Category: Commerce Notes PPT

Students of Commerce to various concepts that are both theoretical yet practical as they are to do with personal and professional finance. If we put our minds to it, we will surely learn a lot! This section deals with the topic of fixed cost and variable cost. 

Whether you are part of a company or run a business yourself – cost is a fundamental brick without which no company can ever run! It is the total monetary value incurred by a company for the purpose of manufacturing products or ensuring its services reach the target audience. 

Fixed cost remains unmoving for a long period of time while variable cost keeps changing based on the expenditures and assets of the company. 

You will know you have understood these two concepts well when you are able to differentiate between fixed and variable cost in a given set of data.

Fixed Cost

The fixed cost is more or less an independent variable. Irrespective of the productivity or operations of a company, these costs have to be borne by the business at all periods of time. For instance, the commercial rent for the structure occupied by the company is an ideal example of fixed cost. It has to be paid by the company throughout its period of functioning, irrespective of whether it is making profits or not. 

These costs may rarely be subject to changes. They are usually constant over a long period of time.

 Variable Cost

The variable cost as opposed to the fixed cost is dependent on the operations and productivity of the company. A few instances of variable cost include the salaries, utility bills, manufacturing costs and so on. Naturally if the production of the company is at a low, variable costs will be lower. However if the company is running in a full swing, the variable costs will be equally high. 

Fixed and variable costs are an essential part of running an organization. But both need to be monitored and kept within their limits. If they exceed a set target, it could prove to be detrimental for the operations of a company.

The report lists the balances of a company at a certain point in time of all the general ledger accounts. The accounts that are reflected on the trial balance are all related to major accounting items such as equity, assets, revenues, liabilities, expenses, losses, and gains. The trial balance is generally used to identify at a certain point in time, the credit entries and the balance of debits from the transactions that are recorded in the general ledger.

Features of a Trial Balance

The trial balance usually includes a list of totals of accounts of the general ledger. The general ledger accounts should include the description of the account, the account number, and the final debit/credit balance. Along with this, the trial balance should include the accounting period of the report being created. The trial balance does not show each separate transaction, only the accounts total whereas the general ledges show all the transactions of the account. If any adjusting entries were entered, the trial balance should show the adjusting entry, the figures before the adjustment, and the balances after the adjustment.

What is a Balance Sheet?

The balance sheet is a key part of both financial modeling and accounting. The company’s total assets and how they are financed, either by debt or equity, are displayed in the balance sheet. The balance sheet can also be described as a statement of financial position or a statement of net worth. The fundamental equation that describes the balance sheet is Assets = Liabilities + Equity.

Features of a Balance Sheet

In a balance sheet, the assets and the liabilities are divided into two separate categories which include current assets or current liabilities and noncurrent (long term assets) or noncurrent liabilities. After the illiquid accounts or non-current accounts such as plant, property, and equipment (PP & E) and the long-term debt, more liquid accounts are placed such as cash, inventory, and the trade payables.

Difference between a Trial Balance and a Balance Sheet

Concept of Trial Balance 

Trial balance is an internal report generated by a company’s accounting department that lists general ledger accounts as well as its balances. The columns in the trial balance show the credit balance and debit balance amounts.

The figures in these columns are subsequently summed up for showing that the consolidated credit balance is equal to the consolidated debit balance. 

Importance of Trial Balance

Trial balance acts as the precursor to the preparation of financial statements as well as assessing the arithmetical accuracy. It is used for the verification of actual amounts from various ledgers. It also leads to the determination of the balances of all ledger accounts, which are eventually used for the financial statements.

It assists in the rectification of errors and makes due adjustments. Such adjustments are relevant only for the particular accounting year. Trial balance also helps in the comparative analysis with a previous year’s balances and the current one. 

Concept of Balance Sheet

As an external reporting document, the balance sheet forms a part of the financial statement of a company. It is primarily a summary and report on the balances generated out of liabilities, assets and the equity accounts held by stockholders in the general ledger of a company.

Due to this fact, a balance sheet is also referred to as “Statement of financial position”. This financial statement pertains to a particular date which is usually the accounting period’s last date. 

Importance of Balance Sheet 

The importance of balance as a part of a company’s financial statement can be understood along with the documents of cash flow and income statements. All of these combined together help in indicating the financial position of the company to the interested parties. It imparts the information about what the company owes and owns. 

Such information is particularly crucial for such investors who seek to derive insights on the operations and financial health of a company for considering whether it will be a sound investment option.

Trial Balance vs  Balance Sheet 

The table below shows how to distinguish between trial balance and balance sheet.

Table 1: Trial balance and balance sheet difference 

Trial Balance Example 

Let, the following be the trial balance of a consulting company, XYZ. 

Table 2: Trial Balance of XYZ

Table 2 shows that the credit equals the debit. However, the figures in the trial balance do not indicate accuracy, and it is entirely possible that an item or transaction may have been missed or a wrong expense account has been entered.

Balance Sheet Example 

Table 3: Balance sheet of XYZ

A balance sheet can be presented in two formats – (a) report form and (b) account form. Table 3 shows the balance sheet of XYZ in report form.

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A company refers to a group of individuals who are associated together to attain a common goal. A company incorporated under the Companies Act of 2013 or any other company law is legally defined as a company. There are certain advantages and disadvantages of incorporation. Incorporating a company can create a separate legal entity for itself, have perpetual succession, provide power to own particular property, create the capacity to sue, and have easier access to capital. However, it also has some significant disadvantages. 

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The image shows the paperwork on the incorporation of a company. The disadvantages to incorporation are further explained in the details below.

Introduction to Incorporation 

Incorporation is the legal process of formation of a new corporation of any kind such as a business, sports club, cafe, nonprofit organization, etc. Incorporation becomes an independent legal entity that is recognized by law. These companies can be identified on their behalf by terms such as “Inc” and “Limited”. It will be a  legal entity completely separated from the owner.

Steps in Incorporation of a Company 

1. Determining the availability of names 

2. Drafting Articles of Incorporation and Articles of Incorporation 

3. Prints, signatures, stamps, memorandums and article reviews

4. Power of Attorney

5. Documents to be Filed with the Registrar of Companies

6. Statutory Declaration in e-Form

7. Payment of Registration Fees

8. Certificate of Incorporation

 

Disadvantages of Incorporation 

1. Formalities and Expenses 

Starting a business is a very complex and long legal process that requires a great deal of time and money. These sophisticated procedures discourage people who are seriously and passionately uninterested in doing business. Even after the establishment of the company, it must be very tightly controlled and must follow the statutory provisions of the Companies Act. Certain special events or activities such as accounting, company audits, meetings, borrowing, lending, investment, and capital issuance, dividends, etc. must be carried out and performed strictly in accordance with the Companies Act. 

Other companies do not have to follow as many rules and regulations as they do.

2. Corporate Disclosures 

Despite the large legal framework designed to ensure maximum transparency and disclosure of company information, not all the information is available to the company employees and others in the management. Everyone has limited access to the company’s information. 

3. Separation of Control from ownership 

Shareholders of a company who are in minority do not really have control of the functions and decisions of the company. 

This is because the number of employees in a company is so large that even individuals or  a small number of people cannot make a significant impact on the work of the organization. 

Therefore, the position labeled “ownership” is just a term that has no real meaning. You have no active or complete control over the activities of the company. 

4. Payment of Heavier Taxes in Some Cases 

Compared to other forms of companies, incorporations have to pay higher taxes as they do not receive discounts or minimum tax limits. 

They are also required to pay income tax at a fixed rate on all income, while other legal entities are taxed in stages or at a fixed rate. 

Therefore, many companies often start as private or partnership companies. And as the scale grows, it becomes an incorporated company.

5. Social Responsibility 

Many companies have billions of dollars in assets and employ hundreds of thousands of people. They have a significant impact on society, and these companies often participate in social activities that are part of their corporate social responsibility (CSR) campaigns. These incorporation companies are so influential that they must adhere to certain social norms and contribute to the development of society.

Economic elements that influence business and consumer behaviour are referred to as the economic environment. The economy of a country has an impact on investment decisions. There are several factors, both internal as well as external  that affect the economy.

 

Elements of Economic Environment

Several external factors have a significant influence on a country’s economy. These factors play a huge role in deciding consumer behaviour and financial flow of a country, thereby affecting its economic activities. All these elements together constitute the economic environment definition.

 

These elements of economic environment are as follows –

Gross Domestic Product is the total value of all products and services produced in a country. Therefore, the growth of GDP signifies that the economy of a country is stable and improving. It also means that people have more disposable income that, in turn, leads to increased demand for products and services.

 

It evaluates the financial worth of final goods and services—those that are purchased by the end user—produced in a country over a specific time period (say a year). It includes all of the output generated within the country. GDP  also includes non-market production, for example, education services which are provided by the government itself.The GDP growth rate measures the economic reports and amount of a country ’s economic growth (or contraction). Faster growth in the gross domestic product (GDP) expands the overall size of the economy and strengthens fiscal conditions.

A high level of unemployment in a country means that such an economy is not using its resources to its full potential. At the same time, it would negatively impact individual disposable income that will result in lower demand. It affects the commercial aspect of an economy significantly. This phenomenon is markedly noticed in the existing economic environment in India.

 

The individuals not only lose income but also face other hurdles financially as well as mentally. Government expenses extend further than the provision of benefits to the loss of worker output, which  eventually reduces the gross domestic product (GDP) which in turn leads to economic issues and then poverty. It will lead to lower GDP growth and fall in tax revenue for the government.

When the overall prices of goods and services increase in a given period, it is known as inflation. It happens when even though the prices of goods and services are rising the general income level of consumers stays the same. Therefore, individuals have less money at their disposal. Small businesses and cottage industries are also affected as prices of raw goods and labour increase, resulting in smaller profit margins.

 

The propensity for the price level to rise over time is referred to as inflation. Inflation boosts prices and has the potential to reduce the purchasing power of consumers. People buy more than they need to avoid paying higher costs tomorrow, which drives up demand for products and services. Suppliers are unable to keep up. Worse still, neither can salaries. As a result, most individuals are unable to afford common products and services. Inflation reduces the value of pensions and savings.

Government policies also play a huge role in influencing the economy of a country. Government policy can have a major influence on the economic environment. This can include fiscal or monetary policy. An example of monetary policy is a reduction in interest rates on bank loans which encourages consumers’ demand for loans. An example of fiscal policy would be when the government decides to reduce income tax.  Both of these policies attempt to gradually increase individual disposable income and encourage consumers to spend more, thus boosting commercial activities.

It can influence interest rate, taxation and a rise, which tends to increase the borrowing cost. Consumers will spend less if the interest is higher but if the interest rate is lower it might attract investments. In general, a government’s active role in responding to the economic circumstances of a country is for the purpose of preserving important stakeholders’ economic interests. 

The banks are considered to be one of the most crucial aspects of the Indian economy. As a consequence, any reforms in this sector will have a huge impact on the economy.

 

The banking sector plays a vital role in the betterment of the economy. By boosting the quality of financial services and increasing money accessible, banking sector openness may directly improve growth.

India has a mixed economy where both the private and public sector plays a significant role. While the public sector plays a valuable role in carrying out plans and reforms, developing infrastructure and building a strong industrial base, the private sector is responsible for generating employment opportunities. About 80% of the population is working in either organised or unorganised private sectors.

 

The public sector promotes economic development at a rapid pace by filling gaps in the industrial structure. It reduces the disparities in the distribution of income and wealth by bridging the gap between the rich and the poor. Agriculture and other activities like dairying, poultry come under the private sector. It plays an important role in managing the entire agricultural sector.

Briefly, Balance of Trade (BOT) is the difference between the money value of a country’s imports and exports of material goods only whereas Balance of Payment (BOP) is the difference between a country’s receipts and payments in foreign exchange. When the exports are greater than the imports, it leads to a favourable trade balance. It means there is a high demand for its goods offshores, and that increases the demand for its currency.  On another hand, when the outflow is greater than the inflow, there is a current account deficit.

 

BOT records only merchandise and doesn’t record transactions of a capital nature. BOP records transactions relating to both goods and services. BOP is a true indicator of the economic performance of an economy. 

The consumer is confident about his purchasing habits or decisions when they know they have income stability, and income is stable when the overall economy of a country is. It also affects the markets. For instance, if manufacturers and retail stores detect weak consumer confidence, they have to manage their inventory and cut back on production. Therefore, the economy will experience a slow down and ultimately, recession. A stable and growing economy usually boosts a consumer’s confidence.

 

The confidence of consumers impacts their economic decision and hence is a key indicator for the overall shape of an economy.

 

Role of Economic Policies

The basic purpose of economic policy is to help their country thrive economically through determining tax rates, money supply, government budgets, and interest rates, among other things.

 

Apart from the components of the economic environment, economic policies introduced by the government can also have an impact on markets. The components of economic policies are mentioned below.

 

Liberalisation

Liberalization is a broad phrase that refers to any process in which a government removes limitations on some individual person activities. It occurs when something which used to be banned is no longer banned. In simple language, you can say that Govt. eliminates regulation on private firms and trade.

 

Earlier it was restricted by the government for the production of goods and there is various permission that has to be taken from Govt. Due to this, there was a strong influence of the government in business.

 

This refers to when a state lifts the restrictions imposed on private business ventures so as to enable them to continue their operations without any hindrance and to facilitate economic growth. For instance, in 1991, the government of India removed some previously enforced restrictions on Indian companies. This includes –

• Removing almost all licenses except for a few

• Freedom in setting the price of products and services

• Reducing tax rates

• Relaxation on import and export of goods

• Allowing foreign investment in India

Some features of liberalisation in India are:

• Abolition of the existing License Raj in the country.  

• Reduction of interest rates and tariffs. 

• Removing the state sector’s monopoly from several aspects of our economy.

 

 Privatisation

In general, privatisation involves transfer of all national economies from the public to the private sector. Privatization can take multiple forms, one of which is the ‘partial or total denationalisation of assets.’ Disinvestment of government’s equity in PSU’s and the opening up of hitherto closed areas to private participation is the meaning that economics generally specifies.

 

The privatization of government assets and functions are seen to generate savings for taxpayers by increasing efficiency, improving incentives, and reducing waste. 

This refers to when industries in the private sector are given more roles and the participation of the public sector decreases. Toward this, the Indian government took several steps like – 

• Migrating public sector organisations to the private sector

• Setting up a board to manage those public sector enterprises that are not performing well

• Selling off government-owned stakes to private organisations

Recently, The Centre had proposed to privatise the Indian Overseas Bank (IOB) and the Central Bank of India.

 

A recent example of privatisation would be when the Indian government opted to privatise Bharat Petroleum Corporation Limited in November 2019.

 

Globalisation

Globalisation refers to something that encompasses or connects the entire world rather than being limited to a single country.

 

We exist in a world that is now constantly linked. Our everyday lives are strewn with the imprints of other cultures, communities, and economies. The smartphone we use may be made in China, the clothing we wear could be made in Bangladesh, and the fast-food places we frequent could be from a little state in the United States.. It determines how quickly globalisation rates can move by allowing countries to expand their links for mutual benefit with other countries.

 

This refers to when the economy of a particular nation integrates with the world or global economy. This is done via increased trade with other countries, the use of technology, foreign direct investments, etc. The Indian economy was globalised in 1991 when it faced a severe economic crisis.

 

Impact of LPG Policies in India

The above economic policies were adopted by our government when India went through a major financial crisis in the year 1991. These policies impacted the business environment of our country in several ways. These include – 

• Indian companies faced increasing competition from foreign businesses.

• They had to adopt new technology into their business to keep up.

• Indian industries became more market-oriented, which means that they started manufacturing products based on customer demands.

• Companies focused on developing the skills of their employees. 

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What is the Direction?

Directing is a significant part of every organisation. It refers to the process of instructing, guiding, and overseeing people’s work. It helps people work effectively and efficiently towards the achievement of the organisational goals and objectives. The direction does not include a single activity but is a group of multiple functions. It provides supervision, communication, leadership and motivation. Management involves overseeing subordinates at work and supervising them. 

Communication refers to the process of exchanging ideas and information to create understanding. Motivation means inspiring people to work with confidence. Leadership refers to guiding and influencing people to do in the desired direction.

What is Leadership?

Leadership refers to the process of motivating and inspiring people to work. It is essential for the realisation of an organisation’s goals. It includes influencing people to work for the achievement of a plan or objective. It involves creating an inspiring vision for the future. 

Leadership plays a vital role in direction. A good leadership integrates the interests of an organisation with the personal goals of its workers. A leader influences the behaviour of the workers in various ways. He is responsible for setting a clear vision, motivating the employees and building their morale.

Characteristics of a Good Leader

Leadership is an essential element of management. A person must possess the qualities of a leader for the smooth functioning of the business. A good leader unites the best qualities of his workers and concentrates them for the achievement of organisational goals. The following are the 10 characteristics of a good leader:

Communication

Communication is the most critical tool for success in an organisation. The characteristics of a good leader include effective communication. A leader is responsible for transmitting a variety of information to his workers. Good communication skills can help a leader in developing a better understanding among the employees.

Honesty and Integrity

A leader is successful when he sticks to core beliefs, values and ethics. Integrity is doing the right thing, which is important for the success of an organisation. True leadership demands being fair and honest every time irrespective of the situation.

Gratitude 

Gratitude helps in increasing self-esteem and reducing depression and anxiety. Giving thanks at work can help in motivating the employees to work hard. A person is more willing to work under an appreciative leader than a thankless boss.

Influence

Influencing refers to the ability of convincing people through emotional and logical appeals. An effective leader must influence and inspire people with authenticity and transparency. Influence is different from manipulation, and it requires trust-building and emotional intelligence. 

Respect

Every employee wants to be treated with respect. A leader must respect all his workers to ease tension and conflicts. This helps in building trust and improving the effectiveness of the employees. To gain respect, a leader must value his employees and communicate more with them.

Creative and Innovative

Creativity and innovation are equally important characteristics of leadership. In the modern, fast-paced world, constant innovation and creative ideas are essential for a business to succeed. A leader must think out of the box. He should have the potential to turn his goal and innovative ideas into reality.

Courage

Leadership involves a vast amount of courage. A good leader must be able to voice his new ideas and provide feedback to reports. He must be able to flag concerns for someone with a higher authority. A leader must never avoid conflicts or problems but face them with courage.

Learning Agility

Learning agility refers to the ability to know what to do in a new situation. It is essential for the success of an organisation. It involves learning from the experiences and applying those lessons in the next unfamiliar situations. The traits of a good leader include learning and having strong learning agility.

Self Awareness

A leader needs to understand himself first to lead others. A person who knows his own strengths and weaknesses can increase his efficiency and become an excellent leader.

Vision and Purpose

A good leader is known for his vision and purpose. He develops a vision and inspires his followers to work towards the goal. Sharing his vision helps his followers see the bigger picture and motivates them to work harder. Having a clear vision is among the most important qualities of a great leader. 

Several traits theories of leadership are essential for leaders to abide and follow. This article includes all the crucial attributes of a leader. Leaders are the pillar of any organisation, and the qualities of an effective leader help the business prosper.

What is Equity? Market Value, Book Value

In simplest terms, equity meaning involves ownership in an organisation. As corporations issue shares in the secondary market to raise capital, investors provide the required finance through those shares.

As a result, they gain ownership in a company proportionate to the number of shares they have invested in. 

However, equity refers to the monetary compensation that shareholders will receive in case an organisation decides to liquidate its assets. Therefore, equity is primarily the difference between total assets and total liabilities of a company.

In addition, equity also indicates the financial performance and health of a company. It is an important marker that investors use before investing their capital in any corporation. 

What is the Definition of Equity? 

Equity definition is mainly the value of an asset that an investor invests in after all its associated debts are cleared. Therefore, one can relate equity to ownership of the asset that an investor acquires through buying shares of a corporation. Besides, it is a marker of the stake of an individual in an organisation’s assets. 

The simplified formula that denotes equity definition accounting of a company is – 

Shareholders’ equity = Total assets of a company – Total liabilities of a company. 

For example, let’s consider that a company XYZ issues shares in the stock market. Through the equity balance sheet of XYZ, it is clear to investors that it has a total asset of Rs.200. On the other hand, investors have the knowledge that the total liability of XYZ is Rs.125. Therefore, equity of XYZ is Rs.75.

As a result, the shareholders of XYZ have claims to Rs.75, which is the value of that company. 

What Does Brand Equity Mean? 

Brand equity definition is essentially an improvement upon the original definition of equity and contains several factors. Companies usually rely on consumer perception and the value of their commodities to determine equity. 

Therefore, students who want us to define brand equity should know that it is the value that a company generates. For instance, let’s get back to the example of company XYZ. Consider that it produces a very popular product that is easily recognisable and distinguishable among its competitor products. 

As a result, the additional value that XYZ generated from the premium product is the brand equity meaning. Therefore, consumers are likely to buy quality products at a higher price than from different companies. The excess value that XYZ creates typically refers to brand equity. 

However, there are several types of equity that students should keep in mind to understand the nature of equity investment. 

What are the Types of Equity? 

As we now know, equity is primarily the difference between the total assets and total liabilities of a business organisation. Therefore, it is mainly the figure that remains from the subtraction of current/non-current assets and current/non-current liabilities. 

Moreover, equity can be classified into the types as stated below – 

• Book Value – The book value of equity mainly refers to the accounting perception of equity. This typically relates to the figure that accountants of a firm derive from balance sheet calculations. Therefore, book value deals with equity that is reflected on an organisation’s financial statement. 

First of all, book value considers current and non-current assets and liabilities. For instance, a company’s assets are cash, inventory, prepaid expenses, and fixed assets. Additionally, it also includes accounts receivable, intellectual property, and intangible assets. Besides, book value also takes into account the current and non-current liabilities. These mainly involve credit, short-term and long-term debt, and other fixed financial obligations. 

For example, let’s assume that Big Bazaar has a shareholders’ equity of Rs.1,000. On top of that, this company has issued 100 shares in the securities market. Therefore, the book value of equity for Big Bazaar is Rs.10. 

• Market Value – Contrarily, the market value of equity implies the financial aspect of equity in the share market. However, market value of equities differs from book value as the former indicates the present value of equity in the market.

Besides, Market value is heavily influenced by the level of competition and information related to a company’s range of products. Typically, the method to calculate market value of equity involves the multiplication of trading price and number of shares. 

Therefore,

Market Value of Equity = latest share price X outstanding shares in the market. 

Let’s consider that Google has 5,000 outstanding shares in the market. An investor Ms. Seema finds that the market price of Google shares is Rs.100. Therefore the market value of equity is Rs.100 X 5,000 = Rs.5,00,000. 

Moreover, market value of equity deals with the financial information currently available to investors. Book value of equity typically deals with financial information from a specific period of time in the past. 

Therefore, both book value and market value of shares reflect the financial condition of a company. On the basis of this information, an investor decides the risk factor of investment in a particular company. As a result, these values send signals to investors as to whether it is financially safe to invest in an organisation. 

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