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• The consistency concept suggests that while writing accounts or preparing financial statements, the same policies, procedures and methods should be followed every year.
• Accounts remain comparable only if consistency is maintained. If consistency is not maintained in accounting, the accounts may not remain comparable and can also mislead at times.
• In the consistency principle, personal bias can be avoided, the accountant has to follow consistently the same set of principles, practices, procedures or methods every year.
• For example, if stock is valued by FIFO method, the entity should follow the same method year after year as far as possible.
• In this way, if depreciation is provided by straight-line method in a year, the same method should be followed consistently every year.
• If the method of stock valuation or method of depreciation is changed every year, the accounts do not remain comparable and the profit or- loss position of different years may also indicate different.
• However, valuation of stock at cost or market price, whichever is less every year does not violate the principle of consistency.
• The logic behind the principle of consistency is that the users of financial statements lose confidence in the accounts if frequent changes are made in the policies or practices based on personal whims and fancy of those preparing the same.
• Consistency does not mean that the accounting policy or procedure can never be changed. When circumstances change or change in policy or procedure or method can present a better view of accounting information, the change can be made with appropriate reasoning. However, such changes should not be made frequently.

Generally, the accounts of the business are prepared with the assumption that the business is going to be continued and is not to be closed in near future. This concept is known as Going concern concept. The creditors supply goods and services with the expectation that the business is to go on for a long period of time. The money lenders or financial institutions offer investments based on this principle.

When depreciation is calculated on fixed assets, it is presumed that the assets will be used in the business for a long time. At the end of the accounting year, the provision for bad debts and discount reserve are also made based on this assumption. A provision is made for future contingent liability based on the presumption. Based on the concept that the business is going to continue for a long period of time, the transactions are recorded in the books of accounts.

This concept is important in the following cases:

(1) When the benefit from a certain expense is to be received not only during that year but for a long period of time, then such expense is written off or distributed in the future years. The expense of that year is recorded in the Profit and Loss Account and the balance is shown on the Assets side of the Balance Sheet.

(2) Depreciation on the assets is written off or apportioned over the useful life of the asset. Thus according to this concept, the asset is not recorded in the books at the market price, but is recorded in the books at original cost price.

(3) If the business is to run for a specific period of time, then the total cost of the asset is treated as expense of that period and is matched against the revenue of that period, e.g., joint venture for construction of bridge or construction of dam.

(4) According to this principle, fixed assets are shown at cost less depreciation and the current assets are shown at their realisable value in the Balance Sheet.

(5) Distinction is made between ‘Capital expenditure’ and ‘Revenue expenditure’ because of going concern assumption.

In the following circumstances, this concept should not be followed :

• When the object for which a business was established is achieved or is likely to be accomplished in very short period;
• When an industrial unit is declared sick;
• When a liquidator is appointed for liquidation of a company;
• When a business is likely to be liquidated very shortly.

In each accounting transaction, minimum two aspects or two accounting matters are concerned. The two aspects or effects are the debit effect and the credit effect. One effect is receiving of benefit which is debited and the other effect is giving of benefit which is credited. This way the total of the debit and credit balances is equal. In other words, each receiver is the giver and each giver is the receiver, e.g., Anish purchased goods worth ₹ 3,000 on cash from Raj Traders. In this transaction, Anish receives the goods and gives the money, whereas Raj Traders gives the goods and receives the money. This way there is a credit effect in one or more accounts, of equal amount having a debit effect in one or more accounts. As a result, the total of debit balances is equal to the total of credit balances.

On this basis, a simple equation is prepared which is C + L = A. If the funds invested by the owner in the business is known as ‘C’ (Capital), the amount invested by third parties in business is known as X (Liabilities) and Assets are known as A’, then the equation indicates that, on the assets of the business, there is a right of the owners and creditors (liabilities). The assets in the business will be equal to the funds invested in the business by the owner of the business and creditors.

Then the following equation is available :
C + L = A
Change on one side of this equation brings the same and the similar change on the other side of the equation. As per the dual aspect, if there is change in stock or assets due to an opposite effect in some other asset then there is no change in the total assets of the business. If any asset is purchased on credit, then there is an increase in the assets, and similarly, there is also an increase in the liabilities by the same amount. When capital is invested in the business, there is an increase in the assets as well as in the capital of the business.

According to Money measurement concept, only those events or transactions, which can be measured in terms of money, are recorded in the books of accounts. For accounting, money is accepted as common measurement unit. Economic worth of assets and liabilities are stated in monetary terms instead of their physical quantity. Therefore, according to this concept, the transactions which cannot be measured in terms of money are not recorded in accounts.

For example, the amount brought by the owner as capital is recorded in terms of money. If we record the quantity of goods or assets, how to present the same becomes an issue. Similarly, for payment of any expenses, money is the only measurement unit. Therefore, for accounting, money measurement is an accepted accounting concept.

This concept has two important limitations :

1. According to this concept, value of money remains stable every year or the changes in the value of money is immaterial and hence of no significance, e.g., A motorcar purchased in 2014 for say ₹ 8,00,000 is shown in account of 2018 at the same value less depreciation, though its present value may be different in 2018.
2. The transactions and events affecting business, though important, are not recorded in the books of accounts of business if they cannot be measured in terms of money. For example, factory workers going on strike, disputes between Production Manager and Sales Manager, Changes in the sales policy, etc. have a material impact on business operations.

Acctual concept implies that the revenue should be recognised and recorded in accounting as and when it is earned or it accrues irrespective of the time or period of receipt. Similarly, expenses should be recognised and recorded in accounting as and when it is incurred irrespective of the period of payment thereof. In short, this concept is relevant in the area of revenue and costs.

Revenue or costs are accrued, i.e., recognised, as they are earned or incurred and not only when cash is received or paid. Also, the revenue and costs will be recorded in the period to which they relate, e.g., When goods are sold on credit to a customer, the revenue should be recognised in accounting when such goods are sold even though cash is not yet received for such sale.

Salary payable for March 2018 will be treated as expense for the month of March 2018 even if it is paid in April 2018. This concept have some limitations. In case of gold mine, as soon as the production of the gold is obtained it is recorded in the books at selling price. In construction of bridge, road or building, profit is calculated even though the construction is incomplete. Professionals like advocates, doctors, chartered accountants, etc. record their fees as revenue at the time of its actual receipt.

The concept of accrual of revenue is similar to concept of realisation of revenue. It guides about the point in time when revenue should be recognised or when revenue should be treated as realised. However, accrual concept deals with accrual of not only revenue but also that of costs.

Accounting cost concept states that all assets are recorded in the books of accounts at their monetary cost of acquisition and not at its market price. It means that fixed assets like building, plant and machinery, furniture, etc., are recorded in the books of accounts at a total price paid for them. For example, a machine purchased by XYZ Limited for ₹ 5,00,000, for manufacturing shoes. An amount of ₹ 10,000 were spent on transporting. In addition, ₹ 5,000 were spent on its installation.

The total amount at which the machine will be recorded in the books of accounts would be the sum of all these items, i.e., ₹ 5,15,000. This cost is also known as historical cost. Suppose the market price of the same now ? 9,00,000 it will not be shown at this value. The effect of cost concept is that if the business entity does not pay anything for acquiring an asset this item would not appear in the books of accounts. Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset for a price.But no accounting entry is made for free samples received as there is no cost.

A possibility of probable loss in future is to be considered for but a possibility of future profit of revenue is not to be considered. Such a concept is known as Prudence or Conservation concept. According to this concept of prudence, an accountant does not take into account anticipated gain or profit to be received in future but provides for all anticipated losses. For example, closing stock is valued at cost price or market price, whichever is less.

Similarly, in the accounts, provision for bad debts on debtors, discount reserve on debtors, provision for repairing reserve, taxation provision, investment fluctuation fund, etc. are made based on the principle of prudence only. In accounting for sale under “sale or return” basis also income is not recognized based on this principle only. The sale income is recognized only when confirmation is received from the buyer for having accepted the sales.

According to the concept, in case of accounts for long term contracts also when the work completed is very less, entire profit of that year is reserved by transfer to work in progress account. (It means the profit is not taken into account). However, if there is loss, the same shall be taken into account. According to this concept, all research and development expenses are debited to the Profit and Loss Account of the year in which they are incurred even if the benefit of such expenses is derived in future. In this way, utmost care is to be taken while preparing the books of accounts. Such a concept is called as Prudence concept or Conservations concept.

According to this principle, there may be any possibility that the net profit of the business might be lesser than the actual profit, due to which the goodwill of the unit is maintained, Because of this principle, in the form of company organisation, the possibility of unfairly excess distribution of dividend, decreases. This concept also violates the concept of full disclosure.

In the present age, the use of this concept is increasing day by day. For the Profit and Loss Account to show true profit or loss and the Balance Sheet to show a fair financial position of the business, it is required to use this concept. From the accounting point of view, it is not fair to conceal the true profit and financial position of the business by creating more than the required provisions.

At the time of preparing accounting books, one assumption is made that the business will be continued for unlimited time period and it will not be closed in the near future. Because of this reason, the owner of the business cannot maintain the accounts of the business for an unlimited time period. Even if the business is to continue for a long period, it is necessary to know the results of the business at the end of a specific time period. Thus, the whole life of the business is divided into specific time intervals.

Generally, such accounting period is kept for one year. The reason for taking the accounting period as one year is that all types of transactions of the business are covered in this period. A period of one year comprises all seasons and therefore all types of seasonal transactions are covered. Accounting year may be the calendar year, or from 1st April to 31st March or Kartak Sud 1 to Aso Vad, but for income tax purposes the accounting year is kept from 1st April to 31st March.

At the end of every accounting year, a Profit and Loss Account and a Balance Sheet has to be prepared. The Profit and Loss Account shows the annual results and a Balance Sheet shows the financial position of the business. Many times the accounts are also prepared monthly, quarterly or half-yearly. The accounting records are useful to the owner of the business, creditors of the business, lending institutions, banks, government offices, etc.

Periodicity concept is related to going concern concept. For internal users of financial statements, this accounting period could be of a month or a quarter also.

For the purpose of accounting, the business will be treated quite separately from the owner of the business. The business is a different person and the owner is a different person. Business transactions are recorded in the books of business, while personal transactions of the owner are not recorded in the books of business.
Examples:

• The amount invested by the owner in the business is credited in the capital account.
• When the owner withdraws money, goods or assets for personal use or when any personal expenses is paid from the business, all these are debited to drawings account.
• Firm gives interest on owner’s capital and charges interest on drawings.
• The Independent branch prepares its own trial balance separately.
• Profit is credited to the capital account.
• The capital of the owner of the business is recorded as a liability in the Balance sheet.

For the purpose of accounting, the business will be treated quite separately from the owner of the business. The business is a different person and the owner is also a different person. Business transactions are recorded in the books of business, while personal transactions of the owner are not recorded in the books of business.

From business point of view, the owner’s amount is payable to him due to which there is no difference between a creditor and the owner. The owner makes investments in the business which means that the owner has given the amount to the business and the business has received the amount from the owner of the business. The personal assets of the owner are not included in the assets of the business. The capital invested by the owner in the business is a type of liability of the business.

The concept of business entity is applicable to all forms of business organisations. This concept is clearly observed in limited company as a limited company obtains separate individual personality by law.

Because of the concept of business entity, the transactions between the business unit and the owner are recorded in the following manner in the books of accounts:

• The amount invested by the owner in the business is credited in the capital account which is liability of the business.
• When the owner withdraws money for personal use or when any personal expenses is paid from the business or assets are withdrawn by the owner from the business, all these are debited to drawings account.

According to accounting entity, It is assumed that business has the separate existence and its entity is different from that of its owner(s). Each business is considered as a separate entity in spite of common owner thereof.
Accounting entity comprises of proprietorship, partnership firm, corporation, limited company, co-operative society and non-trading concerns as well.

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1. According to Going concern concept, revenue expenses paid in advance are shown on the asset side of Balance Sheet.

2. According to Going concern concept, semi-finished goods or work-in-progress is valued at cost incurred thereon and not at their realisable value.

Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. According to this concept, every transaction has two-fold effect or has a dual impact on the accounting records.

(1) From the angle of benefit received and
(2) From the angle of benefit given. This concept is also called as duality concept. Duality principle is fundamental accounting convention and is the underlying basis for double entry book keeping system. The structure of accounting is based on this concept of duality. Accounting equation or Balance Sheet equation is also based on Dual aspect concept.

Examples:

• If business acquires asset, so decrease in some other asset. For example, purchased Furniture of ₹ 5,000 for cash.
• If business acquires asset, then increase in liability of business. For example, purchased furniture worth ₹ 5,000 from Radhe Furniture Mart.
• If business acquires asset, therefore increase in capital of owner. For example, if owner has brought personal machine of ₹ 20,000 into business.
• When goods costing ₹ 17,000 is sold for ₹ 20,000 for cash.
• When goods costing ? 12,000 is purchased on credit.
• When loan of ₹ 25,000 is received from Dena bank.
• When salary of ₹ 10,000 is paid to clerk by cash.

A possibility of probable loss in future is to be considered for but a possibility of future profit of revenue is not to be considered. Such a concept is known as prudence concept or conservation concept. According to this concept, utmost care is to be taken while preparing the books of accounts.

Examples:

• The closing stock is valued at cost price or market price, whichever is less.
• Provision for doubtful debts on debtors is made in the accounts.
• Provision for discount reserve on debtors is made in the accounts.
• Provision for discount reserve on creditors is not made in the accounts.
• Provision for reduction or erosion in value of investments is usually made in the books of accounts.
• Contingent liabilities are shown in the Balance Sheet whereas contingent assets are not shown therein.
• In case of long term contracts, when the work completed is very less or negligible, loss is to be considered, but profit is ignored.
• All research and development expenses are usually debited to Profit and Loss Account of the year in which they are incurred.
• Provision for loss of theft of uninsured stock will be made in the books of accounts soon.
• When goods are supplied on ‘sale or return’ basis, the revenue is not recognised till the confirmation is received from the buyer for having agreed to purchase the same.
• Bank credit interest on doubtful advances to Interest Suspense Account and not to Interest Account.
• Assets like patents, goodwill, trademarks and copyrights are proportionately written off in the next coming years.
• The amount payable to the employees as gratuity must be recorded in the company’s accounts.
• Current assets like debtors are recorded in the books at the realisable value.

According to this concept, all material information should be disclosed in the financial statements. To enable the users of the financial statements to take informed economic decisions, it is necessary to disclose all the relevant information in the financial statements. No material information affecting the interest of general investors should remain undisclosed or concealed. Financial statements should be prepared honestly. According to section 129(1) of the Company Act, 2013, the financial statements shall give a true and fair view of the state of affairs of the company.

Examples :

• Based on full disclosure concept, whenever there is change in method of providing depreciation, the impact of such change on the profit or loss and in the value of asset should be disclosed in financial statements.
• Similarly, information about the change in method of stock or inventory valuation and its impact should be disclosed in financial statements.
• In addition to book value of investment in listed shares, the market value thereof is also shown as additional information in financial statement.
• The practice of appending notes or schedules to the financial statements has developed as a result of the principal of full disclosure, e.g., information about contingent liabilities, future plans, etc.

The International Accounting Standards Committee (IASC) and the Institute of Chartered Accountants of India (ICAI) treats following three concepts as the fundamental accounting assumptions :

1. Going concern concept,
2. Consistency concept and
3. Accrual concept.

Materiality concept is associated with the principle of full disclosure. According to full disclosure principle, all material information should be disclosed in the financial statements. Materiality depends on the relevance and reliability of information. Also Materiality refers to what is significant and what is insignificant.

According to this concept, any information would be shown in detail in financial statements only when the same is useful to the users of such information, while immaterial information may not be disclosed, e.g., Instead of preparing separate accounts for items like pen, erasers, rough writing pads, pencil, etc., only one account styled as ‘Stationery Expense Account’ shall be maintained.

Examples:

• Instead of preparing separate accounts in factory for small tools like small hammers, nails, screws, screwdrivers, etc., only one account of ‘Loose Tools Account’ shall be maintained.
• Purchase of dustbin for ₹ 45 should be considered as an expense instead of considering the same to be a fixed asset.
• Instead of charging expenses of only partly used notebook (pad), full cost of notebook (notepad) is charged as expense to Profit and Loss Account even if the part thereof is still unused.
• Any item of income or expenditure which does not exceed 1 % of the revenue from operations or ₹ 1,00,000, whichever is higher is not required to be separately shown in statement of Profit and Loss of a company unless specifically mandated otherwise.
• If accounting year ends of 31st March, 2017 and a Electricity bill is received for the period of 3-3-’17 to 02-04-’17, entire value of this bill may be charged as expense to Profit and Loss Account for the period ended 31st March 2017 instead of charging expense for two day in the year 2017-18.

1. According to Full disclosure concept, information about the change in methods of stock or inventory valuation and its impact should be disclosed in financial statement.

2. According to Full disclosure concept, information about the change in method of providing depreciation and its impact should be disclosed in financial statements.

1. According to Consistency concept, frequent changes in the method of depreciation or stock valuation should be avoided.

2. According to Accrual concept, when goods are purchased on credit from a supplier, the purchase should be recorded in accounts immediately, even though cash is not yet paid for such purchase as the amount becomes payable once the goods are purchased.

1. According to Accounting period concept, in absence of any contrary information, life of the business is assumed to be indefinite or for a very long period and hence such life is divided into convenient accounting periods to ascertain performance and position of entity at the end of each such accounting period.

2. According to Materiality concept, any item of income or expenditure which does not exceed 1 % of the revenue from operations or ₹ 1,00,000 whichever is higher is not required to be shown separately in statement of profit and loss of a company, unless specifically required otherwise.

1. According to Money measurement concept, excellent quality management system of an entity is not reflected in its books of accounts even if such system enhances goodwill of the entity.

2. According to Accrual concept, advances received from a customer cannot be credited to sales account.

1. According to Cost concept, this transaction should be recorded at ₹ 10 lakhs only in the books of both parties.

2. According to Dual aspect or Duality concept, every transaction recorded in the accounts affects at least two items and accounting system is designed so as to record dual effects of a transaction. Hence, Accounting is called as ‘Doubleentry system’ or ‘Double-entry bookkeeping system’.

1. According to Prudence concept or Conservatism concept, provision for discount reserve on debtors is made in the accounts but provision for discount reserve on creditors is not usually made in the accounts.

2. According to Prudence concept or Conservatism concept, provision for loss of theft of uninsured machinery will be made in the books of accounts soon after the theft even if there is possibility of recovery of this machinery if police catches the thief.

1. According to Accounting entity concept, when partner of a partnership firm withdraws any amount from the firm, the partnership firm will debit this amount to partner’s drawings account.

2. According to Money measurement concept, no accounting entry is recorded for death of a key employee of the firm even if it is an important event affecting business.

The functions of commerce are as follows: 

1. Removing the hindrance of person and that means lack of information to producer about consumer and to consumer about the producer. It is removed by advertising. 

2. Transportation removes hindrance of place. 

3. Storage and warehousing activities remove the hindrance of time. 

4. Banking removes the hindrance of finance. 

5. Insurance removes the hindrance of risk. 

6. Advertising removes the hindrance of information.

(c) Synthetic industry 

Correct Answer is: (c) industry and commerce

(c) Animal husbandry 

Activities which are meant for assisting trade are known as auxiliaries to trade. These activities are generally, referred to as services because these are in the nature of facilitating the activities relating to industry and trade. Two business activities which are auxiliaries to trade are

(i) Transport and Communication: Production of goods generally takes place in particular locations. Transport facilitates movement of raw material to the place of production and the finished products from factories to the place of consumption. Communication facilities help the producers, traders and consumers in exchanging information with one another. Thus, postal services and telephone facilities may also be regarded as auxiliaries to business activities. 

(ii) Warehousing: Goods are not sold or consumed immediately after production. They are held in stock to be available as and when demand comes. Special arrangement must be made for storage of goods to prevent loss or damage. Warehousing helps business firms to overcome the problem of storage and facilitates the availability of goods when needed.

Profits play a vital role in any business. Earning of profits is essential for any business because of the following reasons given below: 

• Means of Livelihood: Profits act as a means of livelihood for the entrepreneurs. Without profits, entrepreneurs cannot continue with the business. 
• Rewards for taking risks: It provides returns for taking risks. 
• Funds for Growth: It would provide funds for growth of the business. 
• Symbolic of efficiency and efficacy: Profits symbolise that management is efficient and business is operating in a healthy manner.
• Enhancement in goodwill: A business making higher profits has a better goodwill and reputation in the market

It is incorrect to assume there can be only one objective of a business. Peter F. Drucker remarked, “To Manage a business is to balance a variety of needs and goals. And this requires multiple objectives.” Thus, the management of a business must set objectives, in every ‘key area’ that influences its survival and growth. Peter F. Drucker has suggested eight key areas where objectives must be set. These are discussed below:

1. Market standing: It refers to the market position of a business in relation to its competitors, e.g. position of ‘Liberty’ against that of ‘Bata’. A dynamic enterprise must aim at increasing its market standing by offering better products at competitive prices and winning permanent customers. 

2. Innovation: It means the introduction of new products, new uses of existing products, or new methods of production. Innovations are essential for a business enterprise to grow in the competitive world. For example, LG introduced door cooling technology in refrigerators. 

3. Productivity: It is the ratio between output and inputs in the production process. Productivity is often used as an indicator of the efficiency of an organization. More productivity will lead to reduced cost of production. 

4. Employee satisfaction: An organization must also aim at moulding the attitudes of employees so that they may contribute better towards organizational goals. It is also important to provide such working conditions to employees that they feel satisfied in working with and for the organization. 

5. Resources—Physical and financial: A business enterprise requires many physical and financial resources. A business must aim at procuring these resources. 

6. Managerial performance: A team is entrusted with the tasks of planning, organizing, staffing, directing and controlling which is called management. Management needs to set targets in the areas of planning, organizing, staffing, directing and controlling and also overall targets for the development of the organization. 

7. Social responsibility: A business is a part of society. There are some responsibilities of business towards society like generating employment, using eco-friendly methods of production, etc. I must fulfill these responsibilities. 

8. Profitability: Consider all the above objectives. They are either not possible to be attained without profits like consumer wants good quality. So for market standing we need to provide good quality product which can be provided only when we have enough profits. Similarly, employees want good monetary and non-monetary benefits which are dependent on profits. Some other objectives contribute towards higher profits like innovation and managerial performance. Therefore, we can conclude that the main aim of a business is to earn profits and other aims are either an outcome of the profits or profits are not possible without these.

(c) Maximum price-from consumers 

Every business operates with an aim to earn more than what has been invested and profit is the excess of revenue over cost. Profit plays an important role in business

1. It is a source of income for business persons. 

2. It can be a source of finance for meeting expansion requirements of business. 

3. It indicates the efficient working of business. 

4. It can be taken as society’s approval of the utility of business. 

5. It builds up the reputation of a business enterprise.

Need for Multiple Objectives: It is generally believed that profit earning is the primary objective of business. However, as per modern thinking, business needs to have several objectives. Consistent and sustainable profit can be earned only if the business performs useful services to society. Business requires multiple objectives since it has to balance a number of needs and goals related to various aspects of society. Following only one objective cannot lead business towards excellence. Objectives are needed in every area where performance and results affect the survival and prosperity of business.

Five of the objectives of business are described below

(i) Profit Maximization Profit is defined as excess of revenue over cost. Profitability refers to profit in relation to capital investment. Although, earning profit cannot be the only objective of business, its importance cannot be ignored. Every business makes an attempt to reap maximum profit as possible in the given market conditions. Profit may be regarded as an essential objective of business for various reasons :

1. It is a source of income for business persons. 

2. It can be a source of finance for meeting expansion requirements of business. 

3. It indicates the efficient working of business. 

4. It can be taken as society’s approval of the utility of business. 

5. It builds up the reputation of a business enterprise.

(ii) Market Standing Market standing refers to the position of an enterprise in relation to its competitors. A business enterprise must aim at standing on stronger footing in terms of offering competitive products to its customers and provide customer satisfaction.

(iii) Innovation Innovation is the introduction of new ideas or methods. There are two kinds of innovation in every business

(a) Product Innovation : In product innovation a new product or service or an improved version of existing product is developed 

(b) Process Innovation: This involves innovation in the methods, skills and activities needed to produce or supply products. Product demand starts declining after a span of time. At this stage, the business must introduce a new innovation to create fresh demand for the existing product by introducing new features in it or bring out a new product to sustain in the market.

(iv) Productivity Productivity is calculated by comparing the value of outputs with the value of inputs. It is used as a measure of efficiency. Higher productivity leads to reduction in costs as the same amount of output is produced with lesser amount of inputs. This ensures survival and growth of the enterprise. 

(v) Social Responsibility Every business operates within a society. It uses the resources of the society and depends on the society for its functioning. This creates an obligation on the part of business to look after the welfare of society. So, all the activities of the business should be such that they will not harm, rather they will protect and contribute to the interests of the society. The activities of business towards the welfare of the society earn goodwill and reputation for the business in the eyes of consumers as well as government.

The term ‘business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. Business risks are of two types: speculative and pure. Speculative risks involve both the possibility of gain as well as the possibility of loss’ Speculative risks arise due to changes in market conditions, changes in prices or changes in fashion and tastes of customers. Pure risks involve only the possibility of loss or no loss. The’chances of fire, theft or strike are examples of pure risks.

Nature of business risks can be understood in terms of the following characteristics

1. Business risks arise due to uncertainties. 

2. Risk is an essential part of every business. 

3. Degree of risk depends mainly upon the nature and size of business. 

4. Profit is the reward for risk taking.

Characteristics of business are as follows: 

1. An economic activity: All business activities are economic activities and are done for the sole purpose of earning money. 

2. Production and procurement of goods and services: A business activity involves production or procurement of goods and services. A manufacturer is involved in production, while a shopkeeper is involved in procurement. 

3. Sale and exchange of goods and services for the satisfaction of human needs: Sale and exchange of goods and services is done to satisfy human needs. 

4. Dealing in goods and services on a regular basis: One time dealing in goods or services cannot be termed as a business. The business should happen on a regular basis. 

5. Profit earning: Profit earning is the fundamental motive of doing a business. Other objectives cannot be attained without it. 

6. Uncertainty of returns: Returns can never be certain in business activity. This happens because of external factors which are outside the control of the business organization. 

7. Element of risk: An element of risk is always present in business activity.

Commerce includes two types of activities, viz. 

(i) trade and 

(ii) auxiliaries to trade.

Buying and selling of goods is termed as trade. On the other hand, activities that are required to facilitate the purchase and sale of goods are called services or auxiliaries to trade. The various activities included in commerce are discussed below

(i) Trade The hindrance of persons is removed by trade thereby making goods available to the consumers from the producers. Trade is an essential part of commerce. It refers to sale, transfer or exchange of goods. It helps in making the goods produced available to ultimate consumers or users. Businessmen are engaged in trading activities as middlemen like wholesalers and retailers to make the goods produced at a large scale in one place, available to consumers in different markets. Trade may be internal or external.

(ii) Auxiliaries to Trade Activities which are meant for assisting trade are known as auxiliaries to trade. These activities are generally, referred to as services because these are in the nature of support service facilitating the activities relating to industry and trade. These activities help ’.in removing various hindrances which arise in connection with the production and distribution of goods. Auxiliaries to trade are briefly discussed below

(a) Transport and Communication: Transport removes the hindrance of place. Transport facilitates through road, rail or coastal shipping facilitate movement of raw material to the place of production and the finished products from factories to the place of consumption. Along with the transport facility, there is also a need for communication facilities to enable the producers, traders and consumers to exchange information with one another. Thus, postal services and telephone facilities are also regarded as auxiliaries to business activities.

(b) Banking and Finance: Capital required to acquire assets and meeting the day-to-day expenses is provided by banking and financial institutions. Commercial banks lend money to business organizations by providing loans and advances. Banks also undertake collection of cheques, remittance of funds to different places, and discounting of bills on behalf of traders. In foreign trade, payments are arranged by commercial banks on behalf of importers and exporters.

(c) Insurance The risk of loss or damage to the factory building, machinery, furniture, goods held in stock or goods in course of transport due to theft, fire, accidents, etc is removed by insurance of goods. By payment of a nominal premium, the amount of loss or damage and compensation for injury, if any. can be recovered from the insurance company.

(d) Warehousing: Storage and warehousing activities remove the hindrance of time by facilitating holding of stocks of goods to be sold as and when required. Warehousing helps business firms to overcome the problem of storage to prevent loss or damage and facilitates the availability of goods when needed. Continuous supply of goods and thus stable prices can thus be maintained.

(e) Advertising: Advertising makes it possible for producers and traders to promote the goods and services available in the market thus removing the hindrance of information. It is practically impossible for producers and traders to contact each and every customer. Advertising helps in providing information about the goods available, its features, price, etc, and inducing customers to buy particular items.

It doesn’t waste its energy in making a sound.

She noticed that he had no work to do and was sitting idle.

When a person is engaged in an occupation which provides services on the basis of specialized knowledge and experience in their respective occupations, it is called profession. For example, Legal (Lawyer), Medical (Doctor), Accountancy (C.A). An occupation can be called a profession if it has the following features: 

1. Membership of a professional body and certificate of practice is required. 

2. Personalised services of expert nature. 

3. Professional qualification and training are required. 

4. Professional fee is charged in lieu of services. 

5. The limited capital for establishment is required. 

6. The degree of risk is low. 

7. Professional code of conduct is to be followed that has been given by the concerned authority.

Following are the hindrances in commerce: 

• Lack of Personal Contact: This hindrance is removed by traders and middlemen. 
• Distance or Place: This hindrance is removed by transportation. 
• Finance: This hindrance is removed by banking. Time or Storage: This hindrance is removed by warehousing. 
• Risk: This hindrance is removed by insurance companies. 
• Information: This hindrance is removed by advertisement or communication.

The causes of business risk include: 

1. Changes in government policies regarding foreign trade 

2. Entry of multinational companies 

3. Changes in laws affecting the business like licensing, taxation etc. 

4. Changes in consumer laws and labour laws. 

For example, an increase in tax rates may reduce profit margin of the business or an increase in minimum wages may increase labour cost for the business.

Economic activities may be divided into three major categories

(i) Business: Business refers to those economic activities, which are connected with the production or purchase and sale of goods or supply of services with the main object of earning profit. People engaged in business earn income in the form of profit. 

(ii) Profession: Profession includes those activities, which require special knowledge and skill to be applied by individuals in their occupation. Those engaged in professions are known as professionals and are generally subject to guidelines or codes of conduct laid down by professional bodies, e.g., lawyers are engaged in the legal profession, governed by the Bar Council of India and Chartered Accountants belonging, to the accounting profession are subject to the regulations of the Institute of Chartered Accountants of India. 

(iii) Employment: Employment refers to the occupation in which people work for others and get remunerated in return. Those who are employed by others are known as employees. Thus, people who work in factories, offices of banks, insurance companies or government department, etc. at various posts are the employees of these organizations. They receive wages and salaries.

Differences between insurable risks and non-insurable risks is summarised below:

(d) All of the above

(d) Element of risk