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.

Difference between a Central Bank and a Commercial Bank
Difference between a central bank and a commercial bank

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.

Read further - Types of Banks

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

14 principles of Management by Henri Fayol
Principles of Management

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. The 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.

10. The Principle of Order- As per this principle, there must be a place for everything and everything must be in its place. You cannot have a mess in the office or in the factory. There should be a place for everything. So there should be a proper place where you keep your files, there should be a proper place where you keep your stationary, there must be a fixed place where you can keep your raw materials, there should be a  proper place where you would keep your finished goods etc. Thus, there should be a place for everything. At the same time, everything must be in its place. So, if you have allocated a particular area to keep the files, then the files should be kept in that area only. Similarly, if you have assigned a particular area for keeping your finished goods, then all the finished goods should be kept at that particular place only. There should be a place for everything and everything must be in its place.

11.. The Principle of Equity - What this principle says is that all the employees should be treated in an equal manner. There should not be any discrimination among the employees. Everybody should get a fair treatment. If this principle is not followed properly, then this may result in de-motivation of the employees which will affect the overall output of the organization.

12. The Principle of Stability of Tenure - According to this principle, the employees should not have any insecurity about their job. They should feel that their job is stable and secure. This creates a sense of belongingness among the employees and it also motivates the employees to put more efforts, thereby resulting in higher productivity and higher output.

13. The Principle of Initiative - What this principle says is that managers should encourage workers to take the initiative. They should encourage the workers to come out with new ideas (new ideas about the products or maybe even the processes). When the employees are encouraged to come up with new ideas, they feel motivated and if the idea is good and if it is implemented, it results in the overall benefit of the organization. Hence it is important that the management realizes the importance of this principle and creates an environment where employees can come up with new and innovative ideas. The managers should not only encourage the employees to come up with new ideas, but they should also encourage them to take initiative in the implementation of those ideas.

14. The Principle of Esprit de Corps- What is Espirit de Corps? Esprit de Corps means the union is the strength. What this principle says is that the management should create a team spirit within various employees or various groups in the organization. All the employees should work as a team towards achievement of the organizational goals. A team spirit is required in all group activities and management is no different. Management involves leading a group of employees and hence management is a group activity. There should be a team spirit between various departments of the organization and unless there is a team spirit within all the employees, the organization will not be able to achieve its goals.

Also refer -

Wednesday, 8 November 2017

Basic Accounting Terms - 2

Basic Accounting Terminologies-

Basic Accounting Terms - Commercial Studies
Accounting Terminologies

Goods - Goods are the products in which the business deals.

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.

Read Further - Basic Accounting Terms III

Related Videos -

Thursday, 26 October 2017

Basic Accounting Terms - 1

Accounting terminology-

Basic Accounting Terminologies
Basic Accounting Terms

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. For example, a 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. Other examples of current liabilities are outstanding(unpaid) salaries, tax payable, etc.

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 the future. For example, if a customer has filed a suit against the company for some compensation. This can become an actual liability in the 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 which the business owns. For example, plant and machinery, land and building, furniture and fixtures, Investments etc.

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, plant and machinery, furniture and fixtures, etc.

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 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).

Fictitious Assets: As the name suggests, these are not assets in a true sense. These generally include some one time heavy expenses which are not considered as an expense only in the year in which they were incurred. Rather, these expenses are shown as expenses over few accounting years. If the entire amount of these expenses is considered as an expense in the year of occurrence, these expenses may result in a big loss in that particular year. So these expenses are spread out over a few years. For example, preliminary expenses. These are expenses incurred at the time of starting the business. If the entire amount of preliminary expenses is assigned to the first year only, it would result in a huge loss in the first year itself. So instead of treating the entire amount of preliminary expenses as an expense of the first year, these expenses would be spread out over a few accounting years. For example, say preliminary expenses are Rs.100/-. So what the firm may do is spread it over a period of say 5 years. So in the first year, only Rs.20/- (Rs.100 divided by 5) would be considered as preliminary expenses and balance Rs.80/- would be shown as an asset (fictitious asset) in the first year. During the second year, again Rs.20/- will be considered as preliminary expenses and balance Rs.60/- would be shown as an asset (fictitious) in the second year, so on and so forth. Thus, such expenses are spread out over a period of accounting years.

Depreciation - The word depreciation has been derived from the Latin word 'Depretium' which means 'decline' or 'reduction' in price or value. Depreciation is a continuous, gradual and permanent decrease in the value of fixed assets. For example, machinery purchased today will not have the same value after 5 years, even if it is unused. This reduction in value of machinery is called as Depreciation.

Balance Sheet - A balance sheet is a statement that shows a company's assets and liabilities as on a particular date. The balance sheet gives an idea as to what the company owns and owes. In simple words, it shows the financial health of the business

Goodwill - Goodwill is the monetary value of the reputation of the firm. Some firms develop a good reputation in the market over a period of time. For example, Tata Group companies, L & T, Google, etc. Such reputation expressed in monetary terms is called Goodwill. This reputation helps these firms to earn more profits as compared to a newly started business.

Bad Debts - Bad debts refer to irrecoverable dues (from the debtors). For example, suppose you have sold the goods worth Rs.10,000/- to Mr.X on credit. But he is able to repay only Rs.9000/-. In such a case, Rs.1,000/- would be considered as bad debts. Bad debt is a loss to the business which reduces its profit.

Read Further - Basic Accounting Terms II

Related videos-

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

Reasons for rejection of Home loan
Reasons for rejection of a housing loan

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.

Also refer -

What is Pre-Approved Home Loan?

Factors that affect your home loan eligibility

Friday, 13 October 2017

Types of Bank Accounts

There are broadly two types of bank deposits -
(a) Demand deposits - There is no fixed tenure of these deposits. The deposits are repayable on demand. The account holder can withdraw his money anytime. Savings account and Current account are demand deposits.

(b) Term/Time Deposit - Here there is a fixed tenure of the deposit. Recurring Deposit and Fixed Deposit fall under this category.

Accordingly, there are basically four different types of bank accounts. They are as follows-

Types of Bank Accounts in India - Economics

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. The customer gets the cheque book facility for the current account. Some current account holders are also given overdraft facility. Overdraft is a credit facility offered to current a/c holders. An overdraft is like a temporary loan given to the customer to clear/honour cheques already issued by him (in case of insufficient balance in the current account of the customer). For example, say you have a current a/c but balance as on date is zero. Let us say you have been assigned an overdraft limit of Rs.50,000/- on your current a/c. A cheque of Rs.25,000/- issued by you has come for clearing today. Bank will honour the payment even though you have zero balance. You can later repay Rs.25,000/- back to the bank and you will be charged interest from today till the day of repayment of this amount. There is an upper limit on the amount of overdraft for each eligible customer which is decided by the bank itself based on the financial documents of the account holder, his past record and the relationship of the customer with the bank.

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 account is also called the cumulative time deposit account. It is meant to cultivate the habit of savings among the economically weaker section of the society. 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 account does not have the facility of withdrawal. The chequebook 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 (All banks these days allow pre-mature withdrawal of fixed deposit i.e, withdrawal of fixed deposit amount before the end of the term of the deposit. Banks deduct some amount from interest earned as a penalty for pre-mature withdrawal). 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 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.

Multiple Option Deposit Account: A lot of banks have recently introduced this type of bank account. It is a type of Savings Account in which deposit in excess of a particular limit gets automatically transferred into Fixed Deposit. For example, suppose the limit for automatic transfer of funds from savings account to fixed deposit is Rs.10,000/-. If you are having a balance of Rs.50,000 is this type of an account, Rs.40,000/- will be automatically transferred to a fixed deposit account. This means you would earn a higher rate of interest on Rs.40,000/- (since rate of interest on fixed deposit is always more than interest on savings account).On the other hand, in case adequate fund is not available in the Savings Bank Account so as to honour a cheque that you may have issued, the required amount gets automatically transferred from Fixed Deposit to the Savings Bank Account. The balance amount remaining in fixed deposit account (after transfer of required amount from fixed deposit to savings account) continues as Fixed Deposit. 

Related Posts - 
Types of Banks 

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.

Related Posts -

Joint Stock Companies and its types.

Related Videos -

Wednesday, 4 October 2017

Advantages of Joint Stock Company

Joint Stock Company is one of the various forms of business organizations.

Merits of Joint Stock Company
Merits of Joint Stock Company

Advantages of Joint Stock Company are as follows-

Large Capital - Public Limited Company can raise a huge amount of capital as there is no upper limit on the number of owners (shareholders) that a public limited company can have. You don't need a huge capital to invest in a public limited company. Owners can invest even a small amount of capital. Public Limited Companies have a large number of shareholders. So even if every shareholder invests a small amount of money still the company can create a large capital base.

Growth Opportunities - As the company has a large capital base growth opportunities are also enormous, especially in case of a public limited company. Even after the company has commenced the business, if a public limited company requires more capital, it can always issue more shares.

Democratic Management - Public Limited Companies have a large number of shareholders. The company is run by the Board of Directors. And the Board of Directors is appointed by the shareholders. The Board of Directors is answerable to the shareholders. Thus the business is run by the Board of Directors who are appointed by the owners/shareholders themselves.

Limited Liability - The owners of Joint Stock Company have limited liability. In case the company becomes insolvent/bankrupt and is unable to pay off business liabilities out of business assets, the personal assets of the owners/shareholders cannot be used to repay the liabilities of the company.

Professional Management - Since Public limited companies have access to large financial resources, it is possible for a public limited company to appoint professionals who are experts in different areas. The directors are generally well educated and are experts in different areas of management. Thus the business is managed professionally. Availability of experts of different areas results in better decision making and increased efficiency in the operation of business activities

Perpetual Existence - Joint Stock Company has a separate legal identity from its owners. It has a separate legal status, which means in the eyes of the law the joint stock company is different from its owners. Death, Insolvency or Insanity of any of the owners doesn't result in the closure of the company.

Transferability of Shares - Shares of a public limited company are listed on the stock exchange and are easily transferable. A shareholder who wants to sell his/her share can do so through a stock exchange

Economies of Large-Scale Operations - Since public limited companies have large-scale operations, they enjoy economies of the scale (Low cost due to the high volume of business). They have a better bargaining power than other form of business organizations.

Read further - Demerits of Joint Stock Company

Related Videos -

Friday, 29 September 2017

Various Forms of Utility

Various types or forms of utility - There are basically six different types or forms of Utility

Various forms of Utility - Micro Economics NCERT

Form utility - Form Utility is a utility created by changing the form of a particular substance or commodity. The Utility created by changing shape, size or color of a particular product is called as a form utility. For example, making furniture out of wood. Making furniture out of wood increases the utility of the wood. So utility created by converting wood into furniture is Form utility.

Place utility. - Place utility is a utility created by changing the place of a particular commodity. For example, bringing crops from farms to market or to the place for consumption is an example of creation of the place utility.

Time utility - Utility created by the change in time is called as time utility. For example, demand for woolen clothes is more during winter as compared to demand in summer. So the utility of the woolen clothes is more during winter than in any other season. Thus utility created due to change in time is called time utility

Service Utility - Service utility is the utility created by providing service to someone. Such services are generally provided by professionals in the society to other people in the society. For example, the knowledge given by teacher to his/her student or treatment given by a doctor to his or her patient

Knowledge Utility - Knowledge utility is a utility created due to increase in knowledge of the consumers. For example, the utility of mobile phone increases when a person understands what all functions it can perform. Thus, this is an example of knowledge utility.

Possession Utility - Possession utility is the utility created due to change in possession of a particular commodity or substance. For example, the utility created by purchasing a car from someone is an example of possession utility. Utility created by having possession of the car from the seller is possession utility.

Related Posts -
Utility and its features

Related Videos -

Wednesday, 9 August 2017

Understanding Features of Equity Shares

Features of Equity Shares:

Permanent Capital - The amount invested by equity shareholders is permanent capital for the business. It is not repayable to the equity shareholders during the tenure of the company. The capital is to be repaid by the company only in the event of the winding up of the company. So equity provides a  permanent/long-term capital to the organization.

Rights of Equity Shareholders - Equity shareholders enjoy the certain rights. They have a right to get a share of profit. The share in profit, which is distributed to the equity shareholders, is called dividend. Thus, equity shareholders have a right to get a share of profit of the company. Equity shareholders also have the right to vote. They have a right to vote and elect the board of directors of the company. The board of directors of the company runs the business on behalf of the equity shareholders. They also have a right to vote for the amendment of the memorandum as well as articles of association. Equity shareholders are the owners of the company and hence they have the right to inspect the books of accounts of the company anytime. They also have the right to transfer their shares. Equity share capital is not repayable during the tenure of the company. The capital of equities is paid back only at the time of winding up of the company. However, if any shareholder wants to transfer his shares, he can do so. This right to transfer the share is one of the most important rights of the shareholders.

No fixed dividend - Every equity shareholder has a right to receive a share in the profits of the company. His share in the profit of the company is called as the dividend. However, this dividend is not fixed. This dividend is not provided at a fixed rate to the shareholders. The dividend paid to equity shareholders depends upon the profit of the company. If the company makes good profits, then equity shareholders get good dividends.
However, if the company doesn't make any profit or makes very less profit, chances are that equity shareholders may not even get the dividend. So the dividend amount is very fluctuating in nature. Thus, the returns that equity shareholders get on their investment in the company are fluctuating in nature.

No Preferential Rights - Equity shareholders do not have any preferential rights, unlike preference shares. In the case of preference shares, the dividend is fixed and is paid before the dividend is paid to the equity shareholders. Equity shareholders are the last to receive the dividend. Out of the profits made by the company, the company first pays interest on external loans. So the interest on external loans is first paid. After that the dividend is paid on the preference shares and only after that, the equity shareholders get the dividend. So if no profit is left after giving the dividend to preference shareholders, then equity shareholders won't get any dividend Similarly, at that time of winding up of the company, the proceeds received from the sale of assets of the company are first used to pay off the external liabilities. Once the external liabilities are paid, then the preference share capital is repaid. Once the amount has been repaid to preference shareholders, after that the equity shareholders can get their capital. Thus, equity shareholders are the last when it comes to payment of the dividend or when it comes to repayment of the capital at the time of the winding up of the company.

Risk Takers - Equity shareholders are the ones who take the maximum risk in the company. The dividend to equity shareholders is paid at the last (after repayment of interest on external liabilities and after paying the dividend to preference shareholders). Similarly, the capital repayment also happens at the last to equity shareholders. At the time of closure of the business, the amount received by selling the assets of the company is first used to repay the external liabilities. Then the repayment of preference share capital is made and only after that equity shareholders can get their capital. Thus, they are the true risk bearers of the company.

Control of the Company - Equity shareholders control the company. The control of the company lies in the hands of equity shareholders. This is because they have the right to vote. They have the right to elect the Board of Directors who control/manage the company on behalf of equity shareholders. Thus, equity shareholders are the ones who have control over the company.

Residual Claimants - Equity shareholders are residual claimants. This is because the dividend is paid to equity shareholders only after the interest of all external liabilities is paid and after the preference dividend has been given. The profits of the company are first utilized to pay off interest on all external loans/liabilities and then it is utilized to pay off the dividend of the preference shares and the dividend to equity shareholders is paid only out of the remaining amount. Again in the case of winding up of the company, they are the last one to receive the payment. In the case of winding up or closure of the company, the amount received by the company by selling off its assets is first utilized to pay off all outside liabilities/outside loans. Then the amount is paid to preference shareholders and if there is anything left after paying off the preference shareholders, then the remaining among is paid to the equity shareholders. Thus, they are the residual claimants in the company.

Eligibility for Bonus or Rights issue - The equity shareholders are eligible to get bonus shares and rights shares. Bonus shares are the shares which are given to equity shareholders by the company out of the profits accumulated by the company. Bonus shares are given free of cost. Generally, the profit made by the company is not completely distributed among the equity shareholders as a dividend. Generally, a part of the profit is kept aside by the company and only a part of the profit is distributed as a dividend to the equity shareholders. The bonus shares are given free of cost to equity shareholders out of these accumulated profits. The profits which company accumulates over the period of time is utilized to give bonus shares to the existing shareholders. Equity shareholders also get the benefit of the rights issue.
What is a Rights Issue? -  Whenever the company requires additional capital for expansion of business or for any other reasons, they may decide to raise those funds by issue of equity shares. Thus, they may issue more shares to raise further capital. In such circumstances, companies generally give existing shareholders the right to buy those shares. These shares are not given to the shareholders free of cost. This is called as a rights issue. Thus, under the rights issue, the first option for buying the shares is given to the existing shareholders. (the option to buy the shares is first given to the existing shareholders)

Thursday, 27 July 2017

Joint Stock Companies

What is a Joint Stock Company?

In simple words, a joint stock company is a form of business organization where there are multiple owners.

There are 2 different types of Joint Stock Companies-
1. Private Limited Company and 
2. Public Limited Company

What is a Private Limited Company?

It is the kind of joint stock company which cannot have more than 50 owners. Hence, in a private limited company, the minimum number of owners are 2 and maximum no of owners are 50. 

Also in the case of a private limited company, there are restrictions on the transfer of shares. The shares of a private limited company cannot be transferred freely unlike public limited company where the shares can be transferred freely through a stock exchange.

A private limited company cannot invite the public to subscribe for its shares or debentures. A private limited company cannot accept deposits from anyone except its members (owners), directors or their relatives. 

A private limited company must have a minimum paid up share capital of Rupees One Lakh. So before starting the business, the owners need to invest minimum One Lakh Rupees as the capital of their own pocket. All private limited companies must use the words "Private Limited" at the end of their name (Example, Xxx Pvt Ltd).

What is a Public Limited Company?

A public company is a form of joint stock company which is not a private limited company

In the case of a public company, there is no restriction on transfer of its shares. The shares can be transferred freely through stock exchanges. There should be minimum 7 members (owners) in a public company 

A public company must have a minimum paid up share capital of Rupees 5 lakhs. In other words, owners have to invest minimum Rupees Five Lakhs from their pocket in the company

A public company can invite public to subscribe to its shares. It can invite and accept deposits from public

The minimum number of members required to start a public company is 7. There is no maximum limit on the number of members that a public company can have. 

In the case of a public company, it is mandatory that the company must use word "Limited" after its name. For example Xxx Limited.

A public limited company must have at least 3 directors. Directors are the people elected by the shareholders/owners to run the business on their behalf.

Features of joint stock companies-

1. Artificial Legal person - A joint stock company is an artificial legal person created by law. So a joint stock company can enter into agreements with third parties. It can conduct transactions like buying and selling properties in its own name 

2. Separate Legal Identity -The company has its own separate legal identity. In the eyes of the law, the joint stock company and the owners are two different identities.

3. Limited liability - This is one of the biggest advantages of a joint stock company. The liability of the owners is limited. So in case, the business assets are not sufficient enough to pay off the business liabilities the personal Assets of the owners cannot be used to pay off the liabilities of a joint stock company 

4. Common Seal - Since the company has no physical existence, there is a common Seal which is used as a substitute for its signature.

Common Seal is an instrument very similar to paper punching instruments used for filing papers and looks like the image shown below
Image Source - Wikipedia

This instrument is embossed on documents to create an impression like the one which is shown below

Image Source - Wikipedia

5. Mandatory Registration - Registration of a Joint Stock Company is mandatory. Every Joint Stock Company must be registered with ROC (Registrar of Companies) as per Indian Companies Act.

6. Separation of Ownership and Management - In case of a Joint Stock Company, there is a separation of ownership and management. Shareholders are the owners of the company/business but they do not run the day to day business. The day to day running of business is done by Board of Directors. Board of Directors is a group of people appointed by shareholders to run the business on their behalf.

7. Minimum and Maximum number of owners (members) - A private limited company has a minimum of 2 owners and can have maximum 50 owners. In case of public limited company, minimum numbers of members are 7 and there is no upper limit to the number of members in case of a public limited company.

8. Perpetual Succession - A joint stock company enjoys perpetual succession. The business does not come to an end in case of death, insolvency or insanity of any of its members.

Read Further - Merits/Advantages of Joint Stock Company

Related Videos -