Category: Commerce Notes PPT

What are the Losses of Consignment?

The loss of consignment is a part of consignment accounting. Consignment is the manufacturer’s act of sending a specific number of goods to the agents for a sale. The one who sends these goods is known as a consigner. The consigner can either be the producer or manufacturer or an assigned person. When the product stocks remaining with the cosigner experiences a loss, it is known as the losses of the consignment. This loss might take place due to destruction or a condition of no-sale for a prolonged period.

There are two types of consignment, and you can get the details about both here. 

Types of Losses of Consignment

There are mainly two types of losses of the consignment. They are normal loss and abnormal loss. Here you can go through all the details about them. 

Normal Loss

A normal loss is prominent and it cannot be avoided. It occurs due to physical degradation of the product like breakage, leakage, evaporation, etc. At the time of consignment accounting, the company makes the valuation of the normal loss and deducts it from the total quality. 

However, only the quantity of normal loss is calculated by an organization but not it’s worth. Moreover, no separate journals are needed in case of calculating normal loss. The organization always takes the gross profit to contrast the amount of normal loss with it. Furthermore, the organization does not publish any journals for it. 

For Example: In the case of the consignment of 1000 kg oil, some might evaporate during the delivery. In such a situation, the amount of broken vaporised oil is considered as a normal loss. 

Here the mathematical formula you can apply is:

The total value of goods * unsold quantity of goods/amount of goods that the consumer receives. 

Abnormal Loss

Abnormal loss is another significant part of consignment accounting. All losses incurred due to the carelessness or any other drawbacks during delivery comes under abnormal cost. It can also be considered a human-made mistake. 

Moreover, the loss in products occurred due to unavoidable circumstances like a flood, fire, earthquake, or en theft comes under abnormal loss. 

Any organization remains keen to restrict abnormal losses on their consignments as it hampers the net worth of profit. This can not only lead to the degradation of production for the company. 

The organizations make a journal entry for the abnormal losses because they desire to keep records of it. When making a journal note, they make a couple of tables.  In the first table, all the data related to an abnormal loss is entered when the loss is not recoverable. 

Here are the details of the treatment measures of normal loss and abnormal loss you must know about. 

Treatment of Normal Loss

Less amount of treatment takes place for the normal loss as the companies remain aware of it when sending the consignments. In case no goods are correctly sold after sending the consignment, some organizations can follow the formula for understanding the leftover value of the stock. It is:

(The value of goods when no normal loss occurred/total units after the normal loss occurred) * Unsold units. 

Most of the organizations (if necessary) make a balance sheet to keep a detailed record of the normal loss over a consignment.

Treatment of Abnormal Loss

As mentioned earlier, the journal is made to account for the abnormal loss of the consignment; here are the details about it. 

Journal entries for the goods where insurance is absent

Profit and Loss A/C

Consignment A/C

Journal entries of the goods where insurance is present

The claim of insurance A/C

Consignment A/C

Journal entry for the compensation on goods given by the insurance company

Insurance claim A.C 

Consignment A/C

Profit and Loss A/C

Entering the data into the journal when the organization receives the claim amount from the insurance company.

Details of the insurance claim

Bank A/C

In the second procedure, the abnormal losses are counted in a separate account known as the abnormal loss account. In this case, the journal entities are made, however, the techniques are different. 

Journal entry to transfer loss 

Abnormal loss A/C

Consignment A/C

Journal entry to close –  for goods that are not insured properly

Profit and  Loss A/C

Abnormal Loss A/C

Journal entry to close –  for goods that are insured properly

Insured Claim A/C

Abnormal Loss A/C

If a loss is more than Compensation

Profit and Loss A/C 

Abnormal loss A/C

Insurance Claim A/C

If claimed received with the help of insurance company

Insurance claim

Bank A/C

Market Equilibrium is the state where the market supply and demand balance each other well, which results in stabilizing the prices. Practically, an over-supply of the goods or services causes the prices to go down, this results in higher demand. While an under-supply or shortage causes the prices to go up resulting in lessening the demand. The balancing effect of supply and demand gives rest in a state of equilibrium.

In this context, we will know about the market equilibrium that resides in a Free Entry and Exit situation.

Market Equilibrium Free Entry and Exit

The students are quite clear on the presumption of market equilibrium where the market has a fixed number of firms. While, let us face the reality here, where no markets are actually confined to a specific number of firms. So, in this section, we will study the market equilibrium where the enterprises can enter and exit the marketplace according to their will. 

The presumption of free entry and exit implies that in equilibrium, there is no enterprise that earns a supernormal profit or sustains an acute loss by remaining in the production. The equilibrium cost price will be equal to the minimum average cost of the enterprises.

Suppose, the market has a possibility of earning a supernormal profit, this will attract some enterprises to freely enter the market and compete. Thereby, they distribute the profit incurred in between them resulting in all the firms earning normal profit. 

Now with new firms joining the profit-oriented market this will result in:

• The market supply curve will shift rightward. The demand remains constant.

• This will cause the market cost price to decrease

• When the prices decrease, the supernormal profits are chalked out

• After all the enterprises in the market start to earn a normal profit, no more enterprises will be attracted to enter the market.

• Likewise, if the enterprises are earning less than normal profit, then some enterprises will exist which will lead to an increase in the cost price, and with a lesser number of enterprises, the profits of all the enterprises will rise to the degree of normal profit.

Definition of Market Equilibrium 

This is a situation where for a particular good, supply = demand. When this market is in equilibrium, then there is no tendency for the prices to change. 

Market equilibrium can be represented by using the supply and demand diagrams

In the diagram following, the equilibrium price is P1. The equilibrium quantity is Q1.

In Case the Price is Below the Equilibrium 

In the above diagram, the price which is P2 is below the equilibrium. Here the price, demand is greater than the supply. Hence, there is a shortage of (Q2 – Q1)

If there is a shortage, the firms will put up prices and then supply more. As the price rises, there will be a movement along the demand curve and there will be less demand.

The price will rise to P1 until there is no shortage. While supply = demand.

If the Price is Above the Equilibrium

If the price was at P2, this would be above the equilibrium of P1. At the price of P2, then supply (Q2) would be greater than the demand (Q1) and therefore there is too much supply. There is a surplus. (Q2-Q1)

Therefore, the firms would reduce this price and then the supply less. This would encourage more demand and the surplus will be eliminated. Then the new market equilibrium will be at Q3 and P1.

Movements to a New Equilibrium

1. Increase in Demand

If there was an increase in income the demand curve would shift to the right (D1 to D2). Initially, then there would be a shortage of the good. Therefore, the price and the quantity supplied will increase leading to a new equilibrium at Q2, P2.

2. Increase in Supply

An increase in supply will lead to a lower price and more quantity sold.

For any nation across the world, an underdeveloped economy can be a major concern. It reflects the financial capability, status of citizens, their living and health conditions, and similar other things that are closely associated with the economy. This article will be of help to those who wish to know about this aspect of the economy. When someone refers to this term, it means that they are referring to the per capita income and low level of the standard of living of that particular area/ place. 

 

What is an Underdeveloped Economy?

The economy plays a fundamental role in every nation. There have been several countries including India which have righteously recovered from the image of the underdeveloped country by removing the problem of the underdeveloped economy in the country. Without clearing the concept of an underdeveloped economy, an individual cannot understand the struggle and hardships that occur along with this crisis. 

 

The common characteristics of this form of the economy are low living standard and per capita income, high rate of unemployment, excessive population growth, lack of capital and advanced infrastructure, and lack of education. These are the key features that can separate the economy into two parts which are developed and underdeveloped.

 

Difference Between Developed and Underdeveloped Economy

The economies that have high per capita income and support a high standard of living are referred to as developed economy and, on the other hand, economies that have low per capita income resulting in a low standard of living is referred to as underdeveloped economy. 

In such an economy there is a lower rate of poverty incidence, service and industrial sectors are thriving. There are a sufficient amount of resources and technological advancement supporting a high rate of production. Most importantly, there is a minor gap between the poor and the rich. 

There is a significant amount of poverty and the primary sector like agriculture is in a leading position. The resources in this form of the economy are not judiciously utilised and there is a high rate of dependency on traditional approaches which results in a low rate of production. Most importantly, there is a significant amount of difference between the rich and the poor. In such an economy, the state or the country fails to meet the necessary standard of living for the major section of a population. This leads to materialistic deprivation, misery, hunger, deterioration of health and overall living standard. 

 

Understanding the Concept of Underdevelopment

While talking about what is an underdeveloped economy, it is first important to understand the concept of underdevelopment. It is a relative concept as it compares the quality of life through the economy that creates the difference between a developed population and an underdeveloped population. The concept refers to the sustenance of absolute poverty which refers to the kind of poverty, where people are unable to fulfil their basic needs, like, food, clothing, shelter and similar things as such. There is a constant struggle among people to survive. 

 

Thus the meaning of absolute poverty is equivalent to the meaning of an underdeveloped economy. Some of the common characteristics of the underdeveloped economy are low per capita income, economic inequalities, the slow growth rate of per capita, low-productivity labour and lower level of living, rudimentary techniques of production, low rate of capital formation, lack of resource utilization and similar things as such. 

 

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We all know that a joint venture is a contract between two or more parties to carry on a specific business for a set period of time. It is jointly controlled by all joint venture partners, and profits and losses are divided according to the agreed ratio. It also comes to an end when the time limit expires or the specific goal is achieved. Co-venturers are the partners involved in a Joint Venture. In this article, you will understand memorandum joint ventures, their importance, and samples. Let’s look at how to make a memorandum Joint Venture A/c. 

A memorandum joint venture account is a type of venture to determine the profit or loss of a joint venture. The co-ventures are paying their expenses which are debited from their Account and profit made by the co-ventures is credited in the respective co-ventures name. The memorandum of joint venture account is an agreement when two or more parties who are called co-ventures join together to execute a business for a limited period of time. A Joint venture memorandum account is managed jointly by all the parties to the joint venture. The profits and losses earned in this agreement are shared as per the specified ratio.

How to Maintain Memorandum Joint Venture

Step 1 – In this case, the Co-venturers can maintain the records separately, and there are different books of accounts for the joint venture. This can be done in the following two ways:

1. Put the records of all the transactions

2. Put the records of own Co-ventures transactions. 

So, the co-venturers keep the record of their transactions only, so we make the Memorandum Joint Venture Account. 

In this case, each co-venturer of the joint Account records only his transactions.

Joint Venture Memorandum Account

Each co-venture opens a ‘Joint Venture’ with their AccountAccount. Each of them then debits all the income, losses, profits, and expenses from the joint venture to this AccountAccount. However, we cannot estimate the profit or loss from the venture from this AccountAccount. We prepare ‘Memorandum Joint Venture A/c’ for estimating the profit or loss of the Joint venture. 

Each co-venturer sends a regular statement of their transactions as per the joint venture to the other co-venturers involved in the joint venture.

This final statement helps in the preparation of the Memorandum Joint Venture A/c. We call it a memorandum Account because this Account is not a part of the double-entry system. 

Importance of Memorandum Account

The important features of the Memorandum joint venture account are:

• Each co-venturer has only one personal account named Joint Venture account in his book (Name of other co-venturer). In his books of accounts, the other co-venturer will follow the same procedure.

• Each co-venturer will open only one personal account, irrespective of the fact that the other co-venturers are present. In the case of joint ventures of 4 people, A, B, C, and D, A will open only one personal account in his books, named Joint venture with B, C, and D.

• Only the transactions that are done by him, will be recorded in his book; transactions performed by other co-venturers will be ignored.

• A combination account named “memorandum joint venture account” will be opened in addition to the above personal account.

• A memorandum account is just a combination of personal accounts that each co-venturer has opened. The personal account’s debit side will be transferred to the memorandum account, and the personal account’s credit side will be transferred to the credit side of the memorandum account.

• Transactions between co-venturers, such as cash received or paid from one co-venturer to another, will be ignored when a memorandum account is prepared.

• The profit or loss of the particular business will be represented by the balance of the memorandum joint venture account. Furthermore, the profit or loss will be transferred to each co venturer’s profit-sharing ratio.

Sample Memorandum of Understanding for Joint Venture

Suppose there are two Co-venturer, A and B. 

1. A Co-venturer will open his account in his book, and it will be titled: Joint Venture with A Account, which is a personal account. It does not show the profit or loss of a Joint Venture. A Co-venturer debits the Account with his expense and credits the Account when he receives income. 

2. In this case, only A records only his transactions. No account can be incurred etc. by the other co-venturer B.

Journal entries made in the books of one party say, Mr. A and the other Co-Venturer Mr. B.

The above is a personal account. It does not display any profit or loss of the Joint Venture. To get the profit or loss of Joint Venture, we have to prepare a Memorandum Joint Venture Account. To prepare a Memorandum Joint Venture Account, one co-venturer A will have to send another co-venturer B a copy of the Account kept by him.

Based on the copy of the Account and his Account, Memorandum Joint Venture is prepared. In short, the Memorandum Joint Venture Account is just a collection of Joint Venture Accounts prepared by all the co-venturers.

Performance Appraisal and Modern Methods of Performance Appraisal

Performance appraisal refers to the methodical assessment of the employees’ performances, with proper identification of their abilities and channelizing them towards better productivity and development. This review of the performances is done to bring out the strengths and weaknesses of employees to use them effectively in the future.
The modern methods of performance appraisal are stated below: 

• Assessment Centre Method

• Behaviorally Anchored Rating Scale (BARS) Method

• Human Resource Accounting Method

• Psychological Appraisal Method

• Management by Objectives

• 360 Degree Method

• 720 Degree Method

A Detailed Analysis of the Modern Techniques of Performance Appraisal

Assessment Centre Method: 

As a part of the Assessment Centre Method, employees’ performances are evaluated to bring out their potentiality, further allowing a systematic placement in key departments. The interpersonal abilities, intellectuality, career setting goals, motivation and the ability to plan and organize are determined through this process.

Behaviorally Anchored Rating Scale (BARS) Method: 

BARS method helps in determining the key areas in the performance of an employee, suggesting areas of improvement to build the steps to achieve goals. As a part of the performance management, employees have a predefined behaviour recorded with the organization for effective performance. This method of appraisal analyzes the present behaviour of an employee in comparison with the predefined one. This makes the employees aware of their deviations and required improvements.

Human Resource Accounting Method: 

This method takes employees as assets evaluating their performance in monetary terms. Performance appraisal is analyzed based on the cost incurred and contributions provided by the employees, where contribution should remain higher than the expenditure incurred on the employees.

Psychological Appraisal Method: 

As a part of this method, psychological tests are conducted to determine the prospects of the employees instead of their past work analysis.

Management by Objectives: 

The MBO method originally proposed by Peter Drucker is implemented for setting goals for ultimate success. Setting smart enough goals can analyze the performances in line with the predetermined goals for better productivity. Douglas McGregor added to the concept defining the confined reach of the traditional methods setting goals examples for the organization as a whole.

360 Degree Method: 

In the 360 Degree Method, an employee’s performance evaluation surveys are conducted on colleagues, managers, subordinates and customers keeping their identities anonymous.

720 Degree Method: 

This system includes a synchronized method of appraisal where a 360-degree appraisal is combined with in-time feedback followed by further evaluation for setting goals smart and achieving them.

What is a SMART Goal? 

The characteristics of a SMART goal are:

S- Specific

M- Measurable

A- Achievable

R- Relevant

T- Time-Bound

In all modern methods of performance appraisal, setting goals is essentially done keeping SMART elements in mind. Why should this be limited to the professional field? Setting goals in life should also be done giving SMART elements the topmost priority. Only then, one can achieve them and learn from them effectively. 

Steps in Goal Setting

Setting goals is important. The following are the various steps in setting goals:

• Mutual discussion and agreement between the management with the employees bringing out the best suitable roles for the employees. 

• By setting goals smartly, employees define their objectives for the following year or a span of certain years.

• The employee consults with the manager on devising the plans.

• The manager at regular intervals evaluates the progress of performance of the employees.

• Evaluating the outcomes after the predefined time period in accordance with the organizational goals.

• The appraisal is followed by a new plan of action defining the steps to achieve goals.

Limitations of Goal Setting

Setting goals for employees examples require setting goals in life in line with their organizational goals. However, there are limitations of goal setting in organizations as discussed below:

• Such steps to achieve goals can be applied only in organizations bringing out definite outcomes. This is not applicable in the case of blue-collar workers.

• It is a time-consuming procedure requiring patience and effective coordination, without which hindrances might occur.

• This is better applied only in the case of executives in the high levels who have established better communications with the low-level ones in devising new ideas and plans.

• Setting goals is not a favourite for the operator workers who refrain from taking up initiatives.

Nature of Business- Definition, Concept

The word Business is derived from ‘bus- ness,’ for example keeping oneself busy with either work, yet it is substantially more than being occupied.

To have a superior comprehension of what a business is:

The whole sole purpose of the economic activity nature of a business is maximising wealth agenda

The service or goods incurred in a business creatures utility, that is, the conversion of product in a consumable form. Time utility occurs when the making of the services or goods are available when there is a need for them. Finally, place utility occurs when there is an availability of the services or goods wherever required, for the consumers.

Any endeavour requires a store contingent upon the size and its sort.

It is identified with assembling and offering merchandise available to be purchased or providing food administrations. 

The underlying rationale of a finance manager is making a benefit out of his endeavour.

It is worried about the fulfilment of the client’s requests and needs.

There are significantly two gatherings included, the client and the product.

It has some social duties, such as making openings for work, managing authorised items and so forth.

Importance of Business

Business is an independent work that opens the door for an individual to become self-reliant and ace his thoughts. It isn’t just gainful to the proprietor yet additionally affects society. 

It is the way to income age for the entrepreneur since it acquires benefit and ends up being a wellspring of pay for the proprietor. 

It is fundamental for the financial development of a nation since high income implies a higher duty assortment.

• Improves Standard of Living:

A country with more modern units and organisations experience a higher pace of business and better expectations for everyday comforts.

It includes conceptualising and age of groundbreaking thoughts which opens up the path for development.

It is a drawn-out cycle which requires the human asset to work effectively. Consequently, it makes openings for work.

Business Risks

Business risk can be characterised as vulnerabilities or startling functions, which are out of hand. In basic words, we can say business hazard implies an opportunity of causing misfortunes or less benefit than anticipated. The financial specialists can’t constrain these elements, and these can bring about a decrease in service or can likewise prompt trouble.

 

Causes of Business Risk

Natural Causes

Natural causes of risk occur due to natural calamities like cyclones, flooding, earthquakes, and other natural disasters that can lead to the loss of properties and lives. For example, a delivery bike is on its way to deliver the good order made by a customer but is met with a storm along the way, leading to an accident. To escape natural causes, businesses need to take out comprehensive insurance coverage to manage every loss incurred.

 

Human Causes

Human causes are identified with an opportunity of misfortune because of individuals or representatives of the association. The deceptive nature of representatives can bring serious mishaps for business. For example, the workers may release a business mystery to a contender and may submit misrepresentation likewise bring substantial troubles by wastage of assets.

The representatives may hamper the creation by going on strikes, riots and so on. This cause can likewise prompt substantial loss of business condition. There can be value variances in the market; there can be an adjustment in style, taste, inclinations, and requests of clients.

 

Monetary Causes

Monetary causes are identified with an opportunity of misfortune because of progress in the market. There can be an adjustment in the level of rivalry. All these directly affect the profit of the business.

Indeed, even change in Government strategy influences the business a great deal. For instance, in 1971, when the Janata government came to control the Coca-Cola Company, numerous other unfamiliar organisations were sent back to India.

 

Economic Causes

Economic causes involve situations like a growing increase in the prices of raw materials or labour costs, or the ever-increasing rise in the interest rates for borrowing, and competition.

 

Types of Business Risk

The business risk can be classified into two significant classifications: 

Insurable Risk

The dangers which can be recuperated are called insurable dangers. The misfortunes which can be made acceptable or misfortunes for which organisation can get pay from the insurance agency are called Insurable Risks. By and large, the common and physical dangers are insurable.

Non-insurable Risks

The dangers for which no security is accessible are called Non-insurable hazards. The finance managers can’t get paid for an adjustment sought after or misfortune because of carelessness or thoughtlessness of representatives.