Explore topic-wise InterviewSolutions in .

Guarantee of Profit to a Partner: Sometimes, a partner is admitted into the firm who is having a specialized knowledge in a particular field, e.g., sales and marketing, professional efficiency of specific type, etc. Such type of partner wants a minimum guaranteed amount as share in the profits of the business from the other partners. 

Such a guarantee is given either by:
(a) one of the old partner or
(b) all the partners in a certain ratio. 

Such type of guarantee can be given in four ways as follows:

• Guarantee by the firm
• Guarantee by a partner
• Guarantee by a partner to the firm
• Guarantee by a partner to the firm and guarantee by firm to a partner So, it is called guarantee of profit to a partner.

Business exists due to existence of society, With this respect, a business needs to acknowledge the existence of society and try to fulfill certain social objectives other than pure objective of profit. These social objectives could be following fair trade prac-tices, providing employment opportunities, providing quality goods and services, etc.

The characteristics of business are as follows:
(a) Objective of profit:

• Profit is the primary motive of business.
• Profit is necessary for the survival and continuity of the business.
• In absence of profit the business is quite likely to shut down.
• Moreover, how well is the business performing can be known by measuring the profits it earns.
  Profit is the barometer of business.

(b) Exchange of goods and services:
Business is done by exchanging goods and services.

• This exchange then leads to profit.
• A manufacturer produces goods and sells them to buyers. In addition to selling the goods he also provides several after sales services such as installation, repair, return, etc. to his buyers.
• Apart from manufacturers there also exists seller of services i.e. service providers who sells the services and earn profit.
• For example, Samsung Company manufactures mobile phones and sells them to earn profit whereas Vodafone sells mobile services to customers and earns profit.
• Thus, business involves exchange of tangible (physical) goods and intangible services.

(c) Risk and uncertainty:

• There always lies risk of uncertainty in business.
• Risk can be either man-made or natural.
• Man-made risks include fire, accident in factory, strike of employees, riots, robbery, thefts, change in preferences of customers, decreased demand, changes in life-style, taste or habits, competition, changes in technology, etc.
• On the other hand natural risks could be earthquake, flood, tsunami, etc.
• A business may get badly affected, may make huge losses and may even get shut down due to such risks.

(d) Creation of utility:

• In commerce, utility ’ can be defined as the ‘capacity of goods or services to satisfy human wants’.
  Creation of utility (OR creating utilities):
• One of the major characteristics of a business is to create utility (i.e. usefulness) for a product or a service. This is called ‘creation of utility’.

A business can create utility in three ways:
1. Form utility:

• • If a person changes the form (i.e. shape, size, etc.) of a commodity to make it sellable we say he has created ‘Form utility’.
  • For example, making ice-cream from milk.

2. Place utility:

• • When goods are carried from place of production to place of consumption i.e. to the customers, we say ‘Place utility’ is created.
  • For example, when we transport food grains from farms to market yards/ consumers we say we have created ‘Place utility’.

3. Time utility:

• • When a manufacturer produces goods and stores them when it is not the right time to use such goods and sells them at the right time we say he has created Time utility’.
  • For example, selling umbrellas in monsoon is creation of time utility.

(e) Continuance of activity:

• The various activities, processes and financial transactions of a business should keep on going continuously. This is called continuance of activity. This means business is not a one-shot process.
• For example, if a trader/producer constructs a building for his residence and later sells it and earns profit, if is not business. The reason is this is not a business activity because there is no continuity in it.

(f) Need of money (capital):
Business needs capital (money) all the time. Money is needed to buy raw material, machinery, to give salary, etc. _
A trader needs money to purchase and store goods.

(g) Economic activity:
Business is a part of economic activity with the motive of earning’profit and creating wealth.

Rise in consumer awareness, rules and regulations imposed by government, consumer associations, etc.

For economic benefit or monetary consideration.

Correct option is (A) Render service

Total drawings by Rashmi = 100 ×12 

= Rs 12,000

Interest on drawings = 12,000 x \( \frac { 65 }{ 12 } \times \frac { 12 }{ 100 }\) 

= Rs 780

Total drawings by Ashish = 2,000 x 12 

= Rs 26,000

Interest on drawings= 24,000 x \( \frac { 55 }{ 12 } \times \frac { 12 }{ 100 }\) 

= Rs 1,320.

The short term objective is to earn profit whereas the long term objective is creation and maximization of wealth.

Correct option is (C) Cultural

Business:

An economic activity done with the motive of earning profit and creating and maximizing wealth is known as business.
Objectives of business can be classified in two parts. They are:
(A) Economic objectives
(B) Social objectives

(A) Economic objectives:

1. Objective of profit:

• Earning profit, is one of the key objectives of business.
• Earning profit is necessary for both survival and growth of business.
• Profit can be called the motivating force, barometer of efficiency and life blood of business.
• However in today’s time rather than just maximizing the profits the concept of fair (reasonable) profit is more accepted.
• It is highly essential for a business to focus on earning ‘fair profit’ i.e. a reasonable profit in order to survive and get acknowledged in the society.

2. Maximization of wealth:

• In shorter runs say at the end of year the objective of business can be annual income, i.e. net profit. However in longer run say about at the end of five years or so a businessman aims at creating wealth and maximize.
• In order to achieve the long term goals of wealth creation and maximization, the business should adopt a broader view and give up the sole focus of profit, especially in times of depression like situations in the market.

3. Other economic objectives:

Business also has other economic objectives like economic growth and development of business, market expansion, optimum utilization of resources, adopting modern technology and practices, etc. to boost the business.

(B) Social objectives of business:
Business exists due to existence of society. With this respect, a business needs to acknowledge the existence of society and try to fulfill certain social objectives other than pure objective of profit. These social objectives could be following fair trade practices, providing employment oportunities, providing quality goods and services, etc.

Some of the social objectives are:
1. Objective of social responsibility:

• Business is not an independent activity. It interacts with various groups/ classes of people of society associated with business directly or indirectly but with different interests. Business interacts with owners, employees, creditors, government, etc.
• It is quite important to take care of the interests of these different groups of society.
• To do so, business has abide by the laws to maintain the business environment, follow the Employee Welfare Act, Factory Act, Consumer Protection Act, etc.
• Factors like rise in consumer awareness, rules and restrictions imposed by state, consumer associations and increased education compel a business to fulfill these social responsibilities.

2. Objective to provide opportunity of employment.

• With increasing unemployment, some business units are established to create new opportunities of employment.
• For example, Khadi and Village Industries Commission (KVIC), a Government of India body encourage those industries that provide ‘ employment opportunities. KVIC gives preference to those business units that are established in backward/rural areas for providing employment to the unemployed.

3. Objective to provide quality goods and services:

• Business aims at providing quality goods and services to people in order to satisfy their needs.
• For example, units that manufacture spices used for cooking food, food products, cold drinks, etc. need to maintain very high quality standards. Moreover, business units also need to provide quality services. For example, after sales service, installation assistance, setting up service centers, etc.

4. Objective to adopt fair trade practices:

• A business unit should see that it does not fall into practices that are against the well-being of society. For example, black marketing, hoarding, misleading advertisements, creating artificial scarcity, etc. are unfair practices and hence should be avoided.
• A businessman should adopt only fair trade practices in the welfare of customers and society.

5. Other objectives:

• To establish a specific identity in the society.
• Conduct research in production activities.
• Help in the economic development of nation and co-operate with the government.
• Provide various incentives to the employees and execute welfare schemes for them.

Creation of utility (OR creating utilities):

One of the major characteristics of a business is to create utility (i.e. usefulness) for a product or a service. This is called ‘creation of utility’.

A business can create utility in three ways:
1. Form utility:

• If a person changes the form (i.e. shape, size, etc.) of a commodity to make it sellable we say he has created ‘Form utility’.
• For example, making ice-cream from milk.

2. Place utility:

• When goods are carried from place of production to place of consumption i.e. to the customers, we say ‘Place utility’ is created.
• For example, when we transport food grains from farms to market yards/ consumers we say we have created ‘Place utility’.

3. Time utility:

• When a manufacturer produces goods and stores them when it is not the right time to use such goods and sells them at the right time we say he has created Time utility’.
• For example, selling umbrellas in monsoon is creation of time utility.

Correct option is (B) Professional

Correct option is (B) Form

Objective of profit:

• Profit is the primary motive of business.
• Profit is necessary for the survival and continuity of the business.
• In absence of profit the business is quite likely to shut down.
• Moreover, how well is the business performing can be known by measuring the profits it earns.
  Profit is the barometer of business.

Correct option is (B) Profit

A business unit that provides said quality and services, does not involve in black marketing or hoarding, does not mislead its customers with false advertisements, etc. is said to follow fair trade practice.

Objective to adopt fair trade practices:

• A business unit should see that it does not fall into practices that are against the well-being of society. For example, black marketing, hoarding, misleading advertisements, creating artificial scarcity, etc. are unfair practices and hence should be avoided.
• A businessman should adopt only fair trade practices in the welfare of customers and society.

Correct option is (A) Commission

Correct option is (C) Dairy

There are seven fundamental units in SI system.

Objective of profit, exchange of goods and services, risk and uncertainty, etc.

Correct option: (A) K 

Profit is the lifeline and prime motive behind a business.

• Every businessman has the right to earn a profit. However, with an aim to earn high profits in this greedy world the businessman may tend to compromise on his product quality or service, take undue advantage of customer’s ignorance, or even charge unreasonably high from his customers. In other words, he runs towards profit maximization at any cost.
• Today, the customer is well-in formed, aware, literate, has other options for a product and protected by several laws.
• Under such circumstances aiming for very high profits can be very harmful in longer run.
• A businessman that aims at a fair or say reasonable profit can satisfy his customers and employees better, survive and slowly grow too.
• Hence, the concept of ‘fair profit’ is widely accepted.

Correct option is (B) Commerce

Correct option is (D) In backward areas

Accounting equation is: Assets = Liabilities + Capital.

Features of subsidiaiy books are : 

1. It is a book of original entry of transactions. They substitute the journal. 

2. Each subsidiary books contains specialised transations having common characterstics. 

3. Entering transactions is simple and much earlier than journalising.

(c) 15th August 2014

Correct option: (C) elements

Correct option: (D) 7

Business risks that may take place due to man-made activities are called man-made risks; Example: Strike, theft, robbery, etc.

• Business is not an independent activity. It interacts with various groups/ classes of people of society associated with business directly or indirectly but with different interests. Business interacts with owners, employees, creditors, government, etc.
• It is quite important to take care of the interests of these different groups of society.
• To do so business has to abide by the laws to maintain the business environment, follow the Employee Welfare Act, Factory Act, Consumer Protection Act, etc.
• Factors like rise in consumer awareness, rules and restrictions imposed by state, consumer associations and education compel a business to fulfill these social responsibilities.
• A business man that ignores these responsibilities may end up facing legal and financial problems and even lose his credibility.
• Hence, a socially responsible business is the need of the hour.

Change in technology, threat of substitute products, competition, uncertainty of demand, physical risk, etc.

Events that take place naturally and which poses risks to business are called natural risks; Example: Flood, earth-quake, tsunami, etc.

• In order to increase quality and productivity of product/services man continuously invents new methods of production.
• New methods of production may require changing existing machinery or addition of new equipments or machinery.
• For example, with invention of smart phones manufacturers were forced to stop producing old fashioned phones and set-up new machineries and technology to produce smart phones.
• Thus, business remains under threat of constantly moving with the new technologies that come up in market. Failing to do so is a serious threat to business.

Correct option: (B) units

An assets acquired by a concern is recorded in the books of accounts at cost called cost concept.

Business risk:

The risk of uncertain profit or even loss that lies while doing business is called business risk. There always remains uncertainty of profit or even risk of incurring loss in the business. Thus, the uncertainties associated with business that may result into loss of profit and even loss of business is termed as business risk.

Types:
(A) Natural risks:

• Risk of loss that may occur due to fury of nature is called natural risk.
• Natural risks that may harm the business could be earthquake, flood, fire, etc.
• These factors may damage or destroy business assets like machinery, / furniture, stock, etc.
• These risks are natural and man or business has no control over them.

(B) Man-made risks:

• Risks that are generated due to man-made factors are called man-made business risks.
• These risks could be strike of employees, change in technology, change in preference and demand of customers, political factors in the state, competition in market, etc.

Business risk:

The risk of uncertain profit or even loss that lies while doing business is called business risk.

Risk and uncertainty:

• There always lies risk of uncertainty in business.
• Risk can be either man-made or natural.
• Man-made risks include fire, accident in factory, strike of employees, riots, robbery, thefts, change in preferences of customers, decreased demand, changes in life-style, taste or habits, competition, changes in technology, etc.
• On the other hand natural risks could be earthquake, flood, tsunami, etc.
• A business may get badly affected, may make huge losses and may even get shut down due to such risks.

The threat of substitute products:

• Change in technology, reduced price, price rise customer preference, etc. may divert a customer to use other substitutes of a product available in market.
• For example, when ball pen was invented people started using it more compared to traditional ink pens.
• Other examples are steel vessels instead of copper, dalda ghee instead of desi ghee, etc.

Short term financial position of the business is assessed by calculating current ratio and liquid ratio.

In accounting, a record is made only of those transactions which can be expressed in terms of money called money measurement concept.

Correct option is (C) Changes in technology

(i) Payment of current liabilities. 

(ii) Issue of share capital etc.

(i) because there is uncertainty whether it will be sold or not. 

(ii) It will take time before it is converted into debtors’ and cash.

As 1. Disclosure of Accounting Policies 

As 2. Valuation of Inventories.

Sale of stock at cost price.

Quick ratio will improve as both the liquid assets and current liabilities will decrease by the same Amount.

Debt-equity ratio will decrease because the Long-term loans remain unchanged where as the Shareholders funds are increased by the amount f share capital issued.