Commerce

In this category, articles related to commerce (general topics) will be available

Vostro, Nostro and Loro Accounts

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Vostro, Nostro and Loro Accounts:-

Bank maintains three types of current accounts for quick transfer of funds in foreign currencies. In case of transfer of foreign exchange from one account to another, Vostro, Nostro and Loro accounts are used.

Vostro Account:-

Vostro is an Italian word which literally means “Your“. This account is the account of one country’s bank [foreign bank] with another country’s bank [Indian bank].

Example:-

  1. Account of foreign bank with local bank.
  2. Citibank’s account with State bank of India.
  3. Doha bank maintains an account with Punjab National Bank.

[Your account with us]

Nostro Account:-

Nostro is an Italian word which literally means “Our”. This account is the account which is held by a domestic bank [ex.-Indian bank] with foreign bank [ ex.-bank in Switzerland]. It is also known as “our account with you”.

Here, one country’s bank’s currency account is maintained by the bank in a foreign country is called as Nostro Account.

Example:-

  1. An Indian bank’s account with a bank in Switzerland in Swiss franc.
  2. An Indian bank’s account with bank in USA in US Dollar.

Note:- Account which is Nostro for one bank is Vostro for another.

Loro Account:-

Loro is an Italian word which literally means “Their“. This account is the account where foreign exchange transaction are settled by domestic banks by using the account of third party bank which has a Nostro account. Ex.-ICICI bank’s account with Citibank.

Example:-

If IFCI bank is required to be paid the bill of machinery imported from the USA on behalf of its customers, IFCI bank will approach ICICI bank who has Nostro account with Citibank and ask to settle the invoice on its own behalf.

Here, ICICI bank works as an intermediary between Citibank and IFCI bank.

Forms of Business Organization

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Forms of Business Organization

The following are the forms of organization:-

Sole Proprietorship:-

L.H. Haney:-The individual proprietorship is the form of business organization 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.

  • This is one of the best popular small forms of business. As the name suggests, sole proprietor, here, the word sole implies only, and proprietor refers to owner. Hence, a sole proprietor is the single person who is owner of a business.
  • In such a form of business organization, a business is owned, controlled and managed by an individual who owns the business, and all profits and risk will be borne by that individual. In India, high proportion of micro and small businesses are unregistered.
  • In a modern economy where the best financial system exists, it is often possible to obtain micro–finance and bank finance for this type of small business.
  • Here, the owner of the business is personally responsible for the debts, and if there is a shortfall to meet liabilities or debts,  if any, the owner’s personal assets could be used for the repayment of debts.

Important Points:-

  • Sole proprietor is considered as one’s own boss.
  • Sole proprietor is regarded as an economic hero.
  • Autonomous power, unlimited liability and bearing capacity of risk.
  • No separate entity, there is no difference between owner and business.

Hindu Undivided family

Joint Hindu Family can also do business in India. HUF (Hindu Undivided Family) is formed automatically in a Hindu Family which consists of persons lineally descended from a common ancestor, including their wives and unmarried daughters. Joint Hindu Family Business or HUF business is a separate entity from Income Tax point of view. 

Important Points:-

  • It is governed by Hindu Succession Act, 1956.
  • Three successive generations are considered HUF (Hindu Undivided Family).
  • HUF can have income from five heads of income except income from salary.
  • Karta is the person who is the eldest member of the family.
  • Family members are co-owners (also known as co-parceners) by birth.
  • HUF includes Buddhist, Jain and Sikh families.
  • Karta has unlimited liability.
  • Married daughter has equal rights in property of a Joint Hindu Family.

Partnership

The Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed
to share the profit of the business carried on by all or any one of them acting for all.

Important Points:-

  • Minimum two or more persons are required to form a partnership.
  • It is an agreement enforceable by law.
  • The essence of partnership is partnership deed.
  • Partnership is governed by the Indian Partnership Act, 1932.
  • Ownership is not easily transferable.
  • Liability of partners is unlimited.

Limited Liability Partnership (LLP)

It is registered under the Limited Liability Partnership Act. 2009. Here, the liability of the partners is limited. LLP is a separate entity.

Important Points:-

  • It is a legal entity.
  • Entity is different from partners.
  • Partners have limited liability.
  • ROC is the administrative body.   
  • There is no limit on maximum no. of partners.

Company

According to Prof. Haney – A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.

Memorandum of Association (MOA) and Article of Association (AOA) are important documents of company. There are various types of companies.

Difference between Business, Profession and Employment

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Difference between Business, Profession and Employment

Sr. NoBasisBusinessProfessionEmployment
1MeaningBusiness includes trade and commerce.Profession includes rendering of services based on personalized expert service under code of conduct.Employment includes rendering of services under a contract of employment or rules of service.
2Code of ConductDoes not require.Require (professional codes).Require (employer’s codes).
3 Mode of establishmentEntrepreneur’s decision and other legal formalities, if necessaryMembership of a professional
body and certificate of practice.		Appointment letter and service agreement.
4 QualificationsNo minimum qualification is required. Professional qualification & experience from professional body is necessary.Require as prescribed by the employer.
5Returnprofit.Professional fee.Wages & Salaries.
6InvestmentRequire as per size and nature of business.Limited requirement for set up of office/clinic etc.None.
7RiskHigh.Low.Very low.
8Freedom/AutonomyFull.Quite a bit.Not much.
9Transfer of interestPossible with few requirements.Not possible.Not possible.
10StabilityCertain.Quite certain.Quite certain.
11exampleFactory, Company, Shop and so on. Accountancy, Legal and Medical and so on. Companies, Government departments, PSUs, Banks etc.

Mutual Funds

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Introduction:

Mutual fund creates an important investment opportunity for small investors who do not have knowledge about market and face a lot of problems in taking investment decision because of volatile market. This is one of top solution for the problems of small investors and the history of mutual fund industry started in 1963 with the formation of Unit Trust of India in 1963 by an Act of Parliament under the control of RBI. In 1978 it came under the control of the Industrial Development Bank of India and Unit Scheme 64 was the first scheme of UTI in 1964.

In 1987 public sector mutual funds came into existence and these funds set up by public sector banks, Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). Private sector mutual funds came in 1993. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund under the SEBI (Mutual Fund) Regulations 1996. In 2003, UTI converted into two different entities.

Meaning:-

Mutual fund is a financial intermediary that pools money from investors for collectively investment in stocks, bonds and other securities.

Mutual Fund Operation Flow Chart

  1. Investors invest the amount in mutual fund.
  2. Fund manager of mutual fund invest in securities (shares, debentures).
  3. Earn returns redistributed to investors.

Organizational Structure of Mutual Fund in India

  1. Sponsor– is the entity who creates a mutual fund. According to SEBI(Mutual Fund) Regulations, 1996 the sponsor contributes at least 40% of net worth of AMC.
  2. Trust– The Mutual Fund is a trust under the Indian Trusts Act, 1882.
  3. Trustees– The Board of Trustees manage the trust and safeguard the interest of the unit holders. The fund sponsor appoints trustees and trust is created through a document called the Trust Deed executed by the fund sponsor in favour of trustees. Trustees are primary guardian of the unit holders.
  4. Asset Management Company (AMC)- Trustee appoints the AMC manages the funds ,operations and investments of the MF and provide advisory services.
  5. Custodian-safekeeping of the investors’ fund and securities.

Types of Mutual Funds

On the basis of Structure-

  1. Open Ended Funds (Schemes)- Most of the funds are open ended as there is no defined maturity date. The key feature is liquidity round the year. Investors can buy and sell (redeem) at any time. An open ended fund comes into existence through the New Fund Offer.
  2. Closed Ended Funds- have a defined maturity date. Close ended funds are listed on the stock Exchange.

Types of Mutual Fund Schemes:-

Equity Schemes:- Small Cap Fund, Mid Cap Fund, Large & Mid Cap Fund, Large Cap Fund, Multi Cap Fund, Sectoral / Thematic and ELSS.

Debt Schemes:- Liquid Fund, Gilt Fund, Money market Fund, Duration Fund.

Hybrid Schemes:- Conservative/Aggressive/Balanced Hybrid fund, Arbitrage Fund.

Other Schemes:- Index Funds / ETFs.

Net Asset Value

Net asset value is the market value of the securities. Market value of securities changes every day.

The NAV is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.

Formula:-

Net Asset of the Scheme/Number of units outstanding

Net Asset of the Scheme- Market Value of Investments held by the Fund+ Value of Current Assets-Value of Current Liabilities and other payables.

Mutual Fund Terminology:-

  • NFO- New Fund Offer
  • SID- Scheme Information Document
  • SAI- Statement of Additional Information
  • KIM- Key Information Memorandum
  • AUM- Assets under Management
  • KYC Know Your Client
  • FATCA- Foreign Account Tax Compliance Act
  • SIP- Systematic Investment Plan
  • NAV- NET ASSET VALUE

True Blood Report

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True Blood Report:-

For the betterment of corporate financial reporting, The American Institute of Certified Public Accountants (AICPA) formed a study group under the chairmanship of Robert M. True Blood. The study group visited various places and studied more than 500 corporations, professional firms, national and international organisations.

The Study group conducted meeting and interviewed of various executives and submitted report in October, 1973.

On the basis of this study, the study group recommended twelve objectives of financial reporting.

Objectives:-

  • To provide useful information for financial decision
  • To provide information to investors and creditors for prediction, comparison and evolution.
  • To give priority to users who have limited resources, authority and capability and rely on financial statements as principle source of information.
  • To furnish information to users for predicting, comparing and evaluating the earning capacity of business concern.
  • To supply information to the management by which resources can be utilised in such a manner that goal of enterprise achieve.
  • To give factual and interpretative information about transactions and events.
  • To provide financial position statement with current value.
  • To provide income statement for predict, compare and evaluate earning capacity of business concern and if changes in value should be reported separately.
  • To provide information that makes the economic decision beneficial for investors.
  • To provide financial information which increase the reliability of users.
  • To provide Information for evaluating earning and effectiveness of resources in achieving predetermined goal of the enterprise.
  • To provide report on financial statements about business activities which have effect on society and social environment.

Commodity Market| Terminology used in Commodity Market

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Commodity Market:-

Commodity market is the market where commodities are bought and sold. For example metals & raw material commodities like cotton, pulses etc.

In commodity market, prices get influenced by many factors from monsoon predictions to political decisions.

Multi Commodity Exchange of India Limited (MCX) and the National Commodity & Derivatives Exchange Limited (NCDEX) are the primary commodity trading platforms in India.

Terminology used in Commodity Market:-

  1. Futures Contract:-agreement where one party agrees to take a short position and another party assumes the long position on contracted commodity with the specific quantity, quality, price per unit, and the date.
  2. Settlement:- Close out day of the futures contract.
  3. Margin:- Margin equal to usually 5-15%.
  4. Open:-Opening price of the trade.
  5. Low:- Lowest price in the trading session or day.
  6. High:- Highest price in the trading session or day.
  7. Open Interest:-Number of open positions of contracts.
  8. Short position in a contract:-party who agrees to sell the contracted commodity.
  9. Long position in a contract:- party who agrees to purchase the contracted commodity.
  10. Expiry date:- Closure date of the contract.
  11. LTP:-Last traded price.
  12. Unit traded:-The unit of measurement

Commission in Consignment

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Commission and its types:-

Commission:- Commission is the amount paid by the consignor to the consignee for the services (selling the consigned goods) rendered.

There are three types of commission:-

  • Ordinary Commission- is paid by consignor to consignee based on fixed percentage of the gross sales proceeds. This type of commission doesn’t provide protection to the consignor from bad debts.
  • Del-credere Commission- This is one type of additional commission paid by consignor to consignee for encouraging to make credit sales. This provides protection to the consignor against bad debts.
  • Over-riding Commission- This is an extra commission paid by the consignor to the consignee to promote sales at higher price then specified when new product is introduced in the market. The calculation off this type of commission is depend on the agreement whether it is calculated on total sales or difference between actual sales price of product and invoice price or any specified.

Lease| Types of Lease| Operating Lease| Finance Lease

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Lease :- a lease is a contract between the owner (lessor) and the user (lessee) wherein lessor gives right to use the asset/capital goods/equipment on payment of periodic amount to lessee.

Parties involved in Lease agreement:-

  • Lessor – lessor is the real owner of asset.
  • Lessee – lessee gets the right to use the asset on payment of periodic amount.

Types of Lease :-

Operating lease :- under this lease, lessor is unable to recover the full value of asset/capital goods/equipment and other related charges due to short period of lease. In addition to this, lessor also bear insurance, repair & maintenance costs etc. Operating lease, generally, prefers in the following situations:-

  • When the asset is subject to rapid obsolescence.
  • When the long life of asset is uncertain.
  • When the asset is required for temporary use.

Finance lease :- under this lease, lessor is able to realize the value of asset/equipment due to long period of lease and title of ownership is transferred from lessor to lessee. In such lease, lessee doesn’t have option to terminate the lease agreement subsequently and bear insurance, maintenance costs. In finance lease, two types of options are available for lessee i.e. right to purchase the leased assets after the expiry of initial lease period at an agreed price & the right to share the sale proceeds of the asset after expiry of lease period.

Portfolio Management |Objectives |Phases of Portfolio Management |Portfolio Theories

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Portfolio Management :- Portfolio + Management, portfolio refers to a combination of financial assets or a collection of investment such as shares, bond, mutual funds etc. , management means taking right decision at the right time (i.e. selection of best securities).

Investors invest in securities such as s bonds, debentures and shares etc. & Investment in such type of securities requires analytical skills.

According to the famous punching line that never puts all eggs in the same basket, an investor never invest all funds in one security, he invests in a diversified portfolio that can reduce the risk and get good returns. So, selection of best securities is the important activities in portfolio management.

Objectives :-

  • Safety of Principal- to keep the capital or principal amount safe & it should not erode in terms of purchasing power.
  • Reduce Risk- to reduce the risk by investing in different types of securities.
  • Capital growth- to attain capital growth by reinvesting in growth securities.
  • Stability of income- To facilitate planned & systematic reinvestment of income to ensure stability in returns.
  • Liquidity/Marketability- investor is able to take advantage and buy and sell the securities.
  • Tax benefits- effective plan reduce the tax burden by which yield can be improved effectively.

Phases of Portfolio Management :-

Security Analysis:- various securities are available for an investor to invest such as equity shares, preference shares, debentures and bonds, Convertible Debentures, Deep Discount Bonds, Zero Coupon Bonds, Global Depository Receipts, Euro-currency Bonds, etc. out of these securities, investor has to choose best one, for this detailed analysis of securities is necessary. There are two approaches to analyse security i.e. fundamental and technical analysis. Fundamental analysis focus on fundamental factors of company such as EPS, DP Ratio, company’s market share and management etc. In fundamental analysis, intrinsic value of security compares with the current market price. If the current market price is greater than intrinsic value then the share said to be overprice and vice versa. With the help of fundamental analysis, investor would buy securities which are under- price and sell which are over-price.

The second approach to analyse securities is Technical Analysis. According to this, past movement in the prices of shares are studied to identify the trends and patterns in prices of securities and to predict the future price movements, immediate past patterns is considered.

Portfolio Analysis:- after selection of best securities for investment, the next step is to make portfolio by combining these securities. The return and risk can be studied on the basis of risk return profiles.

Portfolio Selection & Revision:- The rational investor is to identify the best portfolio out of various after that continuously monitor that.

Portfolio Evaluation:- The objective to make a portfolio is maintain optimal risk return.

Theories:- Theories play an important role in selecting and combining securities for expected rate of return for any given degree of risk from investor’s point of view.

  • Traditional Approach:- This approach to portfolio management concerns with the investor, portfolio objectives, investment strategy, other assets, need for income. In addition to this, investor considers age, responsibilities, portfolio needs, need for income, capital maintenance, liquidity, risk and taxation.
  • Modern Approach:- This approach developed by Dr. Harry M. Markowitz in 1950. Harry Markowitz is regarded as the father of Modern Portfolio Theory and his theory provides a mathematical framework in which investors can optimise their risk and return.

Perfect Competition | Features of Perfect Competition| Market in the Economy

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Perfect Competition | Market in the Economy | Features of Perfect Competition

Perfect Competition Market :- is a market where large number of sellers sell identical products to various buyers.

Features:-

  • Homogeneous product :- there is no product differentiation and no distinctive features of the products.
  • Large number of buyers and sellers :- every firm is a price taker and sell the products at the going price. Buyer is also a price taker
  • Transportation Cost :- there is no transportation cost. Price paid by a buyer is equal to the price received by the seller.
  • Knowledge of Market :- every buyer and seller has full knowledge of the prevailing price of the product.
  • Economic Rationality:- every buyer and seller is motivated by his own decision to buy or sell the products.
  • Free Entry & Exit :- new firm can enter the industry and existing firm can close down and leave the industry, there is no restriction.
  • Perfect Mobility of factors of production :- factors of production and workers can freely move from one firm to another.
  • No Government Regulation :- There is no government regulation or interference in terms of the tariff, subsidies, etc.