Category: Commerce Notes PPT

In the past few decades, outsourcing has become a hot topic of discussion amongst many business enthusiasts in different countries. Outsourcing is the process of involving a third party or external service provider (who are generally specialists in the work that is being outsourced) to perform the jobs and functions of any company.

 

Outsourcing has been a controversial topic since no one likes their jobs going overseas. But with the right context and if deployed shrewdly, outsourcing can prove to be an excellent measure for a company to better its bottomline and improve efficiencies. Here you can know about the bpo introduction and other aspects related to outsourcing. 

Introduction to Outsourcing

Outsourcing is known to be a standard business practice. There are negotiations and contract signing when a company hires another agency or organization to carry out a portion of their activities like operations, services, etc. Companies today are outsourcing work majorly in information technology that includes programming and application development, technical support, customer services, and call services. 

There are other types of work also which the companies can outsource like manufacturing, human resources functions, financial functions (bookkeeping payroll processing, etc.). Sometimes a company outsources an entire division, for example, the whole IT department, or chooses to outsource just a portion of it. The other names for outsourcing are “contracting out” and BPO (business process outsourcing)

BPO Introduction

BPO or business process outsourcing is done usually to fulfill peripheral or supplementary jobs and functions of a company rather than the core business functions. The services could be technical or non-technical. Any type of company, a start-up or a  Fortune 500 company, is outsourcing their work and the demand for BPO has been growing over the years.

BPO is Divided into Two Types of Services:

1. Back Office – Internal business processes like purchasing, billing, etc. are the back-office services.

2. Front Office – The services which deal with the customers of the contracting company are termed as front office services. Few examples are marketing, technical support, etc.

BPOs could also combine these services so that they work together rather than independently.

The locations of the vendor divide the BPO industry into three categories. To optimize the total process, a business can combine all three categories:

1. Offshore – This type of outsourcing is done outside of the company’s own country. For example, a company in the U.S. can outsource its work to a third party in India.

2. Nearshore – When vendors are located in countries close to the outsourcing company, it is said to be a nearshore outsourcing. For example, for the United States, outsourcing to Mexico would be considered a nearshore.

3. Onshore – In this type of business process outsourcing vendors belong to the same country as that of the company, though they might be in different cities or states. For example, a company in San Francisco, California, U.S could outsource its work to another company in Santa Clara, California, U.S or Huntsville, Alabama, U.S.

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How Does Outsourcing Work?

Outsourcing involves focussing both on business partnerships and logistics. More than the SLAs (service level agreements), outsourcing is a lot about managing relationships. It is a partnership and not just a purchasing project. It is vital to maintain a secure and trusting relationship with the company you outsource to. This effort is more complicated than merely establishing service agreements.

Experts in outsourcing lay a lot of emphasis on the exit clause of a service contract. Both parties in an outsourcing activity must know when the contract ends and that all responsibilities and obligations have been met before the contract due date.

Why Should Business Organizations Outsource?

If the number 1 goal of the executive team member is to grow the business, irrespective of being small, medium or large, then Outsourcing is one of the best strategies for team members to invest their time and energy.

For any small or medium business, growth is a very important factor, if not the most important. The day the business stops growing, the team ends up falling into a deep valley. With a limited budget, the million-dollar question is: 

How do you find those all-stars who can take the organization to the next level?
How to get on a path to consistent growth without the extreme stress and headache associated with growing a business? The answer lies in Outsourcing.

For example, let’s say the CEO of a recently founded startup is looking to develop far more efficient and smooth workflow strategies than the existing one so that the team can focus more on your core business activities. The right IT partner can help this startup achieve this goal by understanding and crafting strategies that best suit the startup organization’s needs. And this in turn gives the choice to the CEO to focus only on activities that form the core aspect of the business. You also get the opportunity to develop your services, refine your product or provide better support. Outsourcing lets the team focus on what they do the best,a.k.a, Running the business.

Conditions That Indicate the Right Time for outsourcing

1. When the Need to Focus on Business is Critical.
   Adding people on the team simply to do tasks that are mundane, time-consuming and expensive limits the growth of the organization. Investing the time to attract, hire, train and retain talent in areas outside your core competencies, the executive team is using up the valuable resources that could otherwise be used to focus on business-critical activities. In this scenario, Outsourcing may be the best bet. 

Many outsourcing service providers are equipped to help with tasks outside the core competencies of the organization. Suppose even if the team is really great at accounting and solving the urgent issues that come up suddenly, will that help in growing the business? If not, then going to a third party and getting the work outsourced makes a lot of sense and allows the team to focus on the core offering of the organization.

2. When the Team Requires More Time for Strategy Building.
   Productivity doesn’t remain the same throughout the day. If a majority of the time is spent by key team members in doing the transactional task rather than strategic work, then it is not an efficient use of time.
   
   Rather than focusing the time and attention of the team members on non-core tasks that are approaching deadlines, it is better to hand those tasks over to a third-party service provider. This way it is possible to engage the team in priority based meaningful work that drives business growth. 

3. When the Organization Prefers to Lower the Costs.
   It is imperative for businesses to reinvest the money in activities where it would make the most impact. Maybe the organization needs to increase the budget of marketing in order to get more sales and generate more revenue. The team could cut down the unnecessary costs by opting for outsourcing that fits the bill. Lowering costs is one of the biggest benefits of outsourcing non-business activities to third-party service providers. This could give the space to free up more budget that can be reinvested in revenue-generating activities of the organization.

Advantages of Outsourcing

Some of the major benefits outsourcing brings to a company are:

• Expertise and Swiftness – Most of the time vendors are those who specialize in the area that is outsourced to them. The vendors usually possess better equipment, specific talents, and skills which are not present in the contracting organization. Hence the company which outsources can get more quality work done in less time.

• Companies can Concentrate on Core Processes – If a company outsources its supporting work to vendors, it can devote more time to focus on its core business processes. It brings about more quality work and in turn, more profit to the organization.

• Share Risks – Risk analysis is one of the most crucial parts of a project campaign. If a company can outsource a part of that work to vendors who know that area, they can share the risk mitigation responsibility. Since the vendors are experts in their areas, they can formulate an enhanced risk mitigation plan.

• Reduce Costs – Since you outsource, your need for hiring diminishes. This reduces the heavy load of recruitment and operations costs. Outsourcing piecemeal work is always cheaper than hiring full-time staff. Your ongoing investments in internal infrastructure are also reduced due to outsourcing.

• Get Work Done Around the Clock – If the outsourced vendor is overseas, your business could run even when you are sleeping. Though initially, logistics could be an issue, you get tremendous benefits with the different time zones and holidays.

• Simplify Project Management and Work Relationships – With outsourcing, the relationship with workers can be contractual and simplified. This could mean better yields. If you outsource work through specialist freelance websites, most of the time, you are provided with a dynamic platform that helps you efficiently manage projects. Things like; when is the work due, when it is done, when the payment has to be made, etc. are all automated through these intuitive platforms which free up your time for more crucial work.

 

The best advantage of Outsourcing is achieving Growth which is the ultimate goal for any organization. And this can only be achieved when the team is free to focus on activities that drive the biggest ROI.

This includes creating new products, developing and refining the service, improving your scalability, strategizing ways to make your systems far more efficient, creating lucrative offers and marketing strategies. Outsourcing to the right partners is one of the most beneficial strategies to stabilize the workflow of an organization and set it on a path of consistent growth.

Introduction

Personal selling is also known as the act of convincing a customer to buy a given product or device. It is also considered to be one of the most costly and effective promotional methods that are ever seen. It is effective as there is a face-to-face interaction observed between the seller and the buyer which helps the seller to change their promotional techniques used as the situation asks for. If you have been wanting to know more about Personal Selling – Concept, Importance, Advantages, and Limitations then now you can check out this article through to get a detailed view on personal selling and the concepts that are involved.

Personal Selling is yet another type of selling initiative by the business companies, a way to persuade the local people to try their products. Personal Selling is surely one of the distinctive methods which are used by the selling strategists to achieve their goal of selling a destined quantity of sales. 

In our discussion, we have included this interesting topic of ‘Personal Selling’, and to further strengthen our knowledge we have discussed the pros and cons related to this.

  

Concept of Personal Selling

Personal selling is face-to-face selling where one person who is the salesman tries to convince the customer to buy a product assigned by the company. It is a promotional activity by which the salesperson uses his or her skills and abilities to persuade people to buy the product thereby in an attempt to make a sale.

Here, the salesperson tries to highlight the features of the product to convince the customer that the product will hold benefits in the long term. However, getting a customer to buy a product is not always the motive behind personal selling, this personal selling is also done to make the customers aware of new products in the market. 

Personal Selling Examples

Personal selling is where businesses use the sales force to sell the product after meeting the customer face-to-face.

The sellers advertise these products through their skills such as attitude, appearance, and specialist product knowledge. The salesperson informs and encourages the customer to buy or at least try the product.

A unique example of personal selling is found in the department stores on the perfume and cosmetic counters. A customer can get advice on how to apply the product, its specialties and can try different related products, these all are guided by the personal selling staff present there. Products with high prices, and with complex features, are often sold using this type of technique. Examples: Cars and many products that are sold by businesses to other industrial customers.

Importance of Personal Selling 

The following points explain the importance of personal selling:

1. Two-Way Communication:

This is the best tool for personal selling. Salesmen can provide necessary information to customers about the company’s offer, and also can collect feedback from customers. He can ask if there are any queries about the product to the salesman present for personal selling. 

2. Personal Attention:

Advertising and publicity are among mass communication tools, and thus personal selling is concentrated and is focused on one individual, this will result in ineffective results. 

3. Detail Demonstration:

Television demonstrations are limited; thus, salesmen can provide a detailed demonstration and can supervise the customer through personal selling.

4. Complementary to other Promotional Tools:

Personal selling supports advertising, sales promotion, and publicity. Personal Selling even removes the drawbacks of advertising and its sales promotion. 

5. Immediate Feedback:

This is the only market promotion technique that provides immediate feedback from the customers. 

Advantages of Personal Selling 

The Advantages of Personal Selling are as follows – 

• This is a two-way communication where the selling agent gets instant feedback from the prospective buyer about their intention to buy. 

• This is an interactive form of selling, which helps in building trust with the customer. While selling high-value products like cars, the customer must trust the product and thus personal selling is needed. 

• Personal Selling is a persuasive form of selling as in this type of sale the customers come face to face with the salesperson where it is not easy to dismiss them, there is an effort of the customer to listen to them.

• Direct selling helps in reaching the audience. 

Limitations of Personal Selling 

• It is an expensive method of selling that requires high capital costs.

• Also, this method involves many labours as it is a labour-intensive method as a large sales force is needed to carry out personal selling successfully.

• The training of the salesperson for personal selling is also a very time-consuming and costly process.

• The method can only reach a limited number of people, it does not provide mass advertisements like TV or Radio ads.

Consumer preference is a significant part of microeconomics. Customer preferences include the concepts of the budget line, utility, indifference map, and indifference curve which are very closely associated with customer satisfaction. In this article, we will have a precise discussion of the various concepts of the consumer preference theory. Common yet important terminologies will also be included in this. The article will further include an analysis of the consumer behavioural patterns and a study on customer taste and preference.

Consumer Preferences Economics

Understanding the behavioural patterns of consumers means understanding the factors guiding the consumer preference in marketing. The central idea goes around with the concept of utility which is defined by the serving range of a commodity in fulfilling the human needs. It refers to the satisfaction derived by a consumer from the using of a particular product or service.

There are two types of utility:

• Cardinal Utility Approach: This is also called Marginal Utility Analysis. This theory defines utility as something measurable in numerical terms. The Cardinal Utility Theory states that utility has to be measured in the unit called ‘utils’. Goods providing higher satisfaction to the customers will get assigned with higher utils than the ones that provide less amount of satisfaction to the customers.

• Ordinal Utility Approach: This is also called Indifference Curve Analysis. This theory states that utility derived from the consumption of a commodity cannot be measured in numerical terms. Various utility levels are described with the help of ‘ranks’ in this case. Goods providing higher satisfaction to the customers will get assigned with higher ranks than the ones that provide less amount of satisfaction to the customers.

Important Terminologies Associated with Consumer Preference Theory

• Marginal Utility: The additional satisfaction derived from the consumption of an additional unit of a good or service is called marginal utility. It is defined as the change brought in the total utility by the consumption of one more unit of a particular commodity.

• Total Utility: The total amount of psychological satisfaction derived from the consumption of a said amount of a particular commodity is called total utility. Hence, total utility is the total of all the marginal utilities derived from the consumption of every successive unit of a particular commodity.

Law of Diminishing Marginal Utility

Understanding consumer preference meaning has a deeper relationship with the understanding of the Law of Diminishing Marginal Utility. It says that with more and more consumption of a particular commodity, the satisfaction of the consumers gets less and less. With the consumption of successive units of a particular commodity, its marginal utility keeps decreasing. This means that the commodity’s total utility increases but at a decreasing rate.

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Indifference Curve 

Bundles of a product making a customer more satisfies are preferred more than other bundles. However, in cases when some bundles provide equal satisfaction to a customer, indifference grows within the customer for the bundles. This makes the consumer fail in preferring one commodity over another. The indifference curve is a graphical diagram representing the bundles that tend to cause indifference in a customer. It is to be remembered that an indifference curve is in all case sloping downwards and is convex to its origin. The higher satisfaction level is denoted by a higher indifference curve.

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Did You Know?

• Indifference map is a collection of several indifference curves.

• Two indifference curves can never intersect each other.

• Both ‘Marginal Utility’, as well as ‘Total Utility,’ are measured in utils.

• For utility measurement, the Cardinal Utility Theory is a quantitative method while the Ordinal Utility Theory is a qualitative method.

Verification in Auditing

Auditing is a systematic examination or verification of assets and liabilities involved in the accounting process. It is usually performed by an auditor to make sure every department records documented transactions and specifically free from any fraudulent activity. Auditing can be done internally and externally. Intra department auditing is more frequently done within the department by either the chief of the particular department or any trustworthy employee. 

In the case of external auditing, an outsider is preferred to cross-check the account books modestly. Importantly, an auditor has to be remarkably sterile in his job without rendering any kind of partiality towards an organization. Verification of assets and liabilities doesn’t only mean reviewing account books but also internal systems or control of an organization.

 

Who Should Initiate Auditing?

However, in India, anyone who is professionally a chartered accountant from The Institute of Chartered Accountants of India (ICAI) can do the auditing independently in any firm. Vouching is reckoned to be the backbone of auditing since it aids in detecting frauds or fallacies to provide enhanced results in balance sheets or income statements. Therefore, this proves the importance of vouching in auditing

Basic Principles in Auditing

There are 7 basic principles which the auditors prominently adhere for a better and profound audition:

1. Morality, Objectivity, and Independence.

It is the responsibility of the auditor, to be honest, and sincere while he is auditing and importantly he is not allowed to favour the organization. He must not indulge himself in any kind of malpractices and must remain unbiased throughout the whole process of auditing. The next major principle is independence. So the auditor is independent and unbiased the whole process of auditing.

2. Confidentiality or Non-disclosure.

The auditor gets full access to the organization’s sensitive financial information. So he needs to respect it.

He cannot let any other party get access to this information unless the law allows it. The organization trusts him entirely so he has to be more careful with their certificates and documents.

3. Capabilities and Skill

The auditor must be qualified in the field of auditing and he must be updating himself about the new announcements and changes. If required he can take training and workshops to know the procedures in a better way.

4. Work Performed By Others

The auditor has many employees who work under him. But then the auditor will be fully responsible even if his workers had worked for him. And so he must be accurate in his work and review it properly.

5. Documentation

The auditor needs to maintain a record of his auditing files concerning his auditing work as it may serve as evidence that the auditor has done his work. And also the clients can check on his work.

6. Assurance and Controls

The auditor must be sure that the financial status of the company is fair and true. He also must ensure all the material information has been recorded properly in the respective accounts.

7. Audit Evidence

To support his final opinion, the auditor himself must collect the required evidence. This collection is made from compliance and substantive procedures

And there are two sources of this evidence, they are internal and external. The external evidence is always more dependable.

Verification in Auditing

Verification in auditing is a mandatory process, which involves active verification of assets and liabilities. For instance, it may demand weighing, identification, and counting of assets. Verification of assets and liabilities verifies the following conditions:

• Precise recording

• Validity

• Legal ownership and possession

• Freedom from hindrance or encumbrance

• Valuation of the asset. 

 

Solved Example

Q. Explain the physical verification process involved in Auditing.

Answer: Certain things has to be physically verified to preserve the same which many include

This process is legislated by law in certain countries. Verification in auditing can be done either on-site or off-site. On-site verification requires the physical presence of the auditor. In off-site verification, the auditor may not be physically present but the investigation or enquiring ought to take place in any online mode.

Did You Know?

Walter Diemer was an accountant who invented chewing gum in the year 1928. Before manufacturing the successful athletic shoe, Nike co-founder, Phil Knight conferred suggestions with his accountant. History ascertains that double-entry bookkeeping was invented in the 13th century. Likewise, internal auditors were auditing their own company even before the 15th century. As soon as commerce and industry evolved, control measures and audits came into action.

Because resources, including raw materials, are scarce and limited in nature, producers are often faced with the question of, “What to produce?” and “How much to produce?”  Typically, such a problem is solved by allocating available resources in a way that helps to meet consumers’ demand effectively and in turn, generate substantial profits. However, the key to achieving it depends on producers’ ability to use an ideal combination of resources and figure out ways to lower wastage on all production aspects.

 

During their planning stage, several producers and manufacturers rely on well-crafted diagrams and charts to analyze and in turn, solve the problem of choice and resource allocation. Notably, the production possibility curve is one such medium that offers a fair idea about the feasible production goals and then proceeds to offer an insight into the favourable combination of resources. 

 

With that piece of information, are you all set to delve into detail about the production possibility curve in economics? 

 

As per the production possibilities curve definition, it is a graphical representation of all possible combinations of any two specific goods which can be produced in an economy.  Further, the analytical tool explains and addresses the problem of choice that allows producers to solve them effectively.  Additionally, it helps producers keep track of the rate of transformation of a specific product into another in a situation wherein the economy shifts from one position to another. 

 

In such a graphic tool, the maximum manufacturing capacity of a particular commodity is arranged on the X-axis, and that of other commodities is arranged on the Y-axis. The curve obtained tends to represent the number of products that a manufacturer can create with the limited resources and technology available at hand. 

 

To further understand this concept, one needs to take a look at a production possibilities curve example. However, before finding that out, one needs to become familiar with assumptions of the PPC curve. 

 

Check Your Progress: Before moving onto the next level, try to define the production possibility curve in your own words and provide suitable examples. 

What are the Assumptions of the Production Possibility Curve?

Let’s glance through the assumptions on which the production productivity curve rests –

1. Only two specific goods, namely, ‘X’ (consumer goods) and ‘Y’ (capital goods), are widely produced in an economy in different proportions.

2. The same combination of resources can be used for producing either one or both of the goods and can be freely shifted between them. 

3. The supply of resources is fixed but can be reallocated to produce both goods but within feasible limits.

4. All resources and available technology in the economy is optimally allocated and used.

5. The time duration is short.

That being said, let’s check out a hypothetical production possibility schedule and analyze it in the graphical format.

Production Possibility Schedule

Notably, the production possibility schedule is based on the Production possibility curve assumptions mentioned above.

 

Here, both P and P1 are the production possibilities of an economy that can produce either 250 kg of butter (X) or 250 kg of sugar (Y) as shown against possibilities P and P1. Nonetheless, as per assumptions, the economy must produce both commodities, thus giving rise to production possibilities like B, C and D accordingly.

 

As per the schedule, in the case of B – an economy can produce 100 kg of butter and 230 kg of sugar. On the other hand, in the case of C – it produces 150 kg of butter and 200 kg of sugar. Lastly, in the case of D – it can produce 200 kg of butter and 150 kg of sugar.

 

The general observation prevailing here is, as an economy produces more butter, it automatically produces less sugar. To elaborate, an economy reduces a portion of resources from the production of butter to produce more sugar.

 

Now let’s proceed to look at the graphical representation of the same example in the format of the production possibility curve.

 

In this PPC, butter (X) is measured horizontally, i.e. along the X-axis and sugar (Y) is measured horizontally along the Y-axis. The concave curve PP1 highlights various combinations of these two commodities P, B, C, D and P1.

 

Each transformation curve or production possibility curve serves as the locus of production combinations which can be achieved through allocated quantities of resources.  One can notice the rate of transformation on this curve as they move from point B to point C and then ultimately to point D. Also, there is a noticeable increase in the said rate of transformation. Since the curve shows that combinations B, C and D can be achieved with the available resources, they are labelled as technologically efficient combinations. 

 

Further, the production possibility curve ‘R’ lying on this curve indicates that the economy is not using its available resources efficiently. Similarly, the possibility of ‘K’ lying outside this PPC curve indicates that the economy does not have enough resources to produce the said combination. Both such combinations can be labelled as technologically unobtainable. 

 

DIY: Try to solve a project of your choice on the Production Possibility Curve from your textbook and find out if you can solve it without any help!

 

Now that we have gained substantial ideas about the production possibility curve, we should move on to finding its application in real life.

Application of Production Possibility Curve

• It helps to detect the unemployed resources in an economy.

• Explains the overall increase in production of both X and Y through technological progress.

• It comes in handy to understand the growth of an economy.

• Helps to understand the allocation of proper resources to increase production.

• Helps to understand economic efficiency in terms of production better.

• Offers an overview as to how to economize resources for production successfully. 

 

Do you want to learn more about applications of PPC in practical setup and access a detailed explanation of their graphical representation? Refer to ’s compact production possibility notes and strengthen your understanding of the fundamentals and other vital concepts effectively. Don’t wait around, download the app on your device now to jumpstart a fun and innovative way of learning.

About Production Possibility Curve

Production Possibility Curves (abbreviated PPC) is a technique for visualizing the trade-off between the marginal revenue (or benefit) of a project and its variable costs, where the project is represented by an arbitrary profit-maximizing project that can be built by varying the marginal cost of the project.  

 

The curve represents the potential profitability of the project by showing a series of points corresponding to the optimal amount of capital that can be used to maximize the project’s profitability.

 

The name “production possibility curve” derives from the shape of a “production possibility frontier”, i.e., the maximum possible combination of production levels and fixed costs. The term “production possibility frontier” itself was introduced by David Gordon in 1965 in the context of supply and demand theory.

History

Production Possibility Curves can be traced back to the work of British economist Arthur Pigou (1877-1947), who developed an economic model in his book Wealth and Welfare in the 1930s.  The “curve” was popularized by the work of Gordon in the 1960s, in his PhD dissertation and his 1965 textbook.

Overview

A Production Possibility Curve (abbreviated PPC) is a tool used to show the trade-off between the marginal revenue and marginal cost for a given project, or more generally any production function.  A production possibility curve can be constructed by plotting the ratio of the marginal revenue of a project (defined as marginal benefit minus marginal cost) against the marginal cost (cost plus opportunity cost, equal to marginal cost in competitive markets).  

 

Each point on the curve represents the optimal amount of capital that can be used to maximize the profitability of the project.  The marginal cost of the project is the cost of constructing the next unit of the project and is determined by the variable costs of building the project.  In order for the PPC to be symmetric about the y-axis, a project’s marginal cost should equal its marginal benefit.  The PPC is usually based on the assumption that the firm is operating in a competitive market. 

 

A PPC can be constructed using either net profit or net income as the independent variable, as long as this variable is a function of the project’s marginal cost and marginal benefit.  Both methods are discussed below. 

 

The PPC can also be constructed using production output as the independent variable, but for most production functions the output is a function of the project’s output (see example). 

 

When the project is of the first type, the point of the PPC on the y-axis has the maximum capacity utilization.  This is the level at which the firm is operating.  As the marginal benefit goes down, the marginal cost will also go down.  As the marginal cost goes up, the marginal benefit will also go up.  Thus, there is always an optimal level of capacity utilization. 

 

The Production Possibility Curve (PPC) is a visual tool that helps managers, marketers and other decision makers understand the maximum output, cost and lead time (time to start production) from a given input or source.

 

The first Production Possibility Curve developed in 1980 by David W. Hounshell at the University of Virginia can be viewed on his website.  The PPC graph is similar to a Cost-Willingness Curve, which shows how much a firm is willing to pay or cost to obtain an additional unit of output (e.g., a more efficient product or process).  It differs from a cost-willingness curve because it is designed for use by a decision maker who faces a limited budget and has some output capacity to use.

Development of PPC

The PPC was developed by David W. Hounshell as a way of illustrating an optimization problem.  Such problems are common in engineering and production and can be represented by an “input space”, which defines a set of different inputs that may be made available to an economic system.  

 

The output is a set of choices (i.e., output alternatives) that are optimal from an economic point of view, whereas an economic system seeks to maximize production, profit, or other goals.

 

A production possibility set (or feasible set) of outputs is defined by a certain output set and a certain lead time.  The set of feasible lead times defines the range of choices to the production process (i.e., the input space).  The feasible set of outputs is defined by a certain output set and certain minimum input requirements.

 

The output set of alternatives is defined by certain costs (for example a quantity of output) and a certain lead time for the production of each alternative.  A production possibility curve (PPC) represents the set of feasible outputs when the production process starts at time zero and reaches the minimum lead time chosen for the process.  

 

It also represents the cost of each feasible alternative.  The curves are also used in economic modelling to describe the trade-off between various alternative uses of output.

 

A production possibility curve, therefore, is simply a curve representing the possible outputs (i.e., feasible outputs) of a process.  The cost is represented by the slope of the curve.  If the curve has a positive slope, then the curve represents a production possibility set, the curve has a negative slope represents a production restriction set, and the curve with a zero slope represents an impossible set of outputs.

 

In the scope of accounting, accounts of primary entry and accounts of secondary entry are the two types of accounts. Among the books of primary entry, we have some specialized books, and we name these as subsidiary books. Among these subsidiary books, a very important kind is the purchase journal or the purchase day book. There are several types of purchase day books namely purchase journal, purchase day book, the book of the invoice, bought book, etc. It is an original entry book. This article will look into the definition, the format of purchase day book, advantages of purchase day book, solved examples, etc. 

 

Meaning of Purchase Day Book 

The purchase day book is a subsidiary book that records those credit purchases of a firm, which the firm shall resell. Therefore, no cash transactions are a part of a purchase journal. Such trades are a part of the cash book. Any transaction which the business doesn’t mean to resell is not made a part of the purchase book. 

 

For instance, a piece of machinery purchased on credit will not find a place in the purchase book but rather in a journal. When the accountant records all the entries properly, he/she calculates the total at the end of a week or month. This value shows the total amount of credit transactions for that specific period. This amount of money gets debited from the purchase account of the firm, and the credit goes to the accounts of the sellers individually.  

 

Format of Purchase Day Book

The format of the purchase day book is as follows: 

 

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As you can see, the format of the purchase book consists of five columns and is a tad bit different from an ordinary journal. The foremost column is the one concerning the date of purchase. The next column is the one for the particulars of the purchase, which in this case is the name of the supplier. One can also put in other details like the number of goods bought or the price of the goods, etc. The third column reads L.F., which refers to ‘ledger folio’ and the consecutive one is for the invoice number. These details are solely for reference information, as in the method of manual accounting, cross-referencing is an important element. The last column states the total amount that is due to the supplier for a particular transaction. 

 

Advantages of Purchase Day Book 

The following are a list of advantages of purchase daybook:

• All the transactions concerning the goods bought on credit find a single place for the purpose of referencing, thus simplifying the process.

• Important information regarding purchases doesn’t get lost and are together in one place.

• We don’t need a separate narration or account titles for a purchase day book entry.

• It facilitates the division of labour among the workers of the organization.

Now that the definition, format and importance of a purchase day book are clear, let us see a solved question on purchase day book followed by some frequently asked questions. 

 

Solved Examples 

1. PQR Ltd. runs a grocery store. The following is their list of purchases for November 2020. Draft a purchase daybook for these transactions. 

• 20Kg potatoes bought from XYZ farms at Rs. 40 per kilo and a 5% trade discount 

• 50Kg flour bought from EFG Co. at Rs.200 on credit 

• 60 bags of rice bought from DEF Ltd. at Rs.600 each and a 10% cash discount 

• 90Kg sugar bought from IJK Co. at Rs. 60 per kilo on credit 

Answer: 

Purchase Day Book

 

We do not consider the third transaction as the exchange was in cash and therefore, it will not be a part of a purchase day book.

Advantages

While working on a purchase day book, it provided some advantages over other types of record keeping which can be enumerated as follows:

• All entries of purchases are kept as a record in one place, therefore, it is easy to refer to and browse through these entries to look up for any information.

• All the important information regarding the transactions such as the number of items purchased or the amount of a product traded