Tuesday, 30 December 2014

What is Budget and How it is prepared?

A budget is just like a plan for your spendings.

To spend, you need money. And even if you have money, you can not spend it in a haphazard manner. You can spend only within your amount that you possess. For this purpose of meeting your expenses within the money you have, you need to plan whatever to spend and whatever to avoid or postpone. So, you need to make a list of all your needs and calculate whether you can meet all them within your available funds.

To understand What is Budget, it is very simple once you realise this. I hope all of you prepare lists before going for your monthly purchases.

This list itself is a kind of budget for you. When preparing the list, you will be aware of your pocket and the share of money you are going to allocate for that particular shopping. So, you will be having a rough idea of the cost or price of each item that you are going to shop. You may not put down the amount on paper. But you will be accessing the total amount that you may require for that purchase. So, you will try to cut down the quantities or omit some items from the list and try to match the total expenditure with your available fund for that shopping. Or, on the other hand, you may increase the fund for that shopping if you do not feel like cutting items. This process is known as budgeting your expenses to your income.

In a wider sense, Budget means preparing a projection of expenses in terms of money value to be met out during a particular period of time or for a particular job or project against available income or expected income during that period.

Preparation of Budgets
A budget can be prepared in a simple form of putting your available income at the top of the list and then listing all your expenses in money value and match the total expenditure with your income. You may save some money or you may match the total expenditure exactly with your income by increasing or decreasing the expenses.

But in case of big businesses and corporate budgets, it may require a lot of exercise. You will have to calculate your income more accurately and also predict all the expenses that you may have to meet out during that period precisely as safely as you can.

You can put your income calculations on one side and expenditure on the other side of your statement or calculate them on two different pages and attach them.

You can prepare the budget process-wise also, if your business deals with different processes and then club them together to know the total impact. The budget papers can resemble your Profit and Loss statement in such cases with deep details of budget projection in attached statements.

Budget can be of many different types.

  • Personal Budgets are prepared for planning one's own expenses for himself and his family.
  • Business or Corporate Budget is prepared for projecting and meeting the company's expenses against their available funds and run them efficiently. 
  • Government Budgets are required for efficient management of government funds in the interests of public and the country.
  • Short term budgets like monthly, yearly or for a particular purpose or job are prepared to meet those particular short term purposes.
  • Long term budgets can be prepared for full lifetime planning of individuals or for long term goals of companies.
  • Revenue Budgets are prepared for planning revenue expenses and incomes.
  •  Capital Budget is prepared for procurement of capital goods and assets like buildings, land, machinery and erection of projects, etc.

Sunday, 28 December 2014

Need for good relationship between Finance and Accounts fields

Finance and accounts are closely interrelated with each other. Finance deals with the funding and managing of a business concern|corporate whereas accounting deals with the recording and keeping records of the funds utilized in the business operations. So, there needs a good relationship between finance and accounts.

Finance department frequently utilizes the data recorded by accounts for preparation of its financial statements and reviews. Accounting department utilizes the financial guidelines and formats set up by financial managers in order to record the transactions in a very concise and useful manner for the company's overall benefit.

Better administration is possible through linking of Finance & Accounts
Finance and Accounts need to be mutually cooperative with each other for a better administration of the company. In many companies, the Finance Manager is entrusted with the responsibilities of both Finance and Accounts departments in which case he needs to be both an MBA and Chartered Accountant. He will supervise or work along with the Accounts Managers and Accounts Officers in controlling the Accounts and Finance wings. He will guide them in the proper maintenance of accounts books and records and during the preparation of final accounts and financial statements of the company. He can prescribe various formats for providing accurate information and work out the financial ratios and other inputs to the management for better governance of the business. So, a good relationship between finance and accounts is necessary.

Efficient management of Working Capital is possible
Finance people can manage the funds and working capital of the company efficiently if they are linked intimately with the accounts department. As the accounts department keeps records of all expenses, they can provide the information in whatever form the finance manager may require from them and thereby accurate and concise information is gathered by the finance people in preparing various statements for the management. So, the finance department will be in a better position to know how much funds are required for each process and activity of the business and can be able to procure the funds required for working capital of the company timely.

Preparation of Budgets and Fund Flow Statements
Finance department needs to prepare budgets and Fund Flow/ Cash Flow statements on monthly basis and annual basis also for a better administration of the funds of the Company. For this, they need to study the trends in past and be able to know the amount of expenditure incurred for each and every activity. This information is available with accounts departments as they are keeping the accounts. So, with proper cooperation of the accounts personnel, the finance department can prepare a more accurate budget and Fund Flow statements and thereby keep the management with more accurate knowledge in governing the business.

Profit maximization and growth is possible
A better relation and cooperation between Finance and Accounts leads to the growth of the company as well as profit maximization. By keeping accurate records, the accounts people can provide more reliable information at every stage of the business under different time groups and variable circumstances as per requirements of the study by the finance people. So both these departments combined can produce very minute and sensitive information to the management for controlling expenses at every stage of the product and thereby can locate wastages and excessive spendings. Thereby, bottlenecks in activities can be removed leading to efficient production and growth of the company yielding profits.

There can be much more areas where both accounts and finance need to cooperate in their functioning. For example, investments by company or issue of shares and debentures for the raising of working capital, valuation of company property for any purposes or facing legal suits and litigations - all these areas require cooperation and good relationship between finance and accounts departments.

Sunday, 21 December 2014

Finance Management and duties of a Finance Manager

Finance Management is a wider term which includes and deals with accounts, economics and finance matters. To manage finance is to have a clear vision of all financial matters involved in the job, to be able to foresee and plan things, to keep accounts and statistics of all figures involved in the project, to economise applications and resources and being able to create funds and project the results through budgets and forecasts. All these capabilities, in a nutshell, are known as finance management.

Who is a Finance Manager
A Finance Manager is one entrusted with the finance matters of the company. He is supposed to look after all financial matters of the company and guide the management in solving all financial issues besides complying with all statutory & financial requirements of the company law board.

Duties and Responsibilities of a Finance Manager

  • A Finance Manager is the head of finance department which includes accounts, costing and budgeting departments also of the company.
  • He is to oversee and guide the accounts officers of all the above wings and act as a coordinator and head of them.
  • The Finance Manager is directly under the management of the company and is responsible for all functions of the wings under him.
  • He is expected to supervise that funds of the company are utilised properly for benefit of the company.
  • He will look after all the accounts and get the Balance Sheets and Profit and Loss Accounts prepared timely.
  • He will oversee internal auditing and is responsible for timely and proper auditing of accounts by Statutory auditors and AG auditors.
  • He is expected to get prepared the monthly Cash Flow Statements and Budget Reports and provide the same to management.
  • He is required to keep available all managerial information statements and reports as required by the management at any time they may want.
  • He is required to guide the management in all matters dealing with financial involvement and keep them in touch with all financial matters of the company.
Some important functions of finance manager

Understanding Industry
A Finance Manager must, first of all, have full knowledge of the activities of the industry or business in which he is dealing. He should know the processes involved in the business and the financial implications of the business. Unless he is fully aware of the dealings, he can not manage the finances of the business.

Procurement of Funds 
Finance management requires timely procurement and creation of funds for the business activities. He should be well versed with various options available in raising of funds and should be able to take smart decisions regarding arranging funds either through issue of shares and debentures or through loans from banks and financial institutions, etc.

Allocation of funds with prudence
The procured funds need to be cleverly distributed among various requirements of the business. He should be able to locate the importance and emergency of situation among various demands placed before him and allocate the funds carefully and cleverly so that all requirements are met and the operations of the business are not affected due to lack of funds.

Profit maximisation
Profit maximisation is one of the most important functions of finance manager. A finance manager should aim at earning profit or increasing profit of the business. For this purpose, he needs to minimise the cost of production by smartly locating the points of excessive expenditure and wastages in the processes. Further, he should study the markets regarding supply and demand conditions and efficiently manage the stocks and sales to meet the circumstances.

Capital management
The Finance Manager should be well accustomed with the capital market, its swings and factors causing those swings. He needs to be always in touch with the latest trends in stocks and manage the stocks and shares of the company accordingly by involving in selling and buying activities smartly. His decisions can affect the capital involved very sensitively. So he needs to be very careful and smart. Distribution of dividends may also be sometimes shifted to investing in new stocks and shares instead of paying dividends so as to increase share capital and thereby returns to the shareholders.

Saturday, 20 December 2014

What is Depreciation and How to Calculate Depreciation?

Meaning of Depreciation
Depreciation means a decrease in value. As and when we use goods, they undergo wear and tear. Thereby their value gets to decrease gradually. Even, through the mere passage of time also, it can lose its value whether put to use or not. This phenomenon of loss in value needs to be added to expenses in books so as to recover the loss from sales.

Depreciation can be defined as that portion of value which it loses each year due to wear and tear, usage or obsolescence irrespective of whether it is used or not.

It is the process of transferring the cost of the asset into expenses over its lifespan.

Need for charging Depreciation

  • As capital is invested in procuring the assets, it needs to be recovered through sale price of your product. So, the depreciation value is added to cost of production in determining the sale price of the product. By charging depreciation, you are recovering the value of the assets proportionately each year throughout their expected lifespan.
  • It is needed for replacing the asset on its erosion after the completion of its useful life so as to run the business.

How to calculate Depreciation
Depreciation is normally calculated by spreading 95% value of the asset throughout its estimated lifespan period.

5% value of the asset is kept in books as salvage value which means that you can recover at least 5% value of assets when you sell it in any future years. No asset can be reduced to zero value as it is generally considered that it will fetch you at least a minimum of  5% value of its cost on sale. So only 95% value is written off as depreciation during its lifespan.

There are different methods of calculating depreciation as per practices prevalent in different countries and even in different companies.

Depreciation as per Companies Act 2014
As per Schedule XIV of Indian Companies Act' 1956, depreciation is to be calculated in two methods-
the straight-line method or written down value method.

Under this Companies Act, all assets are grouped into different groups of assets and rates are fixed based on the lifespan of each group of assets. The major classification of assets are as follows:

  • Land
  • Roads
  • Buildings
  • Furniture
  • Office Equipments
  • Vehicles ( Light or Heavy)
  • Plant & Machinery
Besides above groupings, there are many subgroupings under each category with some variations in the rates. Further, under Plant & Machinery, calculations are to be made according to a single shift, double shift or triple shift workings at their corresponding rates.

The rate charts are available at Schedule XIV of Companies Act, 1956 (amended in 2014), which get updated as and when changes are made to it.

Straight Line Method of Depreciation

Under the straight-line method of depreciation, depreciation is calculated each accounting year at the same amount as per the Depreciation Rates Schedule of the Companies Act applicable for that Assessment Year. Each accounting year, the depreciation is calculated on the original gross value of the asset. As rates are fixed, the depreciation amount will be the same for each and every accounting year (provided the Gross value of asset remains same and if no additions are made during that year). If additions are made, the amount will increase pro rata.

While making depreciation calculation on additions made during the year, if the addition is made in the first half of the year, the full amount of depreciation will be charged for the whole year on that item.

If the addition is made in the second half of the year, then, only half amount of the depreciation will be charged for that asset in that year.

Illustration for Depreciation Calculated at SLM method

Rate %

In the above example, no additions are taken. If there is an addition during the year, you will have to provide extra columns for the Addition and Total Value also. Depreciation will be calculated for opening balance and addition separately and the total depreciation will be shown in the depreciation column of that year.

Written Down Value Method of Depreciation (WDV method)
In this method, the depreciation is calculated each accounting year on the net value of the asset. The net value of an asset is that value which gets reduced by its previous amount of depreciation. Each year, you go on deducting the depreciation amount from the value of the asset and then calculate the depreciation on that net amount. So, you will be taking the net value of that asset as your opening balance for calculating the depreciation as opposed to the SLM method, where you always take the original gross value of an asset as your opening balance.

In this method of calculation, the depreciation amount will be higher in the starting years and lower at the end period of the asset. The depreciation rates will be higher in this method but the number of years of asset's life will be the same. Since you are calculating the depreciation on diminishing value basis, the total amount of depreciation charged on any asset during its lifespan will be the same as that charged on SLM method. So, in both methods of SLM method and WDV method, the ultimate residual value will remain more or less the same at the end of its lifespan.

Calculation of Depreciation under WDV method

Rate %
2012-13 Depr.
2012-13 WDV
2013-14 Depr.

I hope the concept is clear with the help of above illustrations. You may express your doubts, if any, in the comments section so that I may answer.

Friday, 19 December 2014

Elasticity of Supply, Calculation and Factors influencing it

What is elasticity?
Elasticity refers to the changes or flexibility of something in response to the changes made to other circumstances or factors affecting its performance or existence.  For example, the elastic underwears. The wear fits the body of certain fatness and dimensions. The grip of elastic enlarges or shrinks according to the dimensions and thickness of your waist or body. This nature of adoption to changes is called elasticity.

Performance of any thing, whether a product or service, is dependent on many related circumstances or assumptions. If those circumstances or conditions change, the performance or efficiency of that product or service also gets affected. So, it is elastic according to the situations.

What is elasticity of supply?
Elasticity of supply is the responsiveness of supplies to changes in the prices of those goods or services. It is mentioned in abbreviated terms as Es.

It is also known as price elasticity of supply (abbreviated as PES).

If prices of the goods or services increase, the supply quantities will also increase. If prices fall, supplies will also shrink according to the fall. This is known as price elasticity of supply

How elasticity is measured?
Elasticity is measured in terms of ratio to changes in prices. It is expressed in the ratio of percentage change in quantity supplied by percentage change in price.

PES or ES   = (%change in supply quantity)/(%change in price)

Suppose the price of potatoes increases from Rs.20 to Rs.25 a kg and the supply gets increased to 1000 kg from previous supply of 500 kg. Now, the elasticity in supply is calculated as follows:
PES = {(1000 - 500) / 500 x100} ÷  {(25 - 20) / 20 x 100} = {(500/500) x 100} ÷ {(5/20) x 100
So percentage change in supply = 100 and percentage supply in price = 25
So PES = 100 ÷ 25 = 4

There are 4 kinds of elasticity in supply.
  • If the increase in supply is more higher than the increase in prices, it is known as high elasticity of supply. (It will be always greater than one ( PES= >1)).
  • If the increase is very low as compared to increase in prices, then it is known as low elasticity of supply. (It is always less than one ( PES= <1)). 
  • If there is no change in supply quantity in spite of increase in prices, then that condition is termed as non-elasticity of supply. (The ratio will be always Zero (PES= 0)).
  • When the percentage changes in price and supply are both equal, it is known as unitary elasticity. (PES= 1) 
Factors influencing elasticity of supply
There are many factors influencing elasticity of supply. Some of them are narrated below.
  • Ability to switch over to production of those goods: If you are able to produce the increased price commodities, you can supply more quantities immediately.
  • Time factor: Availability of time for producing those goods or procuring from other places can also influence in more supply of those goods.
  • Availability of resources and factors of production: If all the factors of production are easily available to produce that commodity, you can increase the supply easily.
  • Nature of commodities: Perishable goods are more elastic as compared to more durable goods because of their preservation and maintenance from rot and destruction. 
  • Transportation facilities or mobility: If you are able to transport or move the goods easily, you can increase the supply drastically.

Tuesday, 16 December 2014

Supply and Demand and factors affecting supply and demand

Supply and Demand are the two major forces influencing the markets and economical conditions of any country. The whole economy is based on the interactions of these two major factors. They are interrelated to each other closely and changes in one can drastically influence changes in the other.

What is meant by Supply and Demand?
Supply and demand denote the activities of goods or services that are being produced or procured and made available to the market for sale on one hand, and, the requirements or demands placed/ made by potential buyers of those goods and services at the other end. Each demand requires a supply and each supply should get a demand. This chain of supply and demand is a never ending process deciding the market conditions at any particular place or time.

Understanding Supply 
As you already know, supply is the quantity available in market at a particular price that buyers may be willing to pay.

But, normally, any stock of goods in market can be considered as supply irrelevant of their price variations and quality variations. This is because, they are potentially saleable at any time.

Definition of Supply
Economically, supply can be defined as the quantity of any product that a seller offers for sale at a particular price at any particular time or in a given period of time. So, it is not the simple availability of commodities but the willingness of supplier to sell that matters.

Seven major factors influencing supply
Some of the important factors affecting supply are as follows:

  • Price is an important element that influences supply quantum in any market. The producers of goods and services often try to sell their produce at maximum prices and thereby they always try to release more supply when prices are high and low supplies when prices are not attractive. This may sometimes lead to hoarding and black marketeering of goods which shall be discussed later.
  • Cost of inputs is also a major deciding factor in determining the supplies available at any point of time or place. If the cost of inputs in producing the goods are low, they will be produced more and thereby supplies will also increase drastically. Otherwise, when inputs are expensive, production and supply will be lesser.
  • Prices of related goods can also affect supply of a particular good. If the supplier deals in two or more goods and finds out that certain other goods he is dealing with are more profitable, then he may reduce supply of the less profitable item and increase the supply of more profitable items to earn more income.
  • Demand also controls supplies. Excessive demand will automatically require more and more supply. If there is decrease in demand, naturally, the supply of that goods will also be restricted and decreased.
  • Competition in markets influences your supplies. When there are many choices of alternative goods that satisfy a same need, the buyers can shift to less priced goods and your goods will not be demanded. So, you will be forced to decrease your supply.
  • Tastes and likes of consumers or potential buyers can also influence supply of goods and services. If people like a particular product or brand and are willing to pay more to obtain it, then supply of that product requires to be increased in the market to meet their requirements. So, consumers' tastes and preferences will definitely give rise to more supply of those products in market.
  • Technology also plays some role in determining the supply. Use of advanced technology in production methods, facilitates increased production at reduced costs and thereby makes more supply available at reasonable prices.
  • Government interference can also affect supply to a large extent. Government policies may restrict production and supply of certain products by banning those items or imposing heavy duties and taxes.

Demand occurs whenever need is felt for procuring goods or services. Wants create demand and you indulge in satisfying your wants by procuring goods and services.

But, you should note that every want may not necessarily create demand. It depends on some circumstances.

Definition of Demand
Demand can be defined as the quantity of any product that is demanded or purchased by buyers at a particular price in a given period. So, it is the demand backed by purchasing power of the person demanding it. Simple want or desire is not a demand.

 Major factors affecting demand
Some of the important factors influencing demand are discussed below.
  • Abundance of certain varieties of goods and services can stimulate demand for those goods as compared to those in short supply.
  • Price factor controls demand for goods. Cheaper in cost goods attract more demand as compared to highly priced goods and services.
  • Changes in tastes of people can shift the demand from one type of goods to another one.
  • Prices of related goods like substitutes and complementary goods can affect the demand for original goods or services. You can easily shift to cheaper substitutes or quality goods.
  • Advertisement and media can inspire changes in consumer behaviour and thereby shift in demands.
  • Income of Consumers also control their demand for goods as they have to adjust their consumption according to the income.
  • Climate conditions or seasonal changes also affect demand. During summer, people like to wear cotton clothes whereas in winter they need woollen clothes. Demand for rain coats and umbrellas can increase too much.
  • Economic instability of the country can also lead to much variations in demand for goods in fear of price raises or short supplies.
  • Increase in population can also affect demand as there will be more buyers for same quantity of supply.

Monday, 15 December 2014

Definition of market | Market Creation | Factors influencing Market

What is Market?
Normally people use the word 'Market' to refer to a physical place of shops where goods are bought and sold. You will say "I am going to the market" to tell that you are going to buy some grocery or goods at a particular place.

Other words that come to mind immediately may be world market, stock market and supermarket.

But, in economics, market is a much wider term which includes the whole lot of suppliers and buyers of goods and services doing business either offline or online with no physical contacts and so, it is not limited to any particular area. Due to this fact, a market can be defined to include or refer to the whole lot of interactions between potential suppliers and buyers of goods and services spread all over the world either online or offline.

Definition of market
A physical or nominal place where buyers and sellers interact to trade in goods or services for money or value of money and where the forces of supply and demand operate.

Need for Market
Goods and resources are of numerous types and every person can not have all his requirements at hand. He needs to procure his requirements from different places and from different people as he himself can't produce everything that he needs. So different sections of people indulged in producing different kinds of goods and services which they could easily do. Then they exchanged those things with one another to satisfy their needs. This gave birth to markets through which they interacted and indulged in supply and consumption of those goods and services through the medium of currency.

In primitive days, people used to exchange goods and services as such through a system known as barter system. But, gradually, they learnt about money and money value. Then, they started pricing goods and services in terms of money and began trading their goods and services in lieu of money or money value. They met at some fixed places and transacted their businesses. Thus markets came into being..

Market creation

Market gets created whenever two or more people get involved in buying and selling or interacting with goods and services.

For any market, the basic requirement is supply and demand. There should be supply of goods and services. And there needs to be some demand for those goods. Simple supply without demand does not make market. Nor mere demand without supply can create market. If there is nobody to buy your goods, it does not make any sense as there is no market creation for your stock. Similarly, you want or demand something. But nobody is there to supply you with your requirements. So, no market is available for you.

So, it is a primary condition that market needs both supply and demand for goods or services. When there are both buyers and sellers, market gets created. So, it is inherent that stock should be there to create demand and demand should be there to create stock. When both aspects are present, market gets created. Further, the knowledge about commodity should also be there so that buyers can demand it or a supplier can supply it.

Three basic requirements for market

From the above facts, you are able to see that to create a market, we requires these three fundamental features or basic requirements:

  • A market needs a commodity or stock to deal with.
  • Presence of buyers and sellers is essential for market.
  • Knowledge or awareness about the commodity should be there.

There is no need for physical presence of buyers and sellers at a particular place of the market. They can transact their business through online or mobile or through agents also. The basic requirement for market is a transaction between the buyer and the seller. The seller provides goods or services and the buyer purchases it by paying through cash or cheque or through any other means.

Now, coming to factors influencing market or the market conditions, there are many factors that govern market conditions and operations. Let us look at some of these factors that influence and govern markets.

Factors influencing market

Availability of resources and free trade facilities
A market implies meeting demands with supplies. So there should be enough stock of goods and resources for any market. The resources may be either raw materials being converted into goods or ready made goods imported from other places. So, the quantum of resources and supplies available makes your market sound or weak. Free flow of goods from one region to another region or one country to another without barriers makes markets strong.

Supply and demand
Supply and demand are most effective tools impacting market operations. Excessive supply or short supply and increased demand or decrease in demand can drastically change your market operations and equilibrium.

Political atmosphere
The political environment affects market conditions drastically. If there is political instability, the markets will be dwindling every moment in fear of unexpected revolts and disturbances.

Economic breakdowns
If the economy of the country is poor or disturbed, the markets will dwindle leading to unhealthy practices and corruption in dealings.

Natural calamities
Natural calamities like floods and drought can substantively disrupt and dwindle market conditions by destabilising the forces of supply and demand.

Government interference 
Government interference and restrictions affect the market atmosphere. Excessive controls or too much leniency can throw much influence on the operations of the market making it restricted market or free market.

Saturday, 13 December 2014

Meaning and basic forms of structure of market in economics | Different types of markets

Structure of market
By market structure, we mean the interconnected characteristics such as the number of buyers and sellers, the volume of transactions, the degree of collusion or secret and illegal understandings or obligations between them, the level of competition and the barriers of entry and exit into business. All these things constitute the structure of market.

Four types of market structure

There are four major types or forms of market structure as mentioned below.
  • Monopoly market also known as Controlled or Command market system 
  • Oligopoly market (where a small group of firms dominate and control the market)
  • Perfectly competitive market also known as free market system.
  • Monopsony market

1) Monopoly market
A monopoly is a market condition where only one seller controls the whole market in his field. As there is no immediate substitute for his product, the buyers have to depend on his firm for that product and thereby, he is able to charge a higher price for his product and earn more profits. There is no competition at all for his business.

The salient features of a monopoly market are that it has a single supplier, no competition in market, no substitute for the product, he is sole price maker and profit is the motive.

But, in present conditions, there are few cases of monopolistic markets as governments normally do not allow monopoly practices.

The only cases of monopoly that we can find at present are the government's own tradings in some essential services like power, fuel, water, defence and banking sectors. But, governments generally act in the interests of public and so we cannot find any harm in their monopolistic activities.

2) Oligopoly market
Oligopoly is a situation where the market is controlled by a small group of persons or firms. The firms are able to control the maximum share of business in their field.

Some examples of oligopoly are the mobile phone market, steel, automobiles and gas agencies. They control the whole market and are able to set their prices high.

Important characteristics of oligopoly market are profit maximisation, price fixing, few firms and few competition, interdependence, full knowledge of other firm's activities, long life of firms and abnormal profits.

3) Perfect competition market
A perfect competition market is a situation where there are infinite number of sellers and buyers dealing in identical products with no control over prices and other market conditions. The prices are reached automatically through interaction of supply demand forces and with some intervention of government policies to fix minimum support prices.

The characteristics of perfect market conditions are that there are unlimited sellers and buyers, no barriers for entry or exit, homogeneous products which are perfect substitutes for each other, each seller can maximise his profit, perfect mobility of factors of production, zero cost transactions as you can make direct purchases, free decision making ability and perfect knowledge of goods, etc.

4) Monopsony market
A monopsony market structure is a situation where a single buyer (not the seller) controls the whole market. The buyer can force the price to decline by his actions of collective purchases and thereby can pose a threat to monopoly trade. A single buyer purchases all the produce direct from the sellers or producers at a lower price because of his influence in the market.

Various types of markets
Besides above classification which is based on the structure of market, we can identify or classify markets into various types according to the nature of goods or services it deals with or according to the place or limits within which it operates or on their volume of business, etc.

The following are some of these classifications or types of markets.

Based on Products
  • Paddy market
  • Vegetable market
  • Cement market
  • Oil market
  • Clothes market
  • Electronics market, etc.

Based on Services
  • Financial/ Capital market
  • Labour market
  • IT market
  • Share market
  • Professional services, etc.
Based on place or boundaries
  • Local market
  • National market
  • International market
Based on Volume
  • Wholesale market
  • Retail market
Based on real presence
  • Physical / offline market
  • Online market
  • Future market (dealing in future transactions)
Wholesale market
A wholesale market is a place or system where goods are transacted in whole lots or larger quantities. The wholesaler procures goods direct from producer and sells them to retailers or other middle agents and institutions in whole lots. The wholesaler does not involve in small quantity dealings. He acts as the middleman between producer and consumer or retailer. The wholesale business facilitates manufacturers and producers of goods as they need not worry about sale of their produce and thereby concentrate on their business.

Retail market 
In retail market, the buyers and sellers meet physically. Retail market is a place where the buyer reaches seller physically and buys goods from his shop. For this reason, the retailer should locate his shop nearer to the buyer's location and keep the shop well maintained. The transactions are direct between buyer and seller in this system. So there is physical attachment between retailer and his customers. Thereby the retailer can develop good relations with his customers to keep them engaged with his shop.

Physical market
A physical market is a place where the buyer meets the seller and purchases things. Retail shops like small grocery stores, departmental stores and big shopping malls are all examples of physical market. A physical market can be also termed as offline market in contrast to an online market.

Online market
Nowadays, online shopping has become a trend in most cities. Online market is the system of buying goods using the internet through e commerce. In this system, the suppliers create a website placing all their products for display and sale online. The full details of the product along with its price and features are posted online with images of the products on sale. So any prospective buyer can land into their website, view those details and select their products and book orders. Payments are normally done through credit cards or debit cards and money transfers. Some sellers offer the facility of payment on receipt of product by the buyer.

Future market
A future market is a market wherein a customer can deal in future dealings. The buyer enters in a deal with the seller to buy certain goods or services at a certain specified price to be delivered to him at a future date. In these type of transactions, the buyers are protected from any abnormal changes in prices at that future period as they have already fixed the price with the seller. So, the buyers get relief from future price variations.

Friday, 12 December 2014

How to prepare Balance Sheet and its Importance

What is a Balance Sheet?
A Balance Sheet is one of the most important documents of any company. It is a summary of all the accounts and activities of the company in money value. It is a statement of the assets and liabilities of the company. It gives a complete picture of the financial position of any company in a nutshell. 

Importance of Balance Sheet
Balance sheets are important for the many uses they provide to different sections of people. They are mandatory under the Company Law for any business organization.

  • Balance Sheets are used by governments and Company Law Boards to determine the performances of companies or business entities for the purpose of Income Tax assessment, Corporate Tax, and other statutory compliance requirements. 
  • Investors use the information from Balance Sheets as a guide for their investments in the company. As the balance sheets are certified by licensed Chartered Accountants, they are considered as true and reliable sources projecting true picture of the company's financial position. 
  • Owners and Shareholders use the balance sheets to know the status of the company and to take authoritative decisions on management issues and for the running of the companies.
  • Even staff and workers require the balance sheets to know the progress of the company and for seeking increments, promotions and bonus payments.
  • In legal field also. balance sheets are used to file cases and seek compensations from the company. 
How to prepare Balance Sheets?
Balance Sheet is prepared with the help of Trial Balance and Profit and Loss Statement of the company.

A simple Balance Sheet consists of two columns just like Trial Balance and Profit and Loss account.
On your right side, you will take all the assets which include Fixed Assets, Current Assets, Cash & Bank Balances, and Investments, etc. On the left side, you will show all your liabilities such as Capital, long-term liabilities, current liabilities, etc.

Different countries follow different styles in presentations. Some prefer a single column statement starting with assets and then proceed to liabilities and capital. The asset total is inserted in the midst and the liabilities total at the end. In any case, both assets and liabilities will tally in their total amount. That is why it is known as a Balance Sheet.

Even in the same country, different companies can project their figures in different ways. Say, Cash and Bank balances and current assets first then fixed assets like that. And current liabilities first and then long-term liabilities and then Share capital.

But, in my example below, I am giving a sample balance sheet in a simple format that I used to prepare for my company in a two columnar statement.

Balance Sheet of XYZ Company as on 31st March 2014
Amount ($)
Amount ($)
Authorised Capital
CP shares 200000
Ordinary    50000
Total         250000

Issued & Paid-Up
CP shares 180000
Ordinary     45000

Fixed Assets 200000

Less:Depreciation                                                         30000         



Sundry Debtors

Prepaid expenses


Bank Balance
Total Issued & Paid
Cash Balance
Long-term Liabilities

Current Liabilities

Cumulative Profit


The above is only a sample for easy understanding of Balance Sheet preparation. All figures are to be taken from your Profit and Loss Statement and Trial Balance which is finally confirmed as correct figures.

You need to attach with this Balance Sheet all the quantitative information and the details of each group of account shown here in the above statement. These sheets of information are to be enclosed as Annexures to the Balance Sheet.