its due presentation, it may prefer to be got noted by Notary Public. Noting authenticates the fact of dishonour. For providing this service, a fee is charged by the Notary Public which is called ‘Noting Charge’.
Renewal of the Bill: Sometimes, the acceptor of the bill foresees that it may be difficult to meet the obligation of the bill on maturity and may, therefore, approach the drawer, with the request for an extension of time for payment.
If it is so, the old bill is cancelled and the fresh bill with the new term of payment is drawn and duly accepted and delivered. This is called renewal of the bill. Here noting charges are not required. The drawee may have to pay interest to the drawer for the extended period of credit.
Retiring of the Bill: Sometimes the drawee of the bill has funds at his disposal and makes a request to the drawer or holder to accept the payment of the bill before its maturity. If the holders agree to do so, the bill is said to have been retired. To encourage the retirement of the bill, the holder allows some discount called Rebate on bills for the period between the date of retirement and maturity.
Bills Receivable and Bills Payable Books: When a large number of bills are drawn and accepted, their recording by means of journal entry for every transaction relating to the bills become a very cumbersome and time-consuming exercise. It is then advisable to record them separately in special subsidiary books, the bills receivables in the Bills Receivable Book and the Bills Payable in the Bills Payable Book. The reason for the use of subsidiary books for recording bill transactions is the same as that in the case of other subsidiary books for cash, purchases etc.
An important point in connection with these books is that they only record the transactions relating to drawings and acceptance of bills, all other transactions do not record the entire range of transactions relating to the bills, e.g. relating to bills discounted, endorsement, retirement, renewal etc. simply have a passing reference in these books and the entries relating thereto are recorded as usual in the journal. It may be noted that the entry relating to honouring bills appear in the cash book.
Format of Bills Receivable Book Bills Receivable Book Format of Bills Payable Book Bills Payable Book Accommodation Bills Apart from financing transaction in goods, bills of exchange, promissory notes may also be used for raising funds temporarily. Such a bill is called an ‘accommodation bill’ as it is accepted by the drawee to accommodate the drawer. Hence, the drawee is called the ‘accommodating party’ and the drawer is called the ‘accommodation party’.
Sometimes, the accommodation parties agree to raise the funds through an accommodation bill for mutual benefits. It can be done in any of the following two ways: (a) The drawer and the drawee share the proceeds in an agreed ratio. (b) Each draws a bill and each accepts a bill.
