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Browsing through CA Foundation BCK Notes Chapter 1 Business and Commercial Knowledge: An Introduction helps students to revise the complete subject quickly.

Business and Commercial Knowledge: An Introduction – BCK CA Foundation Notes Chapter 1

Every human being is busy in some activity or the other throughout the day. Every person gets up from bed in the morning, brushes his/her teeth, takes bath and eats breakfast. Then a child goes to School or College to study. An adult goes to work on the job and a housewife works at home. In the evening a person comes back home, watches television, eats dinner and goes to bed at night. All these activities in which a person engages from morning to evening are known as ‘human activities’.

1.1 Economic and Non-Economic Activities:
All human activities may broadly be classified into two categories:

• Economic activities
• Non-economic activities

Economic activities are undertaken with the object of earning money and acquiring wealth. These activities result in the production of economic goods and services. Business is an economic activity but it differs from other economic activities such as those of an employee, and self employed persons like doctors, lawyers, chartered accountants, etc.

Non-economic activities are inspired by sentiments and emotions such as love for the family, desire to help the poor and love for the country. These activities are not undertaken for monetary gain but for one’s satisfaction and happiness.

1.1.1 Economic Activities:
Economic activities refer to all those human activities which are undertaken to earn a living and thereby satisfy human wants. The main object of these activities is to earn income and create wealth. The money earned through work is used to satisfy wants.

For example, a teacher teaches in a school or college, a doctor attends to patients in his clinic and a shopkeeper sells goods to his customers. Economic activities are concerned with the production, distribution and exchange of goods and services. These activities create utilities and result in the production of wealth. Economic activities are also called occupations.

The main characteristics of economic activities are as follows:
(i) Economic motive – Economic activities are undertaken to earn money and acquire wealth The main motive behind these activities is to make an economic gain. These activities are performed by human beings for earning livelihood.

(ii) Productive – Economic activities involve production, distribution and exchange of goods and services for satisfying human wants. These activities are directly related to creation of wealth.

(iii) Economic resources – Economic activities make use of economic resources such as land, labour, capital, etc.

(iv) Rational use – Economic activities require proper allocation of scarce resources so as to obtain maximum output from them. These activities involve optimum utilisation of land, labour, capital and other factors of production. Welfare of society can be maximised when best possible use of resources is made.

(v) Economic growth – Economic activities determine the level of economic development of a country and the standard of living of its citizens.

(vi) Legally valid – Human activities performed for economic gain are called economic activities only when they are lawful. Unlawful activities such as gambling, black marketing, theft, dacoity, smuggling etc., are opposed to public interest. Therefore, these activities cannot be called economic activities.

(vii) Socially desirable – Economic activities are desirable for society. They must be in accordance with the expectations and norms of society.

Examples of economic activities:

• Production of goods by a manufacturer in a factory.
• Distribution of goods by a wholesaler to retailers.
• Selling of goods by a retailer to customers.
• Transportation of goods and passengers by railways/roadways/airlines/ships.
• Storage of goods by a warehouse keeper.
• Acceptance of deposits and lending of money by a banker.
• Insurance of risks by an insurance company.
• Advertising and publicity of goods by an advertising agency.
• A clinic run by a doctor.
• Legal services provided by a lawyer in a court.
• Audit services provided by a chartered accountant in his office.
• Working of a Government officer.
• Services of a teacher in a school/college.
• Working of a farmer in his fields to self his produce.
• Working of a nurse in a hospital.

Economic Activities at a Glance:
Characteristics –

• Economic motive
• Productive
• Rational use
• Economic resources
• Economic growth
• Legally valid
• Socially desirable

Examples:

• Manufacturing goods in a factory.
• Selling goods in a shop.
• A doctor treating patients in his clinic.
• A lawyer providing legal advice in his own office.
• A professor teaching in a university.
• A clerk working in a Government office.

1.1.2 Non-Economic Activities:
Activities which are undertaken to satisfy social, religious, cultural and sentimental requirements are called non-economic activities. The object of these activities is not to earn monetary gain or reward. People engage in non-economic activities for reasons of love, sympathy, religion, patriotism, etc.

For example, a mother looks after her children, a student donates blood, an old man goes to temple daily, a rich man donates money to Prime Minister Relief Fund, a young man helps a blind girl to cross the road, etc.

It is the object of any activity that distinguishes between economic and non-economic activities. The primary objective of economic activities is to earn livelihood and create wealth. On the other hand, the main objective of non-economic activities is to get some sort of social, cultural, religious or recreational satisfaction.

The output of economic activities can be measured in terms of money example the salary of a teacher, the fee of a doctor and the profits of a businessman. But the result of non-economic activities cannot be measured in terms of money.

The same activity may be economic as well as non-economic. For example, a nurse attending a patient in a hospital is an economic activity as the nurse works for a salary. But when the same nurse attends to her sick mother at home it is a non-economic activity because the object is not to earn money.

Thus, the activity of the same person may be economic at one-time or place and non-economic at another time or place. The dividing line is not the activity or the person who is doing it but the objective for which it is undertaken.

Thus, non-economic activities are undertaken due to the following considerations :

• Love and affection – for example taking dinner with the family, cooking food for family.
• Personal satisfaction – for example meditating in a park.
• Physical needs – for example morning walk by a person.
• Religious obligation – for example praying in a temple.
• Social obligations – for example helping victims of an accident, flood or earthquake.
• Patriotism – donating blood for injured army men.

Distinction Between Economic and Non-Economic Activities:

Economic activities are also known as ‘occupations’. Economic activities or occupations may be classified into three broad categories as follows:

1.2 Nature of Business, Profession and Employment:

1.2.1 Meaning and Nature of Business:
Business is an activity, in which different persons exchange something of value, whether goods or services, for mutual gain or profit. It is an organised or systematic activity involving the satisfaction of human wants. Business involves regular or recurring purchase and sale of goods and services with the purpose of earning profits through the satisfaction of human needs.

Repeated dealings rather than a single isolated transaction constitute business. Business may be distinguished from other activities by the fact that goods and services created or purchased are meant for sale and not for personal consumption.

Various experts have defined business in different ways. Some of the popular definitions of business are given below:
→ L.H. Haney : “Business may be defined as human activity directed towards producing or acquiring wealth through buying and selling of goods”.

→ B.O. Wheeler – “Business is an institution organised and operated to provide goods and services to society under the incentive of private gain.”

→ L.R. Dicksee – “Business is a form of activity pursued primarily with the objective of earning profits for the benefit of those on whose behalf the activity is conducted.”

→ James Stephenson – “Economic activities performed for earning profits are termed as Business”.

→ Keith and Carlo – “Business is a sum of all activities involved in the production and distribution of goods and services for private profits”.

→ Urwick and Hunt – “Business is any enterprise which makes, distributes or provides any article or service which the other members of the community need and are able and willing to pay for.”

→ R.N. Owens – “Business is any enterprise engaged in the production and distribution of goods for sale in market or rendering services for a price.”

The salient features of business are given below:
1. Creation of utilities – Business makes goods more useful to satisfy human wants. It adds time, place, form and possession utilities to various types of goods. In the words of Roger, “a business exists to create and deliver value satisfaction to customers at a profit”.

Business enables people to satisfy their wants more effectively and economically. It carries goods from place of surplus to the place of scarcity (place utility). It makes goods available for use in future through storage (time utility).

2. Dealings in goods and services – Every business enterprise produces and/or buys goods and services for selling them to others. Goods may be consumer goods or producer goods. Consumer goods are meant for direct use by the ultimate consumers, e.g., bread, tea, shoes, etc.

Producer goods are used for the production of consumer or capital goods like raw materials, machinery, etc. Services like transport, warehousing, banking, insurance, etc. may be considered as intangible and invisible goods. Services facilitate buying and selling of goods by overcoming various hindrances in trade.

3. Continuity in dealings – Dealings in goods and services become business only if undertaken on a regular basis. According to Peterson and Plowman, “a single isolated transaction of purchase and sale will not constitute business.

Recurring or repeated transaction of purchase and sale alone mean business.” For instance, if a person sells his old scooter or car it is not business though the seller gets money in exchange. But if he opens a shop and sells scooters or cars regularly, it will become business. Therefore, regularity of dealings is an essential feature of business.

4. Sale, transfer or exchange – All business activities involve transfer or exchange of goods and services for some consideration. The consideration called price is usually expressed in terms of money. Business delivers goods and services to those who need them and are able and willing to pay for them.

For example, if a person cooks and serves food to his family, it is not business. But when he cooks food and sells it to others for a price, it becomes business. According to Peter Drucker “any organisation that fulfils itself through marketing a product or service is a business”.

5. Profit motive – The primary aim of business is to earn profits. Profits are essential for the survival as well as growth of business. Profits must, however, be earned through legal and fair means. Business should never exploit society to make money.

6. Element of risk – Profit is the reward for assuming risk. Risk implies the uncertainty of profit or the possibility of loss. Risk is a part and parcel of business. Business enterprises function in uncertain and uncontrollable environment.

Changes in customers’ tastes and fashions, demand, competition, Government policies, etc. create risk. Food, fire, earthquake, strike by employees, theft, etc. also cause loss. A businessman can reduce risks through correct forecasting and insurance. But all risks cannot be eliminated.

7. Economic activity – Business is primarily an economic activity as it involves production and distribution of goods and services for earning money. However, business is also a social institution because it helps to improve the living standards of people through effective utilisation of scarce resources of the society. Only economic activities are included in business. Non-economic activities do not form a part of business.

8. Art as well as science – Business is an art because it requires personal skills and experience. It is also a science because it is based on certain principles and laws.

1.2.2 Meaning and Nature of Profession:
The term profession means an occupation which involves application of specialised knowledge and skills to earn a living. The persons who are engaged in profession are called professionals. They render personal services of a specialised nature to their clients.

The service is based on professional education, training and experience. Professionals receive fee for their services. Chartered Accountancy, medicine, law, tax consultancy are examples of professions.

The main features of a profession are as follows :
(i) Specialised body of knowledge – Every profession has a specialised and systematised body of knowledge. Members of the profession are required to learn this knowledge.

(ii) Restricted entry – Entry to a profession is allowed only to those who have completed the prescribed education and have passed the specified examination.

(iii) Formal training – A profession provides facilities for formal education and training to those who want to acquire professional qualification.

(iv) Professional association – Every profession has its own association. A professional association is a statutory body and its membership is essential. The association regulates entry in the profession, grants certificate of practice, formulates and enforces code of conduct. For example, The Institute of Chartered Accountants of India (ICAI) regulates the accountancy profession in India.

Names of various Professions and their Respective Associations are given below:

(v) Service motive – Professionals are expected to emphasise services to their clients rather than economic gain.

(vi) Code of conduct – The activities of a professional are regulated by a formal code of conduct. The code is prescribed by the professional association of which he is a member.

1.2.3 Meaning and Nature of Employment:
Employment means an economic activity, where people work for others in exchange for some remuneration. The persons who work for others are called ’employees’. The persons or organisations which engage others to work for them are called ‘employers’.

The remuneration by an employer to his employee is known as wages or salary. The employee performs the work assigned to him by his employer as per the terms and conditions of employment. There is an oral or written agreement between the employer and the employee.

The employee acts under the guidance and control of his employer. The employer may be a Government (department) undertaking or a private firm. Employment thus includes all types of jobs in Government offices and private enterprises. When a professionally qualihed person works as an employee he is also said to be in employment. For example, a doctor may be employed in a hospital, a chartered accountant may be working as an accountant in a company and a lawyer may serve as a law officer in a bank.

The main features of employment are as follows:

• In employment, a person works for others called employer.
• An employee provides personal service.
• There is a service agreement or contract between the employee and the employer. It contains the terms and conditions of employment.
• The employee has to obey the order of the employer.
• No capital investment is made by the employee.
• The employee gets wage or salary for his/her service.

Various examples of employment are as follows:

• A teacher teaching in a school or college.
• An engineer employed in Municipal Corporation of Delhi.
• An accountant working in the accounts department of a company.
• A person working as the plant manager of a factory.
• A nurse or doctor working in a hospital.

1.2.4 Distinction between Business, Profession and Employment:
1. Mode of establishment – A business enterprise is established when an entrepreneur takes a decision to carry on some business activity. In a profession, on the other hand, the membership or enrolment of a recognised professional association or institution is essential. In order to take up employment, a person has to enter into a contract of service.

2. Nature of work – A business exists to provide goods and services to satisfy human wants. On the other hand, a professional renders personalised service of a specialised nature to his clients. An employee performs the work assigned by the employer under the contract of service.

3. Qualifications – No formal education is compulsory in order to carry on a business. But for a profession, specialised knowledge and training are essential. Minimum educational qualifications are prescribed for every profession. In case of employment, the qualifications required depend upon the nature of the job.

4. Main objective – In business, the basic motive is to earn profits. A professional, on the other hand, is expected to emphasise the service motive and sense of mission. That is why, a rigorous code of ethical behaviour is laid down in every profession. In case of service, the motive of an employee is to earn salary and receive other benefits.

5. Investment – Every business requires capital depending upon the nature and scale of operations. A professional also has to invest some capital to establish an office for rendering services. There is no need for capital in case of employment.

6. Risk – There is an inherent element of risk in business and profession but practically no risk is involved in case of employment. There can be loss in business but in profession and employment return is never negative.

7. Reward – Profit is the reward of a businessman while professional fee is the reward of a professional. The reward in case of employment is wage or salary. Wage/salary and fee are more regular and fixed than profits.

8. Transfer of interest – It is possible to transfer ownership interest in business. But no such transfer is possible in case of profession and employment.

9. Public advertisement – The success of a business depends upon public advertisements. But professionals are prohibited from giving public advertisements. There is no need for public advertisements in case of service.

In spite of the above differences, there is a closed inter-relationship between business, profession and service. A large business enterprise employs a large number of persons in order to achieve its objectives. It also requires the services of professional experts such as chartered accountants, lawyers, architects, cost accountants, etc.

Modern business has become very complex. Trained and experienced managers and other experts are required for efficient business operations. Professionals and other employees provide the necessary manpower for efficient running of business concerns. Thus, business, profession and employment are complementary to one another.

1.3 Objectives of Business:
Every business enterprise has certain objectives which regulate and generate its activities. Objectives are needed in every area where performance and results directly affect survival and prosperity of a business. Various objectives of business may be classified into four broad categories as follows:

1.3.1. Economic Objectives:
Business is basically an economic activity. Therefore, its primary objectives are economic in nature.
The main economic objectives of business are as follows:
(i) Earning profits – A business enterprise is established for earning some income. It is the hope of earning profits that inspires people to start business. Profit is essential for the survival of every business unit. Just as a person cannot live without food, a business firm cannot survive without profit.

Profits enable a businessman to stay in business by maintaining intact the wealth producing capacity of its resources. Profit is also necessary for the expansion and growth of business. Profits ensure continuous flow of capital for the modernisation and extension of business operations in future. Profit also serves as the barometer of stability, efficiency and progress of a business enterprise.

(ii) Creating customers – Profits are not created by God or by the force of nature. They arise from the businessman’s efforts to satisfy the needs and wants of customers. A businessman can earn profits only when there are enough customers to buy and pay for his goods and services. In the words of Drucker, “There is only one valid definition of business purpose; to create a customer.

The customer is the foundation of business and keeps it in existence. It is to supply the customer that society entrusts wealth-producing resources to a business enterprise”. No business can succeed without providing customers value for their money.

Business exists to satisfy the wants, tastes and preferences of customers. In order to earn profit, business must supply better, quality goods and services at reasonable prices. Therefore, creation and satisfaction of customers is an important economic objective of business. Business creates customers through advertising and salesmanship. It satisfies the needs of customers by producing the required goods and services and by creating utilities.

(iii) Innovations – Business is an organ of dynamism and change. In these days of competition a business can be successful only when it creates new designs, better machines, improved techniques, new varieties, etc. Modern science and technology have created a great scope for innovation in the business world. Innovation is not confined to the invention of a new machine.

It comprises all efforts made in perfecting the product, minimising the costs and maximising benefits to customers. It involves improvements in management, production, selling servicing, methods of personnel and accounting, etc.

Business firms invest money, time and efforts in Research and Development (R&D) to introduce innovations. They develop new technology, introduce new designs and new tools and processes to minimise costs and to satisfy ever increasing wants of customers. In order to create customers business has to explore new markets and attract more customers. It has also to retain old customers by providing better services to them.

1.3.2. Social Objectives:
Business does not exist in a vacuum. It is a part of society. It cannot survive and grow without the support of society. Business must therefore discharge social responsibilities in addition to earning profits. According to Henry Ford, “the primary aim of business should be service and subsidiary aim should be earning of profit”.

The social objectives of business are as follows:
(i) Supplying desired goods at reasonable prices – Business is expected to supply the goods and services required by the society. Goods and services should be of good quality and these should be supplied at reasonable prices. It is also the social obligation of business to avoid malpractices like hoarding, black marketing and misleading advertising.

(ii) Fair Remuneration to employees – Employees must be given fair compensation for their work. In addition to wages and salary a reasonable part of profits should be distributed among employees in recognition of their contributions. Such sharing of profits will help to increase the motivation and efficiency of employees.

It is the obligation of business to provide healthy and safe work environment for employees. Good working conditions are beneficial to the organisation because these help to improve the productivity of employees and thereby the profits of business. Employees work day and night to ensure smooth functioning of business. It is, therefore, the duty of employers to provide hygienic working and living conditions for workers.

(iii) Employment Generation – Business should provide opportunities for gainful employment to members of the society. In a country like India unemployment has become a serious problem and the Government is unable to offer jobs to all. Therefore, provision of adequate and full employment opportunities is a significant service to society. If unemployment problem increases, the socio-economic environment cannot be congenial for the growth of business activities.

(iv) Fair return to investor – Business is expected to pay fair return to shareholders and creditors in the form of dividend and interest. Investors also expect safety and appreciation of their investment. They should be kept informed about the financial health and future prospects of business.

(v) Social welfare – Business should provide support to social, cultural and religious organisations. Business enterprises can build schools, colleges, libraries, dharamshalas, hospitals, sports bodies and research institutions. They can help non-government organisations (NGOs) like CRY, Help Age, and others which render services to weaker sections of society.

(vi) Payment of Government Dues – Every business enterprise should pay tax dues (income tax, GST, excise duty, customs duty, etc.) to the Government honestly and at the right time. These direct and indirect taxes provide revenue to the Government for spending on public welfare. Business should also abide faithfully by the laws of the country.

Thus, businessmen should pursue those policies and take those actions which are desirable in terms of the objectives and values of our society.\

1.3.3 Human Objectives:
Business is run by people and for people. Labour is a valuable human element in business. Human objectives of business are concerned with the well-being of labour. These obj ectives help in achieving economic and social objectives of business. Human objectives of business are given below:

(i) Labour welfare – Business must recognise the dignity of labour and human factor should be given due recognition. Proper opportunities should be provided for utilising individual talents and satisfying aspirations of workers. Adequate provisions should be made for their health, safely and social security. Business should ensure job satisfaction and sense of belonging to workers.

(ii) Developing human resources – Employees must be provided the opportunities for developing new skills and attitudes. Human resources are the most valuable asset of business and their development will help in the growth of business. Business can facilitate self-development of workers by encouraging creativity and innovation among them. Development of skilled manpower is necessary for the economic development of the country.

(iii) Participative management – Employees should be allowed to take part in decision making process of business. This will help in the development of employees. Such participation will also provide valuable information to management for improving the quality of decisions. Workers’ participation in management will usher in industrial democracy.

(iv) Labour management cooperation – Business should strive for creating and maintaining cor¬dial employer-employee relations so as to ensure peace and progress in industry. Employees should be treated as honourable individuals and should be kept informed.

1.3.4 National Objectives:
National objectives of business are as follows:
(i) Optimum utilisation of resources – Business should use the nation’s resources in the best possible manner. Judicious allocation and optimum utilisation of scarce resources is essential for rapid and balanced economic growth of the country. Business should produce goods in accordance with national priorities and interests. It should minimise the wastage of scarce natural resources.

(ii) National self-reliance – It is the duty of business to help the Government in increasing exports and in reducing dependence on imports. This will help a country to achieve economic inde-pendence. This requires development of new technology and its application in industry.

(iii) Development of small scale industries – Big business firms are expected to encourage growth of small scale industries which are necessary for generating employment. Small scale firms can be developed as ancillaries which provide inputs to large scale industries.

(iv) Development of backward areas – Business is expected to give preference to the industriali-sation of backward regions of the country. Balanced regional development is necessary for peace and progress in the country. It will also help to raise standard of living in backward areas. Government offers specific incentives to the businessmen who set up factories in no¬tified backward areas.

(v) Control over pollution – Rapid industrialisation has resulted in air, water and noise pollution. Business is responsible for reducing the adverse effect of business on the quality of life. It must make proper arrangements for the disposal of smoke, effluents, wastes, etc. to protect the health and life of people, animals and birds.

Business Objectives At A Glance:

1.3.5 Role of Profit in Business:
Profit earning is essential in business due to the following reasons:
1. Incentive – Profit is the driving force behind every business. It inspires people to start an enterprise and to work hard for making it successful. Profit is the reward for, undertaking the risk of business.

2. Survival – Profit is essential for the survival of business and it ensures the continuity of an enterprise. In the absence of profits, an enterprise will eat up its own capital and ultimately close down. With the help of profits business can replace obsolete machinery and equipment and thereby maintain its capacity to create wealth.

According to Drucker, “profit is the risk premium that covers the costs of staying in business”. Profits help business to face trade cycles and other shocks. Profits are also required to reward various factors of production.

3. Growth – Profits is the biggest source of capital for expansion and growth of business. It serves as a means of self-financing. In addition, profits enable business to attract capital from outside. Nobody likes to invest money in a loss making enterprise.

4. Measure of efficiency – Profit is considered to be the index of success in business. People judge the performance of an enterprise on the basis of profits earned by it.

5. Prestige and recognition – A loss making business enjoys no goodwill. Profits provide economic power and status to businessmen. Higher profits increase the bargaining strength and credit worthiness of business. Moreover, only a profit making business can provide service to society.

Thus, profit earning is an essential and desirable objective of every business. But mere money chasing is not business. According to Drucker, “the problem of any business is not the maximisation of profit but the achievement of sufficient profits to cover the risks of economic activity, and thus, to avoid loss. The businessmen who keep their customers, employees, investors and the society satisfied, will definitely earn good profits”.

Urwick has very aptly summed up the relevance of profit motive in business as “earning of profits cannot be the objective of a business any more than eating is the objective of living”. A business cannot survive without profit just as a person cannot live without food.

But profits cannot be the sole purpose of business just as eating is not the aim of life. However, profits must be earned by satisfying the wants of customers and after paying workers their dues. In the words of Arvind Mafatlal, “no business or industry is run philanthropically. It has to make a profit for further growth. But this profit cannot be at the expense of labour and the community at large”.

Economic and social objectives of business are not contradictory. They go hand in hand in the long run. No business can earn profits without satisfying customers and other sections of society.

Similarly, business cannot render service without earning profits. Thus, the real objective of business is to earn profit by serving the interests of consumers, employees, investors, Government and the society as a whole.

1.3.6 Objections against Profit Maximisation:
Despite their indispensable role in business, profits cannot be the be-all and end-all of business. The profit maximisation objective is undesirable on account of the following reasons:
1. Profit maximisation overstresses the end result and overlooks the means employed to achieve the profits. It considers profit as the ultimate goals of business rather than a means to the real end. The ultimate aim of business should be social welfare. If profit maximisation is considered as the ultimate aim of business, businessmen might try to maximise profits by socially undesirable means such as profiteering, black-marketing, hoarding, exploitation of workers and consumers, etc.

2. Profit maximisation overstresses the reward for owners and ignores the interests of other stakeholders. Profit is the reward for capital and profit maximisation gives the impression that a business concern is the domain only of owners. In reality, no business can succeed without the fullest co-operation of labour, consumers, Government and the community at large. Profit maximisation objective overlooks the stake of these groups in business.

3. Profit maximisation misguides managers to the point where they may endanger the survival of the business. In order to maximise current profits, managers may undermine the firm’s future. They may ignore research and development, executive development, pushing of the most easily saleable products, and other long-term investments. Such activities threaten the long-term success of the enterprise.

4. Profit maximisation has capitalistic overtones. The advocates of socialism decry the goal of profit maximisation on the ground that profit maximisation results in the exploitation of poor by the rich. It also accentuates inequalities in the distribution of income and wealth.

5. Profit maximisation is inconsistent with the modern trends in business. Diffusion of share ownership, professionalisation of management, growth of institutional shareholding and the emergency of a distinctive technostructure are some of these trends.

The main goal of the technostructure (control by managers and technologists), is survival and growth of business. Profit maximisation may endanger long term growth and, therefore, the technostructure prefers long-term growth. These professionals regard profit maximisation as unrealistic, inappropriate and even immoral.

A truly successful business can be built only if the objective of service to the society is constantly followed. If this is done profits will come automatically, but if the whole emphasis is on making money business may not survive and succeed for a long period. The guiding principle of business should be profit through service. Every business should provide a proper balance between profit motive and social service.

1.4 Forms of Business Organizations:
The main forms of ownership in private sector are as follows:

• Sole Proprietorship
• Joint Hindu Family Business
• Partnership
• Joint Stock Company
• Cooperative Society

1.4.1 Sole Proprietorship:
Sole trader is a person who carries on business exclusively for himself He alone establishes the business, arranges its finances, manages its affairs and bears all its risk. He acts both as the owner and manager of his business. He alone, is responsible for the profits and losses of his business. He may borrow funds and employ people to help him but the ultimate authority and responsibility lie in his hands. Sole trader business is thus a one-man show.

Some popular definitions of sole trader are given below:
The individual proprietorship is the form of business organisation at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure.

A sole proprietor is a person who carries on business exclusively by and for himself. He is not only the owner of the capital of the undertaking, but is usually the organiser and manager and takes all the profits or responsibility for losses.

A sole trader business is a type of business unit where one person is solely responsible for providing the capital, for bearing the risk of the enterprise and for the management of business.

Under the sole proprietorship form of ownership, a single individual organises and operates the business in his own name. He is not only responsible for its management but also for its risks. Sole proprietorship is a form of business where the individual proprietorship is the supreme judge of all matters pertaining to his business. Sole proprietorship is an informal type of business owned by one person.

The sole proprietorship is that form of business ownership which is owned and controlled by a single individual. He receives all the profits and risks all of his property in the success or failure of the enterprise.
The distinguishing characteristics of sole proprietorship are as follows:
1. Single ownership – A sole proprietorship is wholly owned by one individual. The individual supplies the total capital from his own wealth or from borrowed funds.

2. One-man control – The proprietor alone takes all the decisions pertaining to the business. He is not required to consult anybody. Ownership and management are vested in the same person. Some persons may be employed to help the owner but ultimate control lies with him.

3. No legal entity – A sole proprietorship has no legal identity separate from that of its owner. The law makes no distinction between the proprietor and his business. The business and the owner exist together. If the owner dies or becomes insolvent the business is dissolved. Business and the proprietor are one and the same.

4. Unlimited liability – The proprietor is personally liable for all the debts of the business. In case the assets are insufficient to meet its debts, the personal property of the proprietor can be attached.

5. No profit-sharing – The sole proprietor alone is entitled to all the profits and losses of business. He bears the complete risk and there is nobody to share the profits or losses.

6. Small size – The scale of operations carried on by a sole proprietorship is generally small. A sole trader can arrange limited funds and managerial ability. Therefore, the area of operations is limited.

7. No legal formalities – No legal formalities are required to start, manage and close.

Suitability:
Thus, sole proprietorship has several advantages and disadvantages. According to William R. Basset, “the one man control is the best in the world if that man is big enough to manage everything.” But, one man can rarely manage and control everything. Therefore, sole proprietorship is a suitable form of organisation in the following cases:

• Where the market is local, example – small-scale retailers
• Where personal attention to the needs and preferences of customers is essential, example – tailoring, beauty parlours, etc.
• Where fashions change very frequently, example – artistic jewellery.
• Where small amount of capital is required but personal skills are more important, example – health clinic.
• Where quick decision and prompt action are necessary, example – stock brokers.
• Where risk involved is negligible, example – doctors, lawyers, chartered accountants.

1.4.2 Joint Hindu Family Business:
The joint Hindu family business refers to a business which is owned and managed by the members of a joint Hindu family. It is also known as Hindu Undivided Family Business: It is governed by the Hindu Succession Act. This form of business is created by the law of succession. The joint Hindu family form of business is one in which the family possesses some inherited property.

The share of ancestral property is inherited by a male member from his father grandfather and great grandfather. Thus, three successive generations can simultaneously inherit the ancestral property. All the male members having a share in family property are known as coparceners and the oldest male member is called the karta.

Features : The main characteristics of Joint Hindu Family Business are as follows:
1. Membership – A person becomes a member in the family business by virtue of his birth in the family. No formal agreement is necessary between the family members. The membership is restricted to three successive generations. Only male members can be coparceners. A female relative of a deceased male coparcener will have a share after the death of the coparceners. Minors are also full-fledged members of the family business. There is no limit on the number of members.

2. Management – The management of joint Hindu family business is rested in the karta. The karta may, however, associate other members to assist him in the management of family business.

3. Liability – The liability of the karta is unlimited. The liability of other members is limited to the extent of their share in the property of the family business.

4. Right to Accounts – Coparceners are not entitled to inspect the accounts of the business. However, a coparcener who is leaving the family business can demand accounts from the karta.

5. Dissolution – Joint Hindu family business is not dissolved on the death of a coparcener. It comes to an end when all the members notify that they are not members of the joint Hindu family.

Joint Hindu Family Business at a Glance:

1.4.3 Partnership:
The partnership form of business organisation grew out from the limitations of sole proprietorship. When the business expands, one man is unable to arrange the financial resources and bear the risks. He cannot supervise and manage all the functions of business personally. Therefore two or more persons join hands and combine their capital and skill to start and run a business. Partnership is thus an extension of sole proprietorship.

A partnership is a voluntary association of two or more persons who agree to carry on some business jointly and share its profits and losses. They combine their funds and skills to carry on business together. Some popular definitions of partnership are as follows:

L.H. HANNEY: Partnership is the relations existing between persons competent to make contact, who agree to carry on lawful business in connection with a new to private gain.

The Partnership Act : “Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any one of them acting for all”. A Partnership is a form of business organisation in which two or more persons upto a maximum twenty join together to undertake some form of business activity.

Two or more individuals may form a partnership by making a written or oral agreement that they will jointly assume full responsibility for the conduct of business.

The persons who enter into partnership with the one another are individually called ‘partners’ and collectively a ‘firm’. The name under which they carry on business is called the ‘firm name’.

The essential characteristics of partnership are as follows :
1. Two or more persons – There must be at least two persons to form a partnership. A person cannot enter into partnership with himself. The maximum number of persons in a partnership should not exceed 50. If the number of partners exceeds the prescribed maximum, it would become an illegal association of persons. A firm cannot become a partner of another firm though its partners can join any other firm as partners.

2. Agreement – Partnership is the outcome of an agreement between persons. The relation of partnership arises from the formation of a contract and not from status or birth. If a proprietor gives a share in profits to his employee it will not be called a partnership unless there is an agreement of partnership between the two. The agreement may be oral or in writing but it must satisfy all the essentials of a valid contract.

3. Lawful business – A partnership can be formed only for the purpose of carrying on a business. An association of persons who jointly own a house without carrying on a business is not partnership. Moreover, the business carried on by the partners must be lawful. Illegal acts such as theft, dacoity, smuggling, etc., cannot be called partnership.

4. Sharing of profits – The agreement between the partners must be to share the profits of business. There can be no partnership without the intention of mutual gain. The profits must be distributed among the partners in an agreed ratio. Similarly, losses should be shared among the partners. However, sharing of profits is not a conclusive proof of partnership. For example, a manager may be given a share in profits of the firm.

5. Mutual agency – Partnership business can be carried on by all the partners or by any of them acting on behalf of the others. In other words, every partner is an implied agent of the other partners and of the firm. Each partner is liable for acts performed by other partners on behalf of the firm.
The above mentioned features are the real tests of partnership. In addition, partnership has the following characteristics:

6. Utmost good faith – The relations between partners are based upon mutual trust and confidence. Every partner is expected to act in the best interests of other partners and of the firm as a whole. He must observe utmost good faith in all the dealings with his co-partners. He must render true accounts and make no secret profits from the business.

7. Unlimited liability – Every partner is jointly and severally liable to an unlimited extent for the debts of the partnership firm. In case the assets of the firm are insufficient to pay the debts in full, the personal property of each partner can be attached to pay the creditors of the firm.

8. Restriction on transfer of interest – No partner can transfer his share in the partnership without the prior consent of all other partners.

9. Joint ownership and control – A partnership is owned and controlled jointly by all the partners.

Distinction Between Proprietorship and Partnership:

Merits and Demerits of Partnership:

Limited Liability Partnership (LLP) – Limited partnership is now allowed in India under the Limited
Liability Partnership Act, 2008. The chief characteristics of a limited liability partnership are as follows:

• A limited liability partnership must be registered under the Act with a minimum of two partners. There is no limit on the maximum number of partners.
• An LLP is a body corporate having a separate legal entity and perpetual succession.
• In an LLP the liability of partners is limited to their agreed contributions to the LLP. No partner would be liable on account of any unauthorised or independent actions of other partners.
• An LLP must maintain annual accounts reflecting the true and fair view of its state of affairs.
• The liability of partners and the firm would become unlimited in case the firm or its partners carry out any act with the intention to defraud the creditors or any other person or for any fraudulent purpose.
• Thus, LLP is a hybrid form of business organisation combining features of both partnership firm and joint stock company.

Advantages: Limited liability partnership offers the following benefits:

• An LLP is a separate legal entity independent of the partners. It is capable of owning and holding property in its own name.
• It is much more stable than a general partnership because it is not dissolved by the retirement, insolvency, death, etc. of a partner. It enjoys perpetual existence.
• The Liability of partners in LLP is limited, they have not to take unlimited risk.
• As there is no limit on the number of partners, an LLP can raise huge funds for expansion and growth of business.

Disadvantages: An LLP suffers from the following disadvantages:

• It has to be registered under the Act. It has to spend time and money in the documents and formalities of incorporation.
• There is less secrecy of business affairs as it has to fulfil legal requirements.
• Credit standing of an LLP is reduced due to the limited liability of partners.

Distinction Between Company and Partnership:

1.4.4 Joint Stock Company:
The company form of business organization came into existence to overcome the limitations of sole proprietorship and partnership.

According to James Stephenson, “a company is an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade business, and who share the profit and loss arising therefrom”.

Under the Companies Act a company having share capital may be is defined as “a company limited by shares having a permanent paid up or nominal capital of fixed amount divided into shares, also of fixed amount held and transferable as stock and formed on the principles of having its members only the holders of those shares or stock and no other persons”.

According to Prof. Haney, “Joint stock company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership”.

In the words of Justice Lindley, “By a company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money, and is the capital of the company. The persons who contribute it are its members”.

The distinctive features of the company form of organisation are as follows:
1. Separate legal existence – A company has a distinct legal entity independent of its members. It can own property, make contracts and file suits in its own name. Shareholders are not the joint owners of the company’s property.

A shareholder cannot be held liable for the acts of the company. Similarly, members of the company are not its agents. There can be contracts between a company and its members. A creditor of the company is not a creditor of its members.

2. Perpetual succession – Perpetual succession means continued existence. A company is a creation of the law and only the law can bring an end to its existence. Its life does not depend on the life of its members.

The death, insolvency or lunacy of members does not affect the life of a company. It continues to exits even if all its members die. Members may come and go but the company goes on until it is wound up.

3. Limited liability – As a company has a separate legal entity, its members cannot be held liable for the debts of the company. The liability of every member is limited to the nominal value of the shares bought by him or to the amount of guarantee given by him.

For instance, if a member has 50 shares of ₹ 10 each, his liability is limited to Rs 500. Even if the assets of the company are insufficient to satisfy fully the claims of the creditors, no member can be called to pay anything more than what is due from him. However, if the members of the company so desire, they may form a company with unlimited liability.

4. Transferability of shares – The capital of a company is divided into parts. Each part is called a share. These shares are generally transferable. A shareholder is free to withdraw his membership from the company by transferring his shares. However, in actual practice some restrictions are placed on the transfer of shares.

5. Common seal – Being an artificial entity, a company cannot act and sign itself. Therefore, it acts through human beings. All the acts of the company are authorised by its common seal. The name of the company is engraved on its common seal.

The common seal is affixed on all important documents as a token of the Company’s approval. The common seal is the official signature of the company. Any document which does not bear the common seal of the company is not binding on the company.

6. Separation of ownership and control – Members have no right to participate directly in the day- to-day management of a company. They elect their representatives, called directors, who manage the company’s affairs on behalf of the members. Thus, the ownership of a company is distributed among the shareholders while management is vested in the board of directors. The management of a company is delegated and centralised.

7. Voluntary association – A joint stock company is a voluntary association of certain persons formed to carry out a particular purpose in common. Members of a company can join it and leave it at their own freewill.

8. Artificial legal person – A company is an artificial person created by law. It exists only in contemplation of law. It is competent to enter into contracts and to own property in its own name. But it docs not take birth like a natural person and it has no physical body of a natural human being.

9. Corporate finance – The share capital of a company is generally divided into a large number of shares of small value. These shares are purchased by a large number of people from different walks of life.

10. Statutory regulation and control – Government exercises control through company law over the management of joint stock companies. A company is required to comply with several legal formalities and to file several documents with the Registrar of Companies.

Joint Stock Company At A Glance:

Private Company – It means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and which by its Articles of Association:

• restricts the right of its members to transfer shares, if any;
• except in case of one person company limits the number of its members to 200, excluding members who are or were in the employment of the company;
• prohibits any invitation to the public to subscribe for any securities of, the company;
• prohibits any invitation or acceptance of deposits from persons other than its members directors or their relatives.

The minimum number of members required to form a private company is two. Such a company must use the word ‘private’ in its name. A private company enjoys special privileges and exemptions under the Companies Act. It is generally a family affair. A private company enjoys several privileges under the Companies Act, 2013.

The main privileges available to a private company are as follows –
1. A private company can be started with just two members whereas a public company ‘requires at least seven members.

2. A private company can start its business immediately after incorporation. Unlike a public company, it is not required to obtain the certificate of commencement of business.

3. A private company is not required to issue or file a prospectus or statement in lieu of prospectus with the Registrar of Companies.

4. A private company is neither required to hold statutory meeting nor to file statutory report with the Registrar of Companies.

5. A private company can directly allot shares. There is no restriction of minimum subscription.

6. It can have only two directors whereas a public company must have at least three directors.

7. It is not required to offer new issue of shares to the existing shareholders on a pro rata basis. It can issue shares with disproportionate voting rights.

8. Its directors need not retire by rotation. Consent to act as directors or to take up the qualification shares need not be filed with the Registrar. A private company need not take the consent of the Government to grant loans to its directors. Its directors can vote on a contract in which they are interested. Persons can be appointed to office of profit.

9. A private company is exempted from restrictions concerning remuneration to managerial personnel, appointment of persons to office of profit, inter company investments and publication of accounts.

10. Two persons personally present is sufficient quorum for general meeting of a private company unless the Articles of Association provide otherwise.

11. A private company is exempted from preparing an index to its register of members.

Public Company – It means a company which –

• is not a private company;
• has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed;
• is a private company which is a subsidiary of a company which is not a private company.

Thus, a public company is one which:

• does not restrict the transfer of its shares
• does not limit the number of members
• can invite the general public to subscribe to its share; and debentures, and
• can invite or accept deposits from the public.

At least seven persons are required to form a public company.
One Person Company (OPC) – The Companies Act, 2013 allows the formation of one person company. As the name suggests, a one person company has only one member. The company’s name will carry a suffix ‘OPC’. The process of setting upon OPC is the same as that for a private limited company.

Since the company is owned by a single person, he must nominate someone to take charge of it in case of his death or disability. The nominee must give his consent in writing which has to be filed with the Registrar of companies.

An OPC is exempt from certain procedural formalities, such as conducting annual general meetings, general meetings and extraordinary general meetings. No provisions have been prescribed on holding board meetings if there is only one director, but two meetings need to be organised every year if there is more than one director.

Any resolution passed by the sole member must be communicated to the company and entered in the minutes book. There is, however, no relief from the provisions on audits, financial statements and accounts, which are applicable to private companies.

Benefits & drawbacks of an OPC – The biggest advantage of a one person company is that its identity is distinct from that of its owner. Therefore, if the firm is embroiled in a legal controversy, the owner will not be sued, only the company will. Another advantage is limited liability. Since the company is distinct from that of its owner, the personal assets of the shareholders and directors remain protected in case of a credit default.

On the other hand, an OPC is not easy to set up. It requires a lot of paperwork and is a time-consuming and costly process. Despite the advantages that a one person company offers, it may not be a viable option for everyone. In contrast to a company, a proprietorship is easy to set up. The paperwork involved is minimal. Of course, the risk in a proprietorship is higher as the owner is personally responsible for the business.

Comparison Between Proprietorship and Opc:

Distinction Between Partnership and Private Company:

Distinction Between Private and Public Companies:

1.4.5 Cooperative Society:
Cooperative organisation developed as a means of protecting the interests of the weaker sections of society against exploitation and oppression by the economically strong and powerful sections. It is a form of organisation wherein persons associate together voluntarily and on equal basis to further their common interests.

For example, consumers may join hands to provide goods at cheaper rates by establishing direct contacts with manufacturers and thereby eliminating the profits of middlemen. Similarly, people belonging to the working class may form a cooperative society to provide houses at low costs to the members. A cooperative society is based on the principles of self help and mutual help and its primary motive is to render service to the members.

Some popular definitions of cooperative organisation are given below :
Cooperative organisation is “a society which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles”. A cooperative society is “a form of organisation wherein persons voluntarily associate together as human beings on the basis of equality for the promotion of the economic interests of themselves”.

Cooperative is a joint enterprise of those who are not financially strong and, therefore, come together not with a view to get profits but to overcome disability arising out of the want of adequate financial resource. Cooperative is an association of individuals to secure a common economic goal by honest means.

The distinctive features of cooperative organisation are as follows :
1. Voluntary association – A cooperative society is essentially a voluntary association of persons desirous of improving their economic status through joint action. Everyone having a common interest is free to join a cooperative society. He can also leave the society after giving proper notice. He can withdraw his capital but cannot transfer his share to another person. No body is forced to become a member or to continue as a member.

2. Religious and political neutrality – The membership of a cooperative society is open to all irrespective of caste, creed, religion or political affiliation. New members are always welcome to join the society. Cooperative societies represent universal brotherhood.

3. Separate legal entity – After registration a cooperative society becomes a distinct body independent of its members. It can own property and make contracts in its own name. It becomes an autonomous and self-governing organisation.

4. One-man one vote – Every member has one vote irrespective of the number of shares held by him. Rich persons holding more shares cannot dictate terms. The organisation of a cooperative society is democratic and all members have an equal voice in its management.

5. Service motive – The primary aim of a cooperative society is to provide service to its members. Its motto is ‘each for all and all for each’. However, a cooperative society
may earn some profits for the benefit of its members.

6. Disposal of surplus – The surplus of a cooperative society is not distributed among members in proportion to their capital. According to law, at least one fourth of the profits must be transferred to general reserve. A portion of the profits, not exceeding ten per cent, may be utilised for the welfare of the locality in which the society is functioning. Thus, profits of a cooperative society are utilised for the benefit of its members and the local community.

7. Limited return on capital – A dividend not exceeding 10 per cent can be paid to members on the capital. The members of a cooperative society are thus assured of a fixed return on their investment.

8. Cash Trading – Cooperative societies sell goods on cash basis. Cash trading provides protection against bad debts and maintains working capital. However, an exception, may be made in the case of members.

9. Perpetual existence – Once registered a cooperative society enjoys perpetual existence. It is created by law and law alone can dissolve it.

10. State control – Every cooperative society must be registered under the Cooperative Societies Act, 1912 or respective State cooperative laws. It is required to observe the prescribed rules and regulations. Government exercises supervision and control over cooperative societies to ensure their proper functioning.

Cooperative Organisation At a Glance:

Distinction Between Company And Cooperative:

These CA Foundation Accounts Study Material CA Foundation Principles and Practice of Accounting Question Paper is designed strictly as per the latest syllabus and exam pattern.

CA Foundation Principles and Practice of Accounting Question Paper

Question No. 1 is compulsory.

Candidates are also required to answer any four questions from the remaining five questions.
Working notes should form part of the respective answers.

Question 1(a).
State with reasons, whether the following statements are True or False. [6 Statements x 2 = 12 Marks]
(i) In case of admission of a new partner in a partnership firm, the profit/ loss on revaluation account is transferred to all partners in their new profit sharing ratio.

(ii) In the balance sheet of X Limited, preliminary expenses amounting to ₹ 5 lakhs and securities premium account of ₹ 35 lakhs are appearing. The accountant can use the balance in securities premium account to write off preliminary expenses.

(iii) Insurance claim received on account of plant and machinery completely damaged by fire is a capital receipt.

(iv) Purchase of office furniture & fixtures of ₹ 2,500 has been debited to General Expense Account. It is an error of omission.

(v) A Limited is sending goods costing ₹ 50,000 to B Limited on consignment basis. The accountant of A Limited is of the opinion that these goods should be sent under a sale invoice.

(vi) A concern proposes to discontinue its business from December, 2020 and decides to dispose of all its plants within a period of 3 months. The Balance Sheet as on 31st December, 2020 should continue to indicate the plants at its historical costs as the assets will be disposed of after the Balance Sheet date.
Answer:
(i) False: Profit & Loss on Revaluation account is transferred to old partners only in their old ratio.

(ii) True: Section 52 of the Companies Act, 2013 allows that preliminary expenses may be written off through Securities Premium Account.

(iii) True: It is a Capital receipt because it is received against a Capital expenditure.

(iv) False: It is an error of Principle.

(v) False: In Consignment basis when goods are sent to agent for the purpose of sale, a Proforma invoice is prepared because consignor transfers only possession of goods not the ownership of goods.

(vi) False: As per going concern concept any business shows its Fixed Assets at its historical cost but in case of discontinuance of business they should be shown at their expected realizable value.

Question 1(b).
What services can a Chartered Accountant provide to the society? (4 Marks)
Answer:
Role of accountant in the society:
→ An accountant with his education, training, analytical mind and experience is best qualified to provide multiple need-based service to the ever-growing society.

→ The accountants of today can do full justice not only to matters relating to taxation, costing, management accounting, financial planning, company law and procedures but they can act in the fields relating to financial policies, budgetary policies, information technology, Software development and even economic principles.

→ The services rendered by accountants to the society include the following:

• To maintain the Books of Account in a systematic manner.
• To act as a Statutory Auditor (for example under the Companies Act, Income Tax Act, Co-operative Societies Act).
• To act as an Internal Auditor.
• To act as Social Auditor.
• To act as Taxation Advisor.
• To act as Management Accountant.
• To act as Financial Advisor.
• To provide Management Consultancy Services.
• To act as Company Law Advisor.
• To act as Liquidator.
• To act as Arbitrator.
• To act as Management Information System Consultant.
• To act in the held of software development.

Question 1(c).
The following are some of the transactions of M/s. Kamal & Sons for the year ended 31st March, 2020. You are required to make out their Sales Book.
(i) Sold to M/s. Ashok & Mukesh on Credit:
40 Shirts @ ₹ 900 per shirt
30 trousers @ ₹ 1,000 per trouser
Less: Trade discount @10%
(ii) Sold furniture to M/s. XYZ & Co. on credit ₹ 8,000
(iii) Sold 15 shirts to Aman @ ₹ 750 each for cash. (4 Marks)
Answer:
In the books of M/s. Kamal & Sons
Sales Book

Note:

• Furniture sold on credit is not sale of goods, so it will not be recorded in Sales Book.
• Goods sold in cash are not recorded in Sales Book.

Question 2(a).
On 31-3-2020, Mahesh’s Cash Book Showed a Bank overdraft of ₹ 98,700. On comparison he finds the following :
(1) Out of the total cheques of ₹ 8,900 issued on 27th March, one cheque of ₹ 7,400 was presented for payment on 4th April and the other cheque of ₹ 1,500 handed over to the customer, was returned by him and in lieu of that a new cheque of the same amount was issued to him on 1st April. No entry for the return was made.

(2) Out of total cash and cheques of ₹ 6,800 deposited in the Bank on 24th March, one cheque of ₹ 2,600 was cleared on 3rd April and the other cheque of ₹ 500 was returned dishonoured by the bank on 4th April.

(3) Bank charges ₹ 35 and Bank interest ₹ 2,860 charged by the bank appearing in the passbook are not yet recorded in the cash book.

(4) A cheque deposited in his another account of ₹ 1,550 wrongly credited to this account by the bank.

(5) A cheque of f 800, drawn on this account, was wrongly debited in another account by the bank.

(6) A debit of ₹ 3,500 appearing in the bank statement for an unpaid cheque returned for being ‘out of date’ had been re-dated and deposited in the bank account again on 5th April 2020.

(7) The bank allowed interest on deposit ₹ 1,000.

(8) A customer who received a cash discount of 4% on his account of ₹ 1,00,000 paid a cheque on 20th March, 2020. The cashier erroneously entered the gross amount in the bank column of the Cash Book.
Prepare Bank Reconciliation Statement as on 31-3-2020. (10 Marks)
Answer:
Bank Reconciliation Statement as on 31st March, 2020

Question 2(b).
Physical verification of stock in a business was done on 23rd February, 2020. The value of the stock was ₹ 28,00,000. The following transactions took place from 23rd February to 29th February, 2020:
(1) Out of the goods sent on consignment, goods at cost worth ₹ 2,30,000 were unsold.

(2) Purchases of ₹ 3,00,000 were made out of which goods worth ₹ 1,20,000 were delivered on 5th March, 2020.

(3) Sales were ₹ 13,60,000 which include goods worth ₹ 3,20,000 sent on approval. Half of these goods were returned before 29th February, 2020, but no information is available regarding the remaining goods.

(4) Goods are sold at cost plus 2596. However goods costing ₹ 2,40,000 had been sold for ₹ 1,50,000.
Determine the value of stock on 29th February, 2020.  (10 Marks)
Answer:
Statement of Valuation of Stock on 29th Feb., 2020

Working Notes:
1. Calculation of Cost of Sales:

Total COGS is ₹ 9,52,000 (₹ 2,40,000 + ₹ 7,12,000)
This stock is already included in stock taking made on 23rd Feb., 2020.

Question 3(a).
Maya consigned 400 boxes of shaving brushes, each box containing 100 shaving brushes. Cost price of each box was ₹ 3,000. Maya spent ₹ 500 per box as cartage, freight, insurance and forwarding charges. One box was lost on the way and Maya lodged claim with insurance company and could get ₹ 2,700 as claim on average basis. Consignee took delivery of the rest of the boxes and spent ₹ 1,99,500 as non-recurring expenses and ₹ 1,12,500 as recurring expenses. He sold 370 boxes at the rate of ₹ 65 per shaving brush. He was entitled to 2% commission on sales plus 1% del-credere commission.
You are required to prepare Consignment Account. (5 Marks)
Answer:
In the books of Maya
Consignment a/c

Working Note:
1.

Note: Only forwarding expenses will be taken into consideration since goods are lost in transit.

Note : Non-recurring expenses of Agent were incurred on remaining boxes received by him.

Question 3(b).
Attempt any ONE of the following two sub-parts i.e. either (i) or (ii).
(i) From the following particulars prepare a account current, as sent by Mr. Raju to Mr. Sunil as on 31st October 2020 by means of product method charging interest @ 12% p.a.

OR
(ii) Rakesh had the following bills receivable and bills payable against Mukesh.

15th August was a public holiday. However, 6th September, was also declared a sudden holiday.
Calculate the average due date, when the payment can be received or made without any loss of interest to either party. (5 Marks)
Answer:
(i) Mr. Sunil in account current with Mr. Raju
(Interest upto 31st October, 2020 @ 12% p.a.)

Note: Since year 2020 is a leap year, Interest is calculated on 366 days.

(ii) Bills receivable of Mr. Rakesh
Base date = 12th July

Bills payable for Mr. Rakesh
Base date = 12th July

Question 3(c).
Suresh draws a bill for ₹ 15,000 on Anup on 15th April, 2020 for 3 months, which Anup returns to Suresh after accepting the same. Suresh gets it discounted with the bank for ₹ 14,700 on 18th April, 2020 and remits one-third amount to Anup. On the due date Suresh fails to remit the amount due to Anup, but he accepts a bill of ₹ 17,500 for 3 months, which Anup discounts for ₹ 17,100 and remits ₹ 2,825 to Suresh. Before the maturity of the renewed bill Suresh becomes insolvent and only 50% was realized from his estate on 31st October, 2020.
Pass necessary Journal entries for the above transactions in the books of Suresh. (10 Marks)
Answer:
In the books of Suresh
Journal Entries

Working Note:
1. Share of Suresh in discounting charges of Second Bill
= 400 x \(\left(\frac{10000+2825}{171000}\right)\) = ₹ 300

2. Anup’s a/c

Question 4(a).
M/s. TB is a partnership firm with the partners A, B and C sharing profits and losses in the ratio of 3 : 2 : 5. The balance sheet of the firm as on 30th June, 2020 was as under:
Balance Sheet of M/s. TB as on 30-6-2020

It was mutually agreed that B will retire from partnership and in his place D will be admitted as a partner with effect from 1st July, 2020. For this purpose, following adjustments are to be made :
(a) Goodwill of the firm is to be valued at ₹ 3 lakhs due to the firm’s location advantage but the same will not appear as an asset in the books of the reconstituted firm.

(b) Building and Plant & Machinery are to be valued at 95% and 80% of the respective balance sheet values. Investments are to be taken over by the retiring partner at ₹ 46,000. Trade receivables are considered good only upto 85% of the balance sheet figure. Balance to be considered bad.

(c) In the reconstituted firm, the total capital will be ₹ 4 lakhs, which will be contributed by A, C and D in their new profit sharing ratio, which is 3 : 4 : 3.

(d) The amount due to retiring partner shall be transferred to his loan account.
You are required to prepare Revaluation Account and Partners’ Capital Accounts after reconstitution, along with working notes.
Answer:
Revaluation a/c

Partner’s Capital a/c

Working Notes:
1. Calculation of Sacrifice/Gain:
Old Share – New Share
A = \(\frac { 3 }{ 10 }\) – \(\frac { 3 }{ 10 }\) = NIL
B = \(\frac { 2 }{ 10 }\) – NIL = \(\frac { 2 }{ 10 }\) (Sacrifice)
C = \(\frac { 5 }{ 10 }\) – \(\frac { 4 }{ 10 }\) = \(\frac { 1 }{ 10 }\) (Sacrifice)
D = NIL – \(\frac { 3 }{ 10 }\) = – \(\frac { 3 }{ 10 }\)(Gain)

2. Goodwill Treatment:
(3,00,000 x 3/10) D’s Capital a/c Dr. 90,000
(3,00,000 x 2/10) To B’s Capital a/c 60,000
(3,00,000 x 1 /10) To C’s Capital a/c 30,000

3. Capital Adjustment:
Total Capital of the firm: ₹ 4,00,000

Question 4(b).
From the following balances and particulars of AS College, prepare Income & Expenditure Account for the year ended March, 2020 and a Balance Sheet as on the date :

Adjustments:
(a) Materials & Supplies consumed : (From college stores)
Teaching              –  ₹ 52, 000
Research              –  ₹ 1,45,000
Students Welfare –  ₹ 78,000
Games or Sports –   ₹ 24,000

(b) Tuition fee receivable from Government for backward ₹ 82,000.

(c) Stores selling prices are fixed to give a net profit of 15% on selling price.

(d) Depreciation is provided on straight line basis at the following rates :
Building                    5%
Plant & Equipment  10%
Furniture & Fixtures 10%
Motor Vehicle          20%   (10 Marks)
Answer:
Income & Expenditure account of AS College
for the year ended on 31st March, 2020

Balance Sheet of AS College as at 31st March, 2020

Working Note:
1. Calculation of Closing Stock of Stores & Supplies :

Question 5(a).
M/s. Applied Laboratories were unable to agree the Trial Balance as on 31st March, 2020 and have raised a suspense account for the difference. Next year the following errors were discovered :
(i) Repairs made during, the year were wrongly debited to the building A/c – ₹ 12,500.

(ii) The addition of the ‘Freight’ column in the purchase journal was short by ₹ 1,500.

(iii) Goods to the value of ₹ 1,050 returned by a customer, Rani & Co., had been posted to the debit of Rani & Co. and also to sales returns.

(iv) Sundry items of furniture sold for 130,000 had been entered in the sales book, the total of which had been posted to sales account.

(v) A bill of exchange (received from Raja & Co.) for ₹ 20,000 had been returned by the bank as dishonoured and had been credited to the bank and debited to bills receivable account.
You are required to pass journal entries to rectify the above mistakes. (5 Marks)
Answer:
In the books of M/s. Applied Laboratories
Rectification Journal Entries

Working Note:
1. Profit & Loss Adjustment a/c

Question 5(b).
Max & Co. employs a team of 9 worker who were paid ₹ 40,000 per month each in the year ending 31st December, 2018. At the start of 2019, the company raised salaries by 10% to ₹ 44,000 per month each.
On 1st July, 2019 the company hired 2 trainees at salary of ₹ 21,000 per month each. The work force are paid salary on the first working day of every month, one month in arrears, so that the employees receive their salary for January on the first working day of February, etc.

You are required to calculate :

• Amount of salaries which would be charged to the profit and loss for the year ended 31st December, 2019.
• Amount actually paid as salaries during 2019.
• Outstanding salaries as on 31st December, 2019. (5 Marks)

Answer:
(i) Amount of Salaries which would be charged to the Profit and Loss for the year ended 31st Dec., 2019

(ii) Amount Actually paid as Salaries during 2019

(iii) Outstanding Salaries as on 31st Dec., 2019

Question 5(c).
Following are the Manufacturing A/c, Creditors A/c and Trading A/c provided by M/s. Shivam related to financial year 2019-20. There are certain figures missing from these accounts.
Raw Material A/c

Creditors A/c

Manufacturing A/c

Additional Information:
(i) Purchase of machinery worth ₹ 12,00,000 on 1st April, 2019 has been omitted. Machinery are chargeable at a depreciation rate of 15%.

(ii) Wages include the following:
Paid to factory workers – ₹ 3,15,000
Paid to labour at office – ₹ 50,000

(iii) Direct expenses including following :
Electricity charges                     – ₹ 80,000 of which 25% pertained to office
Fuel charges                              – ₹ 25,000
Freight inwards                         – ₹ 32,000
Delivery charges to customers – ₹ 22,000
You are required to prepare revised Manufacturing A/c and Raw Material A/c.  (10 Marks)
Answer:
Raw Material A/c

Creditors A/c

Revised Manufacturing A/c

Working Notes:
1. Actual Depreciation:
= ₹ 2,15,000 + (12,00,000 x 15%)
= ₹ 2,15,000 + ₹ 1,80,000
= ₹ 3,95,000

2. Actual Direct Expenses:
= 2,49,000 – (80,000 x 25%) (electricity of office) – 22,000 (Delivery Charges)
= 2,49,000 – 20,000 – 22,000
= ₹ 2,07,000

3.

Question 6(a).
ABC Limited issued 20,000 equity shares of ₹ 10 each payable as:
– ₹ 2 per share on application
– ₹ 3 per share on allotment
– ₹ 4 per share on first call
– ₹ 1 per share on final call
All the shares were subscribed. Money due on all shares was fully received except for Mr. Bird, holding 300 shares, who failed to pay first call and final call money. All those 300 shares were forfeited. The forfeited shares of Mr. Bird were subsequently re-issued to Mr. John as fully paid up at a discount of ₹ 2 per share.
Pass the necessary Journal Entries to record the above transactions in the books of ABC Limited. (10 Marks)
Answer:
In the books of ABC Limited
Journal Entries

Question 6(b).
Y Company Limited issue 10,000 12% Debentures of the nominal value of ₹ 60,00,000 as follows:
(i) To a vendor for purchase of fixed assets worth ₹ 13,00,000 – ₹ 15,00,000 nominal value.
(ii) To sundry persons for cash at 9096 of nominal value of ₹ 30,00,000.
(iii) To the banker as collateral security for a loan of ₹ 14,00,000 – ₹ 15,00,000 nominal value.
You are required to pass necessary Journal Entries. (5 Marks)
Answer:
In the books of Y Company Ltd.
Journal Entries

Question 6(c).
Discuss the factors taken into consideration for calculation of depreciation. (5 Marks)
Answer:
The elements relevant for deciding the rate/amount of depreciation are:

• Cost of acquisition (Costs necessary to put an asset into usable condition)
• The estimated life of the asset
• Estimated scrap value at the end of its life

Browsing through CA Foundation Business Economics Notes Chapter 1 Nature and Scope of Business Economics help students to revise the complete subject quickly.

Nature and Scope of Business Economics – Business Economics CA Foundation Notes Chapter 1

What is Economics about?
The word ‘Economics’ is derived from the Greek word ‘Oikonomia’ which means household management. Till 19th century, economics was known as ‘Political Economy’. In 1776, Adam Smith published his book entitled “An Inquiry into the Nature and Causes of the Wealth of Nations” which is considered as the first modern work of Economics.

Every individual, every society and every country in this world faces the problem of making CHOICE. This is because of two facts –

• Human wants are unlimited.
• The means (resources) to satisfy unlimited wants are relatively scarce and these scarce resources have alternative uses.

As a result we are confronted with the problem of making choice of wants to be satisfied or the choice among the uses of resources. Thus, we are faced with the problem of allocation of resources to various uses.

The definition of Economics is however is narrow because it concentrates only at present i.e. how to use relative scarce resources to satisfy unlimited human wants. So it gives the picture of a society with fixed resources, skills and productive capacity, deciding what type of goods and services to be produced and how to distribute among the members of society.

However, over a period of time growth takes place. With growth there is increase in the resources and improvement in the quality of resources. But this growth in production and income is not smooth. It is through ups and downs. Economics, therefore, deals not only with how a country allocates its scarce productive resources but also with increase in the productive capacity of resources and with the reasons which led to sharp fluctuations in the use of resources.

Economics gives us understanding on economic issues like changes in the price of a commodity, changes in general price level of goods and services, poverty, level of unemployment, etc. The understanding of such helps us to decide the models and frameworks that can be applied in different situations. The tools of economics helps us to choose the best course of action from various alternatives available.

However, economic problems are of complex nature and are affected by economic forces, political set-up, social norms, etc. Thus, economics does not guarantee that all problems will be solved appropriately but it helps us to examine the problem in right perspective and find suitable measures to deal with it.

Meaning of Business Economics:
→ Business Economics is also referred to as Managerial Economics. It is application of economic theory and methodology.

→ Every business involves decision-making as survival and success depends on sound decisions.

→ Decision making means the process of –

• evaluating various course of action,
• making rational judgment on the basis of available information, and
• selecting i.e. making choice of a suitable alternative by decision maker.

→ Decision making is not simple and straight forward. It has become very complex due to ever changing business environments, growing competition, large scale production, big size of business houses, complex laws, cost awareness, etc. In other words the economic environment in which the firm operates is very complex and dynamic.

→ Business Economics provides a scientific base to the professional management of a business activity. It provides tools like budgeting, market analysis, cost-benefit analysis, etc. which can be scientifically applied to take sound business decisions. Thus, Business Economics is a subbranch of Economics which aims at the scientific application of economic knowledge, logic, theories and tools to take rational business decisions. Thus, it is an APPLIED ECONOMICS.

→ Business Economics is closely connected with both viz., Micro-Economic Theory as well as Macro-Economic Theory. It is also useful to the managers of ‘not-for-profit’ organisations.

Definitions of Business Economics:
1. “Business Economics in terms of the use of economic analysis in the formulation of business policies. Business Economics is essentially a component of Applied Economics as it includes application of selected quantitative techniques such as linear programming, regression analysis, capital budgeting, break-even analysis and cost’analysis.” (Joel Dean)

2. “Business Economics is concerned with the application of economic laws, principles and methodologies to the managerial decision making process within a business firm under the H conditions of risks and uncertainties.” (Evans Douglas)

Nature of Business Economics:
→ The subject matter of Economics is broadly divided into two major parts namely:
Micro-Economics, and Macro-Economics – Before dealing with nature of Business Economics, it is necessary to understand the difference between the two.

→ Micro-Economics – Micro means a ‘small part’. Therefore, Micro-economics study the be-haviour of small part or a small component or different individuals and organisations of a national economy. It examines how the individual units take decision about rational allocation of their scarce resources.

→ Micro-Economics covers the following :

• Theory of Product Pricing;
• Theory of Consumer Behaviour,
• Theory of Factor Pricing;
• The economic conditions of a section of people;
• Behaviour of firms; and
• Location of industry.

→ Macro-Economics – Macro means ‘large’. Therefore, macro-economics deals with the large economic activity. It study the economic system of a country as a whole ie. overall condition of an economy. It is a study of large aggregates like total employment, the general price level. Total output, total consumption, total saving and total investments. It also analyses how these aggregates change over time.

→ Macro-Economics covers the following :

• National Income and National Output;
• The General Price Level and interest rates;
• Balance of Trade and Balance of Payments;
• External value of currency i.e. exchange rate;
• Overall level of savings and investments i.e. capital formation; and
• The level of employment and rate of economic growth.

→ Business Economics is primarily concerned with Micro-Economics. However, knowledge and understanding of Macro-economic environment is also necessary. This is because macro-economic environment influence individual firm’s performance and decisions.

→ As already seen Business Economics enables application of economic knowledge, logic, the-ories and analytical tools. It is Applied Economics that fills the gap between economic theory and business practice. The following will describe the nature of Business Economics:

(1) Business Economics is a Science: Science is a systematised body of knowledge which trace the cause and effect relationships. Business Economics uses the tools of Mathematics, Statistics and Econometrics with economic theory to take decisions and frame strategies. Thus, it makes use of scientific methods.

(2) Based on Micro-Economics: As Business Economics is concerned more with the decision making problems of a particular business establishment. Micro level approach suits is more. Thus, Business Economics largely depends on the techniques of Micro-Economics.

(3) Incorporates elements of Macro Analysis: A business unit is affected by external environment of the economy in which it operates. A business units is affected by general price level, level of employment, govt, policies related to taxes, interest rates, industries, exchange rates, etc. A business manager should consider such macro-economic variables which may affect present or future business environment.

(4) Business Economics is an Art: It is related with practical application of laws and principles to achieve the objectives.

(5) Use of Theory of Markets & Private Enterprise: It uses the theory of markets and re-source allocation in a capitalist economy.

(6) Pragmatic Approach: Micro-Economics is purely theoretical while, Business Economics is practical in its approach.

(7) Inter-disciplinary in nature: It incorporates tools from other disciplines like Mathematics, Statistics, Econometrics, Management Theory, Accounting, etc.

(8) Normative in Nature: Economic theory has been developed along two lines – POSITIVE and NORMATIVE.

A positive science or pure science deals with the things as they are and their CAUSE and EFFECTS only. It states ‘what is’? It is DESCRIPTIVE in nature. It does not pass any moral or value judgments.

A normative science deals with ‘what ought to be’ or ‘what should be’. It passes value judgments and states what is right and what is wrong. It is PRESCRIPTIVE in nature as it offers suggestions to solve problems. Normative science is more practical, realistic and useful science.

Business Economics is normative in nature because it suggests application of economic principles to solve problems of an enterprise, However, firms should have clear understanding of their environment and therefore, it has to study positive theory.

Scope of Business Economics:
→ The scope of Business Economics is wide. Economic theories can be directly applied to two types of business issues namely –

• Micro-economics is applied to operational or internal issues off a firm.
• Macro-economics is applied to environment or external issues on which the firm has no control.

1. Micro-economics applied to operational or internal issues – Issues like choice of business size of business, plant layout, technology, product decisions, pricing, sales promotion, etc. are dealt by Micro-economic theories.
It covers –

• Demand analysis and forecasting
• Production and Cost Analysis
• Inventory Management
• Market Structure and Pricing Analysis
• Resource Allocation
• Theory of Capital and Investment Decisions
• Profitability Analysis
• Risk and Uncertainty Analysis.

2. Macro-economics applied to environmental or external issues.
The major economic factors relate to –

• the type of economic system
• stage of business cycles
• the general trends in national income, employment, prices, saving and investment.
• government’s economic policies
• working of financial sector and capital market
• socio-economic organisations
• social and political environment.

These external issues has to be considered by a firm in business decisions and frame its policies accordingly to minimize their adverse effects.

Basic Problems of an Economy:
→ We know that human wants are unlimited and resources are scarce.
→ The problem of scarcity of resources is not only faced by individuals but also by the society at large.
→ This gives rise to the problem of how to use scare resources so as to serve best the needs of the society.
→ This economic problem is to be dealt with in all the economic systems whether capitalist or socialist or mixed.
→ The central problems relating to allocation of resources are :

• What to produce and how much to produce?
• How to produce?
• For whom to produce?
• What provision should be made for economic growth?

What to produce and how much to produce?

• An economy has millions commodities to produce.
• It has to decide what commodities are to be produced and how much.
• Example – To produce luxury goods or consumer goods, etc.
• Here, the guiding principle is to allocate the resources in the production of goods in such a way that maximizes aggregate utility.

How to produce?

• There are many alternative techniques to produce a commodity.
• Choice has to be made between capital intensive technique or labour intensive technique of production.
• The choice of technique will depend upon
• availability of various factors of production, &
• the prices of factors of production.

Such techniques of production has to be adopted that makes best use of available resources.

For whom to produce?

• Who will consume the goods and services that are produced in the economy?
• Whether a few rich or many poor will consume?
• Goods and services are produced for those people who can purchase them or pay for them.
• Paying capacity depends upon income or purchasing power.

What provisions should be made for economic growth?

• A society cannot afford to use all its scarce resources for current consumption only.
• It has to provide for the future as well so that high economic growth can be achieved.

Therefore, an economy has to take decisions about rate of savings, investment, capital formation, etc.

Meaning of Economic System:
An economic system comprises the totality of forms through which the day to day economic process is at work. It refers to the mode of production, exchange, distributions and the role which government play in economic activity. There are three types of economic systems Capitalism, Socialism and Mixed Economy.

Capitalist Economy:

• Capitalistic economic systems is one in which all the means of production are privately owned.
• The owners of property, wealth and capital are free to use them as they like in order to earn profits.
• The central problems about what, how and for whom to produce are solved by the free play of market forces.

Characteristics of Capitalist Economy :

• There is right to own and keep private property by individuals. People have a right to acquire, use, control, enjoy or dispose off it as they like.
• There is right of inheritance i.e. transfer of property of a person to his legal heirs after his death.
• There is freedom of enterprise i.e. everybody is free to engage in any type of economic activity he likes.
• There is freedom of choice by consumers i.e. consumer is free to spend his income on what¬ever goods or services he wants to buy and consume.
• Entrepreneurs or producers in their productive activity are guided by their profit motive. Thus profit motive is the guiding force behind all the productive activity.
• There is stiff competition among sellers or producers of similar goods. There is competition among all the participants in the market.
• Price mechanism is an important feature of capitalist economy were the price is determined through the interaction of market forces of demand and supply.

Merits of Capitalist Economy:

• Capitalism works through price mechanism and hence self regulating
• In capitalism there is greater efficiency and incentive to work due to two motivating force namely private property and profit motive.
• Faster economic growth is possible.
• There is optimum allocation of productive resources of the economy.
• There is high degree of operative efficiency.
• Cost effective methods are employed in order to maximise profits.
• Consumers are benefited as large range of quality goods at reasonable prices are available from which they makes the choice. This also results in higher standard of living.
• In capitalism there is more innovations and technological progress and country benefits from research and development, growth of business talent, etc.
• Fundamental rights like right to private property and right to freedom are preserved.
• It leads to emergence of new entrepreneurial class who is willing to take risks.

Demerits of Capitalist Economy:

• In capitalism there is vast economic inequality and social injustice which reduces the welfare of the society.
  There is precedence of property rights over human rights.
• Cut-throat competition and profit motive work against consumer welfare leading to exploitation of consumers.
• There are wastage of resources due to duplication of work and cut-throat competition.
• Income inequalities lead to differences in economic opportunities. This lead to rich becoming richer and poor becoming poorer.
• There is exploitation of labour.
• More of luxury goods and less of wage goods are produced leading to misallocation of resources.
• Unplanned production, economic instability in terms of over production, depression, unemployment, etc. are common in a capitalist economy
• Leads to creation of monopolies.
• Ignores human welfare because main aim is profit.

Socialist Economy:
The concept of socialism was given by Karl Marx and Frederic Engels in their work ‘The Communist Manifesto’ published is 1848. A socialist economy is also called as “Command Economy” or a “Centrally Planned Economy.”

• In a socialist economy, all the property, wealth and capital is owned by State. There is no private property.
• State organises all economic activities. It owns, controls and manages the production units; it distributes the goods among the consumers; it decides the size and direction of investment.
• The state works for the welfare of the people and not for profit.

Characteristics of Socialist Economy:
1. There is collective ownership of means of production Le. all the important means of production are state owned.

2. It is a centrally planned economy. All the basic decisions relating to the working and the regulation of the economy are taken by central authority called planning commission.

• Production and distribution of goods is ensured through planning on preferences deter-mined by the state. So freedom from hunger is guaranteed but, consumer’s sovereignty is restricted.

3. There is social welfare in place of profit motive. Those goods and services are given top priority which is in the interest of largest number of people.

• Price policy is guided by the aims of social welfare than profit motive.

4. There is lack of competition because it avoid duplication of efforts and wastage of resources. Hence, competition is done away.

5. Socialism tries to ensure equitable distribution of income through equality of opportunities. Thus, right to work is guaranteed but choice of occupation is restricted.

Merits of Socialist Economy:

• Social justice is maintained by equitable distribution of income and wealth and by providing equal opportunities to all.
• Balanced economic development is possible. Central planning authority allocate resources according to the plans and priorities.
• There are no class conflict and community develops a co-operative mentality.
• Unemployment is minimized, business fluctuations are eliminated resulting in stability.
• Right to work is ensured and minimum standard of living is maintained.
• There is no exploitation of consumers and workers.
• Wastage of resources are avoided due to planning resulting in better utilization of resources and maximum production.
• Citizens feel secure as there is social security cover for them.

Demerits of Socialist Economy:

• There is predominance of bureaucracy resulting in inefficiency and delays.
• There is no freedom of individuals as it takes away basic rights also like right of private property.
• Workers are not paid according to their personal efficiency and productivity. This acts as disincentive to work hard.
• Prices are administered by the state.
• State monopolies may be created and may become uncontrollable. This will be more dangerous than monopolies under capitalism.
• The consumers have no freedom of choice.

Mixed Economy:
Mixed economy combines the features of both capitalism and socialism. The concept is designed to incorporate best of both. The main characteristics/features are:
1. There is co-existence of both private and public sector i.e. economic resources are owned by individuals and state.

• State open those enterprises which are in the interest of the society as a whole.
• Private sector moves to those enterprises which produce higher profit.

2. There is co-existence of free price mechanism and economic planning.

• Price mechanism is however curtailed through measures like price control, administered prices etc.
• Planning is done through incentives like concessions, subsidies, etc. and disincentives like high rate of taxes, strict licensing etc.

3. In mixed economy social welfare motive gets due importance particularly in case of poor and backward classes.
Example: Subsidised hospital, food articles, education etc.; social security schemes like old age pension, reservation of jobs, laws in the interest of workers, consumers, human, children etc.

4. There is freedom to joint any occupation, trade or service according to the education, training, skills and ability.

5. There is freedom of consumption. People are free to consume goods and services of their choice and in the quantity they can afford.

Merits of Mixed Economy:
Merits of capitalist economy and socialist economy are found in mixed economy.

• There is right of private property and economic freedom. This results in incentive to work hard and capital formation.
• Price mechanism and competition induces the private sector in efficient decision making and better resource allocation.
• There is freedom of occupation and consumption.
• Encourages enterprise and risk taking.
• Leads to development of technologies through research and development.
• Economic and social equality is more.

However, mixed economy suffers from uncertainties, excess control by state, poor implementation of plans, high taxes, corruption, wastage of resources, slow growth, lack of efficiency, etc. There are possibilities of private sector growing, disproportionately if state does not maintain a proper balance between public and private sectors.

These CA Foundation Economics MCQ with Answers CA Foundation Economics Question Paper is designed strictly as per the latest syllabus and exam pattern.

CA Foundation Business Economics Question Paper

1. When a firm produces 7 units of production and the TR is ₹ 42 after raising the production to 8 units TR reached ₹ 46 marginal revenue will be __________.
(a) ₹ 5
(b) ₹ 6
(c) ₹ 4
(d) ₹ 8
Answer:
(c) ₹ 4

2. When output increases more than the increase in input, it occurs due to __________.
(a) External and internal disecono-mies
(b) External and internal economies
(c) External diseconomies and internal economics
(d) External economies and internal diseconomies
Answer:
(b) External and internal economies

3. Micro Economics is also known as __________.
(a) Public Economics
(b) Income Theory
(c) Demand Theory
(d) Price Theory
Answer:
(d) Price Theory

4. If Indifference curve is L shaped, means two goods will be __________.
(a) Perfect Substitute goods
(b) Perfect inferior goods
(c) Perfect superior goods
(d) Perfect Complementary Goods
Answer:
(d) Perfect Complementary Goods

5. Purushotham wanted to buy laptop by paying ₹ 60,000 but the actual price is ₹ 55,000, then consumer surplus is __________.
(a) 6,500
(b) 55,000
(c) 5,000
(d) 60,000
Answer:
(c) 5,000

6. On the basis of nature of transaction, a market may be classified into __________
(a) Wholesale and retail market
(b) Cash and forward rate
(c) National and international mar-ket
(d) Regulated and unregulated mar-ket
Answer:
(b) Cash and forward rate

7. Use the table and answer for the following questions __________

(a) 350
(5) 80
(c) 90
(d) 25
Answer:
(d) 25

8. The average variable cost of 5 units of output __________
(a) 84
(b) 64
(c) 104
(d) 420
Answer:
(b) 64

9. The marginal cost of 5th unit of output is __________
(a) 60
(b) 70
(c) 90
(d) 540
Answer:
(a) 60

10. The total cost is ₹ 4200 and fixed cost is ₹ 1200 then find the variable cost __________
(a) 1,200
(b) 3,000
(c) 4,200
(d) 5,450
Answer:
(b) 3,000

11. If a seller obtains ₹ 6,000 after selling 50 units and ₹ 6,204 after selling 53 units, then marginal revenue will be __________
(a) 68
(b) 118
(c) 120
(d) 204
Answer:
(a) 68

12. If quantity supply changes substantially in response to small changes in price of the good then it is __________
(a) Perfect elastic
(b) Unitary elastic
(c) Relatively less elastic supply
(d) Relatively greater elastic supply
Answer:
(d) Relatively greater elastic supply

13. Smart phones market is an example of __________
(a) Perfect competition
(b) Monopoly
(c) Monopolistic competition
(d) Oligopoly
Answer:
(d) Oligopoly

14. The price elasticity of demand for X is 1 and the original quantity demand of X is 90 units, if the price of X decreases from ₹ 300 to ₹ 180 per unit, calculate the new quantity demand of X __________
(a) 36 units
(b) 120 unit
(c) 126 units
(d) 144 units
Answer:
(c) 126 units

15. The concept of “innovative entrepreneurship” was given by __________
(a) Adam smith
(b) Marshall
(c) J K Mehta
(d) Schumpeter
Answer:
(d) Schumpeter

16. Positive Science only explains __________
(a) What is?
(b) What ought to be?
(c) What is right or wrong?
(d) None of the above
Answer:
(a) What is?

17. The study of behaviour of different individuals, organisations with in an economic system is known as __________
(a) Micro economics
(b) Macro economics
(c) Welfare economics
(d) None
Answer:

18. External economies can be achieved through __________
(a) External assistance
(b) Development of unskilled labour
(c) Superior managerial efficiency
(d) Technological external economies
Answer:
(d) Technological external economies

19. When price of apple is ₹ 120 per kg. Ram buys one kg of apples at that price. Now it other’things remains the same but the price of apples falls to ₹ 90 per kg. Now Ram buys 2 kg. of apples. It is called as
(a) Demand schedule
(b) Market demand
(c) Contraction of demand
(d) Expansion of demand
Answer:
(d) Expansion of demand

20. To know the base price and quantity, which method of elasticity is used?
(a) Arc elasticity
(b) Point elasticity
(c) Cross elasticity
(d) cannot be measured
Answer:
(a) Arc elasticity

21. Let assume that in OY-axis we have good A and on OX-axis good B. If the price of good B increases by ₹ 1 but the price of good A remains constant and income also remains unchanged, the budget line will shift __________
(a) Left on OY axis
(b) Left on OX axis
(c) Right on OY axis
(d) Right on OX axis
Answer:
(b) Left on OX axis

22. Which activity is the base of all production activities __________
(a) Consumption
(b) Production
(c) Exchange
(d) Investment
Answer:
(a) Consumption

23. Among the following statements which is incorrect in relation to isoquants __________
(a) These are negatively sloped
(b) These are concave to origin
(c) These are not intersecting
(d) These are convex to origin
Answer:
(b) These are concave to origin

24. Marginal product will be __________ at the point of inflexion is
(a) Minimum
(b) Maximum
(c) Negative
(d) Zero
Answer:
(b) Maximum

25. Aluminium industry is the example of which type of oligopoly __________
(a) Full oligopoly
(b) Open oligopoly
(c) Pure oligopoly
(d) Syndicated oligopoly
Answer:
(c) Pure oligopoly

26. When ABC Ltd. sells 130 units then total revenue will be __________
(a) 6,000
(b) 6,500
(c) 12,050
(d) 18,550
Answer:
(b) 6,500

27. When the price of petrol decreases, people reduce the consumption of diesel, then the goods are __________
(a) Complementary
(b) Substitutes
(c) Superior
(d) Any of the above
Answer:
(b) Substitutes

28. Kinked demand hypothesis is designed to explain the under oligopolistic market __________
(a) Collusion between firms
(b) Price and output determination
(c) Rigidity of price
(d) Price leadership
Answer:
(c) Rigidity of price

29. A functional relationship between inputs and output Is called __________
(a) Cost function
(b) Revenue function
(c) Production function
(d) Consumption function
Answer:
(c) Production function

30. In which economic system production and distribution of goods and services aim at maximizing the welfare of community as a whole __________
(a) Normative
(b) Mixed
(c) Socialism
(d) Capitalistic economy
Answer:
(c) Socialism

31. Which of the following is not an economic activity __________
(a) Online teaching
(b) Consumption of food items
(c) Land owner compensate the tiller of land in form of food grain
(d) Doctor consulting his own family
Answer:
(d) Doctor consulting his own family

32. A market where goods are exchanged for money payable either immediately or within short span of time __________
(a) Forwarded market
(b) Regulate market
(c) Wholesale market
(d) Spot market
Answer:
(d) Spot market

33. Answer the following questions

(a) 40
(b) 45
(c) 55
(d) 60
Answer:
(a) 40

34 __________ is the best example of oligopoly
(a) WTO
(b) GATT
(c) OPEC
(d) SAARC
Answer:
(c) OPEC

35. In which market prices are determined by the market forces of demand and supply?
(a) Perfect Competition
(b) Pure Competition
(c) Monopolistic Competition
(d) Oligopoly
Answer:
(a) Perfect Competition

36. Choose the incorrect statement regarding the barometric price leadership __________
(a) Old and experienced firm acts as a leader
(b) Live and let live philosophy is followed
(c) Price decided by assessing market conditions
(d) Price decided by leader is gener-ally accepted by the rest of all
Answer:
(c) Price decided by assessing market conditions

37. During the phase of trough of business cycle, the growth rate became __________
(a) Negative
(b) Zero
(c) High
(d) Low
Answer:
(a) Negative

38. “Competition among few” is described in __________
(a) Monopoly
(b) Monopsony
(c) Oligopoly
(d) Duopoly
Answer:
(c) Oligopoly

39. In which economy, cost benefit analysis is used to answer the fundamental questions of economy __________
(a) Socialistic economy
(b) Capitalistic economy
(c) Regulatory economy
(d) Mixed economy
Answer:
(d) Mixed economy

40. Taxation policy of government is the part of __________
(a) Industry policy
(b) Monetary policy
(c) Fiscal policy
(d) EXIM policy
Answer:
(c) Fiscal policy

41. The nature of business economics is __________
(a) Positive in nature
(b) Pure science
(c) Pragmatic
(d) Independent
Answer:
(c) Pragmatic

42. Which of the following phase occurs after threat and before peak?
(a) Boom
(b) Recession
(c) Expansion
(d) Depression
Answer:
(c) Expansion

43. Which indicators coincide or occur simultaneously with the business cycle movements?
(a) Legal
(b) Lagging
(c) Leading
(d) Concurrent
Answer:
(d) Concurrent

44. What is the most visible sign of recession in an economy __________
(a) Fall in the level of employment
(b) Fall in price level
(c) Rise in the inventory cost
(d) Weakening stock market
Answer:
(b) Fall in price level

45. Railways charges comparatively cheaper fares from senior citizens. This is an example of __________
(a) Market analysis
(b) Profit discrimination
(c) Price discrimination
(d) Demand forecasting
Answer:
(c) Price discrimination

46. When the industry is dominated by one large firm it is called __________
(a) Full oligopoly
(b) Partial oligopoly
(c) Organized oligopoly
(d) Closed oligopoly
Answer:
(d) Closed oligopoly

47. __________ is measurable economics factor that changes before economy starts to follow a particular pattern of trend.
(a) Lagging indictors
(b) Leading indicators
(c) Coincident indicators
(d) Concurrent indicator
Answer:
(d) Concurrent indicator

48. A socialistic economy is also called as __________
(a) Profit oriented economy
(b) Centrally planned economy
(c) self-regulatory economy
(d) Unorganized economy
Answer:
(b) Centrally planned economy

49. Phases of business cycles are __________
(a) Bottom, recession, trough and boom
(b) Peak, depression, trough and boom
(c) Peak, depression, bust and boom
(d) Peak, recession, depression and recovery
Answer:
(d) Peak, recession, depression and recovery

50. Which is not an example of coincident indicator __________
(a) Inflation
(b) GDP
(c) Financial market trend
(d) Interest rate
Answer:
(d) Interest rate

51. The most feature of business cycles __________
(a) Pervasive nature
(b) Regular length
(c) Periodic intensity
(d) None of these
Answer:
(a) Pervasive nature

52. ABC Ltd. realizes total revenue of ₹ 6,000 by the sale of 120 units and ₹ 6050 by the sale of 121 units. What is the average revenue when ABC Ltd. sells 121 units
(a) 50
(b) 100
(c) 6,000
(d) 6,050
Answer:
(a) 50

53. Which of the following is not an exampleofsocio-cultural environmen?
(a) Family structure
(b) Educational levels
(c) Role of women in society
(d) Raising income
Answer:
(d) Raising income

54. “Modern business activities are based on the anticipations of business community and are affected by waves of optimizing or pessimision” is said by __________
(a) Hawtrey
(b) Pigou
(c) Keynes
(d) Schumpeter
Answer:
(b) Pigou

55. Which of the following is an internal cause of business cycles __________
(a) Population growth
(b) Wars
(c) Natural factors
(d) Fluctuations in the effective demand
Answer:
(d) Fluctuations in the effective demand

56. Economics in terms of Dynamic Growth and development defined by __________
(a) Adam smith
(b) Robbins
(c) Alfred Marshall
(d) Paul A Samuelson
Answer:
(d) Paul A Samuelson

57. During __________ there is fall in level of investment and employment
(a) Boom
(b) Recovery
(c) Contraction
(d) Depression
Answer:
(c) Contraction

58. __________ economics explain economics phenomenon according to their causes and effects
(a) positive
(b) Normative
(c) Empirical
(d) Applied
Answer:
(a) positive

59. In capitalistic economy __________ and __________ will be more
(a) Equalities, non-exploitation
(b) Inequalities, exploitation
(c) Exploitation, equalities
(d) Non-exploitation, inequalities
Answer:
(b) Inequalities, exploitation

60. __________ are responsible for all economic problems
(a) Alternative resources
(b) Unlimited wants
(c) Scarcity of resources
(d) Others
Answer:
(c) Scarcity of resources

61. Demand forecasting by means of asking customer what they are going to buy comes under
(a) Statistical method
(b) Grass roots method
(c) Survey of buyers intention
(d) Experts opinion method
Answer:
(c) Survey of buyers intention

62. Intellectual property rights and copyrights is an example of which of the following key factor of PESTLE Matrix?
(a) Social
(b) Economic
(c) Political
(d) Technological
Answer:
(d) Technological

63. Which of the following is not an important characteristic of business environment?
(a) Image building
(b) Giving direction for shrinking
(c) Continuous learning
(d) Opportunities and threats
Answer:
(b) Giving direction for shrinking

64. The effect of change in price will have on customers is __________
(a) Price Discrimination
(b) Price Skimming
(c) Pre-Emptive Pricing
(d) Price sensitivity
Answer:
(d) Price sensitivity

65. Which of the following is the recently introduced form of business organization in INDIA wide companies Act, 2013?
(a) Sole proprietorship
(b) Private limited company
(c) OPC
(d) LLP
Answer:
(c) OPC

66. The number of units of given currency that can be purchased for one unit of another currency is called as __________.
(a) Current Ratio
(b) Equity Ratio
(c) Exchange Ratio
(d) Dividend
Answer:
(c) Exchange Ratio

67. __________ is a framework for macro environmental analysis.
(a) Social
(b) Global
(c) Political
(d) PESTLE
Answer:
(d) PESTLE

68. Factors like Trends, Events of different interest groups are needed to be considered in __________.
(a) Environmental analysis
(b) Environmental inference
(c) Environmental response
(d) Environmental scanning
Answer:
(d) Environmental scanning

69. According to Income-tax Act, which of the following cannot be a source of income for HUF?
(a) Income from salary
(b) Income from house property
(c) Income from business and profession
(d) Income from other sources
Answer:
(a) Income from salary

70. ABC company is aiming towards Joint venture and partnership with other firms to manage uncertainly. This is an example of following type of Organizational response to the environment?
(a) Administrative response
(b) Collective response
(c) Competitive Response
(d) Micro environmental response
Answer:
(b) Collective response

71. Which of the following company ranked first in fortune 500 company list 2019?
(a) Microsoft
(b) Intel
(c) American Express
(d) Walmart
Answer:
(d) Walmart

72. In which of the following FDI is prohibited under both the Government Route as well as the Automatic Route:
(a) Solar energy
(b) Wind energy
(c) Atomic energy
(d) Biomass energy
Answer:
(c) Atomic energy

73. Who has the vision “To attain world class Excellency by demonstrating value added products to customers”?
(a) IBM Corporation
(b) Intel Corporation
(c) Bharti Airtel Limited
(d) Bajaj Auto Limited
Answer:
(d) Bajaj Auto Limited

74. __________ is a measurement of relationship between stock price of any particular stock and the movement of whole market.
(a) Call Option
(b) Bids and Offer
(c) Break-even Point
(d) Beta
Answer:
(d) Beta

75. Perpetual succession indicates __________
(a) Limited scope for rising fund
(b) Registration of partnership firm is compulsory.
(c) Separate legal entity, separate from its members
(d) Liability of the partners is limited to his contribution to capital.
Answer:
(c) Separate legal entity, separate from its members

76. Controller of capital Issues was replaced by which of the following Regulatory authority?
(a) RBI
(b) IRDAI
(c) SEBI
(d) Competition Commission of India (CCI)
Answer:
(c) SEBI

77. In 1981, 7 engineers in Pune, Founded the following company:
(a) Infosys
(b) L&T
(c) Wipro
(d) TCS
Answer:
(a) Infosys

78. What is popular psychological motive in case of profession as an economic occupation?
(a) Economic achievement
(b) Service to clients
(c) Source of livelihood
(d) Membership of professional body
Answer:
(b) Service to clients

79. To help individuals and businesses realize their full potential. Is the vision of __________
(a) Cognizant
(b) Walmart
(c) Apple
(d) Microsoft
Answer:
(d) Microsoft

80. Limited liability partnership is __________
(a) Non-mutual agency
(b) Social & environment concern
(c) Public sector
(d) Hybrid form of business organi-zation
Answer:
(d) Hybrid form of business organi-zation

81. A security which has a solid record of dividend payments and offer the dividend higher than the common stock is __________
(a) Hedge
(b) Index
(c) Income Stock
(d) Holding period
Answer:
(c) Income Stock

82. SEBI was setup to regulate the __________
(a) Capital market
(b) Insurance market
(c) Security market
(d) Money market
Answer:
(a) Capital market

83. Bid is the __________
(a) Lowest value the which the seller is willing to sell
(b) Lowest value which the buyer is willing to pay
(c) Highest value which the buyer is willing to pay
(d) Highest value which the seller is willing to sell
Answer:
(c) Highest value which the buyer is willing to pay

84. __________ is the reduction in the price of goods given to encourage sale on cash basis.
(a) Cash Discount
(b) Trade Discount
(c) Both (a) and (b)
(d) None of these
Answer:
(a) Cash Discount

85. Taking of restrictions in exports and imports of goods is __________
(a) Liberalization
(b) Privatization
(c) Globalization
(d) Socialization
Answer:
(a) Liberalization

86. IRDAI full form __________
(a) Industrial Regulatory Develop-ment Authority of India.
(b) Institutional Regulatory Develop¬ment Authority of India.
(c) Insurance Regulatory Develop-ment Authority of India.
(d) Insurance Ruling Development Authority of India.
Answer:
(c) Insurance Regulatory Develop-ment Authority of India.

87. Government keeps hold of responsibility and private enterprise handle fully or partially the delivery of product and services. Such type of concept of privatization is known as __________
(a) Delegation
(b) Divestment
(c) Displacement
(d) Disinvestment
Answer:
(a) Delegation

88. The formation of National Skills Development Corporation (NSDC) is an example of which of the following type of public policy?
(a) Restrictive
(b) Facilitating
(c) Social
(d) Regulatory
Answer:
(b) Facilitating

89. Selling of a portion of ownership from public enterprise to private parties is called __________
(a) Divestment
(b) Delegation
(c) Deregulation
(d) Disinvestment
Answer:
(d) Disinvestment

90. Which of the following is not an objective of establishing the Com-petition Commission of India (CCI)?
(a) To preserve and sustain competi¬tion in markets
(b) To Prevent practices having adverse effect on competition
(c) To protect the interests of the customers
(d) To ensure restriction of trade carried on by other participants in markets.
Answer:
(d) To ensure restriction of trade carried on by other participants in markets.

91. Which of the following is not a regulatory body?
(a) EBI
(b) RBI
(c) CCI
(d) IDBI
Answer:
(d) IDBI

92. Which of the following financial institution is known for dealing in SHG bank linkage program?
(a) SBI
(b) NABARD
(c) IRDAI
(d) SEBI
Answer:
(b) NABARD

93. Which of the following is a multi¬national financial service corpo-ration?
(a) IBM corporation
(b) American Express
(c) Walmart
(d) Microsoft Corporation
Answer:
(b) American Express

94. The non or partial realization of expectation is called as __________
(a) Returns
(b) Earnings
(c) Risk
(d) None of these
Answer:
(c) Risk

95. Above the balance available in the account of the payer is called __________
(a) Maturity
(b) Market value
(c) Mortgage
(d) Overdraft
Answer:
(d) Overdraft

96. A strongly motivated and long standing decision of the customer to purchase a particular product or service is referred as __________
(a) Brand Recognition
(b) Brand Loyalty
(c) Buying behaviour
(d) Customer satisfaction
Answer:
(b) Brand Loyalty

97. For Call Options, __________ means the stock price is below the strike price.
(a) In the money
(b) Out of the money
(c) With money
(d) Other than money
Answer:
(b) Out of the money

98. Organizing of immunization camps by government is an example of which policy?
(a) Restrictive
(b) Social
(c) Regulatory
(d) Distributive
Answer:
(d) Distributive

99. Gradual decrease in government command and control over economic policies is called __________
(a) Socialization
(b) Globalization
(c) Capitalization
(d) Liberalization
Answer:
(d) Liberalization

100. Collusion is impossible if an industry has __________
(a) Only few number of firms
(b) Only two firms
(c) Limited number of firms
(d) Large number of firms
Answer:
(d) Large number of firms

Meaning and Scope of Accounting – CA Foundation Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

Meaning and Scope of Accounting – CA Foundation Accounts Study Material

Question 1.
What do you mean by Accounting? Give its definition.
Answer:
According to AICPA, “Accounting” is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.

From the above, it is clear that accounting refers to:

• A procedure of writing financial transactions and events.
• A system of recording, classifying, summarizing, analyzing, interpreting and reporting periodically, in terms of money/which provides necessary financial formation.

The said financial information is used for taking necessary and proper decisions about the allocation of economic resources and running the organisation successfully.

Accounting accumulates data systematically and supplies the necessary information to the users of financial statements by which the users can take proper economic decisions and also may make proper predictions, i.e., in short, it conveys financial information about an entity for a specified period.

Question 2.
What are the branches of Accounting? Explain.
Answer:
Accounting has basically three branches:
(a) Financial Accounting:

• It is concerned with the maintenance of books of account of an enterprise.
• Recording & classifying all its financial transactions and events with a view to prepare Annual Financial Accounts.
• To be used by various interest groups (i e. General Purpose Financial Statement).

(b) Management Accounting:

• It refers to use of accounting data with proper analysis in reporting, so as to serve the need of management.
• To help them in decision making and exercising proper controls.
• It may not have separate books of account but uses the data from financial accounts & cost accounts and
  Properly analyses it, compares it, calculate ratios etc. and present it to management periodically.

(c) Cost Accounting:

• Generally manufacturing concerns maintains cost accounts.
• With a view to ascertain the cost of goods manufactured or services rendered with proper break-up of cost.
• Also providing useful data to management for effective cost control and
• Govt, also has prescribed maintenance of cost records by specific industries.

(d) Social Responsibility Accounting:

• Concerned with measurement and reporting of the impact of the operations of an organisation on the society.
• Attempts to disclose the costs incurred and
• Benefits accrued to the society as a consequence of the activities of the organization.

(e) Human Resource Accounting:

• It is the process of measuring the amount of investments done in the human resource of an enterprise.
• It also reports the information regarding the activities related to human resource performed by the organisation and
• The end results of the human resource related activities to the stakeholders.

Question 3.
Who are the users of Financial Statement and what are their information needs?
Answer:
The users of financial statement & their information needs:

Question 4.
Explain qualitative characteristics of financial statement.
Answer:
Qualitative characteristics of financial statement:

• Qualitative Characteristics are the attributes (features) that makes the information provided by financial statement useful to the users.
• Qualitative Characteristics are as follows:

There are four main qualities & some sub-qualities:
1. Understandability : The information should be readily understandable to those who have reasonable knowledge of business & economic activity.

2. Relevance : Information has relevance when it influences the users decision making. Nature of information & materiality will be considered to decide relevance:

3. Materiality: An information is material (significant) if its misstatement or non-statement can influence decision maker.
Example: Small expenses are clubbed under one head like Office exp./General exp. etc. or Stationery, postage such items are treated as expense and generally no stock is ascertained & adjusted.

4. Reliability : Information is reliable if it is error free, it is unbiased (neutrality) & gives faithful representation.

• Neutrality: If it influences users into predetermined actions, then it is not neutral (then information is biased).
• Faithful Representation : To be reliable it should give in-formation what it purports to give.
• Example: If an asset is shown in Balance Sheet entity must have it.
• Substance over form : Substance of transactions & not merely its legal form should be reflected by information.
• Example: Item purchased under hire-purchase system is treated as an asset from the beginning and depreciation charged even though legal ownership will be transferred only when the last instalment is paid.
• Prudence : Application of prudence will make information neutral & consequently reliable.
• Completeness : To be reliable information should be complete.

5. Comparability : It should be comparable with its own past data & also with other similar enterprises.

Question 5.
What is the role of Chartered Accountants in the society?
Answer:
Role of accountant in the society
→ An accountant with his education, training, analytical mind and experience is best qualified to provide multiple need-based service to the ever-growing society.

→ The accountants of today can do full justice not only to matters relating to taxation, costing, management accounting, financial planning, company law and procedures but they can act in the fields relating to financial policies, budgetary policies, information technology, Software development and even economic principles.

→ The services rendered by accountants to the society include the following:

• To maintain the Books of Account in a systematic manner.
• To act as a Statutory Auditor (for example under the Companies Act, Income Tax Act, Co-operative Societies Act).
• To act as an Internal Auditor.
• To act as Social Auditor.
• To act as Taxation Advisor.
• To act as Management Accountant.
• To act as Financial Advisor.
• To provide Management Consultancy Services.
• To act as Company Law Advisor.
• To act as Liquidator.
• To act as Arbitrator.
• To act as Management Information System Consultant.
• To act in the held of software development.

Question 6.
Give the relationship of accounting with other disciplines like:
(i) Economics
(ii) Statistics
(iii) Mathematics
(iv) Law
(v) Management
Answer:
(i) Accounting and Economics:

• Economics is viewed as a science of rational decision making about the use of scarce resources.
• It is concerned with the analysis of efficient use of scarce resources for satisfying human wants.
• Accounting is viewed as a system which provides data to the users to permit informed judgment and decisions.
• Accounting overlaps economics in many respects and contributes a lot in improving the management decision making process.
• However, there exists a wide gulf between economists’ and accountants’ concepts of income and capital.
• Accountants got the ideas of value, income and capital maintenance from economists, but brushed suitably to make them usable in practical circumstances.

(ii) Accounting and Statistics:

• The use of statistics in accounting can be appreciated better in the con-text of the nature of accounting records.
• Accounting information is very precise, it is exact to the last paisa.
• But such precision is not essential for making business decisions and hence statistical approximations are sought.
• In accounts all values are important individually because they relate to business transactions.
• As against this, statistics is concerned with the typical value, behaviour or trend over a period of time or the degree of variation over a series of observations.
• Therefore, wherever a need arises for only broad generalizations or the average of relationships, statistical methods have to be applied to accounting data.
• Accounting records generally take a short-term view of events and are confined to a year while statistical analysis is more useful if a longer view is taken for the purpose of decision making.
• Statistical methods are helpful in developing accounting data and in their interpretation & are useful even in valuation.
• Therefore, the study and application of statistical methods would add extra edge to the accounting data.

(iii) Accounting and Mathematics:

• Knowledge of arithmetic and algebra is a pre-requisite for accounting computation and measurements.
• The fundamental dual aspect concept of accounting is expressed in the form of a mathematical equation, popularly known as ‘accounting equation’.
• With the advent of the computer, mathematics is becoming a vital part of accounting.
• Statistical and econometric models are largely used for developing decision models for the users of accounts.
• The use of the technique of operations research has made accounting all the more mathematical.
• Presently graphs and charts are being extensively used for communicating accounting information.
• In addition to statistical knowledge, knowledge in geometry and trigonometry is also essential to have a better understanding about the accounting communication system.

(iv) Accounting and law:

• An economic entity operates within a legal environment.
• Every country has set of economic, fiscal and labour laws.
• All transactions with suppliers and customers are governed by the Contract Act, the Sale of Goods Act, the Negotiable Instruments Act, etc.
• The entity itself is created and controlled by laws. For example, a partnership business is controlled by Partnership Act and a company is created and controlled by the Companies Act, etc.
• Very often the accounting system to be followed is prescribed by law. For example, the Companies Act has prescribed the format of financial statements of companies and requires accrual principle to be applied.
• However, legal prescription about the accounting system is the product of developments in accounting knowledge.
• That is to say, a legislation about accounting system cannot be enacted unless there is a corresponding development in the accounting discipline.
• In that way accounting influences law and is also influenced by law.

(v) Accounting and Management:

• Management is broad occupational field which comprises many functions and encompasses application of many disciplines including those mentioned above.
• Accountants are well placed in the management and play a key role in the management team.
• A large portion of accounting information is prepared for management decision making.
• In the management team, an accountant is in a better position to understand and use such data.
• In other words, since an accountant plays an active role in management, he understands the data requirements. So the accounting system can be moulded to serve the management purpose.
• ‘Management accounting’ processes accounting data for management . decision making.
• This indicates the linkage between management and accounting.
• Accounting is an essential service function of management.

Question 7.
Limitations of accounting
Answer:
Limitations of accounting are:

• Accounting is not an exact science.
• It is based on many assumptions & conventions.
• It involves many estimation which results into subjectiveness.
• There are different alternatives possible for the same item which gives scope for manipulation to get desired result.
• It is a post mortem exercise and the information about entities performance and financial position are available quite late i.e. after a year.
• It cannot record the effect of many important events which cannot be measured in terms of money like value of human resources which an enterprise has.
• It does not consider the effect of inflation on income, expense, assets & liabilities (known as Inflation Accounting).

Question 8.
Functions of accounting data
Answer:
Accounting data serves the following functions:

• Measurement: Account data helps to measure the performance & financial position of the enterprise. It measures Assets, Liabilities, Expenses & Incomes.
• Forecasting : On the basis of past accounting data, forecasting about future plans are made.
• Decision Making: Various decision requires timely & correct information which is provided by accounts.
• Evaluation: Evaluation of an enterprise’s performance & financial health is done from accounting data.
• Control: By adopting various accounting techniques, checks & balances the activity of the enterprise is controlled.
• Stewardship : The management, manages the money of shareholders/owners, on their behalf.
• Govt, regulation & Taxation : Accounting data serves the various requirements of govt, regulations & to assess proper tax liability.

True or False

Question 1.
Capital is all assets less fictitious assets.
Answer:
False: Capital is all assets less fictitious assets less external liabilities.

Question 2.
Capital + Long Term Liabilities = Fixed Assets + Current Assets + Cash – Current Liabilities.
Answer:
False: Because Accounting Equation is:
Capital + Long Term Liabilities + Current Liabilities = Fixed Assets + Current Assets.

Question 3.
Equity + LTL – CL = FA + CA
Answer:
False: The basic accounting equation is: Equity + LTL + CL = FA + CA.

Students should practice Nature of Contracts – CA Foundation Business Law MCQ Questions with Answers based on the latest syllabus.

Nature of Contracts – Business Law MCQ Questions with Answers

1. Law of contract _______.
(a) Is the whole law of obligations
(b) Is the whole law of agreements
(c) Deals with only such legal obligation which arise from agreement
(d) Deals with social agreements
Answer:
(c) Deals with only such legal obligation which arise from agreement

2. Social agreements are _______.
(a) Enforceable in the courts
(b) Not enforceable in the courts
(c) Subject to legal obligations
(d) Made by social workers.
Answer:
(b) Not enforceable in the courts

3. All contracts _______.
(a) Are agreements
(b) Are not agreements
(c) Do not have legal obligations
(d) Should be in writing
Answer:
(a) Are agreements

4. Obligation between parties that form contract _______.
(a) Are all kinds of obligations
(b) Are legal obligation which spring from agreements
(c) Are not voluntary in nature
(d) None of the above
Answer:
(b) Are legal obligation which spring from agreements

5. A contract means an agreement _______.
(a) Which is enforceable by law
(b) Which is not enforceable by law
(c) Which creates social obligation.
(d) Which is in writing.
Answer:
(a) Which is enforceable by law

6. Voidable contract _______.
(a) are enforceable by law if they are not avoided
(b) are not enforceable by law
(c) can be enforced if the court directs
(d) can be enforced with prior permission of Court/ Government
Answer:
(a) are enforceable by law if they are not avoided

7. The terms of agreement _______.
(a) must be certain
(b) must be capable of made certain
(c) unambiguous and clear
(d) all the above.
Answer:
(d) all the above.

8. All illegal agreements _______.
(a) are not void
(b) are not void ab-initio
(c) are void
(d) none of the above
Answer:
(c) are void

9. A void agreement _______.
(a) is illegal
(b) is not void ab-initio
(c) may or may not be illegal
(d) none of the above
Answer:
(c) may or may not be illegal

10. All kinds of obligations between the parties form part of the contract. This statement is _______.
(a) True
(b) False
(c) Partially true
(d) None of the above
Answer:
(b) False

11. A contract is made where:
(a) A buys a book from a shop
(b) X bids at a public auction.
(c) X agrees with Y to discover a treasure by magic.
(d) Z agrees to attend the birthday party of his friend.
Answer:
(a) A buys a book from a shop

12. Right in rem implies:
(a) a right available against the whole world.
(b) a right available against a particular indi-vidual.
(c) a right available against the Government.
(d) none of the above
Answer:
(a) a right available against the whole world.

13. A void contract _______.
(a) is void from the very beginning.
(b) is valid in the beginning but becomes void later on.
(c) is enforceable at the option of one of the contracting parties only.
(d) none of the above.
Answer:
(b) is valid in the beginning but becomes void later on.

14. A void agreement is one _______.
(a) which is forbidden by law
(b) enforceable at the option of one of the parties
(c) which is not enforceable by law
(d) enforceable by law
Answer:
(c) which is not enforceable by law

15. An agreement created by words spoken or written is called _______.
(a) express agreement
(b) execute agreement
(c) implied agreement
(d) voidable agreement
Answer:
(a) express agreement

16. Which of the following statements is false _______.
(a) Law of contract is the whole law of obliga-tions
(b) Certain contracts must be in writing
(c) All contracts are agreements
(d) Conditional Contract
Answer:
(a) Law of contract is the whole law of obliga-tions

18. A agree to sell to B a hundred tons of oil. There is nothing whatever to show what kind of oil was intended. The agreement is _______.
(a) Valid
(b) Void for uncertainty
(c) Voidable
(d) Illegal
Answer:
(b) Void for uncertainty

19. A agrees to sell to B my white horse for ₹ 500 or ₹ 1,000. There is nothing to show which of the two prices was to be given. The agreement is _______.
(a) Valid
(b) Void
(c) Voidable
(d) Unenforceable
Answer:
(b) Void

State Whether The Following Are True or False:

1. An agreement and a contract are one and the same thing.
2. Law of Contract is the whole law of obligations.
3. Social agreements are enforceable in the Courts.
4. All contracts should be in writing.
5. A foreigner is not competent to enter into a contract.
6. All contracts are not agreements.
7. The Indian Contract Act, 1872 is a complete code on contracts.
8. Precedents (Judicial decisions) form an important source of mercantile law.
9. Voidable contracts are enforceable by law, if they are not avoided.
10. Mercantile law is applicable to businessman only.
11. An agreement the meaning of which is not capable of being made certain is void.
12. An unenforceable contract can be enforced if the technical defect is removed.
13. A contract is a contract from the time its performance is due and not from the time it is made.
14. A contract consists in actionable promise or promises.
15. An agreement with intention to create legal liability is not enforceable in law.
16. In an executed contract both parties have yet to fulfill their obligations.
17. All illegal agreements are void but all void agreements are not necessarily illegal.
18. All void agreements are illegal.
19. There cannot be a contract to make a contract.
20. All kinds of obligations between the parties form part of the contract.

Answer:

1. False
2. False
3. False
4. False
5. False
6. False
7. False
8. True
9. False
10. False
11. True
12. True
13. False
14. True
15. False
16. False
17. True
18. False
19. True
20. False