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Thursday, 7 December 2017

Differences between a Central Bank and a Commercial Bank

Distinguish between a Central Bank and a Commercial Bank-

1. A Central bank is an apex institution in the banking structure of an economy. It is the topmost bank in the banking system of a country. It is a regulatory body of the banking system. It lays down rules and regulations to be followed by other banks in the country. No one can start a bank in the country without the license of the central bank of the country. Commercial banks, on the other hand, are the banks which run the banking business to make profits. All the commercial banks have to follow the rules and regulations laid down by the central bank of the country.

2. The main objective of the central bank is to promote social welfare, whereas the main objective of a commercial bank is to make profits.

3. The Central Bank of a country is owned by its government. Commercial banks may be owned privately or by the government

4. The Central Bank has a monopoly on issuing currency notes. Commercial banks do not have any such right

5. Central Bank is a banker to the government. It is also a banker of commercial banks. It is called a bank of bankers. However, a central bank does not deal with the general public directly. A commercial bank, on the other hand, is a banker only to the public. Commercial bank deals directly with the general public.

6. There can be only one Central Bank in a country. For example, Reserve Bank of India, Bank of Japan, Federal Reserve Bank (USA) etc. However, it may have a few branches across the country. Usually, there are many commercial banks in the country with a lot of branches spread over the length and breadth of a country. For example, ICICI Bank, State Bank of India etc.

Saturday, 18 November 2017

Henry Fayol's 14 Principles of Management

Who was Henry Fayol?

Henry Fayol was a French mining engineer. After a lot of research and studies, he had developed 14 principles of management. Due to his contribution to management studies, he is also called as a father of modern management. So let's see what are those principles of management defined by Henri Fayol

1. The Principle of Division of Work - According to Henri Fayol the total work of an organization should be divided into smaller parts and these parts should be assigned to various employees based on their skill sets. So a person who is good at sales should be given a sales job. Similarly, someone who is good at operations should be placed in operations department and someone who is good in finance must be placed in the finance department. Division of work leads to specialization. When one person performs the same task, again and again, he specializes in the performance of that task. If a person keeps on doing the same task again and again over a period of time he will be able to do it faster and better.

2. The Principle of Authority and Responsibility -  What this principle says is that whenever you assign a responsibility to a particular employee he should also be given the required authority. Unless he is given the required authority, he won't be able to perform the task which has been assigned to him. For example, if you have assigned a task of producing 10000 units of a product X to a factory manager then he should be given sufficient authority to order the raw materials required for making 10000 units of that particular product X. He should also be given authority to hire the required number of workers to achieve the target of production. With Authority also comes the responsibility. It means that when you give authority to someone it is his responsibility to complete the task assigned to him. For example, if you have given all the required authorities to factory manager to produce ten thousand units of a product X then if he cannot achieve the target he should be held responsible for the same. So with authority comes the responsibility. You can't have a scenario where there is an authority but no responsibility. An authority will always be accompanied by the corresponding responsibility

3. The Principle of Discipline - According to Henry Fayol, discipline is one of the most important aspects of any organization. Maintaining proper discipline within the organization is the responsibility of Management. If there is no discipline within the organization, then the organization cannot achieve its goals.

4. The Principle of Unity of Command - This principle states that every employee should receive orders from only one person. This is because if he is receiving orders from more than one person, it will lead to confusion and he will not be able to perform his task properly. This principle is applicable to employees at all levels right from top management to bottom.

5. The Principle of Unity of Direction - Principle of unity of direction deals with groups within the organization. The principle of unity of command is applicable to individual employees. So the previous principle talks about every individual employee of the organization, whereas this principle talks about groups within the organization. As per principle of unity of direction, each group in the organization should have the same objective. The group should be directed by only one person using one plan

6. The Principle of Remuneration -  According to this principle every employee in the organization should receive fair remuneration. The remuneration of the employees should be decided based on his skills, education, expertise, knowledge, and tenure with the organization. Principle of remuneration, says that when the employees are given a fair remuneration they work with enthusiasm and show more productivity which results in more output

7. The Principle of Subordination of Individual Interest to General interest - What this Principal says is that the interest of the organization is supreme. Individual interest is subordinate to the general interest or the interest of the company. So while taking the decisions the managers should always keep the organization's interest on the top. Individual interest should not come in the way of interest of the organization. The interest of the organization is more important as compared to the individual interest. While making the decisions managers have to realize that organization's interest is more important than the personal interest of any employee (including himself).

8. The Principle of Centralization - This principle refers to the concentration of decision making power or authority in the hands of a few people in the organization. In certain organizations, there is a high concentration of power or authority in the hands of a few people. In such organizations, only a few people control the organization and make decisions. This is especially true in case of the smaller organizations. However, the large organizations cannot have the concentration of power in the hands of a few employees. In such big organizations, the power is generally divided among different groups or different managers. This is called as decentralization of power. According to Henry Fayol, there should be a proper balance between centralization and decentralization of powers depending upon the size of the organization and the nature of business the company does. There should not be complete centralization of powers, nor there should be complete decentralization of powers. There should be a balance between the two. Decision-making power should not be given to very few people at the same time it is important that decision making power is not given to every Tom, Dick, and Harry. People to whom the decision making power is given should be responsible and mature enough to make good decisions. Otherwise, they may give self-interest more importance than the interest of the organization

9. The Principle of Scalar Chain- In any organization, usually the communication flows from top to bottom or from bottom to top. Such communications happen in a very proper manner. They generally happen in the form of a chain. So if a manager wants to convey a certain message to everybody till the level of workers, he will pass on this information to the departmental head who in turn will pass it on to the supervisor, the supervisor will pass on the information to the foreman and the foreman will inform the workers. Thus, you can see that the information is passed on in the form of a chain. This is called as Scalar Chain. Similarly, if there is any information which workers want to pass on to the manager, the process happens exactly in a reverse manner. The workers will pass on the information to the foreman, the foreman will pass on the information to the supervisor, the supervisor will pass on that information to the departmental head who will then pass on the information to the manager. However, this principle of Scalar Chain should have some flexibility because it is very time-consuming. Sometimes you may not have enough time to pass on the information in this form. So if there is some urgent information which is to be passed on, then the cross-communication should be allowed. Cross communication means the communication that doesn't happen exactly in the form of Scalar Chain. So in case, there is an urgent message, then one may not follow the scalar chain. However, if someone is not following the Scalar Chain, he/she must do it with permission of the proper authorities  

Wednesday, 8 November 2017

Basic Accounting Terms - 2

Basic Accounting Terminologies-

Purchases - Purchases refer to the total amount of goods purchased by the firm. It includes goods purchased by cash as well as goods purchased on credit. However, purchases do not include the purchase of assets. For example, purchase of machinery will not be included in purchases. In case of a manufacturing firm purchases would include raw materials purchased for further production. In case of a trading firm purchases would include the goods purchased for resale.

Purchase return - Purchase return refers to the total amount of goods returned by the firm out of the goods purchased by it.

Sales - Sales refer to the total amount of goods sold by the firm. It includes goods sold by cash as well as goods sold on credit. However, this does not include the sale of assets.

Sales return - Sales return refers to the total amount of goods returned back to the firm by the customers out of the goods sold by the firm

Stock - Stock refers to the amount of goods lying unsold as on a particular date. The stock is always valued at cost price or market price whichever is lower.

Opening stock - Opening stock refers to the amount of unsold goods (stock) at the beginning of a financial year.

Closing Stock - Closing stock refers to the amount of unsold goods (stock) at the end of the financial year.

Revenue - Revenue refers to receipts of the firm. For example, receipts from the sale of goods, rent income, dividends etc.

Expense - It refers to cost or sacrifice incurred by the firm to earn the revenues. For example purchases, salaries to employees, purchase of stationery etc.

Thursday, 26 October 2017

Basic Accounting Terms - 1

Accounting terminology-

Capital: Capital means an amount invested by the owner in the business. Investment by the owner can be in the form of cash or in kind. For example, if the owner uses personal furniture for the business it will be recognized as the capital


Liability: Liability is something which the business owes to any outsider. For example, loan from a bank

Current liabilities: Current liabilities are the liabilities which the business has to pay within a year. These are short-term liabilities. For example, trade creditors. Trade Creditors are the suppliers from whom we purchase the goods on credit. Usually, the payment to trade creditors is made within one year

Contingent Liability: Contingent Liability is that kind of a liability which is non-existent as on date, but it may become an actual liability in future. For example, if a customer has filed a suit against the company for some compensation. This can become an actual liability in future if the firm loses the case. However, as on date it is not a liability as the outcome is not known today


Asset: Asset means something with the business owns. For example, plant and machinery.

Fixed Assets: Fixed assets are long-term assets. These are assets which are purchased for use over a long period of time (Generally more than one year).  For example, land and building

Current Assets: These are short-term assets. Current assets are assets which are expected to be converted to cash within a year. For example, Debtors. Debtors are the customers to whom we have sold the goods on credit. Generally, the amount receivable from debtors is received within a year's time.

Liquid Assets: Liquid assets include cash and all other assets which can be converted into cash at a very short notice. These are the assets which can be disposed of quickly. They are also called as quick assets. For example, cash in hand, cash at bank, shares etc.

Tangible Assets: These are assets which have physical existence. We can touch, see or feel these assets. For example, plant and machinery

Intangible assets: These are the assets which do not have any physical existence. It is not possible to see, touch or feel them. For example, Goodwill (Goodwill is the reputation of the firm expressed in terms of money)






Monday, 23 October 2017

Causes of rejection of a home loan

When you are applying for a home loan, you need to know the reasons due to which your home loan may get rejected. It will save a lot of time and money for you, but more importantly, it will save you from distress you will have to undergo should your home loan get rejected

Following are some of the most common reasons why your home loan application can get rejected-

1. Bad Credit History - If you have not paid your past loans regularly, most frontline institutions would reject your home loan application. If there are just a couple of minor delays in repayment track record of any of your past loans, your application can be considered provided you can justify the delay in repayment. Some borrowers are intentional defaulters and hence most leading home finance institutions do not compromise much on this point.

2. Title of the property is not clear - The property that you are purchasing should have a clear and marketable title. The seller/s of the property must be the legal owner/s and should have right to sell the property. Banks do not want to get into legal battles over the title of the property. If the lender feels that the title of the property is not clear, the loan may be rejected

3. If the property you are buying falls in a negative area - Some banks do mark some areas as negative areas. These are generally the areas where recovery of the loans may be difficult (areas having a lot of anti-social elements) or the areas where properties generally have structural issues (land may not be very suitable for construction of buildings or the area may have a history of collapsing of some buildings etc.). These are the areas where they do not lend the money. So if the property you intend to buy falls in the negative area of the bank to which you have applied for a home loan, your home loan application would be turned down no matter how strong your financial position may be

4. Dishonor of processing fee cheque - This is one reason that the home loan borrower needs to know before applying for the home loan. If the processing fees cheque gets dishonored, your home loan will not be disbursed. Banks see this as a sign of financial distress and hence do not disburse the loan on the bouncing of processing fee cheque (even if they may have issued an in-principle sanction letter)

5. Inter-Family Transactions - If you are buying the property from anyone who has a blood relation with you, your loan might get rejected, as most banks do not offer home loans on Inter-Family Transactions. They see this as an arrangement within the family to get a loan at lower interest rate as usually other loans are priced quite higher than home loans

6. Cheque Bounces in your Bank a/c - Too many cheque bounces in your bank a/c may also lead to rejection of your loan. It gives an impression that either you are in a financial crunch or you are too casual in fulfilling your financial commitments

7. Deliberate Hiding of some vital Information - It's always advisable to correctly reveal all the important information sought by the lender. A deliberate hiding of any material information may lead to immediate rejection of your loan. You should not break the trust of the lender by holding back some vital information that may have an impact on bank's decision to provide you the home loan applied for

Friday, 13 October 2017

Types of Bank Accounts

There are basically four different types of bank accounts. They are as follows-

1. Current Deposit Account - This account is generally meant for businessmen. This is because they have a high frequency of bank transactions. They usually have multiple transactions daily. Under this account, there is no restriction on the number of withdrawals and hence is most suitable for businessmen. No interest is paid by the banks on such accounts. Some current account holders are also given overdraft facility. An overdraft is like a temporary loan given to the customer to clear/honor cheques already issued by him (in case of insufficient balance in the current account of the customer). There is an upper limit on the amount of overdraft for each eligible customer which is decided by the bank itself based on the past record and the relationship of the customer with the bank.  The customer gets cheque book facility for current account  

2. Savings Deposit Account - This account is made for the general public especially salaried people. The main objective of having the savings account is to cultivate the habit of saving among people. Interest is also paid by the banks on the savings account. The interest rate is moderate (less than the rate of interest offered on recurring or fixed deposit account). However, there are restrictions on the number of withdrawals that can be made through savings account and hence this type of account is not suitable for businessmen. Customers are generally required to maintain a certain minimum balance in the account. Failure to maintain the minimum balance may result in minimum balance charge being deducted from the savings account. No overdraft facility is offered on a savings account. Saving account holders are given cheque book facility

3. Recurring Deposit Account - This type of an account is also called as the cumulative time deposit account. It is meant to cultivate the habit of savings among poor people. Under this type of an account, the customer is allowed to deposit a certain small but fixed amount (Rs.50, Rs.100, Rs.500 etc.) every month for a fixed period of time. The customer gets back the total amount deposited along with interest at the end of the specified period. This type of an account does not have the facility of withdrawal. The cheque book facility is not given to recurring deposit account holders. However, they do get a passbook which shows the amount deposited every month along with the interest amount for each month. 

4. Fixed Deposit Account - Under this type of account, a one-time lump-sum deposit is made by the customer for a fixed period of time (generally 3 months to 10 years). The customer cannot withdraw the amount during this period. However, he can take a temporary loan against the fixed deposit receipt (FDR). At the end of the fixed period, the customer can either withdraw the amount or renew the fixed deposit. The rate of interest offered under this account is highest among all the four main types of accounts. This type of an account does not have a passbook or cheque book facility. The customer gets a fixed deposit receipt (FDR) as a proof of the fixed deposit.

Sunday, 8 October 2017

Demerits of a Joint Stock Company

Disadvantages of Joint Stock Company are as follows-

1. Difficulty in Formation - Formation of a joint stock company, especially public limited company involves a lot of legal procedures. It is time-consuming and expensive too. Registration of joint stock companies is mandatory. Also at the time of formation, certain legal documents like MOA (Memorandum of Association), AOA (Articles of Association) etc.

2. Slow Decision Making - Decision making is slower in case of public limited companies. The company is run by the Board of Directors. The decisions are taken jointly by the Board of Directors. Also in taking certain decisions, they have to seek shareholders approval by calling a meeting of shareholders. This is mandatory as per law. Since there are a lot of people involved in decision making, the process of decision making takes time

3. Low Motivation - The ownership and management of public limited companies are different. The company is run by the Board of Directors who are people appointed by the owners (shareholders). Board of Directors run the business on behalf of the shareholders. It's the Board of Directors who run the company, but profit belongs to all the shareholders of the company. Hence there is no direct relationship between efforts and rewards. (In some other forms of business organizations like sole proprietorship, more efforts lead to more profit  for the owner/s). There is no incentive for the Board of Directors to work hard.

4. Lack of Secrecy - In case of a public limited company, there is lack of secrecy. The companies have to publish their financial details/accounts on a regular basis as per law. They have to send an annual report of the business to all the shareholders every year. This means a lot of information can also be viewed by anyone (including competitors). Certain decisions cannot be taken without the approval of shareholders. This also leads to dilution of business secrecy.

5. Excessive Government Control - There are a lot of rules and regulations that have to be followed while running the business. This consumes a lot of time in certain situations. This also reduces the flexibility in doing the business.