Category: Commerce Notes PPT

What are the Best Words to Use in English?

Words are the basic components of the English language (or any language). They carry a lot of importance when communicating the right idea to an individual or a group. The choice of words definition can be termed as the words one uses from their vocabulary when speaking or writing. One could say that words form the core of the concept of communication itself. Many factors could influence one’s choice of words. There are a few main do’s and don’ts when it comes to word choice:

• DO choose words that will be commonly understood

• DO state your intent with accurate and specific words

• DO make sure to use strong words

• DO give positive words more significance

• DON’T use redundant words

• DON’T use archaic words 

Word Choice and Why it’s Important?

There are many words in English. One must develop their ability to use the right words to the point where it is inculcated as a habit. Seasoned speakers know how important word choice is: 

• The right word can emphasize the right subject in a person’s mind while holding their attention

• The right words can clear up awkward situations or pauses, and wrong words can cause them

• Using the wrong words can mean the information was misunderstood 

• The wrong words can result in no one understanding what was said or written

• The right word choice also shows the speaker/writer in a more positive light

Words are an integral part of communication and oration. The right words, combined with charisma and confidence, can make an audience hang on to one’s syllable. The correct usage of words can make all the difference between striking a chord or missing the mark entirely. Any good speaker knows that one must take great care in building their vocabulary and consider what words they wish to use. Using the wrong words can have potentially disastrous results and could even cause a riot! That’s why understanding the good words in English is vital for anyone who wishes to achieve success in the workplace or on stage.

The English word ‘communication’ is derived from the Latin communis, which means common sense. The word communication means sharing the same ideas. In other words, the transmission and interaction of facts, ideas, opinions, feelings or attitudes. Communication is the essence of management. The basic function of management (planning, planning, staffing, supervision and management) cannot be done effectively without effective communication.

Communication is a two-way process which involves transferring of information or messages from one person or group to another. This process goes on and includes a minimum of one sender and receiver to pass on the messages. These messages can either be any ideas, imagination, emotions, or thoughts.

Communication is a Latin word which means “to share”. There are different modes of communication available today. These include emails, chats, WhatsApp, skype (conference calls), etc. Effective communication makes people’s work easier and smooth. 

Communication Process

Communication is an ongoing process that mainly involves three components namely. sender, message, and recipient. The components involved in the communication process are described below in detail:

1. Sender:

The sender or contact generates the message and transmits it to the recipient. He is the source and the first contact

2. Message:

It is an idea, knowledge, opinion, truth, feeling, etc. produced by the sender and intended for reference.

3. Encoding:

The message produced by the sender is encrypted in a symbolic way such as words, pictures, touches, etc. before transfer.

4. The media:

This is how the coded message is conveyed. The message can be conveyed orally or in writing. 

5. Recording:

It is a process of modifying the signals sent by the sender. After recording the message is received by the recipient.

6. Recipient:

You are the last person in the chain and the message you sent was sent. If the recipient receives the message and understands it correctly and acts on the message, only then the purpose of the communication is achieved.

7. Answer:

Once the recipient confirms to the sender that you received the message and understood it, the communication process is complete.

8. Noise:

Refers to any restrictions caused by the sender, message or recipient during the communication process. For example, incorrect telephone connection, incorrect coding, incorrect recording, careless recipient, incorrect understanding of message due to discrimination or inappropriate touch, etc.

Types of Communication

Verbal Communication and Non-Communication

Communication occurs through verbal, verbal or written communication that conveys or conveys a message to others is called oral communication. Verbal communication is the use of language to convey information verbally or in sign language.Verbal communication is important because it works well. It can be helpful to support verbal Non-verbal communication Any non-verbal communication, spoken words, conversation and written language ​​is called.

It occurs with signs, symbols, colors, touches, body or facial features. Insignificant communication is using body language, body language and facial expressions to convey information to others. It can be used both intentionally and deliberately. For example, you may have a smile on your face when you hear an idea or a piece of interesting or exciting information. Open communication is helpful when you are trying to understand the thoughts and feelings of others.

Mode Of Communication

Formal Communication refers to communication that takes place through legal channels in an organization. That kind of communication takes place between managers or employees of the same class or between high and low and vice versa. It may be oral or written but a complete record of that communication is kept in the organization.

Informal communication is defined as any communication that occurs outside of the official channels of communication. Informal communication is often referred to as the ‘vine’ as it spreads throughout the organization and on all sides regardless of the level of authority.

Few Communication Barriers

One sometimes wants to connect with one thing, but he is actually saying something else that he did not intend. This type of event in communication behaviour is known as the “Arc of Distortion”. The distortion may be the result of some error in any of the communication channels. These barriers to communication are also known as “barriers”.

Some of the barriers to communication:

•  Lack of proper style, feedback.

• Content is not related to customer requirements.

• Failure to maintain dual communication.

• Bad weather.

• Lack of horizontal flow of ideas.

• Availability of technical coordinators.

• Semantic Problems.

• Lack of leadership.

• Lack of enthusiasm.

• Lack of support from heads of institutions.

Importance of Communication

1. Communication Foundation:

The manager explains to the employees the goals of the organization, the methods of their success and the interpersonal relationships between them. This provides communication between the various staff and departments. Therefore, communication serves as the basis for collaboration in the organization.

2. Functional:

The manager coordinates the individual and physical aspects of the organization in order to run it efficiently and effectively. This integration is not possible without proper communication.

3. The Basis for Making Decisions:

Good communication provides information to the manager that helps them make decisions. No decisions could have been made without knowledge. Thus, communication is the basis for making the right decisions.

4. Improves Management Ability:

The manager transfers targets and issues instructions and assigns tasks to subordinates. All of these factors are involved.

Importance of Communication

Communication plays a vital part in building up a strong relationship across the world, either in organisational structure or outside of it. It is an essential pillar for people in sharing the ideas, delegating responsibilities, management of a team, building up a healthy relationship, etc. Effective communication is necessary for managers in the organisation for planning, organising, leading and controlling. Managers of the organisation are dedicated enough in communicating throughout the day in various tasks performances. They spent the whole time communicating face-to-face or over the phone to their colleagues, subordinates and the clients. Managers also use written communication in the form of Emails, memos, daily reports and so on. Effective communication is a successful building block of the organisational structure.

Here The Importance of Communication Can Be Briefed As Follows

• Good communication encourages motivational skills. 

• It is a mode of information in the decision-making process.

• Communication emphasises socialising within or outside the organisational structure. 

• It helps in controlling the process. Employees have to follow the organisation rule, code of conduct and other company policies.

Types of Communication

There are four types of communication. It is categorised into verbal, non-verbal, written and visual.

Verbal

Verbal communication is one of the modes where people communicate or transfer information through words. It is one of the common and usual types and frequently used during one on one presentations, video calls or conferences, meetings, phone calls etc. 

There Are Certain Measures Which Enhance This More Effectively

Firm and confident communication reflects the personality of the person. It gives more certainty of completing any task. So always be confident so that your ideas are more precise and specific.

A good listener always tends to listen to everyone’s perspective or viewpoints. Active listening helps in identifying each one’s problem or thoughts in a more clear way.

While giving a presentation, avoid using filler words such as yeah, like, so, etc. It might be distracting to your audiences. Try not to use them in official conferences or meetings. 

Non-Verbal

Non-verbal communication is the use of body language. It includes body gestures, facial expression, and shaking hands, etc.. For example: How you sit during an interview automatically reflects your body language. If they are indicating closed body language like closed arms, bent shoulders, shaking legs, etc., they might be nervous, low in confidence, surrounded with anxiety, etc. Non-verbal communication is the most powerful communication to understand others’ thoughts and emotions. 

Here are Certain Categories Where Non-Verbal Communication are Briefed Up

• Imitate non-verbal communication you find useful: Some facial expression or body language can be found helpful in an interview. If an interviewer has positively nodded his head, it gives a clear positive sign in a closed way, i.e. non-verbal communication.

Written

It is the form of communication that involves writing, typing and printing symbols, letters, etc. It is used in Emails, chats, etc. which are the common techniques of using it in the workplace. Whereas it also furnishes a record of all docs in one place and keeps a systematic account of it.

Here Are Certain Categories Where Written Communication is Briefed Up

Any type of written communications should be in a simple format and clear. It helps audiences to understand and provides more transparency on information which you’re providing. 

Whenever you’re writing, always review your emails, letters or memos before sending it. Reviewing helps to find the mistakes or opportunities to present something distinct. 

Since this is not a mode of verbal or non-verbal communication, always be cautious and have a polite tone while writing.  

If you received the memo or email which you’re finding helpful or interesting, you could save that template for further references to use it in future writing for improving your written communication.

Visual

Visualizing is a form of communication where one can use photographs, drawing charts and graphs to convey information through it. It helps in furnishing the right information through graphics and visuals during office presentation (along with verbal and written). 

Here are Certain Steps Which Help in Visual Communication Skills

Visual communication includes presentation or emails. Always ask for other’s advice if any mistake can be rectified. 

Always put those visuals in presentation or emails that can be understood by everyone quickly. If you are giving a presentation on any data or chart which is not familiar to the audience, you need to explain it clearly. There shouldn’t be any usage of offensive visuals.

Barriers in Communication

There are certain barriers which create hindrance in building up communication over the time period.

Communication takes place between receiver and sender. It’s a two-way process which should be clear. In case message formation went wrong, it gives a wrong and unclear message to the recipient. The receiver might get the wrong perspective while receiving a message. Therefore the message should be written effortlessly.  

 If any machine or electronic errors occur by any means or in any unforeseen situation, it may affect the importance of communication.

Flow of Communication

An organisation follows the five flow of communications: 

In this, communication flows from the higher level to lower level, i.e. communication carried out by the head of the organisation to the subordinates like providing feedback, giving job instructions etc. 

Communication which flows to the higher level of the organisation is upward communication. Subordinates use upward flow to transfer their grievances and performances to their seniors. 

It takes place where communication happens between the same level of the hierarchy that is communication between colleagues, managers or between any horizontally equivalent members of the organisation. It benefits employees to perform coordination among the tasks, time-saving, solving problems of employees of other departments or conflicts within the department. 

Communication which takes place between the manager and employee of other work departments is known as diagonal communication. 

Communication which takes place between the manager and external group likes vendors, suppliers, banks, financial institutions and many more. For example, the Managing Director would be meeting with the bank manager to get the bank loan or some other financial work.

Authority is characterized as the institutionalized and legal power inherent in a job role, or position that allows the holder of the job to perform his or her responsibilities effectively. It is assigned officially and legally. Authority means a particular authorization obtained from a person’s higher officer and based on which a person is entitled to do the work in an organization. It is important for administrative functions. Without authority, no person can carry out his duties with full responsibility.

This includes the right to monitor a situation, commit funds, issue orders, and demand them to be obeyed. It is followed by accountability for one’s acts and failures to execute actions. Additionally, true authority often means that the authority is recognized by the aim.

 

Concept of Authority

• The secret to managerial employment is authority. Authority is the cornerstone of the organization to the degree that an organization is defined as a system of relationships between authorities. Authority has a variety of meanings in daily life; it may refer to an individual with superior expertise and skills in a specific field; it may apply to certain officials such as a police commissioner, a university vice-chancellor, or a company’s managing director; the word ‘registered dealer’ also has a different connotation, that of a legally-constituted relationship. However, for management purposes, these definitions of authority are not sufficient. The Authority shall be allowed to make a decision on a matter given or assigned by the superiors. Taking decisions is not sufficient. The decisions are made by those given the responsibility of enforcing the said decision. Authority here becomes a right to order and even to execute the decision.

In short, the Authority can be defined as:

• A legitimate right to a decision that may be given or assigned,

• Entitlement to command,

• The right to see that the decision is implemented properly and honestly

Characteristics of Authority

• Basis of Getting Things Done: Authority grants the right to do something in an organization and to control the actions of the other employees of the organization. It immediately contributes to the completion of certain activities for the achievement of the stated goals.

• Legitimacy: Authority means a legal right open to superiors (within the company itself). This type of right exists because of the practice of authenticity, custom, or norms agreed upon in an institution. Based on an organizational hierarchy, the right of a manager to influence the behavior of his subordinates is granted to him.

• Decision Making: A prerequisite of authority is decision-making. The manager may order his subordinates to behave or not to act. The manager makes this form of decision concerning the operation of an office.

 

Features of Authority:

• It is an individual’s legitimate right.

• It enables staff to be determined by the placeholder.

• This means the right to seek compliance.

• It is practiced in a certain manner to control the actions of subordinates.

• It moves within the organization from top to bottom.

• It is the ultimate organizing power, and it unites the various individuals who work in the company.

• It is used to accomplish organizational goals.

• Differentiating authority from power. Power is referred to as the ability to influence the attitude and behavior of an individual whereas authority is particular authorization obtained from the higher end.

 

Elements of Authority

There are 5 elements of authority which are explained below.

• Usage of Power: In other words, there is a power where there is an authority based on which the authorized person gives orders and instructions to other persons under his/her jurisdiction.

• Influential Personality: If the power is assigned to a person of influential personality, he can make successful use of these powers, easily because his orders are readily accepted by the subordinates.

• Performance: An essential aspect of authority is the need for the exercise of authority control. Such success can take place in various ways, such as with the application and issuing orders in writing, etc.

• Effective Leadership: The individual with authority must be an effective leader so that his subordinates can be guided and his subordinates can obey his instructions in turn.

• To Influence the Subordinates: The person having authority must have a quality impact on his subordinates for the successful exercise of authority to be able to recognize and comply with his orders

Relationship Between Authority and Responsibility

Authority can be defined as the legal right of a person or superior to command his subordinates.  On the other hand, accountability refers to the duty of an individual to carry out his performance as per the company standards. The direction of the flow of authority is from the superiors to subordinates. During this flow of authority, subordinates receive orders and instructions from their superiors on the nature and time frame to complete the task. It is only by the use of the authority that a manager exercises control and demands accountability from his subordinates. 

For example, it is the marketing manager who directs the sales supervisor for the sale of a specified number of units within a pre-scheduled deadline (such as in a month/ yearly goals). If the set standards are not satisfactorily accomplished, it is the marketing manager who will be accountable to the chief executive officer. This example illustrates how authority flows from top to bottom and why responsibility flows from bottom to top. Accountability is a result of responsibility and responsibility in turn is achieved through authority. Therefore, authority and accountability always go hand in hand.

Importance of Delegation

In a practical sense, we know that a manager alone cannot perform all the tasks assigned to him. If he wishes to achieve his targets, it is unavoidable that he delegates his authority. Delegation of authority here means division of authority and powers downwards to the subordinate and workers down the power structure. Delegation basically involves sharing work with someone else, usually a group of people to do parts of the manager’s job.

Delegation of authority is a structural way of relieving the managerial position of work beyond his capacity and hence becomes an important tool in organization function. If one looks close enough, it is through delegation that a manager/ superior multiplies himself by dividing/multiplying his work with the subordinates.

The state of being balanced that is obtained by an end-user of the products which refers to the number of goods and services which the consumers can buy, given their level of income and the prevailing cost prices is called the Consumer’s Equilibrium. Consumer Equilibrium permits the customer to get maximum satisfaction that is possible from their income.

A rational consumer will purchase a commodity to a point where the price of the commodity is equal to the marginal utility that is obtained from the product. If the condition is not fulfilled then the consumer will either purchase more or less of the commodity.

When the objective is presumed to maximize total utility, the user makes certain choices about the number of goods and services. However, the consumer faces several constraints in maximizing total utility, out of which consumer’s income and if the most important, including the prices of the goods and services that the consumer wants to use. Moreover, these efforts to strengthen total utility are subject to relevant constraints, known as the consumer’s problem and the solution to it, which requires decisions about the consumption of goods and services by the user is further referred to as Consumer Equilibrium.

 

Consumer Equilibrium Utility Analysis

When a consumer is purchasing a specific commodity, and then he stops buying that particular commodity as the price and the utility have been equated.

At this point, the total utility is maximum at this level. The consumer is said to be in equilibrium at this point because he is getting maximum satisfaction derived from the commodity and he will buy neither more nor less of the commodity. That means the consumer reached his level of satiety.

While, if there is a change in the price then it will lead to a change in the quantity demanded.

 

Equilibrium with One Commodity

A consumer or a user buying just a single commodity will be at equilibrium when he gets maximum satisfaction after buying a certain quantity of the thing. However, the number of consumption units of any commodity by a consumer relies on two factors, that is the marginal utility or the expected utility from each successive unit and the price of the commodity.

In order to decide the point of equilibrium, the user compares the cost or price of the commodity with its benefit or utility. Therefore, when the marginal utility is and the price paid for the commodity is equal, the rational consumer will be at equilibrium. However, keeping this in mind, both the price and marginal utility should be in the same units, so that they can be effectively compared.

 

Equilibrium with More than One Commodity

Agreeing with the Marshallian utility analysis, when the expenditure of a consumer has been completely adjusted, which means, when the marginal utility of the consumer in each direction of his purchases is quite the same, then this is called Consumer’s Equilibrium. In this case, he has no desire to buy any more of one commodity or any less of another commodity.

With the set market prices, the consumers too want their income, which the consumer is said to be in equilibrium when the marginal utilities are being equalized and so the maximum satisfaction is obtained. After this, there will be no inducement to revise the scheme of this expenditure. The consumer will have to continue to buy the same commodities with the same quantities and until and unless either of the income or his wants or the prices change. Adjustment of these wants to one another and to their own environments is a sign of Consumer’s Equilibrium. For a consumer in order to be in equilibrium with respect to all the goods that are bought, this is the marginal significance of all goods in terms of the value of money which is to be equal with their money prices.

To derive the maximum satisfaction from the amount of money that a consumer has, he will be required to apportion his expenditure with that of the marginal utilities of the goods purchased which will be in proportion to their prices.

Thus, a consumer will be in equilibrium when,

M.U. of X /price of X = M.U. of Y / price of Y/ M.U. of Z / price of Z = k

 

()

 

Conditions of Consumer Equilibrium

A consumer is in equilibrium with his tastes, and the price of the two goods, in which he spends a given money income on the purchase of two goods in a way as to get the main satisfaction. According to Koulsayiannis, “The consumer is in equilibrium when he maximizes his utility, given his income and the market prices.”

Consumer Equilibrium in a Single Commodity Case

• The purchase should be restricted only to a single commodity.

• The price of the commodity is the price which exists in the market. The consumer will only determine the quantity to buy at the given price.

• The consumer is only a rational human being and, so, the goal of the consumer is to maximize the consumer’s surplus which only means that the surplus of this utility which he incurs over the expenditure on the good at the point of the commodity’s purchase.

• There is no problem with the consumer’s expenditure, i.e., he has only sufficient money to buy whatever quantity he decides to buy to achieve his own goal.

Consumer Equilibrium Formula

The formula for Consumer’s Equilibrium is as follows:

Consumer’s Surplus = total utility obtained – total expenditure

(at the Consumer’s Equilibrium point)

[= Total Utility-Pricetimes Quantity Purchased]

[= Total Utility-Marginal Quantitytimes Quantity Purchased]

 

Importance of Consumer Equilibrium

The state of balance that is obtained by an end-user of products refers to the number of goods and services they can buy, given their existing level of income and the prevailing level of cost prices. Consumer Equilibrium denotes the satisfaction which is attained by a customer which signifies his most satisfaction possible from their income.

Disadvantages of Utility Analysis

It is assumed in the utility analysis that it can be expressed in the exact unit or it is cardinally measurable. However, when it comes to utility, it is just a state of mind or what our mind feels and there is no standard measure to know what a person or consumer goes through or feels. So, it comes to a conclusion that utility is immeasurable and cannot be in terms of figures. This is one of the worst limitations of utility analysis.

The format for writing an email for an invitation is different from that for writing an email for a job application, or for notifying a group of people of some important event. In this segment, we shall learn in detail the email writing format for all these categories, and about the various types of emails and mail formats. 

Email Writing

In the term E-mail, “E” stands for electronic. It is one of the simplest and cheapest and most convenient modes of communication. It is drafted in a formal, semi-formal as well as in an informal tone of expression or writing.

Categories of Email Writing

Email writing can be categorized in the following forms.

• Semi-Formal email

• Formal email

• Informal email

Email Writing Format

The email writing format is quite similar for each of the above-mentioned categories, though the choice of words and language vary depending upon the type of email. You can use a friendly and casual style in drafting informal emails, but the language of formal emails should be precise, professional and structured. The email format sample is discussed below.

From: Sender’s Email ID

To: Receiver’s Email ID

Cc: The individuals apart from the receiver, who are going to receive the email with visible IDs. It stands for “Carbon Copy”.

Bcc: Other individuals receiving the email with invisible IDs. It stands for “Blind Carbon Copy”.

Subject: Title or reason for writing the email.

Salutation: Words like ‘Dear’, ‘Hi’, etc, used for greeting the receivers.

Main Body: 

• Introduction

• Matter in detail

• Conclusion

Closing: Ending Statement.

Attachments: Attached Files with Email.

Signature Line: Sender’s Name, Signature, or other details of the contact.

Each type of email writing format is discussed below.

A Sample of Informal Email Writing Format

An email written for friends, family, or relatives is an informal email. The use of polite, friendly, and casual words along with proper greetings and closings are some major rules of informal email writing. 

Sample Email Format

For example, You wish to invite your friends to your birthday party . To draft an email for the same follow the below-given format.

From: Sender’s Email ID

To: Receiver’s email address

Cc: The individuals apart from the receiver, receiving the mail with visible IDs. It stands for “Carbon Copy”.

Bcc: Other individuals receiving mails with invisible IDs.It stands for “Blind Carbon Copy”.

Subject: Birthday Party invitation 

Hello Friend!

Hope you are doing well. I am thrilled to invite you to my birthday party on Dec 03 at MNO Hotel from 7 pm onwards. Retro is the theme of my birthday party. Your presence at my birthday party would be a blessing to my day. We will have a great time together. 

See You Soon

Stu

A Sample of Semi-formal Email Writing Format

The semi-formal email is an email written for any teammates or colleagues. You can use a friendly tone in this type of email, but always make sure to maintain time and dignity.  Some major points to consider while drafting a semi-formal email are as follows.

Sample Email

Draft an email to your classmates informing them about intra-college quiz competitions.

From: Sender’s Email ID

To: Receiver’s email address

Cc: The individuals apart from the receiver, receiving this mail with visible IDs. It stands for “Carbon Copy”.

Bcc: Other individuals receiving this mail with invisible IDs.It stands for “Blind Carbon Copy”.

Subject: Intra-college Quiz Competition.

Hello Everyone!

This is to inform you of an intra-college quiz competition which is going to be held in our college on Aug 25 from 11:30 am in Hall – 01. Everyone is encouraged to take part in the competition so that our department can win. 

For any doubts, you can always reach out to me. 

Thanks

Sam

(Class Representative)

A Sample of Formal Email Writing Format

Under this category, there are emails written for business communication or professional use. Formal emails are written for any government department, school authority, company, or any offices. The use of polite and precise words, proper greeting, clarity, and closing are some of the important points of the official email.

A Formal Email Writing Format Example is Given Below

A mail for resignation.

From: Sender’s Email ID

To: Receiver’s email address

Cc: The individuals apart from the receiver receiving this mail with visible IDs. It stands for “Carbon Copy”.

Bcc: Other individuals receiving mails with invisible IDs.It stands for “Blind Carbon Copy”.

Subject: Letter of Resignation 

Respected  Sir,

This email is regarding my notice leaving my position at your organization. As per our organization’s norms, before resigning, I am providing a notice a month ago. I hope you will get a suitable replacement for me within this period.

I acknowledge the opportunities that I got in this organization, which have helped me grow. I wish great success to you and the company ahead. 

Thanks and Regards,

Tom

(Project Head)

In financial terms, an asset is any valuable resource that a business owns. Anything tangible or intangible that a company possesses to create an economic value can be considered as an asset.

An asset gets classified into three types based on convertibility, physical assets, and resources. Based on convertibility, the asset gets further sub-divided into current and non-current assets. In finance, an asset can be defined as a valuable resource that a business owns. A tangible or intangible resource that a company owns to create values in the economy is called an asset. They are divided into 3 types which are based on the factors like physical assets, resources and convertibility. Based on convertibility, the assets are again divided into current and noncurrent assets. Here, we will learn about current assets. They are the resources that are possessed by a company and can be converted into cash during the financial years. They are sold and consumed due to the business operations that occur. This may include cash or cash equivalents which are expected to be converted during an operating cycle.  They appear as the standard item under the section of assets in the firm’s balance sheet and play an important role in the assessment of the ratio and management of working capital. The components of the current assets are cash and cash equivalents, receivable account, inventory and prepaid expenses. Cash and cash equivalents are the properties that can be liquidated and they are the values of the company’s properties. These include commercial papers, bank accounts and debt securities etc.

For example, a company XYZ will have total current assets that are cash, inventory and receivable accounts. The current asset amounts vary for different firms or companies.

Definition of Current Assets

Current assets are those resources which a company owns and expects to convert into cash during a financial year. These get sold, exhausted or consumed due to the ordinary course of operations of the business. 

According to the current assets definition, they include cash or cash equivalents that a business expects to be converted during one operating cycle.

These appear as a standard item under the assets section in the balance sheet of the firm. They are a vital component in the assessment of working capital management and the current ratio. 

According to the current asset examples, a leading e-commerce company X total current assets for the financial year 2019 comprises cash (Rs. 10,00,000), inventory (Rs. 20,00,000), account receivables (Rs. 7,00,000), etc.

Similarly, another leading manufacturer XYZ has a total summation of cash (Rs. 13,00,000), pre-paid expenses (Rs. 5,00,000), inventory (Rs. 25,00,000). The total current assets of the company account for Rs. 43,00,000.

What are Non-Current Assets?

Non-currents assets are long term investments that cannot be easily converted into cash or cash equivalents. The entire value of these assets cannot be utilised during a fiscal year. As a result, these are also known as fixed assets.

For example – A company ABC has a total non-current assets of Rs.1,40,00,000. It is the summation of land (Rs. 60,00,000), buildings (Rs. 50,00,000), and machinery (Rs. 30,00,000), etc. 

Land, buildings, patent, trademarks, equipment and machinery are a few other examples of fixed assets.

What are the Components of Current Assets?

These assets consist of various components that ascertain the worth of the firm. For example –

• Cash and Cash Equivalents – These are those items in the balance sheet that can be liquidated immediately. They account for the value of the company’s assets, and these include bank accounts, commercial papers, treasury bills and debt securities that contain a maturity date of three months or less.

• Account Receivables – These constitute the money that a firm owes from its customers for the goods and services delivered. The business expects to receive these amounts within one operational year. However, many times a business fails to recover its entire amount from the customers. These get listed under bad debts of the company, and they do not come under the current assets.

• Inventory – The stocks include raw materials and finished products which a firm calculates in the assets segment. However, there are other accounting methods that a business adopts to ascertain the inventory, such as LIFO (last-in, first-out) and FIFO (first-in, first-out).   

• Pre-paid Expenses – These include the costs that a company pays in advance to receive the goods and services in future. A business cannot convert such current assets into cash. The future expenses comprise the insurance premium that a firm incurs in a financial year.

The Formula of the Current Assets

The asset side of the balance sheet comprises cash and equivalents (including petty cash, currency, etc.), account payables, prepaid expenses, etc. A business ascertains its profit or loss by tallying both the assets and the liabilities. 

The assets are arranged in reverse chronological order of liquidity in the balance sheet. The items having higher chances of cash conversion are placed first and vice versa. 

One can determine current assets by merely summing up all the assets that have chances of conversion within an operational year. The current assets formula can be shown below as:

Current Assets = Cash and Cash Equivalents + Accounts Receivables + Marketable Securities + Inventory + Prepaid expenses + Other Liquid Assets

A firm uses current assets in many formulas to ascertain the costs and profits that occurred in the fiscal year. Some of the formulas are as follows:

1. Current ratio

2. Average current assets

3. Quick ratio

4. Net working capital

What is the Current Ratio and How to calculate it?

It is used to calculate the capacity of a business to meet its short-term obligations. A firm ascertains it to understand its liquidity. The current ratio varies from one organisation to the other.

The formula to calculate it is listed underneath as:

Current Ratio = Current Assets/ Current Liabilities, 

Current liabilities are the items that the company owes to its customers. These include accounts payable, bank overdrafts, accrued expenses, etc.

How are the Quick Ratio and Net Working Capital formulated?

A firm uses current assets to measure the quick ratio or liquidity ratio of the firm. The ratio is also known as the acid-test ratio, and one can obtain it by dividing quick assets by current liabilities. However, it can also be calculated by subtracting current assets from inventory and prepaid expenses, divided by current liabilities. 

Quick ratio = Quick assets (Cash + Account Receivables + Marketable Securities)/ Current Liabilities

Or, 

Quick Ratio = (Current Assets – Prepaid Expenses – Inventory)/ Current Liabilities  

One can use networking capital to understand the earning cycle. One can calculate it as follow:

Net Working Capital = Current Assets – Current Liabilities

How to Ascertain Average Current Assets?

One can calculate average current assets by dividing both the total assets of the present year plus the preceding year by the number of years.

Average Current Assets =[frac{(Assets , of , the , present , year + Assets , of , the , preceding , year)}{2}]

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