Category: Commerce Notes PPT

When we purchase various products we tend to check the manufacturing date and company, expiry date or year of the expiry of the warranty, check the nutritional count if it is a food product and so on. We perform a thorough quality check and go through the terms and conditions before purchasing any product. Especially if we purchase electronic goods like a laptop we are more careful than ever in checking for its specs, manufacturer and seller, the quality of the piece and the year until when its warranty is valid. 

When we go for intangible services too, we tend to check the reliability of a service provider and quality of services offered before making a decision, be it checking into a 5-star hotel, booking vacation packages or installing WiFi at home. 

A sales agreement happens when a buyer and a seller thus engage in a material transaction. Warranty and conditions are two important components of this transaction. 

What are a Condition and Warranty?

Conditions can be defined as certain obligations, terms or provisions that are associated with the transaction between a buyer and seller. Breach of these conditions can lead to cancellation of agreement and violation of warranty. The non-offending party can also claim appropriate reimbursements and cancel the existing contract as well. A warranty can be expressed or implied. 

What are the Types of Conditions?

Implied conditions are those terms that are not explicitly stated but rather understood and legalised as per the law – 

1. Implied Understanding Regarding Title – Here, it is implied that the seller can sell his goods with all rights and transfer ownership to the buyer. It is understood that before the transaction takes place, the seller is the owner of the goods. In case of any defects, the buyer can claim damages as per the conditions and warranty. It is implied that no fraudulent third party charges will be imposed upon the goods. 

2. Implied Knowledge of Quality and Fitness – The buyer engages in a transaction with the seller with the belief that about the seller’s skill, that he can sell appropriate goods and the seller is aware of the intentions of the buyer.

3. Sale by Description – If the goods are being sold as per the description of the product, then the warranty and conditions will be in accordance with the same. If there is a sample involved as well, then the warranty and conditions will again conform to both. 

4. Sale by Sample – When products are being sold as per the samples earlier marketed, it is implied that the warranty and conditions for the bulk products have to match the quality of the original sample. Buyers should receive sufficient time to compare what they purchase with the quality of the sample and check for defects if any. 

5. Expressed Conditions – The terms and conditions that are explicitly stated in the sale agreement are known as express conditions. Buyers should go through this and have a complete understanding before purchasing.

Consumer organizations are the focused group that seek to protect people from the corporate abuse led by the business owners – like unsafe products, predatory lending, false advertising and pollution to the environment. Consumer Organizations may even operate through the protests.

Today, consumer organisations are playing a dominating role in engaging the consumers to lift their voice against exploitation by the business individual who sells inferior and faulty products. In educational institutions also consumer rights are taught, to prepare the student’s courses of study by keeping in view the interests of the consumers in the society. In our discussion, we are going to know about the consumer protection forums that operate in India.

Consumer Organizations

In the capitalistic system of the Market or economy privatization is the basic mode of production. And consumers remain as individuals responsible for their choice of products. With the growing times, these manufacturing companies become big organized houses having a considerable command over all the products available in the market. Unlike entities controlled by the democratic or other forms of government the motive of such private enterprises is only to make a profit. So there have been instances of manipulation and adulteration of products as an insincere way of earning money. Or sometimes they indulge in the methods of dissemination of misinformation to a consumer and exploit them for their hard-earned money. This is more common in scenarios where products are services provided by any privately-owned companies. In such settings, victims often find themselves helpless against such business entities for the reclamation of their lost money or remediation of their misery. By the late 19th century various movements started to emerge for the protection of consumers from giant corporate houses. These movements translate into Consumer Organizations all over the world. Such groups were meant to be the voice of general consumers getting abused of any kind. They often take the course of litigation, protest, campaign or other means of peaceful actions. 

In India, there are also many Consumer Organizations working for the cause of customers getting abused by manufacturers or service providers. To give an illustration the names of organizations are Akhil Bhartiya Grahak Panchayat, Consumer Guidance Society of India, All India Consumer Protection Organization, The Consumers Eye India, United India Consumer’s Association, Grahak Shakti, Coordinated Action of Consumer & Voluntary Organizations, Consortium of South India Consumer Organizations (COSICO), Consumer Awareness, Protection and Education Council (Cape Council), Consortium of South India Consumer Organizations (COSICO). The Ministry of Consumer Affairs, Government of India, has also started a consumer awareness program called ‘Jago Grahak Jago’.

These Non-governmental Organizations are also always active by collecting data and survey reports of the product tests and for the user experience of various products and services. The information gathered helps them to find any corrupt practices in the market and generate awareness about the same.

Any established organization has a legal identity of its own, and which is separate even from the identity of its employees. As it’s obvious that a company itself isn’t a living body and thus, various members come together to work in the name and behalf of the company, living under a shadow/veil. This is simply termed as “Corporate Veil”.  Under certain urgent occasions and circumstances,  the corporate veil is removed and it’s known as the ‘piercing of the corporate veil’, which enables the company to check frauds committed by members. Thus, it’s necessary to know in detail what the corporate veil is.

What does Corporate Veil do?

The corporate veil is a legalized concept separating the actions of the organization from that of its shareholders.

It also safeguards the shareholders from being guilty of the actions of the company. The court has the right to determine the guilty party. This method exercised by the court is called “piercing the corporate veil in which the court can directly charge the investors of the company as responsible for debts or frauds and put aside the limited liability of the shareholders. The effectiveness of piercing the corporate veil can be mostly observed in closed and small corporations which have limited shareholders and assets. But, it is more convenient to abstain from uplifting this veil unless some serious breach of affairs and misconduct take place.

Factors determining the Piercing of Corporate Veil

1. Fraud done to third parties- Piercing the corporate veil becomes necessary in dishonest practices like fraudulent activities.

2. Inability to make separate identities among companies- Sometimes, when various small companies work under one big company, certain mishappenings occur. In such cases, the law allows the court to carefully inspect the relationship between the parent company and its subsidiaries.

3. Not in conformity with the corporate guidelines- It is mandatory to follow the corporate rules and guidelines and the breach of it may result in waiving off of the limited liability protection to the shareholders.

4. Inability to maintain separate identities with shareholders- This happens in case the name of the company merges with that of the shareholders or the owner.

5. Inability to capitalize the economy successfully- If the business is found undercapitalized, the court can check the assets of the company to determine if creditors have their fair share of assets.

A company is a separate and distinct legal entity, separate from the identity of its members too. A company is not a living body hence the members work on behalf of the company behind the veil. This, in simple terms, is known as the ‘Corporate Veil’. 

There arise many circumstances where the corporate veil is removed which are known as the ‘piercing of the corporate veil’, to check any fraudulent activities conducted by the members. In this discussion, we will delve into the theory of Corporate Veil, so let us get started.

Corporate Veil

The corporate veil is a legal concept which separates the actions of an organization to the actions of the shareholder. Moreover, it protects the shareholders from being liable for the company’s actions. In this case a court can also determine whether they hold shareholders responsible for a company’s actions or not. Here comes the term of ‘Piercing the corporate veil’ which refers to a circumstance where courts set aside the limited liability of the shareholders and hold a company’s investors or directors personally liable for the organization’s fraudulent activities or failure in debts. Laws vary from state to state, but courts will generally abstain from piercing the corporate veil unless there have been signs of serious misconduct.

Piercing the Veil

The liability protection of a corporation is quite important, unfortunately, it is not always absolute. Piercing the corporate veil takes off the distinction between the owners and the business, the distinction is stripped away. The owners or the shareholders working on behalf of the company become personally responsible for the financial condition of the business, like as they would be if the company was a sole proprietorship.

Piercing of the corporate veil generally occurs when someone, like the creditor or a person who has been affected by a business, takes legal action. He would argue that the owners of the business should be held personally liable for the money that is at stake or frauded. The court will not easily agree to pierce the corporate veil in any random situations, since the entire purpose of creating the veil is to protect owners and allow the business to operate in its own independence. However, the court will pierce the corporate veil in situations where the owners, directors or shareholders commit frauds, fail to follow the corporate formalities or have acted inappropriately.

Piercing the Corporate Veil Factors

Though there is no definite set of the equation for the number of factors that must be validated to pierce the veil, there are particular factors that raise red marks, a few worth noting are mentioned below:

1. The Existence of Fraud or Wrongdoing to the Third Parties

One of the biggest factors that the court condemns is the existence of fraud or wrongdoing to the third parties, the court pierces the corporate veil in this case. 

2. Failure to Maintain the Separate Identities Among the Companies

A common scene that may cause some checking is where there are several related companies acting under the umbrella of one company and the failure to maintain separate identities of the companies.

3. Failure to Maintain Separate Identities of the Company with its Owners or Shareholders.

This is the merging of the name of the company with the owners or shareholders of the company. 

4. Inadequately Capitalize the Company

Courts will check the assets of the company to determine if the company’s quantum of assets available for the creditors is appropriate or not, whether it is a scene of undercapitalization.

5. Not in Accordance with the Corporate Formalities

Another red flag that could lead to piercing the corporate veil is the failure to follow corporate formalities. In cases where formalities are not legally followed, courts have held that the liability protection of the shareholders will be waived off and the personal assets of the owners can be tied in this case.

Piercing the Corporate Veil Examples

Examples of the piercing of the corporate veil and its related circumstances are as follows-

1. The creditor of ABC Corp. receives a final judgment for money damages. Here the veil is to be lifted.

2. ABC Corp. cannot pay the judgment so it shuts down. This too leads to the piercing of the veil.

3. ABC Corp. transfers all of its assets to XYZ Corp. and XYZ Corp. operates a similar business with the same assets and same employees, it is likely that ABC Corp. engaged in fraudulent actions, by shutting down its business and reopening a new corporation. This is a classic example of a debtor who attempts to defraud its creditor, here the court will pass the judgement in favor of lifting of the corporate veil.  

Corporate Veil Case

In Broward Marine Inc. v. S/V Zeus, the U.S. District Court of the Southern District of Florida pierced the corporate veil, they found that the corporation’s dominant shareholder should be personally liable for the torts of his corporation. In this case, the plaintiff sued the defendant yacht corporation for foreclosure of its mortgage on a yacht. Upon obtaining a judgment against the yacht corporation, the plaintiff instituted the proceedings after learning that the yacht corporation had transferred all of its assets, post-judgment, to other corporations controlled by the yacht corporation’s sole shareholder. 

Through the previous supplementary, the plaintiff sought to hold the transferee-corporation and the sole shareholder liable for the underlying judgment against the yacht corporation. Specifically, the Court found that the yacht corporation had transferred all of its assets to hinder or defraud the Plaintiff. In consequence, the yacht corporation had its veil pierced and its sole shareholder and one of his closely-held corporations were found liable for the underlying judgment.

The business thus maintains a separate and distinct identity from that of its owners. However this mere shell of a corporate structure is not always enough to avoid personal liability.

According to the definition of E-governance provided by the World Bank, it is the approach of governmental agencies to use technologies related to communication and information for the purpose of transforming and strengthening relations with businesses, citizens, and other governmental agencies. The IT Act, 2000, defines one of its prime objectives as electronic governance or e-governance promotion. Let us discuss electronic records and E-governance in detail. 

Mention of e-Governance and Associated Provisions in the IT Act, 2000

To know what an e-record is, it is important to understand the electronic record’s meaning. The electronic record meaning is best described in the legal recognition of electronic records, digital signatures, and associated topics, for which the following provisions of the IT Act, 2000 were formulated.

For any important point to become a law, it is needed to be written, printed, or typewritten. It can also be considered to be a law if the information is provided in an electronic form. However, the electronic form must be accessible all the time for subsequent referencing.

Most of the documents related to a person are authenticated by his or her signature. If the person can produce a digital form of his signature acceptable by the central government, then the person is legally allowed to validate the documents with the digital signature. This is the summary of the legal recognition of digital signature provision.

According to this provision, if the law allows a person 

• To fill an application, form, or document related to Government authorities or related agencies,

• To issue or grant sanction, licence, approval, or permit in a particular way,

• To Pay or receive money in a certain manner then the person can certainly do so in an electronic form if he maintains the government-approved format.  

Additionally, the manner and format of creating, issuing, and filing electronic records, and the methods of payment of fees for the same may be prescribed.

The law can also retain the electronic form of any information, document, or record if it needs to do so. Retention of records can take place if the records are accessible and available for subsequent referencing, the format of the information is unchanged, or accurately represent the original information, and adequate information of the destination, origin, and date and time of receipt or dispatch of the record. The law does not hold for automatically generated information related to the dispatch or receipt of the record. However, the provision does not apply to laws that expressly provide for electronic retention of documents, records, and information.

If the law requires to publish any official rule, regulation, notification, by-law and related matters in the Official Gazette, then it can also do so in the Electronic Gazette. The publication date of such rules and regulations will be the same as its first published date in any form of the Gazette.

• Section 6, 7, and 8 does not Provide the Right to insist Acceptance of an Electronic Form of the Document (Mentioned in Section 9 of the Act)

The previous sections 6, 7, and 8 do not grant the right to any person to insist on the issuance, acceptance, retention, or creation of any document or monetary transactions directly from the central or the state government, ministry of the department, or associated agencies.

According to the IT Act, 2000, the central government has the power to prescribe:

• Format and manner of affixation of the digital signature.

• Digital signature type.

• Identification procedure for the person who affixes the digital signature.

• Determines the procedures to justify the security, integrity, and confidentiality of electronic records.

• Any other legal procedures for digital signature.

Data Protection

According to Section 43A of the IT Act, 2000, if the body responsible for maintaining the security of personal information and data in a computer resource shows negligence leading to wrongful gain or loss, then the body is liable for paying damages as compensation up to 5 crore rupees.  Additionally, the Government of India incorporated the Information Technology Rules, 2011, under section 43A of the IT Act, 2000, which applies the rules of security to all corporate bodies in India.

Interesting Facts about Cyber Security 

The origin of the word “cyber” can be traced back to a time when there was no trace of the internet at all. Back then, the word cyber was used in association with computers and their networks, and even virtual reality at times. This usage can further be traced to a time (the 1940s) when the word “cyber” started to get pushed into English by Norbert Wiener, a reputable scientist of that time. 

In the 1970s, Bob Thomas, a researcher, came up with a certain computer network called “CREEPER” that was able to move across a network called “ARPANET”, and wherever it went, it would leave a trail behind it. This is when the concept of cyber security was first utilized. 

Depreciation Charge

Depreciation is an essential concept of accounting which every student must acknowledge and be aware of. If there is a reduction in the value of particular assets owing to decrement and the discontinuance of technology, it is known as depreciation. It is an expense in relevance to the profit and loss account by the end of the year. 

This method of depreciation charge is precisely termed as Declining Charge Method. To derive the formula, the behavioural aspects of the assets for a definite period are taken to account. Following these methods, the depreciation sum is sure to reduce every successive year.

Charging Depreciation – Declining Charge Method

These methods are generally implemented when the receipts from the particular assets are on the verge of decline. In this case, modifying the depreciation charge for the asset turns out to be mandatory in order to meet the exact earning.

 

Methods Falling Under Charging Depreciation

There are three methods of depreciation charges that come under this category.

Now we will be seeing in detail the significance and concept of the Diminishing Balancing Method.

Diminishing Balance Method

As per the diminishing balance method, depreciation is charged on a particular percentage, in relevance to the asset’s book value, turning up in the balance sheet. There’s a book value reduction in the sheet every subsequent year. Therefore, it is also named Reducing Balance Method or Written Down Value Method i.e., loss of charge method.

Owing to the reduction of book value every year, there’s a decrease in the depreciation expense as well. Therefore, the value of the concerned asset is never directed to zero.

Advantages of Diminishing Balancing Method

The Diminishing Balancing Method comes with its advantages. They are listed below.

• Every year there’s a decrease in depreciation, giving rise to repair expenses. Thus, the method poses an equal burden on each year’s profit.

• With the aid of this method, depreciation is charged on, with relevance to the Income Tax Act.

• A significant part of the depreciation charge is evaluated at the beginning of the year. Hence, it gets easier to replace the asset.

Disadvantages of Diminishing Balancing Method

However, the Diminishing Balancing Method isn’t devoid of cons as well. The same is detailed here.

• Following this method, it gets tough to correctly evaluate the figures for charging depreciation. It often appears to be an incomplete Depreciation of the full asset.

• The figures of the asset never direct to zero.

• With this method of Diminishing Balancing, it is not possible to evenly spread the Depreciation throughout the assets’ life.

Every year, the depreciated rate is drafted as a percentage. It is known as the depreciation rate. The formula for Depreciation charge is presented as, 2*straight line*book value during the starting of the accounting period.

 

Did You Know?

Here are some of the most amazing facts about Depreciation that you would be surprised to see.

• Assets such as land, stocks, sums, building, investment, etc., can’t be depreciated.

• Diamonds, some particular brands’ watches and more, don’t lose their value.

• Car is a depreciating asset and loses value as time goes.

• Expenses are always better than Depreciation.

• BMW 5 series, is the super fastest depreciating asset. 

 

Solved Example

1: How Many Types of Assets are There?

Assets are regarded as a particular element, which is liable for investment and has value as well. Suppose a particular sum such as stocks is said to be an asset. Whereas, your personal properties like house or even bank account are assets too. Depreciation is charged on the assets.

There are three categories of assets.

• Tangible and intangible assets.

• Current and fixed assets.

• Operating and non-operating assets.

The assets’ category is variable depending on their nature and type. Stocks or sum belongs to a particular category, whereas savings account or personal property such as a car belongs to the other.

Now we will be going through some of the common questions that people often face while solving Depreciation queries.

For a business to run smoothly and efficiently, capital investment is needed. The capital or wealth is required to purchase or equip assets that help them manufacture products or finish a service. In their business venture, the two kinds of capital which are required are fixed capital and working capital. Using these two capitals, an entrepreneur can keep a perfect balance between their assets and liabilities and work toward generating more significant revenue. 

What is Fixed Capital?

To put it simply, the funds invested in procuring long-term assets or fixed assets is known as fixed capital. These fixed assets are the initial most procurement a company does and are utilized continuously to produce the final product. These perpetual assets don’t get utilized or consumed in a single accounting period. 

Examples of Fixed Capital 

Tangible and durable assets which are required for production and are utilized for a long period are a part of fixed capital. Machinery, vehicle and equipment, plant, buildings, etc. are examples of fixed capital. 

What is Working Capital?

Working capital is the measure of approximate funds available to the business and is represented as the difference between current assets and current liabilities. Current assets refer to the assets an organization owns which can be liquefied within one year. Current liabilities are the outstanding payments which a company has to make in the coming financial year. 

Inventories, cash in hand, debtors, etc. are a few examples of current assets, whereas short-term loans, bank overdrafts, creditors, tax provisions, etc. are examples of current liabilities. 

Therefore, one difference between fixed capital and working capital is that working capital is used to meet the short-term business operations of an organization. Mentioned below are the types of working capital. 

Key Differences between Fixed Capital and Working Capital

The distinction between fixed and working capital can be clearly identified on the basis of the following factors:

• Fixed capital is the portion of an organization’s total capital that is invested in long-term assets. Working capital is the money that is utilized to run a firm on a day-to-day basis.

• Durable goods, which will remain in the business for more than one accounting period, are considered fixed capital investments. Working capital, on the other hand, is made up of the company’s short-term assets and obligations.

• Because fixed capital cannot be easily changed into cash, it is relatively illiquid. Working capital investments, on the other hand, are easily turned into cash.

• Working capital is used for short-term funding, whereas fixed capital is utilized to purchase non-current assets for the business.

• Fixed capital is used to support the entity’s strategic objectives, which include long-term business planning. Unlike working capital, which serves

A business entity’s essential prerequisite for doing business is capital. After analyzing the preceding arguments, it is evident that total capital includes both fixed and working capital. They are not mutually exclusive, but they do complement each other in the sense that working capital is required to utilize a company’s fixed assets, such as plant and machinery if raw materials are not employed in manufacturing. As a result, working capital ensures that the company’s fixed assets are used profitably.

Do you Know? 

• Net working capital gives an approximate idea about their business performance in the real world. 

• A negative value for net working capital depicts that the business is in a state of loss as the amount of current liabilities exceeds the value of current assets. 

Questions to Solve 

Q1. Divide the Following into Appropriate Categories of Fixed Capital and Working Capital.

Ans: Machinery, cash, inventory, vehicles, accounts receivable, physical infrastructures, marketable securities, notes payable, accrued expenses, accounts payable. 

Q2. Define Fixed Capital and Working Capital. 

Ans: Key difference between fixed and working capital

While both fixed and working capital is important for a business’s growth, there are several differences between these two. The list created below shows some of these differences. 

1. On the Basis of Meaning 

Fixed capital refers to the investment on fixed assets or long-term assets that a company procures. In the case of working capital, funds are utilized for procurement of current assets in the company. 

2. It Comprises of 

Durable assets or long-lasting assets are a part of fixed capital, and they aren’t consumed in a single accounting period. Therefore, a significant difference between working capital and fixed capital is that working capital comprises current assets and liabilities and not fixed assets. 

3. Based on the Use of the Capital 

To differentiate between fixed capital and working capital in terms of use, fixed capital is only used to purchase long-lasting assets or fixed assets like equipment, land, office space, vehicles, infrastructures, etc. Working capital is used explicitly for short-term investments like the purchase of current assets or payment of current liabilities. 

4. Based on Liquidity 

To distinguish between fixed capital and working capital based on its liquidity, consider the following points – 

• Fixed capital is invested on assets that are permanent in an organization and aren’t liquid. So, these are comparatively difficult to convert into liquid cash. 

• Working capital deals with the current assets and liabilities and hence is highly liquid. Businesses can convert these into cash any time should the need arise so. 

5. Based on Objectives 

Both fixed capital and working capital do have objectives and hence function accordingly in a business venture. While fixed capitals have strategic objectives, working capitals are used to meet the operational objectives of an organization. 

Since fixed capital refers to the purchase of long-term assets like factories, equipment, etc., they tend to the strategic goals of the organization. But everyday overheads are met by the liquid funds in hand and through working capital. 

Test your Knowledge 

Q1. A company XYZ enterprise has current assets amounting to Rs.15 lakh, and its current liabilities stand at Rs.10 lakh. Determine their gross and net working capital, and if the company is accruing profit or loss. 

Ans: Gross working capital of XYZ enterprise will be Rs.15 lakh and Networking capital of XYZ enterprise will be Rs.5 lakh (15 – 10). Since the value of assets is higher than that of liabilities, the value of profit XYZ enterprise earns is Rs.5 lakh. 

With such concepts, students will be able to solve questions of the difference between fixed capital and working capital class 9 NCERT. They can learn more about the concepts and get profound knowledge by visiting ’s websites.