Lecture notes on Business studies

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के न्द्रीय विद्यालय संगठन KENDRIYA VIDYALAYA SANGATHAN अहमदाबाद संभाग AHMEDABAD REGION अध्ययन -सामग्री STUDY MATERIAL CLASS: XI BUSINESS STUDIES सत्र -2014-15 SESSION-2014-15 CHAPTER - 1 NATURE AND PURPOSE OF BUSINESS  Introduction: All Human beings where ever they may be require different type of goods and services to satisfy their needs. Business is a major economic activity in all modern societies concerned with production and sale of goods and services required by the people. It is aimed at earning money by satisfying human demands.  Meaning: Literal meaning of Business is “BUSY”. Business is defined as an economic activity involved in the production and sales of goods and services undertaken with the motive of earning profit by satisfying human needs in the society.  Characteristics of Business activities:  An Economic activity: It means an activity aimed at earning money. Business is also aimed at earning money or livelihood by satisfying human needs.  Production and procurement of goods and services: Every business enterprise must either manufacture the goods or it acquires from producers. Goods may be consumer goods or Capital goods. Services means facility offered to consumers like banking, insurance etc.  Sale or exchange of goods and services: Business involves transfer or exchange of goods and service for value.  Dealing in goods and services on a regular basis: It should be a regular activity. One time sale or exchange will not be considered as business.  Profit earning: Business always aims at earning profit.  Uncertainty of earning: There is always a possibility of less amount of profit or even loss in business.  Element of Risk: There is always a possibility of Uncertainty of earnings.  Comparison of Business, Profession and Employment: Basis Business Profession Employment 1. How to Start? Based on Getting membership Getting an entrepreneurs of a professional body appointment letter /owners decision 2. What is its nature? Providing goods Rendering of Performing work as and services to personalized expert per service contract the public services 3. Qualification/Who can No minimum Requires qualification Requires start? qualification and training in a qualification and specific field training 4. Return/What will you Profit Professional Fees Salary get? 5. Capital/How much you Requires capital Requires limited No capital required need to start? as per the size of capital the Business 6. Risk involved More risk Less risk No risk 7. Transfer of Interest – Can Is possible with Not possible Not possible you transfer? some formalities 8. Code of conduct No code of Professional code of Code of conduct is conduct is conduct to be prescribed by the prescribed followed employer to be followed  Classification of Business Activities:  Industry: Production or processing of goods and services. It is concerned with changing the form of the products. It gives form utility to the products. It is classified into the following: Industry (Producing or processing of Goods as well as breeding of animals) 1. Primary 2. Secondary 3. Tertiary Extraction and Processing the Support services production of materials got in the to primary and natural resources primary industries secondary and reproduction industries and development of living organisms, plants etc. 1. Primary Industry a. Extractive Industry b. Genetic Industry Mining, lumbering, Breeding plants hunting and fishing and animals, operations Poultry farming and fish hatchery 2. Secondary Industry a. Manufacturing Industry b. Construction Industry Production and Construction of processing of Buildings, dams, goods creating bridges, etc., form utilities 2.a. Manufacturing Industry (i). Analytical (ii). Synthetical (iii). Processing (iv). Assembling Industry Industry Industry Industry Separates Combines Involves series Assembles different various of activities different elements from ingredients Eg., Sugar and components the same Eg., Cement, Paper Eg., Television, materials Textiles, etc., Car, Eg., Petrol, Computer, Diesel,etc.,  Commerce: It includes all those activities which are concerned with removing all the hindrances in the movement of goods from the manufacturer to the consumers. It includes the following activities. COMMERCE INDUSTRY TRADE Commerce includes the following activities : 1. Industry 2. Trade – Export, Import 3. Transport and communication 4. Banking 5. Insurance 6. Advertisement 7. Packaging 8. Warehousing etc.,  Trade : Trade means exchange of goods and services between sellers and buyers with profit motive.  Auxiliaries to Trade: 1. Transport and communication : Physical movement of goods from the place where there is no demand to the place where there is demand. Creates place utility to the product. 2. Banking an d Finance : Helps in removing financial hindrances. Facilitates production, buying and selling by providing funds by way of loans. 3. Insurance: It facilitates business by ensuring compensation for various types of risks. 4. Warehousing: It keeps the goods in tact till they are in demand. It creates time utility to the product. 5. Advertising: It provides information about availability of goods and services. It induces the consumers to buy the product.  Role of Profit in Business:  It is source of income for the business man.  It provides funds for expansion  It is an indicator of efficiency of business man.  It builds up reputation. Innovation Productivity Innovation Physical and vvity financial resources Objectives of Business Earning profits  Manager performance and development Worker performance and attitude Social Responsibility  Business Risk: It refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. Nature Of Business Risks  Business risks arise due to uncertainties  Risk is an essential part of business  Degree of risk depends upon the nature and size of business  Profit is the reward for risk taking.  Causes of Business Risks: 1. Natural Causes: Risk may be due to Flood, earth quake, lightning, heavy rains etc. 2. Human Causes: It includes dishonesty, carelessness or negligence of employees, strikes, riots, etc. 3. Economic Causes: It includes uncertainties relating to demand for goods, competition, price, collection of dues from customers, changes in economic policies etc. 4. Other Causes: It includes political disturbances, mechanical failures etc.  Basic factors to be considered before starting a Business: 1. Selection of Line of Business: Based on the requirements in the market nature and type of business to be selected. 2.Size of the Firm: Based on the amount of funds available and demand for the product in the market size of the firm i.e. small scale or medium or large scale to be decided. 3.Choice of form of ownership: Based on the amount of capital required, legal formalities to be filled in, liability of the owner, etc. the form of ownership is to be decided. 4.Location of the Business enterprise: Based on the availability of raw material and infrastructure facilities location of the Business is to be selected. 5.Financing the Proposition: Requirement of Capital and its sources must be decided. 6.Physical facilities: Availability of physical facilities including machines and equipment, building and supportive services to be considered before starting a business. 7. Plant layout: Plant layout should draw to show the arrangement of these facilities. 8.Competent and committed worked force.: Every business needs work force. So careful planning should be about selection, training and motivation of employees. 9. Tax Planning: Tax liability and its impact on business to be considered. 10. Launching the enterprise: After fulfilling the formalities entrepreneur can launch the business. Points to Remember: 1. Example of Economic activity 2. Features of Business 3. Trade and auxiliaries to trade 4. Types of industry 5. Business Risk and its features. 6. Comparison between the business, profession and employment. 7. Factors to be considered before starting a business. HOTs: 1. What term is used to refer to physical arrangement of machines and equipment needed to manufacture a product? Ans. Plant layout 2. ABC Ltd. Is planting trees on roadside. Which objective is trying to achieve? Ans. Social Objective. 3. What type of industry is banking? Ans. Tertiary industry  Tutorial Notes:  Types of economic activities: 1.Business 2. Profession 3.Employment  Causes of business Risks: 1.Natural causes2. Human causes3.Economic causes4. Other causes  Factors to be considered before starting a business. 1. Selection of Line of Business 2.Size of the Firm 3.Choice of form of ownership 4.Location of the Business enterprise 5.Financing the Proposition 6.Physical facilities 7. Plant layout 8.Competent and committed worked force. 9. Tax Planning 10. Launching the enterprise CHAPTER - 2 FORMS OF BUSINESS ORGANISATION  Introduction: Decision relating to the form of organization plays an important role if one has to start a business. The forms of organization are (i) Sole proprietorship (ii) Partnership (iii) Joint Hindu Family business. (iv) Co-operative society (v) Joint Stock Company.  Important Concept  Meaning of Sole Proprietorship: It refers to a form of business organization which is owned, managed and controlled by an individual who is in receipt of all profits and bearer of all risks. Features: (i) Easy to form and close (ii) Liability (iii) Only bearer of profit and loss (iv) Control (v) No separate entity. (vi) Lack of business continuity. Merits: (i) Quick decision making (ii) Personal satisfaction (iii) Information will be kept secretly (iv) Direct incentive (v) Ease of formation and closure. Demerits: (i) Limited resources (ii) Limited life of a business concern. (iii) Unlimited liability (iv) Limited managerial ability.  Meaning of Joint Hindu Family Business: Karta eldest member of the family controls the business. Features: (i) Formation (ii) Liability (iii) Control (iv) Continuity (v) Minor members. Merits: (i) Effective control (ii) Continuity of business (iii) limited liability of members (iv) Increased loyalty. Demerits: (i) Limited resources (ii) unlimited liability of Karta (iii) Karta’s dominance (iv)limited managerial skills.  Meaning of Partnership: Relation between persons to share the profits of the business carried on by all the partners or any one of the partner acting on behalf of all the other partners Features: (i) Formation (ii) Liability (iii) Risk bearing (iv) decision making (v) continuity (vi) Member Merits: (i) Easy to start and close (ii) proper decision making (iii) More money (iv) secrets are maintained. Limitations: (i) Unlimited liability (ii) Fights exist (iii) Chances for closure (iv) No public confidence. Types (i) Active (ii) sleeping (iii) secret (iv) Nominal (v) partner by behaviors (vi) partner by holding out. Kinds of partnership: (i) At Interest (ii) Formed for completing a work Partnership deed: It contains the rules and regulations for carrying on partnership.  Meaning of Cooperative Society: It is a voluntary association of persons formed for protecting the consumers from middlemen. Features: (i) Voluntary association (ii) service motive (iii) power to take decisions (iv) limited liability (v) Registration is compulsory so they have legal status. Merits: (i) Equal voting rights. (ii) Continuous existence (iii) low cost of operation (IV) Government support (v) Easy to start (VI) limited liability. Limitations: (i) Resources are little (ii) Difference of opinion. (iii) Management is not proper (iv) Strict rules from the government. Types: (i) Consumer (ii) Producer (iii) Marketing (iv) Farmer’s (v) Credit (vi) Cooperative housing societies.  Meaning Of Joint Stock Company: Company is an artificial person with continuous existence& common seal. Features: (i) Artificial person (ii) Formation is difficult (iii)Company has separate identity.(iv)Continuous existence (v) Control of the company is made by directors.(vi)liability is limited.(vii) Common seal. Merits: (i) Liability is limited (ii) Chances are there for expansion (iii) Managed by professional people (iv) Continuous existence (v) Shares can be easily transferred from one person to another person. Demerits: (i) Very difficult to form (ii) No secrecy (iii) No personal involvement.(iv)More rules and regulations. (v) Very slow in decision making (vi) owners have less control. Types of Companies: (i) Private company (ii) Public company. Choice of form of Business organization: (i) less costly in setting up the organization (ii) Limited liability (iii) continuous existence (iv) Form of raising capital (v) Control to be made (vi) Nature of business.  Formation of a Company STAGES Promotion: Functions of a Promoter: (i) Finding out a business opportunity (ii) Conducting studies (iii) Getting the name approved. (iv) Fixing up persons to sign Memorandum of association (v) Appointment of professionals.(vii) preparation of necessary documents. Documents: Memorandum of association: (i) Name clause (ii) Registered office clause (iii) Objects clause (iv) Liability clause (v)Capital clause (vi) Association clause. (vii) Articles of association. (viii) Consent of directors (ix) Agreement with managing director or whole time director (x) statutory declaration Incorporation: The memorandum of association must be duly stamped, signed and witnessed. (ii) The articles of association duly stamped and witnessed. (iii)Written permission of the directors. (iv) Agreement with the managing director/manager (v)A copy of the registrar’s letter giving permission for the name. (vi) A declaration that all the legal requirements are followed (vii) A notice about the exact office of the registered office. (viii) Documents showing the payment of fees. Capital subscription: (i) SEBI approval (ii) Filing of prospectus. (iii) Appointment of brokers, bankers etc., (iv) Collection of minimum subscription (v) Application to stock exchange (vi) Allotment of shares.  Commencement of Business: (i) A declaration about meeting minimum subscription requirement. (ii) A declaration regarding the application and allotment money paid by the directors as same as others. (iii) A declaration that no money is payable to the applicants because of the failure of the company. (iv) A statutory declaration that the above particulars are followed. (v) The registrar shall examine the documents if these are found satisfactory a certificate of commencement of business will be issued.  Key Concepts in Nutshell: FORMS OF BUSINESS ORGANISATION Sole proprietorship Partnership Hindu Undivided Co operative Company Family Society  Meaning Of Sole Proprietorship: Sole means only Proprietor means owner Merits of sole proprietorship: 1. A sole proprietor can take decision quickly. 2. Information can be kept secretly without any leakage. 3. No need to share profits. 4. He gets self satisfaction for the work he has done. 5. Easy to start and to close because of less rules and regulations.  Partnership Types of Partners: 1. Active partner: An active partner is a partner who gives capital, participates in management, shares the profits and losses and has unlimited liability. 2. Sleeping partner: A Partner who do not take part in the business activities. 3. Secret partner: A partner who has association with the firm but unknown to the public. 4. Nominal partner: A partner who allows his name to be used by the firm 5. Partner by estoppel: A person who by behaviour sets an impression to others that he/she is a partner of the firm. 6. Partner by holding out: A person who is not a partner but allows himself to be represented as partner in a firm. Consequences of Non Registration: 1. A Partner of an unregistered firm cannot file a case against the firm or other partners. 2. The firm cannot file a case against third parties. 3. The firm cannot file a case against the partners. Types Of Companies COMPANY PRIVATE PUBLIC  Public Company: 1. Members: Minimum 7, Maximum unlimited 2. Minimum number of directors: 3 3. Minimum paid up capital: 5 lakhs. 4. Index of members: Compulsory. 5. Transfer of shares: Shares can be transferred easily from one person to another. 6. Invitation to public: It can invite the public to purchase the share and debentures  Private Company: 1. Members: Minimum 2, Maximum -50. 2. Minimum number of directors: 2 3. Minimum paid up capital: 1 lakh 4. Index of members: Not compulsory. 5. Transfer of shares: Shares cannot be transferred from one person to another. 6. Invitation to public: It cannot invite the public to purchase the share and debentures.  Memorandum of Association: 1. It defines the objects for which the company is formed. 2. This is the main document of the company. 3. This defines the relationship of the company with outsiders. 4. Every company has to file Memorandum of Association. 5. Alteration of Memorandum of Association is difficult.  Articles of Association: 1. It defines the objectives of the company that are to be achieved. 2. This is the subsidiary document of the company. 3. Articles define the relationship of the members and the company. 4. It is not necessary for the public limited company. 5. It can be altered by passing a special resolution. Points to Remember: 1. Meaning and features of sole proprietorship 2. Meaning of partnership and types of partners 3. Meaning and features of joint stock company 4. Difference between Partnership firm and joint stock Company 5. Meaning of cooperative society and its types. 6. Comparison between Private and Public company. 7. Difference between Memorandum of Association and Articles of Association 8. Promotion stage of company. HOTs: 1. In which business organization is there is separation of ownership and management? Ans. Joint stock company 2. In case of heavy loss, creditors can claim the recovery of their dues from personal assets of sole proprietor. Which features of sole trade is highlighted here? Ans. Unlimited liability 3. Who are usually the first directors of the company? Ans. The signatories to the memorandum of association 4. Which certificate is called the birth corticated of the company? Ans. Certificate of Incorporation 5. When does a company come into existence? Ans. From the date of incorporation 6. Shivam Ltd issues 6,00,000 shares of Rs10 each for public subscription. Application along with money was received for 5,00,000 shares. Can company allot these shares? Explain. Ans. No company can allot these shares because as per companies Act, 1956 a company must receive 90% of subscription within 120 days from the date of issue otherwise allotment cannot be made .Tutorial Notes:  The structure in which there is separation of ownership and management is called- “Company”  The maximum number of partners allowed in the banking business are “10” and in others -“20”  A partner whose association with the firm is unknown to the general public called-“Secret partner”  Stages in formation of a public company: 1. Promotion 2.Incorportaion 3.Capital Subscription 4.commencement of business. CHAPTER - 3 PUBLIC, PRIVATE AND GLOBAL ENTERPRISES  Introduction: Soma, a student of class XI was reading a newspaper. There was the news item that Government planned to disinvest its shares in some PSUs as they were incurring heavy losses. At the same time, it was written that some private companies and MNCs were earning so much of profits. Maruthi Suzuki Ltd which a joint venture of Maruthi Company and Suzuki Company of Japan was launching a new car in the market. She was curious to know about these terms like PSUs, joint venture etc. Forms of Business Organisations Public Sector Private Sector a. Departmental Undertakings b. Statutory Corporations c. Government Companies a. Departmental Undertakings - Features  Part of Government-Central or State  Under direct control of the ministry  Funds comes directly from Govt.Treasury  Employees are Govt. employees.  Examples:- Railways  Defence  Post and Telegraphs Merits  Effective control  Public Accountability  Suitable for national security Demerits  Lack of flexibility  Delay in decision making  Red tapism  Political interference  Unable to take advantage of opportunities b. Statutory Corporations They are created by Special Acts of the Parliament which contains their powers and functions, rules and regulations regarding their employees and its relationship with government departments. Features  Statutory Corporation is fully owned by the Government.  It is having a separate legal entity.  Its employees are not government employees.  Board of Directors are appointed by the government  It prepares its own budget and can retain its earnings which can be used for its business.  Profit is not the main motive.  It has public accountability.  Usually it is free from all types of interference. Merits  Free from undesirable government  The government does not interfere in their financial matters.  It is relatively free from red tapes and can take quick decisions.  Its policies are subject to parliamentary control which ensures protection of public interest. Limitations  A statutory corporation’s actions are subject to many rules and regulations.  Government and political interference have always been there where huge funds are involved or in major decisions.  Where there is dealing with public, corruption exists at a larger level.  The Board of Directors may misuse their powers and indulge in undesirable practices. c. Government Company Meaning: - According to The Indian Companies Act, 1956, a government company is a company in which not less than 51% of the paid up capital is held by the central or state government or both. Subsidiary of a government company is also considered as a government company. Eg: 1) Hindustan Machine Tools Ltd. (HMT) 2) Bharat Heavy Electricals Ltd (BHEL) 3) Steel Authority of India Ltd. Features  It is created by the Indian Companies Act, 1956.  It is having a separate legal identity.  Its employees are are appointed according to the rules contained in the Memorandum and Articles of Association of the company.  It is exempted from the accounting and audit rules and procedures.  It obtains funds from government shareholdings, private shareholders and capital market. Merits  It can be easily established.  It has a separate legal entity.  There is no undue departmental interference in the working of the company.  It can curb unhealthy business practices by providing goods and services at reasonable prices.  Changing Role of Public Sector Public Sector was started to achieve the following objectives:  To speed up the economic growth of the country  To achieve a more equitable distribution of income  To create infrastructure facilities  To develop all parts the country equally Performance of the Public Sector was poor due to unorganized plants, out dated technology, underutilization of capacity, over staffing, trade unionism, political interference etc., So the government, in the Industrial Policy 1991, introduced the following reforms in the public sector.  The number of industries reserved for the public sector was reduced from 17 to 3 industries namely atomic energy, arms and rail transport.  The Memorandum of Understanding signed between a public sector and its administrative ministry defines its autonomy and the targets to be achieved.  Equity shares of public sector units are sold to private sector and the public which is known as Disinvestment.  Loss making public sectors which are potentially viable will be restructured and revived through the Board of Industrial and Financial Reconstruction (BIFR). Public sector units which cannot be revived will be closed down.  A National Renewal Fund was created to retrain and redeploy retrenched labor and to compensate employees seeking voluntary retirement.  Global Enterprises/Multinational Companies Meaning:- A global enterprise is one which owns and manages business in two or more countries. Eg:- Unilever Ltd, Coca cola, LG, Samsung, Hyundai Motors, Proctor and Gamble, etc. Features  A global enterprise has huge capital resources.  It operates through a network of subsidiaries, branches and affiliates in host countries  It has its headquarters in the home country which controls all branches and subsidiaries.  It uses advanced technology to provide world class products and services.  It employs professionally trained managers.  It has vast access to international markets.  It has advanced research and development departments which are engaged in developing new products and superior designs of existing products.  It uses aggressive marketing strategies.  It usually enters into agreements with local firms in the host countries.  Joint Ventures Meaning: A joint venture is a business partnership between two or more companies for a specified purpose. Eg : Hero Honda, Maruti Udyog, Birla Yamaha Ltd, etc. Benefits  A joint venture has greater resources and capacity.  It has access to advanced technology  It has access to new markets.  It can produce products at a lower cost.  It has ideas and technologies to develop innovative products and services.  When one party in a joint venture has well established brands and goodwill, the other party gets its benefits.  Public Private Partnership (PPP) Public Private Partnership means an enterprise in which a project or service is financed and operated through a partnership between Government and private sectors. Features  It facilitates partnership between public and private sector.  It is related to high priority projects.  It is suitable for big projects whose gestation period is long.  Revenue is shared between government and private enterprise in the agreed ratio.  It is used in the government projects targeted at public welfare. Points to Remember: 1. Meaning and features of Departmental undertaking 2. Meaning of Statutory Corporations and Its feature. 3. Meaning and features of Government Company 4. Difference between Statutory Corporation and Government Company 5. Meaning of Multinational Company. HOTs: 1. Where national security is concerned, which form of public is most suitable? Ans. Departmental undertaking 2. Name the three industries, which are reserved exclusively for public since 2001? Ans. 1. Atomic Energy 2. Arms and ammunition 3. Rail 3. Who are usually the first directors of the company? Ans. The signatories to the memorandum of association 4. How much percentage of shares must be held by government to call a company as Government Company? Ans. 51% 5. Name the company which operates in more than one company? Ans. Multinational Company 6. What term is used for sale of shares to private/public sector? Ans. Disinvestment .Tutorial Notes:  Kinds of organizations that come under the public sector: Departmental undertaking, Statutory Corporation and government Company  Name of Enterprises under the public sector: Departmental undertaking( Railway, Post ), Statutory Corporation(LIC, Air India State Bank Of India) and government Company(GAIL.SAIL,BHEL)  Changing Role of public sector:  To speed up the economic growth of the country  To achieve a more equitable distribution of income  To create infrastructure facilities  To develop all parts the country equally  Difference between Statutory Corporation and Government Company Basis Statutory Corporation Government Company By an Act of Parliament Under the Companies Act Formation Management Nominated board of board of directors may contain Control directors private individuals Wholly owned by Only 51% of shares owned by Ownership Government Government . CHAPTER - 4 BUSINESS SERVICES  Introduction (10 Marks) The chapter Business Services gives you a brief introduction to the characteristics of business services, the difference between services and goods, classification on types of business services, the concept of e-banking, identification and classification of types of insurance policies and the description of different types of warehouses.  Definition Auxiliaries to trade are also known as business services. Service sector includes commercial firms engaged in banking, communication, transport, insurance and

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