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PARTNERSHIP

Definition:
It is the relationship between two or more than two persons who have agreed to share the
profits of the business.
OR
Partnership is an association of two or more than two persons with the object of sharing
profits and losses and losses for accounting purpose, the partnership firm is regard
separated from its partners. Law regulates that a partnership firm shall not be more than
20 partners except in the case of professional firms (CA firms, lawyers firm etc) where
the limit prescribed by law is 50.
Merits of Partnership:
1. Easy to Form:
The partnership like the sole-proprietorship, can be easily organized. There are no legal
formalities involved in the establishment of partnership business. The partners enter into
a partnership deed and commence the business.
2. Larger Capital:
Partnership can bring more capital to the business by the joint effort of the partners.
Partnership is normally in strong position to raise capital and expand the business since
there is a pooling of resources from more than one person.
3. Diversified Skills, Knowledge and Experience:
As there are many persons involved in the operation of business and all of them are stake
holders, therefore there efficiency can be obtained by their diversified skills, knowledge
and experience, division of labor and specialization.
4. Favorable Credit Standing:
Partnership enjoys a better credit rating in the eyes of creditors, as the liability of each
partner in the organization is unlimited. The financial institutions can safely advance
loans to the firms.
5. Distribution of Responsibilities:
The overall responsibilities of a business can easily be distributed the partners.
6. Easy entry or exit:
If any partner wishes to leave the firm or new partner wants to join it, partners with
mutual consultation can alter the association by amending / re-establishing the
partnership deed.
7. Confidentiality:
The partners can keep the business secrets because the firm is not required under the law
to publish its profit and loss account and balance and other disclosures.
8. Special protection to Minor / Disable Person:
A death or lunacy of a partner may not cause dissolution of partnership firm, his minor
can be admitted only to the profits of the partnership with the consent of other partners.
9. Tax Advantage:
In the case of registered firm, the profits are allocated to partners, they pay tax on their
individual share of profit and hence enjoy the privilege of lower assessment.
10. Ease of Dissolution:
A partnership firm can be easily dissolved with the mutual consent of the partners as
compared to the complicated procedures involved in winding up of limited companies.
Demerits of Partnership:
1. Unlimited Liability:
One of the basic defects of partnership is the personal liability of partners who are jointly
and severally liable for the debts of the firm.
2. Limited Life of Firm:
The duration of the partnership firm is always uncertain. If any partner retires or dies or
where a new partner is admitted, differences may arise causing the business to an end.
3. Frozen Investment:
It is very easy for a partner to invest money, but it is most difficult to withdraw funds
from the partnership business.
4. Disputes Among the Partners:
It could be difficult to carry on the business if the partners do not have consensus over
several business matters.
5. Loss of Business Opportunities:
In case of differences among the partners, it may take too long to reach a decision,
resulting in the loss of business opportunities.
6. Lack of Public Confidence:
Partnership form of organization may not enjoy public confidence due to lack of publicity
and absence of regulations.
7. Risk and Implied Authority:
In a partnership form of organization, each partner binds other partners by his acts done
on behalf of the firm. Thus, the other partners may have to pay to satisfy the liability
arising from the act of fellow-partner.
8. Public Investment:
A partnership firm cannot raise its capital through public offer as in the case of limited
company.
COMPANIES
Limited Company:
A limited company is a business organization form as a separate legal entity under the
Companies Ordinance 1984, divided into transferable share (can sell or purchase).
The liability of shareholders is limited to the extent of amount paid on their shares and
they are not personally liable for the debts of the company.
Merits of Limited Company:
1. Greater Permanency:
The life of a limited company as compared to the partnership is very stable. Where a
shareholder dies or sells-out his share to another person, the company shall continue its
business without any effect on its legal formation.
2. Limited Liability:
In a limited company, the shareholders have limited liability to the extent of the amount
paid on their shares and in the case of loss or winding-up, the shareholders are not
required to pay anything or any amount.
3. Easy Transfer of Ownership:
The shareholder / members of a limited company may easily transfer (sell-out) its shares.
4. Public Investment:
Huge amount of capital can be raised through public offering.
5. Management Functions:
The chairman and the board of directors regulate the overall affairs of the company. The
business organization is divided into departments / divisions. Each department is headed
by highly-qualified and experienced personnel.
6. Recognized Legal Entity:
A company is a separate legal entity and can enter into contracts, borrow money, open
bank accounts, and so on in its own name. It can sue or be sued, and deal and dispose-off
property in its own name.
7. Higher Profit:
Due to availability of large capital, the company can install expenses and up-to-date
machinery. Hence, there is greater production of goods. The company enjoys economies
of scales.
8. Spread of Risk:
In company form of organization, the risk is distributed among large number of
shareholders. Hence, the loss, if any, sustained by an individual, is nominal.
9. Democratic Organization:
The company makes its decisions in general meeting where voting is arranged-out, so
each decision is made with the mutual consent of all the investors (shareholders).
10. Investment for Lower / Middle-Class:
An individual of lower or middle class may also become a part of such a big profit
making organization.
Demerits of Limited Company:
1. Complicated Formation:
The formation of a company requires several complicated procedures as compared to that
in the case of partnership or sole-proprietorship. There are also many legal formalities.
2. Burden of Regulations:
A company needs to follow many laws, rules and regulations. For example, a listed bank
requires to comply with Companies Ordinance, Banking Ordinance, listing regulations,
and so on.
3. Exploitation of Shareholders Rights:
The directors retain majority of shares with them. Hence, in every meeting, they can
make the decisions even without the consent of individual shareholders.
4. Separation of Ownership from Control:
In a limited company, the shareholders who are real investors, are not allowed to take
part in the operations of the business. The directors, in collaboration with the managers
and other staff, carry out the operations.
5. Promotion of Frauds:
The company raises its capital through prospectus, which may be mis-stated by the
promoters. The financial statements may also be misstated. Thus, reflecting an untrue and
unfair view to the stake-holders (shareholders).
6. Stock-Exchange Speculations:
The limited company facilitates speculations in shares at stock-exchange. The reckless
speculation is harmful to the interest of shareholders and for sound investments.
7. Lack of Secrecy:
In a limited company, annual / half-yearly / quarterly reports regarding sales, net profit,
assets, liabilities, etc. of the company are published. The competitors thus gain the full
knowledge of strong and weak points of the company.
8. Impersonal Relationship:
As the size of the business run by the company is expanding day by day, feeling of
separation between the employers and employees is widening. The company is, thus,
considered sole-less and cold-blooded.
BUSINESS FINANCE
1. Long-term Finance:
The long-term finance is required by the business for the purchase of non-current assets.
It is also needed for the modernization and expansion of business. The company raises
long-term funds through:
(i) Own capital
(ii) Borrowed Capital
(i) Own Capital:
(a) Ordinary Share Capital:
Equity or ordinary shareholders are the real owners of the company. The company raises
maximum amount of capital through the sales of shares and retains the same through-out
the life of the company except in the case of winding-up or by-back. The Companies
Ordinance allows the issue of only fully-paid shares.
(b) Ploughing-back of Profits:
Ploughing-back of profits means re-investment of profits into the business. Company
retains a part of the profit every year in accumulated or unappropriated profit reserve and
plough-back the same into business for meeting its long-term fund requirements. It is an
internal source of financing.
(ii) Borrowed Capital/Borrowings/Loans:
(a) Debentures:
A company also raises long-term finance through borrowing. These loans are raised by
issuing debentures. A debenture is an instrument issued by a company to acknowledge a
loan taken by the company under its common seal under certain terms and conditions
which are indorsed on the back of the document.
The terms and conditions are:
(i) The rate of interest
(ii) The mode of payment of principal and interest
(iii) Security, if any.
A debenture-holder is the creditor of the company.
(b) Loans from Financial Institutions:
A company also meets its long-term financial requirements from financial institutions
like IDBP, ADBP, HBFC, HSBC, NIT, etc. Such financial institutions help in promoting
new companies, expanding and developing existing companies, providing under-writing
facility, providing local and foreign currency, providing agricultural, industrial, housing
and building finance, etc.
2. Short-term Finance:
Short-term finance is required for meeting the day-to-day expenses of the business e.g.
purchase of raw materials, payment of wages, gas, electricity, and so on. The short-term
funds have a maturity of less than one year.
Sources of Short-term Finance:
The main sources of providing short-term finance are:
(i) Commercial Banks
(ii) Trade Credits
(iii) Installment Credits
(iv) Advances
(v) Account Receivable Credits

(i) Commercial Banks:


The major portion of short-term finance is provided by the commercial banks. The banks
provide wide range of credit facilities to their customers, some of them are mentioned
below:
(a) Loans
(b) Cash credit against securities
(c) Overdrafts
(d) Discounting of bills
(ii) Trade Credits:
It is an important source of short-term financing. Trade credit is given by seller firm to
purchaser. Trade credits usually ranges from 15 days to 3 months. Trade credit is
guaranteed on the basis of financial standing and the goodwill of the purchaser.
(iii) Installment Credits:
Another source of short-term credit is the installment credit. The purchaser receives
whole supplies but pay for them in installments.
(iv) Advances:
Sometimes, the reputed business houses take advances money from the customers for the
supply of goods. The remaining amount is received on the supply of goods.
Brokerage:
Commission paid until or unless the transaction is successful.
Commission:
Commission is paid where the sale and purchase is successful or not.
COMMERCIAL BANKS
Bank:
Bank is an institute which gets money from one hand and lends money to other people
with other hand.
Commercial Bank:
Commercial bank offers large amounts of short-term and long-term loans to business
entities. The bank also offers a wide range of services to their customers including:
(i) making payments by cheques
(ii) accepting deposits
(iii) providing loans and over-drafts
Bankers to Issue:
Collection of subscription amount from public in case of issue of capital by the company
through public offer.
Under-writing:
Banks purchase shares from company and the company pays commission to the bank.
Electronic fund transfer when all shares are purchased, bank also receives commission.
STOCK EXCHANGE
Definition:
Stock exchange is the market for shares, debentures, TFCs issued by the listed
companies. Stock exchange provides a ready means to sell long-term securities. The price
of shares and securities reflect the confidence of public in a company. More popular
companies are able to raise fresh issue of capital through the stock exchange at low cost.
In the stock exchange, most of the securities can be bought or sold at stated price i.e. the
securities are readily marketable as there are always buyers and sellers. The investors
contact a broker in order to buy or sell the shares.
There are three stock exchanges in Pakistan namely:
(i) Karachi Stock Exchange (KSE)
(ii) Lahore Stock Exchange (LSE)
(iii) Islamabad Stock Exchange (ISE)
The transactions are carried out electronically through computerized system 'KATS' with
the help of brokers.
Economic Functions of Stock Exchange:
(i) Organize Ready Market
(ii) Turning investment into cash
(iii) Proper centralization of capital
(iv) Aid to capital formation
(v) Proper equalization of securities
(vi) Profitable use of capital
(vii) Loan opportunity
(viii) Investment by banks / insurance companies
(ix) Facilities for speculation
(x) Riba-free mode of investment
Factors Governing Prices in Stock Exchange
(i) Political stability
(ii) Interest rate
(iii) Inflation
(iv) Demand and supply
(v) Price earning ratio
(vi) Dividend Yield
(vii) Earning per share
(viii) Availability of capital
(ix) Government policies
(x) Reputation of directors
(xi) Business risk
(xii) Availability of finance
(xiii) Liquidity
INSURANCE COMPANY
Insurance:
Insurance is the contract between insured and insurer whereby the insurer promises
insured to compensate for
any financial loss due to the risk covered in the insurance contracts in consideration of
premium payable by
insured.
Types of Insurance:
(i) Marine Insurance
(ii) Fire Insurance
(iii) Life Insurance
(iv) Loss of profit insurance
Role of Insurance:
Insurance companies are engaged in contracts covering foreign trade and collection of
premium and investment in business. The insurance companies are also source of finance
for business.
MARKETING
Marketing:
It is a process of determining consumer demand for a product or a service motivating its
sale and distributing it into ultimate consumer at a profit.
Distributing Channels:
(i) Sole distributors / Suppliers
(ii) Whole sellers
(iii) Retailers
(i) Sole Distributors:
It means a supplier which is only one in the market and may supply goods to the whole
seller or directly toretailers or to the customers. Now-a-days there has been a trend of
home delivery and ordering through e-mail, telephone, fax etc.
(ii) Whole sellers:
The whole seller relieves the manufacturer from the trouble for finding out the suitable
storage space and expense of warehouse to stock the goods manufactured. The whole
seller supplies the goods to retailers at competitive rates.
Types of Whole seller:
(i) General whole seller
(ii) Special whole seller
(iii) Regional whole seller
(iv) Nation-wide whole seller
(v) Wagon jobber
(vi) Cash-and-carry whole seller
Retailers:
A retailer is a seller who sells the goods to ultimate consumer. They purchase the goods
from whole sellers.
Retailers may be classified as:
(i) Small skills retailers (General Stores)
(ii) Large skills retailers (Makro, D-Mart)
GENERAL CONCEPTS
Principle of Conservatism:
Periodic statement is affected to a considerable degree by selection of accounting
procedures or other value judgments. Accountants have to be conservative in selecting
alternatives. They often favored the methods or procedure which yield lesser amount by
net income. Thus, the concept of conservatism means to adopt those methods or
procedures in preparing financial statement which yield understatement rather than
overstatement of assets and income.
Historical Cost:
Assets are recorded at the amount of cash equivalent paid or fair value of the
consideration given to acquire them at the time of acquisition. Assets are recorded in the
ledger accounts at the actual amount expended on them because this is the virtue of being
objective, that is beyond dispute. In most cases the actual cost of asset is ascertained from
the invoice, contract and in some instances by the firm's costing records.
Replacement Cost:
Replacement cost is the estimated amount that would have to be paid to replace the asset
at the date of valuation. Replacement cost is ascertainable from the market price of
exactly the same asset. It is also called current replacement cost or current cost. It is often
referred to as an "entity value" because it is cost of an asset entering the business.
Net Realizable Value:
Assets are carried in the balance sheet at the amount of cash or cash equivalent that could
currently be obtained by setting the assets in an orderly disposal, less estimated cost to
make the sale.It is also called "settlement value" or "exit value”. The term settlement
value or exit value is often used as "It is the amount receivable when asset leaves the
business."
Economic Value:
Assets are carried in the balance sheet on the valuation date at the present discounted
value of the future net cash inflow that asset is expected to generate in the normal course
of business.
Deprival Value:
Assets are carried in the balance sheet at the amount of cash or cash equivalent the owner
would receive to compensate exactly for being deprive of.
Going Concern:
A business is a going concern, if there is no intention to discontinue the business in the
foreseeable future. If it is short of working capital and the owner is unable to pay more
money in it or to find somebody who will be prepared to lend money, the business may
be unable to pay its creditors and is forced to close. Unless stated to the contrary, it is
assumed that the accounts of the business will be prepared on going concern, the assets
are valued in balance sheet at the amount they could be expected to fetch in the enforced
sale, which could be much less than its real worth. Balance sheet should show realistic
situation, bearing in mind the weaknesses of business.
Prudence:
The prudence concept is intended to prevent the profit from being overstated. If the profit
is overstated, a trader may believe that his income is more than it really is, and he may
withdraw more money from the business, which would lead to the capital investment in
the business being depleted. If it happens, it is too often that the business will collapse
and there will not be enough money to pay its creditors and/or renew the assets of the
business when they are born out. Thus, it is safer for profit to be understated rather than
overstated. Therefore,it is the rule:
(i) Profit should not be overstated
(ii) Losses should be provided for as soon as they are anticipated.
The prudence concept states that expense should be recorded when it is incurred or likely
to be incurred and income should be recorded when it is earned.
True and Fair View:
Financial statement shall present fairly the financial position, financial performance and
cash flow of an entity. True and fair presentation requires the faithful representation of
the effects of transactions, other events and conditions in accordance with the definition
and recognition criteria of assets, liabilities, capital, income and expenses set-out in the
framework.
Accrual Basis:
Revenue and cost are accrued, i.e. recognized as they are earned or incurred, regardless of
cash received or paid, and recorded in the financial statement of the period to which they
relate.
For example; Rent expense of the business for the year is Rs.150,000. The rent expense,
according to accrual basis, is recorded in the financial statement as Rs.240,000, not
Rs.150,000. Because Rs.90,000 also relates to the current period.
Consistency:
The consistency concept says that when the business has once fixed the method for the
accounting treatment of an item, It will enter all similar items that follow in exactly the
same way. For example; In applying the principle that "Fixed asset is depreciated over its
useful life", a company may adopt straight line or reducing balance method. If the
company select reducing balance method, it is assumed that the company would
consistently follow the same method which is chosen. Any change from method
would result inconsistency which affect the net profit.
Materiality:
Information is material if its omission or mis-statement could influence the users taken on
the basis of the financial statement. Materiality depends upon the size of an item or error
judged in the particular circumstance of its omission or mis-statement. Thus, materiality
provides a threshold or cut off.