Category: Commerce Notes PPT

Money is the most practical and basic requirement to start a company. The capital structure is the initial fund or money that one needs to start initial business activities. It is the foundation brick of business finance, depicting how you can use different sources of money to initiate growth and finance overall operations. To raise long-term business funds, an arrangement of money from different sources is needed, and this is known as the capital structure. It refers to the combination or proportions of preference share capital, equity share capital, long-term loans, debentures, retained earnings, and other funding sources in the total capital amount which a firm raises to run its business.

What is Capital Structure?

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A careful and intelligent balance between debt and equity is known as the capital structure from a technical point of view. Funds can be divided into two sectors. The first one is owner’s funds, followed by borrowed funds. The answer to the question of what is capital structure is that capital is a mixture of both, which a business uses to finance its day-to-day operations, growth, and assets. Owner’s funds or Equity includes Preference share capital, equity share capital, retained earnings, reserves, and surpluses. While debt or borrowed funds include public deposits, loans, and debentures. 

When Does a Company Have Greater Investor Risks?

The true capital structure meaning is that it is a combination of long-term fund sources. Whenever the proportion of equity and debt maximizes the value of the company’s equity share, it is said that the capital structure is optimal. However, a company is said to have an aggressive capital structure if it is heavily funded by debt. Such firms have a greater risk to investors, but this can also be the primary source of the company’s growth.

Comparing Equity and Debt

Debt vs. equity is a long-fought battle, and now we shall look into it in detail. On the other hand, debt is far riskier than equity because of the repayment of capital with assured interest that the lender earns. Another reason that supports the fact that debt is riskier is that debt interest is a tax-deductible expense. Therefore, it brings down the business’s tax liability, and after-tax dividends are paid out of profit. Liquidation of the company can occur in case of any failures related to repayment of the principal amount or interest payment. Debt undoubtedly adds to the financial risks faced by a business and is more dangerous. 

Factors Affecting Capital Structure

There are various factors determining capital structure, and we shall look into each of them in detail.

• Position Of Cash Flow: Debt capacity is the company’s ability to pay loans and expenses. If the company has a fluent cash flow position, then they may raise funds by issuing debts as they can be repaid in some time. The ability to meet financial obligations is affected if a firm operates in a volatile financial environment. 

• Interest Coverage Ratio: It is the ratio between EBIT or earnings before interest and tax and the interest itself. The company can have more borrowed money if this ratio is high.

• Having Control: The company must issue debts as it does not cost dilution of control. Public issues can make the firm vulnerable and destroy its reputation. So there’s a constant turmoil whether to pay more for capital or give up control.

• Investment Or Return: If the rate of interest on debt is lower than the return on investment, then the business can increase its finance through borrowed funds. But the company should go for equity if they are not sure if they can cover the fixed cost of interest. 

• Floatation Costs: This helps in determining the finance sources after you understand capital structure meaning. The floatation cost includes prospectus cost, broker’s commission, underwriter’s fee, security issuing costs, and more.

• Stock Market: Determining securities is influenced by stock market conditions. Investors are ready to invest in equity shares and take a risk during the boom. But during times of depression, it’s exactly the opposite. 

• Flexibility: It can be incorporated by issuing preferences and debentures. A good financial plan should have the scope to contract or expand whenever required. Hence it should be sound enough and flexible. 

• Rate Of Tax: If the rate of tax is high, then debts are preferred over equity as interest on debt is allowed like a deduction. Again, if the rate is low, then equity gets the first preference. 

Supply, Supply Curve, and Change in Market Equilibrium:

Market equilibrium study is a harder challenge, and it gets tougher when an individual has no idea about several fundamentals of the economic concepts. Thus, it is necessary to have an understanding of all the concepts involved, especially the ones that are more important, like supply and demand.

Starting with the concepts, what do you understand by the supply and supply curve?

Supply is the total quality of all the goods that the seller willingly sells or offers at a sale at:

Furthermore, a supply curve is a graphical representation that is useful to explain the supply schedules (also called supply function) effectively. It acts as the logistic planning of the points showing the amount of well supplied at different prices. According to the Law of Supply, the slope of the demand curve is upwards moving.

Furthermore, let us move on to a supply function (supply schedule). A supply schedule (function) is the mathematical representation of the supplies of the total number of goods and different factors that help in determining the supply.

Qd = f(Px, Y, COP, C, T, Inp, …)

The major determining factors in a supply function are as follows:

• Px – The cost of the product

• Y – The consumer’s income

• COP – Cost of production

• C – Number of sellers OR total competition

• T – Tax

• Inp – Production’s input

Market Equilibrium:

Moving ahead, let us discuss the definition of the market equilibrium.

The market equilibrium is the pair of price and quantity in which the demanded quantity equals the supplied quantity. The representation of Market equilibrium is possible when the market demand and market supply intersects, keeping the other factors constant.

Changes in Market Equilibrium and its Impacts –

Further, we will start with the discussion on changes in market equilibrium, changes in market price, changes in equilibrium price, and other defining factors. Also, we can explain the changes’ impacts on supplies, prices, and commodity output when the commodity demand stays constant.

Starting with the examination of the increase in supplies, consider that last year India experienced a good monsoon season, thus yielding higher excess and surplus in the number of wheat crops. This would have directly raised the wheat supply across the Indian market, causing a right shift to the supply curve.

Additionally, the increase in wheat supplies has an impact on the equilibrium quantity, and the equilibrium price is mentioned in the below graphical representation.

Generally, the demand curve (DD) and the supply curve (SS) intersects at point E. This is the factor that determines that OP is the equilibrium price’s measurement, and OQ is the measurement of equilibrium quantity.

Furthermore, due to the better monsoon season, there must have been a result of bumper wheat crops, thus the supply curve of wheat shifts towards the right from the line SS to the new one, i.e., S1S1. Now, S1S1 (the latest supply curve) intersects DD (the given demand curve) at point E1, determining OP1, the new lower equilibrium price, and OQ1, the larger quantity.

Thus, the increasing supply resulted in the falling price and increase the quantity of equilibrium.

But, rapid enhancements in the technologies, reduced prices for the factors of commodity production or lowered excise duty on any commodity results in the increased commodity supplies.

For example, given, the recent improvements in technology for personal computers’ manufactures served for increasing the personal computers’ supplies. This resulted in the shift in the supply curve towards the right side. Thus, it also resulted in the lowered-down prices of personal computers.

Business activities refers to all those economic activities, whether directly or indirectly  involved in the creation of goods and services for satisfying the consumer needs and ensuring profit earning through customer satisfaction. Business activities are often divided into operating activities, investing activities, and financing activities. Among all the business activities, operating activities tend to play a significant role because these activities directly influence the company performance. 

Based on function, business activities are classified into broad categories namely Industry and Commerce. 

Industry is engrossed with the production, processing or manufacturing of goods. These types of business units are known as “ industrial enterprises”. The Industrial enterprises produce consumer goods as well as machinery and equipment. On the other hand, commerce activities include all the activities, which are necessary for storage and distribution of goods and services. Such units are termed as “commerce enterprises”. The commerce enterprise provides trading and service activities like banking, insurance, transport, and warehousing. 

Read the article below to know types and categories of business activities in brief.

What is Business?

Business is described as an organization or entity engaged with industrial, commercial, or professional activities. Businesses can be for-profit items/services, or they can be non-profit groups that function to fulfill a humane mission or further a social cause. The term “business” also refers to the organized activities and efforts of individuals to build and sell goods and services for profit. Businesses range in scale from single proprietorship to multinational corporations. 

What are Business Activities?

Business activities refers to all those activities that are involved in producing goods or providing services. Business activities reflect the efficiency of organizations with respect to the consumption of resources in the production process or the number of advanced resources, give a representation of financial and economic activities, and also reveal the potential and internal capabilities of an organization.

Understanding the Types of Business Activities

The business activities are classified into three different types namely operating activity, investing activity, and financing activity. Let us discuss the three types of business activities briefly:

Operating Activities: Operating activities refer to all those business activities that are directly or indirectly related to the provision of goods and services. As such they have a direct impact on cash flow, and eventually on income.

Investing Activities: Investing activities refers to all those activities that aimed to be capitalized for more than a year. This includes capital expenditure such as purchase of long term assets or real estate.

Financing Activities: Financing activities refer to all those activities that fund the business but are not directly related to the revenues from goods and services. Common financing activities include bonds, loans, and share issues.  

Classification of Business Activities

The business activities are broadly classified into two categories namely:

1. Industry 

2. Commerce. 

Let us have brief information about both the terms.

1. Industry

The industry sector is defined as a sector where raw material gets transformed into beneficial products. An industry may create capital goods or consumer goods such as cloth, radio, bread, butter, etc. The industry can be classified into three categories namely: 

1. Primary Industry

2. Secondary Industry

3. Tertiary Industry

Let Us Understand Briefly About the Three Types of Industries:

Primary Industry

Primary industry is known as extractive industries. It involves activity connected with the production of wealth directly from natural resources such as water, air, land, etc. The primary sector involves activities like processing and extraction of natural resources etc. These primary industries are further divided as:

• Extractive Industry: Industries that draw out or extract products from natural sources are known as Extractive Industry. Some of the examples of extractive industries involve lumbering, farming, mining, hunting, and fishing operations.

• Genetic Industry: The industries that involve the ventures of breeding and rearing of living organisms, such as plants, birds, animals, etc. are known as genetic industry. For example, rearing of cattle dairy farms or rearing of plants in the nursery is covered in the genetic industry.

Secondary Industry

The industry that uses raw materials as input and produces finished products as output is known as the secondary industry. Secondary industries are divided into two parts:

• Manufacturing Industries: These industries are involved in the process of transformation of semi-finished goods or raw materials into finished goods.

• Construction Industries: These industries are involved with the construction of dams, roads, buildings, etc. These industries use the commodities of manufacturing industries such as iron and steel, cement or lime.

Tertiary industry

Tertiary industries are regarded as providing services that promote the flow of services and goods. This industry helps in the actions of the primary and secondary sectors.

2. Commerce

Commerce refers to the sum total of all the activities related to the placing of products before the ultimate consumers. It provides a significant link between the producer and consumers of goods. The term “ commerce” is defined as an activity that aims to remove the hindrance in the process of exchange. Commerce includes all those business activities which are related  to the sale and purchase of goods and services and facilitate their availability for consumption and use through trade, banking, insurance,and warehousing. Commerce is classified into two different categories namely:

1. Trade

2. Auxiliary to trade

1. Trade

Trade is an essential part of commerce. It involves selling and buying goods and services. There are two types of trades namely – Internal and External Trade.

• Internal Trade: It refers to the selling and buying of goods or services within the geographical contours of a country. Internal trade is also known as domestic trade or home trade. Internal trade is divided into two types: Retail trade and Wholesale trade.

• External Trade: External trade is referred to the selling and buying of goods or services beyond the geographical contours of the country. In external trade, the market is vast. External trade is of 3 types: export trade, import trade, and entrepot trade.

2. Auxiliary To Trade

In terms of business, the term “Auxiliary to Trade ” refers to all those activities which provide support to performing activities related to trade and industry. In fact, the auxiliary to trade provides a facilitating base to industry and trade. Such activities include insurance, banking, warehousing, advertising, and communication.

Interrelationship Between Industry, Trade, and Commerce

The three branches namely Industry, Trade, and Commerce are associated with each other. Each branch is dependent upon the other for the achievement of the aims and objectives of the business. For example, industry refers to the production of goods and services, trade refers to the sale and purchase of products, and commerce refers to the arrangement for their distribution. Industry can only succeed if goods are marketed, and without the production of goods, trades and commerce are not possible. Hence, trade provides necessary support to both industry and commerce. Therefore, industry, trade, and commerce are interrelated to each other and cannot be operated individually. Service facilities also provide necessary enhancement to trade.

Tally Intro

Intro to Tally can be determined as the system of both business accounting and also the management of inventory. The basic and advanced concepts are provided with the tally intro. It is considered that before working in tally one must know the basics of accounting. Providing accuracy, carrying out business transactions efficiently is not just time-saving but also makes the calculations simple and easy for the management.

What is the Tally?

Any company’s day to day business data is recorded in an ERP accounting software package which is known as the tally. In India, this ERP accounting software is used in every financial accounting systems, be it small or large scale enterprises. There are various shortcut keys for duplicate entry in tally.

Combination of function keys or voucher keys in tally is tabulated below; this includes credit note shortcut key in tally and shortcut key for optional vouchers in tally

Intro to Tally Basics

Here is the list of the tally voucher entry shortcut key including the shortcut key for an optional voucher in tally and shortcut key for duplicate entry in tally in the following table:

Tally Voucher Entry Shortcut Key

These are the voucher entry shortcut keys of tally used widely. To excel in tally one must know the entire tally voucher entry shortcut key by heart.

Tally is one of the most important software used for any kind of business. It makes the task easy and time-saving and also error-free with tally voucher entry keys and also with shortcut keys for vouchers in tally. There are also shortcut key in Tally for duplicate entry which solves various business transactions and online functions.

The connotation is an expression or secondary meaning of a word, which is expressed by a word in addition to its primary meaning. It paints a picture or invokes a feeling. It is created when you mean something else, something that might be initially hidden. Words can be divided into negative, positive, and neutral connotations. A rich vocabulary allows you to choose the right words to express yourself. Choosing the right words is essential while you communicate. Although two words may have the same meaning, their connotations may vary. The words you choose significantly change the meaning of a sentence.

Connotation Definition

We can define connotation by an associated meaning of a word suggested apart from its explicit or primary meaning. The connotative meaning of a word is based on the shared emotional association with a word. Now, there can be either positive, negative, or neutral connotations. A connotation is an additional meaning to a word and the examples are endless. We have mentioned a few connotation examples below.

Connotation Examples

We learned above what is connotation now let us take a look at some connotation examples. Like we can say a possible connotation of “home” is “a place of warmth, comfort, and affection”. Again we have a colour blue, but it is also a word used to describe a feeling of sadness, as in ‘She is feeling blue.’. 

Below are a few connotation examples.

• Strong, tough, sturdy, hard.

• Proud, confident, arrogant, egotistical.

• Childish, childlike, young, youthful.

• Rich, loaded, privileged, wealthy, affluent.

• Broke, destitute, impoverished.

• Frugal, economical, stingy, cheap.

• Tempting, attractive, interesting.

• Liar, storyteller, fibber.

Negative Connotation

The negative connotation also called unfavourable connotation, is the word describing the negative qualities or the disabilities or are disrespectful of a person. It is a bad feeling or negative vibes that people get when hearing a specific word or phrase. It is a word whose connotation implies negative emotions and associations. In a sentence “the aroma of my grandmother’s cooking”, if we change “aroma” so that it now reads “the stench of my grandmother’s cooking,” the meaning changes completely. Both “aroma” and “stench” instead of having the same meaning smell, “stench” has a negative connotation, thus, the meal sounds much less appealing.

Logic

By logic, the connotation is roughly synonymous with intention. Connotation often differs from denotation, which is more or less synonymous with extension. Otherwise, the connotation of the word may be thought of as the set of all its possible meanings. The denotation of a word is the collection of things it refers to. Its connotation is what it implies about the things it is used to refer to. The denotation of a dog is (like) a four-legged canine carnivore. Hence saying, “You are a dog” would connote that you were bad rather than denoting you as a canine.

Importance Of Connotation

It is important to note that not all are solely ‘positive’ or ‘negative’ connotations, depending on how a word is used, it can connote different things. Thus, it is one of the most critical things to consider when it comes to word choice, both in literature and everyday conversation. The emotions or meanings associated with words can be everything. While writing or speaking, connotation places a style to clearly express one’s intentions. They can obtain certain emotions or reactions or help to provide distinct impressions of things. Mutually, choosing words with the wrong connotation can produce an undesired reaction or emotion and misrepresent one’s intentions.

Solved Examples

Q1: Give an example to explain the difference between positive and negative connotations.

Answer: Positive connotation: My new neighbour is a mature woman.

Negative connotation: My new neighbour is an elderly woman.

‘Mature’ conveys the connotation of dignified, whereas, ‘elderly’ sounds “old.”

Fun Facts

A stubborn person can be described as being either strong-willed or pig-headed. Though having the same meaning, there lies a difference in placing the words, strong-willed connotes applause for the level of someone’s will, whereas pig-headed connotes adamant behaviour and frustration in dealing with someone. It is often helpful to avoid words with strong connotations when striving to achieve a neutral point of view.

IAS 37, details about the Provisions, Contingent Liabilities and about the Contingent Assets these outlines the accounting for the provisions (liabilities of uncertain timing or amount), (possible obligations and present obligations which are not probable or not reliably measurable)

Contingent Liabilities Meaning

A contingent liability is a specific type of liability, which may occur depending on the result of an uncertain future event. The contingent liability is then recorded if the contingency is likely the amount of the liability will be reasonably estimated by it. The contingent liability may be acknowledged in a footnote on the financial statements unless both the conditions are not met. The lawsuits which are pending and also the product warranties are the common contingent liability examples as their outcomes are not quite certain. The accounting rules for recording this contingent liability vary depending on the estimated dollar which amounts to the liability and is the likelihood of the event that is occurring. The accounting rules ensure that the financial statement readers will receive sufficient information.

Contingent Liabilities Example

Assuming that concern is facing a legal case from a rival firm for the infringement of a patent. The company would lose 3 million if they lose the case. The liability is both possible and easy to estimate thus, the firm posts an accounting entry on the balance sheet to debit that is to increase the legal expenses for 3 million and to credit that is to increase the accrued expense 3 million.

This accrual account permits the firm to immediately post an expense without the need for a quick cash payment. If they lose the case then the debit is applied to the accrued account and the cash is credited and is reduced to 3 million.

Contingent Assets Meaning 

Contingent asset is a possible economic benefit thatA contingent is dependent on thatfuture events that are out of a company’s control. Without knowing for sure whether these gains will materialize, or will be able to determine their economic value, these assets are not to be recorded on the balance sheet. While, they can be noted down in the adjacent notes of the financial statements, provided that certain conditions are met well. A contingent asset can also be termed as a potential asset.

Contingent Assets Example

A company involved in a legal case with the sheer expectation to receive the compensation which has a contingent asset as the outcome of the case is not yet known and the amount is yet to be determined.

Company A Ltd. has filed a lawsuit against Company B Ltd. for infringing a patent case. If there is a good chance that Company A Ltd. will win the case, it has a contingent asset in this matter. This potential asset will generally be disclosed in the financial statement, but will not be recorded as an asset until the case is over and settled.

Contingent assets may also crop up when the companies expect to receive monetary awards through the use of their warranty. Other examples include the benefits that are to be received from an estate or other court settlement. 

Contingent Liabilities in Balance Sheet

A contingent liability is recorded as an ‘expense’ in the Profit & Loss Account and then on the liabilities side of the financial statement, that is the Balance sheet.

A contingent liability is dependent on the outcome of an uncertain future event. A contingent liability is recorded in the records of accounting if the contingency is estimated in probability. Hence, a that future intent liability is recorded in the balance sheet as a form of a footnote.

Concept of Contingent Assets and Liabilities:

IAS 37 defines and specifies the accounting for and disclosure of provisions, contingent liabilities, and contingent assets.

Contingent Liabilities

Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. An example is a litigation against the entity when it is uncertain whether the entity has committed an act of wrongdoing and when it is not probable that settlement will be needed. Contingent liabilities also include obligations that are not recognized because their amount cannot be measured reliably or because settlement is not probable. Contingent liabilities do not include provisions for which the entity certainly has a present obligation that is more likely than not to lead to an outflow of cash or other economic resources, even though the amount or timing is uncertain.

A contingent liability is not recognized in the statement of financial position. However, unless the possibility of an outflow of economic resources is remote, a contingent liability is disclosed in the notes.

Contingent Assets

Contingent assets are possible assets whose existence will be confirmed by the occurrence or non-occurrence of uncertain future events that are not wholly within the control of the entity. Contingent assets are not recognized, but they are disclosed when it is more likely than not that an inflow of benefits will occur. However, when the inflow of benefits is virtually certain an asset is recognized in the statement of financial position because that asset is no longer considered to be contingent.

 

Examples of Contingent Liabilities:

The most common examples of Contingent Liabilities are given below –

• Lawsuit

• Product Warranty

• Pending Investigation or Pending Cases

• Bank Guarantee

• Lawsuit for theft of Patent/know-how

• Change of Government Policies

• Change in Foreign Exchange

• Liquidate Damages