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Tuesday, December 29, 2009
Friday, November 20, 2009
insurance 2010 new policy issue dicount available
What is marine Insurance? What risks are usually covered by a marineInsurance policy. Discuss the various classifications or types of ocean marine insurancepolicies. 3 What are the various types of losses in ocean marine Insurance.What is marine insurance Discuss the main essentials of'Ocean MarineInsurance Contract.
What is fire Insurance? Give in brief the essentials of fire insurancecontract. Explain the nature of fire insurance policy What kinds of losses are includedin the fire insurance policy and what kind of losses can fiever be included?
7. Explain in detail as to how a fire insurance policy is effected. A case ofbuilding be considered for fire insurance
Discuss in brief the various types of fire' insurance policy?
9. If an insured factory catches fire, how the claim of the Insurec is settted bythe insurer.
What is manne insurance?
Differentiate between marine insurance and fire insurance.
Explain in brief three types of marine insurance.
Examine three essentials of marine insurance,
"A fire insurance policy is a contract of indemnity" - Explain.
How is the fire claim settled.
State whether the following statements are true or false fi) Fire insurance contracts are for long period,A contract of marine insurance is a contract of indemnity
All contracts of insurance except life insurance are "the contacts of indemnity.
The rate of premium is uniform for all kinds of fire insurance, (v) The insurance contract is founded on the basic of good faith.
In fire insurance the insurable interest must exist at the time of contract and also at the time of loss.
The payment of fire premium is in easy installments The risk in fire insurance is
What is fire Insurance? Give in brief the essentials of fire insurancecontract. Explain the nature of fire insurance policy What kinds of losses are includedin the fire insurance policy and what kind of losses can fiever be included?
7. Explain in detail as to how a fire insurance policy is effected. A case ofbuilding be considered for fire insurance
Discuss in brief the various types of fire' insurance policy?
9. If an insured factory catches fire, how the claim of the Insurec is settted bythe insurer.
What is manne insurance?
Differentiate between marine insurance and fire insurance.
Explain in brief three types of marine insurance.
Examine three essentials of marine insurance,
"A fire insurance policy is a contract of indemnity" - Explain.
How is the fire claim settled.
State whether the following statements are true or false fi) Fire insurance contracts are for long period,A contract of marine insurance is a contract of indemnity
All contracts of insurance except life insurance are "the contacts of indemnity.
The rate of premium is uniform for all kinds of fire insurance, (v) The insurance contract is founded on the basic of good faith.
In fire insurance the insurable interest must exist at the time of contract and also at the time of loss.
The payment of fire premium is in easy installments The risk in fire insurance is
Wednesday, November 18, 2009
. THE FIRE CLAIM AND ITS SETTLEMENT
.THE FIRE CLAIM AND ITS SETTLEMENT.......
purpose of immediate notice clause in the contract is to enable the
investigate the loss while it is still warm.
2. Claim Form. The insurance company on receipt of the notice will supplya claim form to the insured. The policy-holder is required to furnish a completenventory of the destroyed, damaged, undamaged property, showing in details
quantities, costs, actual cash value and the amount of loss claimed.
Evidence. The insured should try to produce the documentary proof ofthe actual loss as far as possible to the company. The books of account, bills etc.if attached with the claim help the company in the early settlement of claims.
Proof of loss. In order to determine the insurer's liability, the policyholder is also required to furnish a signed and sworn statement of the (1) timeand origin of loss (2) the interest of the insured (3) the cash value of the loss (4)any change in the title of the property insured (5) by whom and for what purposethe building was occupied at the time of loss etc. etc.
Inspection and assessment of loss. The insurance company sends itsspecialized surveyor to examine and determine the loss in the light of documentsand forms received from the policy-holder.
Time limit of paying claims. The insurer is to pay the actual loss,remaining within the limits of the insured policy. The amount shall be payablesixty days after proof of loss is received from the policy-holder.
Time Limit for bringing suit. If there is a dispute in the settlement ofclaim, the parties involved in the insurance contract, can file a suit within the timelimit prescribed in the contract.
Arbitration. The insurance companies normally avoid to file a suit in thecourt in case of disagreement between the parties. The contract usually providesa clause that in case of a dispute, the matter shall be referred to a Board ofarbitration containing one nominee of the insurer and one of the insured. Theaward given by the board is binding on both the parties. In case there isdisagreement among the arbitrators, the case is referred to the umpire whosejudgment shall be final.
purpose of immediate notice clause in the contract is to enable the
investigate the loss while it is still warm.
2. Claim Form. The insurance company on receipt of the notice will supplya claim form to the insured. The policy-holder is required to furnish a completenventory of the destroyed, damaged, undamaged property, showing in details
quantities, costs, actual cash value and the amount of loss claimed.
Evidence. The insured should try to produce the documentary proof ofthe actual loss as far as possible to the company. The books of account, bills etc.if attached with the claim help the company in the early settlement of claims.
Proof of loss. In order to determine the insurer's liability, the policyholder is also required to furnish a signed and sworn statement of the (1) timeand origin of loss (2) the interest of the insured (3) the cash value of the loss (4)any change in the title of the property insured (5) by whom and for what purposethe building was occupied at the time of loss etc. etc.
Inspection and assessment of loss. The insurance company sends itsspecialized surveyor to examine and determine the loss in the light of documentsand forms received from the policy-holder.
Time limit of paying claims. The insurer is to pay the actual loss,remaining within the limits of the insured policy. The amount shall be payablesixty days after proof of loss is received from the policy-holder.
Time Limit for bringing suit. If there is a dispute in the settlement ofclaim, the parties involved in the insurance contract, can file a suit within the timelimit prescribed in the contract.
Arbitration. The insurance companies normally avoid to file a suit in thecourt in case of disagreement between the parties. The contract usually providesa clause that in case of a dispute, the matter shall be referred to a Board ofarbitration containing one nominee of the insurer and one of the insured. Theaward given by the board is binding on both the parties. In case there isdisagreement among the arbitrators, the case is referred to the umpire whosejudgment shall be final.
Tuesday, November 17, 2009
FIRE INSURANCE POLICY AND ITS TYPES
FIRE INSURANCE POLICY AND ITS TYPES
A fire insurance policy is a contact of indemnity. It may be defined as "a contract by which the insurer in consideration of premium paid by the
insured agrees to indemnify him against any accidental
property due to fire, up to the sum agreed upon with him in the fire pc' -
Types of Policies. The main types of insurance policies are as l
Specific Policy. In case of specific policy, the insurance .make good the loss to the insured to the maximum extent of the face va .policy. For instance, a house valuing Rs. 5 lac is insured for Rs. 3 lac only If thehouses catches fire and is burnt to ashes, the insured can claim Rs. 3 lac only Itcannot realise more amount from the company.
Valued Policy. A valued policy is one in which the insurer has to pay thefull value of the subject matter (goods, securities etc)- If the building is destroyedby fire, the insured has not to prove the actual value of the loss. The valued policy
is against the principle of indemnity and so are not commonly issued.
3. Floating policy. A floating policy is that which covers several items ofgoods lying in different localities under one sum and for one premium. Thefloating policy is taken by big manufacturers whose goods are stored in different
localities.
4, Average Policy. An average policy is that which contains an average clause. The average clause lays down that if the property is under insured, the insurer will bear only that part of actual loss as his insurance bears to the total value of the property. For example, a property is insured for Rs. 40 thousand as against its value of Rs. 80 thousand. If the loss due to fire is assessed at Rs, 20 thousand: the claim will be settled as under:
. Insured amount x Actual loss Value of property
40000 x 20000Claim = 80000 = Rs" 10<000
In this case, the insured is penalized for under insurance.
Comprehensive policy. In comprehensive policy alhjypes of risks suchas fire, burglary, riots, strikes, explosion, lightning, etc are covered
Blanket policy. Under blanket policy, both fixed and current assets ofthe business are covered under one insurance.
Loss of profit policy. Under this policy, the insured is indemnifiedagainst' the loss of profits caused by any interruption of business by fire.
Reinstatement of policy. Under this policy, the insurer pays theamount which is required to reinstate the assets or property destroyed. Theinsurer while calculating the amount of claim does not deduct the amount ofdepreciation from the original value of the asset.
A fire insurance policy is a contact of indemnity. It may be defined as "a contract by which the insurer in consideration of premium paid by the
insured agrees to indemnify him against any accidental
property due to fire, up to the sum agreed upon with him in the fire pc' -
Types of Policies. The main types of insurance policies are as l
Specific Policy. In case of specific policy, the insurance .make good the loss to the insured to the maximum extent of the face va .policy. For instance, a house valuing Rs. 5 lac is insured for Rs. 3 lac only If thehouses catches fire and is burnt to ashes, the insured can claim Rs. 3 lac only Itcannot realise more amount from the company.
Valued Policy. A valued policy is one in which the insurer has to pay thefull value of the subject matter (goods, securities etc)- If the building is destroyedby fire, the insured has not to prove the actual value of the loss. The valued policy
is against the principle of indemnity and so are not commonly issued.
3. Floating policy. A floating policy is that which covers several items ofgoods lying in different localities under one sum and for one premium. Thefloating policy is taken by big manufacturers whose goods are stored in different
localities.
4, Average Policy. An average policy is that which contains an average clause. The average clause lays down that if the property is under insured, the insurer will bear only that part of actual loss as his insurance bears to the total value of the property. For example, a property is insured for Rs. 40 thousand as against its value of Rs. 80 thousand. If the loss due to fire is assessed at Rs, 20 thousand: the claim will be settled as under:
. Insured amount x Actual loss Value of property
40000 x 20000Claim = 80000 = Rs" 10<000
In this case, the insured is penalized for under insurance.
Comprehensive policy. In comprehensive policy alhjypes of risks suchas fire, burglary, riots, strikes, explosion, lightning, etc are covered
Blanket policy. Under blanket policy, both fixed and current assets ofthe business are covered under one insurance.
Loss of profit policy. Under this policy, the insured is indemnifiedagainst' the loss of profits caused by any interruption of business by fire.
Reinstatement of policy. Under this policy, the insurer pays theamount which is required to reinstate the assets or property destroyed. Theinsurer while calculating the amount of claim does not deduct the amount ofdepreciation from the original value of the asset.
Monday, November 16, 2009
HOW A FIRE INSURANCE POLICY IS AFFECTED
HOW A FIRE INSURANCE POLICY IS AFFECTED...
The following procedure is adopted in taking a fire insurance policy.
1. Selection of Insurance Company. A person who wants to get his
property insured against fire is to select the insurance company which has a sound financial backing and enjoys a goods reputation in the early settlement of claims in the event of a loss.
Rates of Premium. The companies which give coverage to insurancenormally combine and do not compete among themselves in cutting down therates of premium. The premium rates, therefore, usually do not differ.
Proposal Form. The person who wants to get his property insuredagainst fire or wants a "package" insurance, will furnish the facts in 'Utmost GoodFaith'. There will not be any concealment of facts on the part of the insurer as wellas incurred
Survey of the property. Before insuring the property against fire, theexpert surveyors engaged by the company inspects the property and prepares anestimate of the risk involved.
Acceptance of proposal. If the company is satisfied that the person isnot insuring the property for any profit motive, it on the basis of proposal form andthe surveyor's report, insurers the property and fixes up the premium on the facevalue of the policy. When the premium is paid by the insured, the property isinsured from that date.
Rate of Premium. The rate of premium is not uniform for all kinds ofproperty The rate of the premium is determined by the type of premises wherethe goods are kept. If the building is fire proof, the rate of premium will be low. Incase, the goods kept in a building are of such a nature that they can catch fireeasily, the rate of premium will be high.
Cover Note. On receipt of the premium, the company issues a CoverNote to the insured stating that the contract has been completed and the propertyhas been insured.
Issuance of Policy. The company after the completion of all formalitiesprepares the fire policy, giving their in full detail of the property and sends it to the
insured.
Sunday, November 15, 2009
WHAT IS FIRE INSURANCE
WHAT IS FIRE INSURANCE..
Fire insurance is a contract between the insurance company and the policy-holder wherein the insurance company undertakes in exchange for a premium to indemnify the loss or damage caused to the specified property of the insured by fire or lightning. The contract will be for a specified period of time and the company will compensate for the actual loss caused by fire which in no case exceeds the maximum limit of the insured amount.
Essentials of a Fire Insurance Contract
The main essentials of fire Insurance contract ar as follows:
1. Contract of indemnity. Fire insurance like the marine insurance is acontract of indemnity. The insured can claim the actual loss caused to theproperty by fire, remaining of course within the insured amount.
The insured cannot make a profit from contract. A policy-holder cannotget an overvalued fire policy of his property, This will encourage the insured to gethis property burned to ashes and then claim the full insured amount and make aprofit out of it.
Prescribed period. The fire insurance contract is for a specified period oftime usually for one year. It is annually renewed by the payment of a freshpremium.
The limit of lability. In case the insured property is destroyed by fire, thepolicy holder cannot claim the market value of the property. The claim isdetermined by measuring the actual loss or damage. The amount which appearson the face value of the policy expresses the limit of liability of the company.
Payment of the claim. The payment of the insured property damaged byfire as per contract is made to the person or persons named in the policy asinsured.
Interest of the policy. If the fire insurance contract covers the building,then the claim in the even of loss will be met of the building only. If the policygives a "Package" or multi-insurance coverage in one policy, covering fire, theft,burglary, car liability, etc. etc.. and only one premium is paid for this 'packagepolicy', then in the event of loss, the policy holder is indemnified (paid) for the totalloss remaining within the limit of the liability of the money.
Assignment of Policy. The insured under the contract cannot assign hisinterest in the policy to any third party without getting prior consent of thecompany. The assignment without the consent of the company is void at law.
• 8. Consequential loss. The consequential loss (business interruption unless specifically covered under the contract are not a part of fire loss.
9. Direct loss and damage. The fire insurance contract also s: loss to be covered by the policy must be a direct loss i.e.. the f«re rrust be immediate cause of the loss
10. Insurable Interest. In a fire insurance contract, the insured must havemsuraWe nterest in the subject matter of the policy failing which the contract isvoid at law. Insurable interest is created when in the event of a loss, the insured
a financial loss himself and when compensated by the company, he is financially restored to his previous position.
11. Absolute good faith. The insurer and the insured will place all the cardsat the table and will not willfully conceal or misrepresent any material fact fromeach other. The concealment or fraud before or after a loss will make the policyvoid at law.
Fire insurance is a contract between the insurance company and the policy-holder wherein the insurance company undertakes in exchange for a premium to indemnify the loss or damage caused to the specified property of the insured by fire or lightning. The contract will be for a specified period of time and the company will compensate for the actual loss caused by fire which in no case exceeds the maximum limit of the insured amount.
Essentials of a Fire Insurance Contract
The main essentials of fire Insurance contract ar as follows:
1. Contract of indemnity. Fire insurance like the marine insurance is acontract of indemnity. The insured can claim the actual loss caused to theproperty by fire, remaining of course within the insured amount.
The insured cannot make a profit from contract. A policy-holder cannotget an overvalued fire policy of his property, This will encourage the insured to gethis property burned to ashes and then claim the full insured amount and make aprofit out of it.
Prescribed period. The fire insurance contract is for a specified period oftime usually for one year. It is annually renewed by the payment of a freshpremium.
The limit of lability. In case the insured property is destroyed by fire, thepolicy holder cannot claim the market value of the property. The claim isdetermined by measuring the actual loss or damage. The amount which appearson the face value of the policy expresses the limit of liability of the company.
Payment of the claim. The payment of the insured property damaged byfire as per contract is made to the person or persons named in the policy asinsured.
Interest of the policy. If the fire insurance contract covers the building,then the claim in the even of loss will be met of the building only. If the policygives a "Package" or multi-insurance coverage in one policy, covering fire, theft,burglary, car liability, etc. etc.. and only one premium is paid for this 'packagepolicy', then in the event of loss, the policy holder is indemnified (paid) for the totalloss remaining within the limit of the liability of the money.
Assignment of Policy. The insured under the contract cannot assign hisinterest in the policy to any third party without getting prior consent of thecompany. The assignment without the consent of the company is void at law.
• 8. Consequential loss. The consequential loss (business interruption unless specifically covered under the contract are not a part of fire loss.
9. Direct loss and damage. The fire insurance contract also s: loss to be covered by the policy must be a direct loss i.e.. the f«re rrust be immediate cause of the loss
10. Insurable Interest. In a fire insurance contract, the insured must havemsuraWe nterest in the subject matter of the policy failing which the contract isvoid at law. Insurable interest is created when in the event of a loss, the insured
a financial loss himself and when compensated by the company, he is financially restored to his previous position.
11. Absolute good faith. The insurer and the insured will place all the cardsat the table and will not willfully conceal or misrepresent any material fact fromeach other. The concealment or fraud before or after a loss will make the policyvoid at law.
Friday, November 13, 2009
FIRE INSURANCE
Fire is a great friend of human being. When it misbehaves, it also proves to be a destructive agent of the enemy The damage caused by fire to the property of a person reduces him to utter poverty. Here comes the insurance to the rescue of a person by giving protection against the loss caused by fire. The insurance company, on payment of period payment (premium) compensates the actual loss incurred to the insured property. It does not exceed the maximum amount of the insured amount in any case. The fire insurance policy is also one of oldest method of insurance. It has gained popularity in all the developing and developed countries of the world.
Thursday, November 12, 2009
ESSENTIALS OF OCEAN MARINE INSURANCE CONTRACT
ESSENTIALS OF OCEAN MARINE INSURANCE CONTRACT
"A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the insured, in manner and to the extent thereby agreed, against the losses incidental to marine adventure". The essentials of ocean marine insurance contract are (1) Insurable interest (2) Disclosure of facts (3) Seaworthiness of the ship (4) Legality of voyage (5) Non deviation.
Insurable Interest. The insured must have insurable interest in theproperty insured. In the event of loss, if the facts are found otherwise, the contractwill be void at law.
Disclosure of all facts. An essential feature of the marine insurancecontract is that every contract or insurance must disclose all the facts. If theprinciple of 'Utmost Good Faith' is not observed by either party, the affected partymay sue and declare the contract void,
Seaworthiness of the ship. The-insurer shall promise to the insured thatthe ship is in a good condition and can face the ordinary perils of the sea.
Legality of voyage. The insured must also get a guarantee that thevoyage of the ship is lawful. The illegality of the venture makes the contract ofinsurance void.
Non-Deviation. The policy holder should also get a guarantee from theinsurance company that the ship will not part or deviate from the prescribed route
"A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the insured, in manner and to the extent thereby agreed, against the losses incidental to marine adventure". The essentials of ocean marine insurance contract are (1) Insurable interest (2) Disclosure of facts (3) Seaworthiness of the ship (4) Legality of voyage (5) Non deviation.
Insurable Interest. The insured must have insurable interest in theproperty insured. In the event of loss, if the facts are found otherwise, the contractwill be void at law.
Disclosure of all facts. An essential feature of the marine insurancecontract is that every contract or insurance must disclose all the facts. If theprinciple of 'Utmost Good Faith' is not observed by either party, the affected partymay sue and declare the contract void,
Seaworthiness of the ship. The-insurer shall promise to the insured thatthe ship is in a good condition and can face the ordinary perils of the sea.
Legality of voyage. The insured must also get a guarantee that thevoyage of the ship is lawful. The illegality of the venture makes the contract ofinsurance void.
Non-Deviation. The policy holder should also get a guarantee from theinsurance company that the ship will not part or deviate from the prescribed route
Wednesday, November 11, 2009
LOSSES IN OCEAN MARINE INSURANCE
LOSSES IN OCEAN MARINE INSURANCE
The losses in Ocean Marine Insurance are generally of two types Loss (2) Partial Loss.
1. Total Loss: Total loss is subdivided into (i) Actual total toss ( constructive total loss.
Actual Total Loss. The actual total ocean marine loss occurs when the ship carrying the goods sinks in the sea, catches fire and is burnt to ashes, the pirates take away the ship and remains missing, then it is said to be the actual total loss.
Constructive Total Loss. A constructive total loss is said to have taken place when the actual loss appears to be unavoidable and the expenditure incurred on the repair of ship or the recovery of goods exceed their total value. Under the above circumstances, the company abandons the attempt of repairing the ship, or recovering of the cargo and makes the claims of the policy holders for indemnification.
2. Partial Loss. Partial Loss technically called average is also subdivided into two categories (a) General Average (b) Particular Average.
General Average. If the ship suffers a loss or damage at sea and the loss isof a general nature which has been undertaken to preserve the ship or the cargo,then the loss is to be borne by all the underwriters in the vessel.
Particular Average. Particular average is the loss of a particular interestwhich may be in the ship alone or cargo alone and is incidentally caused by aperil insured against. In particular average the loss is partial and is not voluntary.For instance, a ship may strike against a rock and is partially damaged. Theinsurer in such a case will make good the partial loss suffered by the ship.
The losses in Ocean Marine Insurance are generally of two types Loss (2) Partial Loss.
1. Total Loss: Total loss is subdivided into (i) Actual total toss ( constructive total loss.
Actual Total Loss. The actual total ocean marine loss occurs when the ship carrying the goods sinks in the sea, catches fire and is burnt to ashes, the pirates take away the ship and remains missing, then it is said to be the actual total loss.
Constructive Total Loss. A constructive total loss is said to have taken place when the actual loss appears to be unavoidable and the expenditure incurred on the repair of ship or the recovery of goods exceed their total value. Under the above circumstances, the company abandons the attempt of repairing the ship, or recovering of the cargo and makes the claims of the policy holders for indemnification.
2. Partial Loss. Partial Loss technically called average is also subdivided into two categories (a) General Average (b) Particular Average.
General Average. If the ship suffers a loss or damage at sea and the loss isof a general nature which has been undertaken to preserve the ship or the cargo,then the loss is to be borne by all the underwriters in the vessel.
Particular Average. Particular average is the loss of a particular interestwhich may be in the ship alone or cargo alone and is incidentally caused by aperil insured against. In particular average the loss is partial and is not voluntary.For instance, a ship may strike against a rock and is partially damaged. Theinsurer in such a case will make good the partial loss suffered by the ship.
Tuesday, November 10, 2009
Types of Marine Insurance
There are three types of marine insurance (ij Cargo insurance ( insurance and (Hi) Freight insurance.
(i) Cargo insurance. It is an insurance of the gooes shipper.
Hull insurance, it is an insurance of ship itself against sea pe
Freight insurance. In many cases, freight is paid on the arrival of 5 at the port of destination. If the cargo is damaged or lost, the shipi company will lose the freight. Freight is, therefore, also covered in marine policy.
Types of Marine Policies
The main types of marine policies based on variety of risks covered are as under:
Time policy. This a policy in which the subject matter is insured for aspecified period of time say from April 1997 to Dec. 25, 1997.
Voyage policy. The policy is meant to insure the subject matter for aparticular voyage say from Karachi to London.
Mixed policy. This policy is meant to cover the subject matter on aparticular voyage and for a specified period of time say from Karachi toLondon for a period of 4 months.
Valued policy. In this policy, the value of the goods insured is agreedupon between the insurer and the insured and is written in the policy.
Unvalued policy. A policy which does not indicate the value of thesubject matter is called open or unvalued policy. The value is assessedwhen the loss actually takes place.
Composite policy. It is a policy which is underwritten by more than oneunderwriters. The liability of each underwriter is distinct and separate.
Blanket policy. It is a policy which is taken for a certain amount but onthe beginning of the policy, the premium is paid on the whole of it. Theadjustment is made at the end of the term of the policy.
Floating policy. It is a policy which is used by the cargo owners. Theyinsure the shipment expected to be made during a certain period by onepolicy. When the goods are loaded and the ship is on sea, an actualvalue of the shipment is declared and the actual value of policy is
' reduced or increased by that amount.
(9) Port policy. It is a policy to cover the vessel when it is anchored in a port.
(10) Fleet insurance policy. It is designed to insure a whole fleet of steamers or liners of a company
There are three types of marine insurance (ij Cargo insurance ( insurance and (Hi) Freight insurance.
(i) Cargo insurance. It is an insurance of the gooes shipper.
Hull insurance, it is an insurance of ship itself against sea pe
Freight insurance. In many cases, freight is paid on the arrival of 5 at the port of destination. If the cargo is damaged or lost, the shipi company will lose the freight. Freight is, therefore, also covered in marine policy.
Types of Marine Policies
The main types of marine policies based on variety of risks covered are as under:
Time policy. This a policy in which the subject matter is insured for aspecified period of time say from April 1997 to Dec. 25, 1997.
Voyage policy. The policy is meant to insure the subject matter for aparticular voyage say from Karachi to London.
Mixed policy. This policy is meant to cover the subject matter on aparticular voyage and for a specified period of time say from Karachi toLondon for a period of 4 months.
Valued policy. In this policy, the value of the goods insured is agreedupon between the insurer and the insured and is written in the policy.
Unvalued policy. A policy which does not indicate the value of thesubject matter is called open or unvalued policy. The value is assessedwhen the loss actually takes place.
Composite policy. It is a policy which is underwritten by more than oneunderwriters. The liability of each underwriter is distinct and separate.
Blanket policy. It is a policy which is taken for a certain amount but onthe beginning of the policy, the premium is paid on the whole of it. Theadjustment is made at the end of the term of the policy.
Floating policy. It is a policy which is used by the cargo owners. Theyinsure the shipment expected to be made during a certain period by onepolicy. When the goods are loaded and the ship is on sea, an actualvalue of the shipment is declared and the actual value of policy is
' reduced or increased by that amount.
(9) Port policy. It is a policy to cover the vessel when it is anchored in a port.
(10) Fleet insurance policy. It is designed to insure a whole fleet of steamers or liners of a company
Monday, November 9, 2009
MAIN TYPES OF INSURANCE
MAIN TYPES OF INSURANCE...
There are three major types of insurance (1) Marine (2) Fire and (3) Life. In advanced countries of the world, insurance coverage is given to (4) Casualty (5) Accident and Health (6) Fidelity and surety bonds (7) Title and (8) Credit also. We. in this book will be dealing with the three broad classifications of insurance, i.e., (1) Marine (2) Fire and (3) Life.
MARINE INSURANCE
Marine insurance is the oldest type of insurance dating over 5000 years back. It was originally meant for giving insurance coverage to the loss of ships and cargo at sea. In more recent times, it has been split up into two major forms of transportation coverage, (a) Ocean Marine (b) Inland Marine.
What is an Ocean Marine? The ocean marine insurance is a highly specialized business in its operation and is primarily operated by big insurance companies. Ocean marine insurance covers almost all losses to the ship and cargo while in port or at sea. The main ocean perils include sinking, capsizing,stranding, collision, theft and fire etc. In each marine insurance contract, the insurer (Insurance company) on the payment of a premium by the insured,undertakes to give coverage against loss due to maritime perils. The terms and conditions of the contract are written in a document called Marine Insurance Policy In an ocean marine insurance, coverage is provided for (1) ships(also called Hulls) (2) Cargo (3) Freight and (4) liability undertaken by the interested party.
Inland marine. Inland marine insurance provides coverage to transportation of goods by rail, truck, airplane, inland water ways. The inland marine perils include collision of trucks, theft, fire, windfall, flood, lightning etc.The inland marine insurance policy is written on all risks basis of it may be written to insure only against specified inland marine perils The procedure of getting marine insurance is very simple. The person who wants to get the cargo insured,writes to a few financially sound companies to quote their lowest rates of risk. On receipt of quotations, he contracts the company which quotes the lowest rates,The company fills up the necessary forms and on receipt of premium accepts the marine risk. The marine insurance policy is then given to the insured to recover the claim in the event of a loss.
Marine Insurance.
Marine insurance is the oldest type of insurance It covers (1) Ocean Marine and (2) Inland Marine,
Ocean Marine Insurance. It is a highly specialized business. The insurance companies covers practically all perils of shipments on the high seas.In the ocean marine insurance, the coverage is provided for ship and its contents.
Inland Marine Insurance. An inland marine insurance policy provides coverage to losses caused by fire, theft to goods being transported by rail, truck airplane, steamers.
There are three major types of insurance (1) Marine (2) Fire and (3) Life. In advanced countries of the world, insurance coverage is given to (4) Casualty (5) Accident and Health (6) Fidelity and surety bonds (7) Title and (8) Credit also. We. in this book will be dealing with the three broad classifications of insurance, i.e., (1) Marine (2) Fire and (3) Life.
MARINE INSURANCE
Marine insurance is the oldest type of insurance dating over 5000 years back. It was originally meant for giving insurance coverage to the loss of ships and cargo at sea. In more recent times, it has been split up into two major forms of transportation coverage, (a) Ocean Marine (b) Inland Marine.
What is an Ocean Marine? The ocean marine insurance is a highly specialized business in its operation and is primarily operated by big insurance companies. Ocean marine insurance covers almost all losses to the ship and cargo while in port or at sea. The main ocean perils include sinking, capsizing,stranding, collision, theft and fire etc. In each marine insurance contract, the insurer (Insurance company) on the payment of a premium by the insured,undertakes to give coverage against loss due to maritime perils. The terms and conditions of the contract are written in a document called Marine Insurance Policy In an ocean marine insurance, coverage is provided for (1) ships(also called Hulls) (2) Cargo (3) Freight and (4) liability undertaken by the interested party.
Inland marine. Inland marine insurance provides coverage to transportation of goods by rail, truck, airplane, inland water ways. The inland marine perils include collision of trucks, theft, fire, windfall, flood, lightning etc.The inland marine insurance policy is written on all risks basis of it may be written to insure only against specified inland marine perils The procedure of getting marine insurance is very simple. The person who wants to get the cargo insured,writes to a few financially sound companies to quote their lowest rates of risk. On receipt of quotations, he contracts the company which quotes the lowest rates,The company fills up the necessary forms and on receipt of premium accepts the marine risk. The marine insurance policy is then given to the insured to recover the claim in the event of a loss.
Marine Insurance.
Marine insurance is the oldest type of insurance It covers (1) Ocean Marine and (2) Inland Marine,
Ocean Marine Insurance. It is a highly specialized business. The insurance companies covers practically all perils of shipments on the high seas.In the ocean marine insurance, the coverage is provided for ship and its contents.
Inland Marine Insurance. An inland marine insurance policy provides coverage to losses caused by fire, theft to goods being transported by rail, truck airplane, steamers.
Sunday, November 8, 2009
I. What is life insurance policy.
Describe the various kinds of life insurance policies.
2 How is life insurance policy distinguished from other types of insurance
Define life Insurance policy briefly giving the essentials of life insurance contract. (Ar
Mr. Hamid is interested in getting a life insurance policy. What method will be adopt in securing the life policy for himself? (Ans.4)
What are the various types of life insurance policies? Which policy do you prefer and why? (Ans.5)
What are the benefits of life insurance policy to an individual sole proprietor,partnership. Discuss in brief the advantages of life insurance policy to the business community.
Define life insurance. What are its main advantages,
Define and compare life insurance, Fire insurance and Marine insurance.
What is warranty? Answer. A warranty is a part of the contract. It is an undertaking that the answers given in the application for insurance are correct. If they are proved false, the policy would be considered void.Warranty is of two kinds .express and implied. Express warranties are clearly mentioned and incorporated in the policy. Implied warranties are not mentioned in the policy but they are tacitly presumed to exist. For instance,seaworthiness of the slip, .legality of the venture, are examples of implied warranties in marine insurance.
II. What is self insurance? Answer. In case of self insurance, a person periodically sets apart a specified amount for meeting the risk. In the event of a loss, he banks upon the pool and makes good the loss. For instance, a big shipping company may keep a certain sum as reserve after every two months. In the event of a loss, the damage to the ship will be met out of the accumulated fund. Self insurance can only be carried out by big firms.
What is warranty?
What is self insurance?
How will your distinguish between fir insurance and life insurance?4 What is the business use of life insurance?
State whether each the following statement is 'True' or 'False'
In life insurance, the amount of policy is paid on maturity or earlier death to his nominee.
Describe the various kinds of life insurance policies.
2 How is life insurance policy distinguished from other types of insurance
Define life Insurance policy briefly giving the essentials of life insurance contract. (Ar
Mr. Hamid is interested in getting a life insurance policy. What method will be adopt in securing the life policy for himself? (Ans.4)
What are the various types of life insurance policies? Which policy do you prefer and why? (Ans.5)
What are the benefits of life insurance policy to an individual sole proprietor,partnership. Discuss in brief the advantages of life insurance policy to the business community.
Define life insurance. What are its main advantages,
Define and compare life insurance, Fire insurance and Marine insurance.
What is warranty? Answer. A warranty is a part of the contract. It is an undertaking that the answers given in the application for insurance are correct. If they are proved false, the policy would be considered void.Warranty is of two kinds .express and implied. Express warranties are clearly mentioned and incorporated in the policy. Implied warranties are not mentioned in the policy but they are tacitly presumed to exist. For instance,seaworthiness of the slip, .legality of the venture, are examples of implied warranties in marine insurance.
II. What is self insurance? Answer. In case of self insurance, a person periodically sets apart a specified amount for meeting the risk. In the event of a loss, he banks upon the pool and makes good the loss. For instance, a big shipping company may keep a certain sum as reserve after every two months. In the event of a loss, the damage to the ship will be met out of the accumulated fund. Self insurance can only be carried out by big firms.
What is warranty?
What is self insurance?
How will your distinguish between fir insurance and life insurance?4 What is the business use of life insurance?
State whether each the following statement is 'True' or 'False'
In life insurance, the amount of policy is paid on maturity or earlier death to his nominee.
Saturday, November 7, 2009
Life insurance
Basis of Difference
Life Insurance
Fire Insurance
Marine Insurance
Insurable interest.
It is a legal requirement. The insured must have an insurable interest in the life insured at the time of taking the policy and at the time of death of the insured.
The insurable interest is to exist in the goods to be insured both at the time of taking the policy and at the time of loss of subject matter.
There must be an insurable interest at the time of loss. It is not necessary to have insurable interest at the time of taking the
policy.
Compensation
In case of death of the insured person, the loss cannot be compensated. However the insured amount is paid to his nominee.
In fire insurance, the actual loss is compensated.
The actual total loss is compensated
Surrender of policy
The insured person can give up or surrender the policy before its maturity. The insurance company pays the surrender value to the insured person,
The policy cannot be surrendered as premium has been made.
The policy cannot be given up.
Payment ov premium
The payment of premium is made instalments.
The payment is made in one instalment only.
The payment is made in lump sum amount.
Loss
Life insurance is for total loss.
Partial loss can be paid.
Actual loss is paid. It may be partial or total.
Credit facilities.
The insured can raise a loan on
the security of life insurance policy
It cannot be used as security for bank loa.
The policy cannot be used as security for loan.
Life Insurance
Fire Insurance
Marine Insurance
Insurable interest.
It is a legal requirement. The insured must have an insurable interest in the life insured at the time of taking the policy and at the time of death of the insured.
The insurable interest is to exist in the goods to be insured both at the time of taking the policy and at the time of loss of subject matter.
There must be an insurable interest at the time of loss. It is not necessary to have insurable interest at the time of taking the
policy.
Compensation
In case of death of the insured person, the loss cannot be compensated. However the insured amount is paid to his nominee.
In fire insurance, the actual loss is compensated.
The actual total loss is compensated
Surrender of policy
The insured person can give up or surrender the policy before its maturity. The insurance company pays the surrender value to the insured person,
The policy cannot be surrendered as premium has been made.
The policy cannot be given up.
Payment ov premium
The payment of premium is made instalments.
The payment is made in one instalment only.
The payment is made in lump sum amount.
Loss
Life insurance is for total loss.
Partial loss can be paid.
Actual loss is paid. It may be partial or total.
Credit facilities.
The insured can raise a loan on
the security of life insurance policy
It cannot be used as security for bank loa.
The policy cannot be used as security for loan.
Characteristics of Good Money
Characteristics of Good Money
Following are the characteristics of good mom y: General Acceptability:
The good money is one which is generally acceptable by all without any hesitation. It means that anyone will be willing to readily accept it in the settlement of2. Stability:
The value of money should stay stable otherwise people will loose confidence it. It means that the commodity chosen as money must not depreciate due to usage or wear and tear.
Standardized
The good money is of standardi/ed nature and quality of its material does not •ndergo any great change. It must not be weak in such a manner that may loose its original form and shape due to any mishandling or change of temperature.
4. Economical
The issuances of good money should always be economical. This means that cost red on its issuance must be very low as compared to its value. Taking a simple example we can say that issuance of one rupee note would be economical for Pakistan government if cost of printing a note is less than one rupee.
5. Storabilty:
A good money is one in the shape of'which purchasing power can be stored for a longer period. This means that people must be able to save the money with considerable surety that it will not lose its value.
6. Divisibility:
A good money is capable of being divided into smaller denominations. Hence both the costly and cheap things can be purchased from such money.
Transportability:
A good money is easily transferable form one place to another. Paper money is the best example of this. Not only it can be transferred easily over long distances but we also have different modes of transferring it such as cheques, pay orders, drafts, TC'c etc.
8. Recognizable:
Good money is one that can be easily recognized by seeing or touching. It should be of such a nature that can be easily identified by anyone. Moreover different denominations should be in different colour or size in order to avoid any confusion.
9. Difficult to Copy:
A good money is one which is very difficult to be copied. In other words there should be no danger of fake issuance. There must be certain mark on it which can be easily identified by everyone and which can also be used to determine its originality
10. Easily Meltable
A good currency can be conveniently kept and stamped. Malleability is mainly a quality of metal coins. The metal coins can be melted and reproduced with new government seals. So sucfc a material that cannot be melted is not fit for making coins. Paper currency is also malleable in a sense that it can recycled to produce new notes
11. Elasticity
The supply of money should remain elastic. It means that it should respond to the general needs of the economy. It must be of such a nature that its supply can be increased or decreased to satisfy the requirements of the economy.
12. Element of Supervision
A good money is one that can be effectively supervised by a central monetary authority. It is of such a nature that central authority is able to keep records of the amount of money in circulation and the pattern of its distribution
13. Scarcity:
A good money should be scarce in quantity. Its quantity in the economy should be kept low as compared to the desire for it. This implies that people will always be working hard to earn more money in order to meet requirements of life.
Conclusion:
These are the characteristics of an ideal money. The paper currency conforms to majority of these standards. However the biggest drawback of our paper currency is that it is exposed to inflation due to which is losing its value over time
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Following are the characteristics of good mom y: General Acceptability:
The good money is one which is generally acceptable by all without any hesitation. It means that anyone will be willing to readily accept it in the settlement of
The value of money should stay stable otherwise people will loose confidence it. It means that the commodity chosen as money must not depreciate due to usage or wear and tear.
Standardized
The good money is of standardi/ed nature and quality of its material does not •ndergo any great change. It must not be weak in such a manner that may loose its original form and shape due to any mishandling or change of temperature.
4. Economical
The issuances of good money should always be economical. This means that cost red on its issuance must be very low as compared to its value. Taking a simple example we can say that issuance of one rupee note would be economical for Pakistan government if cost of printing a note is less than one rupee.
5. Storabilty:
A good money is one in the shape of'which purchasing power can be stored for a longer period. This means that people must be able to save the money with considerable surety that it will not lose its value.
6. Divisibility:
A good money is capable of being divided into smaller denominations. Hence both the costly and cheap things can be purchased from such money.
Transportability:
A good money is easily transferable form one place to another. Paper money is the best example of this. Not only it can be transferred easily over long distances but we also have different modes of transferring it such as cheques, pay orders, drafts, TC'c etc.
8. Recognizable:
Good money is one that can be easily recognized by seeing or touching. It should be of such a nature that can be easily identified by anyone. Moreover different denominations should be in different colour or size in order to avoid any confusion.
9. Difficult to Copy:
A good money is one which is very difficult to be copied. In other words there should be no danger of fake issuance. There must be certain mark on it which can be easily identified by everyone and which can also be used to determine its originality
10. Easily Meltable
A good currency can be conveniently kept and stamped. Malleability is mainly a quality of metal coins. The metal coins can be melted and reproduced with new government seals. So sucfc a material that cannot be melted is not fit for making coins. Paper currency is also malleable in a sense that it can recycled to produce new notes
11. Elasticity
The supply of money should remain elastic. It means that it should respond to the general needs of the economy. It must be of such a nature that its supply can be increased or decreased to satisfy the requirements of the economy.
12. Element of Supervision
A good money is one that can be effectively supervised by a central monetary authority. It is of such a nature that central authority is able to keep records of the amount of money in circulation and the pattern of its distribution
13. Scarcity:
A good money should be scarce in quantity. Its quantity in the economy should be kept low as compared to the desire for it. This implies that people will always be working hard to earn more money in order to meet requirements of life.
Conclusion:
These are the characteristics of an ideal money. The paper currency conforms to majority of these standards. However the biggest drawback of our paper currency is that it is exposed to inflation due to which is losing its value over time
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Function of Money 2010
Contingent Functions
These functions are further derivatives of primary and secondary functions. These are as follows:
Basis for Economic Theories
Money is the basis for almost all economic theories. The consumption theory, production theory, utility theory, etc are all applicable because of the function of money. These theories cannot be applied to a moneyless or barter economy. They are based on assumptions that resources are priced in definite monetary terms and rationale comparison can be made between different choices of production and consumption so as to maximise profit.
13. Determination / Distribution of Nl:
With the help of money it is possible to determine national income and to analyse its distribution among various classes of society. Economists have defined many other important calculations to study economic trends such as GDP at factor cost, GDP at market prices, per capita income, personal disposable income etc. but the point to note is that these calculations can be made with sufficient reliability only in the presence of money in the economy
14. Efficiency and Optimum Allocation
Due to money it is possible to evaluate different efficiency levels. The cost of resources stated in money terms is equated with the price of the product to determine allocative and productive efficiency..
15. Basis of Credit
Money lies in the roots of banking credit system. It is in money that bank loans are expressed and advanced. Also the money value of securities are considered by banks while granting credit. Different negotiable instruments also work on the basis of money.
Other Functions
Other less important functions of money are as follows:
16. Measure of Liquidity:
With money it is possible to measure the liquidity of anything. It is stated as current asset and it is the most readily available source to pay off liabilities.
17. Determination of Solvency
Money is used to determine the solvency of any firm or company etc. To analyse that whether a business is able to pay off its debts, money value of all of its net asset is taken into consideration
Different Uses:
Money is suited for many different types of uses. It is used by consumer in variety to get satisfaction.
Summing up:
These are van. of functions which money performs, for us in the modern ' economy.
These functions are further derivatives of primary and secondary functions. These are as follows:
Basis for Economic Theories
Money is the basis for almost all economic theories. The consumption theory, production theory, utility theory, etc are all applicable because of the function of money. These theories cannot be applied to a moneyless or barter economy. They are based on assumptions that resources are priced in definite monetary terms and rationale comparison can be made between different choices of production and consumption so as to maximise profit.
13. Determination / Distribution of Nl:
With the help of money it is possible to determine national income and to analyse its distribution among various classes of society. Economists have defined many other important calculations to study economic trends such as GDP at factor cost, GDP at market prices, per capita income, personal disposable income etc. but the point to note is that these calculations can be made with sufficient reliability only in the presence of money in the economy
14. Efficiency and Optimum Allocation
Due to money it is possible to evaluate different efficiency levels. The cost of resources stated in money terms is equated with the price of the product to determine allocative and productive efficiency..
15. Basis of Credit
Money lies in the roots of banking credit system. It is in money that bank loans are expressed and advanced. Also the money value of securities are considered by banks while granting credit. Different negotiable instruments also work on the basis of money.
Other Functions
Other less important functions of money are as follows:
16. Measure of Liquidity:
With money it is possible to measure the liquidity of anything. It is stated as current asset and it is the most readily available source to pay off liabilities.
17. Determination of Solvency
Money is used to determine the solvency of any firm or company etc. To analyse that whether a business is able to pay off its debts, money value of all of its net asset is taken into consideration
Different Uses:
Money is suited for many different types of uses. It is used by consumer in variety to get satisfaction.
Summing up:
These are van. of functions which money performs, for us in the modern ' economy.
Functions of Money
Functions of Money
Money as already said, removed the inconveniences of barter and showed the world the path of economic activity and development. As the economy grew, importance of money also increased. In today's world money performs variety of vital functions which are described below.
Primary Functions
Primary functions are those which are performed by money on account of its major characteristics. These are as follows:
1. Medium of Exchange
Money serves as a medium of exchange. It is used to make payments for goods and services. Goods can be bought and sold in term of money without any difficulty. So it is a medium that helps buyers and sellers to complete their transactions.
2. Standard of Value
Money serves as a standard of value. The goods and services of modern world are priced and valued in terms of money. This has greatly helped in reducing the time and effort to make transaction. Money measures values of everything (except that of life, love, care, passion, honour and some other things of same kind) in the same way as kg is used to measure weight, km is used to measure distance.
3. Store of Value
Money is also the store of value. It can be saved for use in future. In the form of money, purchasing power can be stored to buy goods in future, however this function of money is normally effected by the rate of inflation prevailing in the economy.
4. Standard of Deferred Payment
Money is a standard of deferred payment. It is used to express debt and business obligations. Goods are normally bought and sold on credit and the credit is expressed in term of money.
Secondary Functions:
Besides the primary functions, money also performs different secondary functions. Such functions depict the role that money plays in the economy.
5. Market Mechanism:
Money is at the base of market mechanism. In other words market mechanism and the forces of demand and supply works only because of money. Money is the factor that leads to the meeting of demand and supply and determination of prices.
6. Income and Consumption:
All economic variable including income-and consumption are determined and quoted in terms of money. Money helps in determination, valuation and budgeting of expenses and revenues.
7. Instrument of Modern Economy:
Money is the basic and most important instruments of modem economy. All the economic policies are applicable only because of the fact that it is possible to state the price of everything in term of money.
8. Monetary and Fiscal Management:
Money is an important element of monetary and fiscal policies of government. It plays its role in all kinds of economic actions taken by government. In fact taxes and public finance can only be generated because money is present in our economy.
j
9. Aids to Economic Activities
All kinds of economic activities such as investments, savings, credit, advances, purchases, sales are made in term of money. It has facilitated the process of expansion of trade and commerce. It has acted as a lubricant in the economy. It is a driving force of economic indicators . It has made business and trading operations, flexible.
10. Specialisation and Trade
Money has made specialisation possible. Previously, there was a concept of self sufficiency. But in today's world, nations tend to specialise in the production of things in which they have comparative advantage and then they trade what they have produced for what they need. This is possible because different resources can be priced in terms of money. This helps in the calculation of cost of production and the determination of comparative advantages.
11. Liquidity to International Trade
Money has provided the liquidity to international trade. The wealth can be transferred readily from one country to another. Payment can be made and received on the other end of world in no time. Bank money has made the, international trade more brisk and much more secure. It has also simplified the task of accumulation of reserves by the governments. Besides accumulating gold and silver governments also hold foreign exchange(currency of stronger countries) as reserves.
Money as already said, removed the inconveniences of barter and showed the world the path of economic activity and development. As the economy grew, importance of money also increased. In today's world money performs variety of vital functions which are described below.
Primary Functions
Primary functions are those which are performed by money on account of its major characteristics. These are as follows:
1. Medium of Exchange
Money serves as a medium of exchange. It is used to make payments for goods and services. Goods can be bought and sold in term of money without any difficulty. So it is a medium that helps buyers and sellers to complete their transactions.
2. Standard of Value
Money serves as a standard of value. The goods and services of modern world are priced and valued in terms of money. This has greatly helped in reducing the time and effort to make transaction. Money measures values of everything (except that of life, love, care, passion, honour and some other things of same kind) in the same way as kg is used to measure weight, km is used to measure distance.
3. Store of Value
Money is also the store of value. It can be saved for use in future. In the form of money, purchasing power can be stored to buy goods in future, however this function of money is normally effected by the rate of inflation prevailing in the economy.
4. Standard of Deferred Payment
Money is a standard of deferred payment. It is used to express debt and business obligations. Goods are normally bought and sold on credit and the credit is expressed in term of money.
Secondary Functions:
Besides the primary functions, money also performs different secondary functions. Such functions depict the role that money plays in the economy.
5. Market Mechanism:
Money is at the base of market mechanism. In other words market mechanism and the forces of demand and supply works only because of money. Money is the factor that leads to the meeting of demand and supply and determination of prices.
6. Income and Consumption:
All economic variable including income-and consumption are determined and quoted in terms of money. Money helps in determination, valuation and budgeting of expenses and revenues.
7. Instrument of Modern Economy:
Money is the basic and most important instruments of modem economy. All the economic policies are applicable only because of the fact that it is possible to state the price of everything in term of money.
8. Monetary and Fiscal Management:
Money is an important element of monetary and fiscal policies of government. It plays its role in all kinds of economic actions taken by government. In fact taxes and public finance can only be generated because money is present in our economy.
j
9. Aids to Economic Activities
All kinds of economic activities such as investments, savings, credit, advances, purchases, sales are made in term of money. It has facilitated the process of expansion of trade and commerce. It has acted as a lubricant in the economy. It is a driving force of economic indicators . It has made business and trading operations, flexible.
10. Specialisation and Trade
Money has made specialisation possible. Previously, there was a concept of self sufficiency. But in today's world, nations tend to specialise in the production of things in which they have comparative advantage and then they trade what they have produced for what they need. This is possible because different resources can be priced in terms of money. This helps in the calculation of cost of production and the determination of comparative advantages.
11. Liquidity to International Trade
Money has provided the liquidity to international trade. The wealth can be transferred readily from one country to another. Payment can be made and received on the other end of world in no time. Bank money has made the, international trade more brisk and much more secure. It has also simplified the task of accumulation of reserves by the governments. Besides accumulating gold and silver governments also hold foreign exchange(currency of stronger countries) as reserves.
issuance of Money
Issuance of Money in Pakistan
In the beginning, the SBP issued notes on the basis of SBP act 1956. According to this act the notes were issued on a proportional reserve system.
This method remained in effect till November 1965. Under this method the notes issued had to be backed by an equivalent amount of assets. At least 30% of such assets must be gold coins or gold bullion, silver bullion or approved foreign exchange. The remaining assets might be in the form of securities bill of exchanges, promissory notes etc.
However, afterward in Nov. 1965 the 30% reserve requirement was changed by an ordinance. The ordinance gave the right and authority to federal government that she after consulting with bank would specify the amount of currency that is to be backed by gold and approved foreign exchange.
Afterwards in Dec. 1965, through a further notification, the level of currency backing was made fixed at Rs.1200 million. The state bank then could issue notes according to the requirements of the economy.
The system is more or less a form of minimum reserve system (MRS has been explained above in -detail). This system is flexible and safe. In this system SBP can increase or decrease the supply of currency in the country according to economic climate. Pakistan has adopted this system as it is beneficially capable and responsive to the needs of our slowly growing economy. Further this system is also flexible and enjoys a higher degree of safety. Under this system the quantum of notes issue reflect the demand of economy for currency. The state bank is in a better position to alter the supply of currency in response to changes in aggregate demand, aggregate supply, trends in general price level and state of economic activity. Also as we have studied above this system is more suitable for the modern economy. Further this system also helps the central bank to perform other monetary and fiscal operations easily. However, despite all this, we are facing problems in maintaining the value of our currency. Inflation trends have caused people to lose faith in the currency and mainly savings are held in dollar and gold.
Concluding it can be said that besides taking advantages of flexibility of minimum reserve system, SBP should take steps to strengthen the rupee and to restore confidence of people in it.
In the beginning, the SBP issued notes on the basis of SBP act 1956. According to this act the notes were issued on a proportional reserve system.
This method remained in effect till November 1965. Under this method the notes issued had to be backed by an equivalent amount of assets. At least 30% of such assets must be gold coins or gold bullion, silver bullion or approved foreign exchange. The remaining assets might be in the form of securities bill of exchanges, promissory notes etc.
However, afterward in Nov. 1965 the 30% reserve requirement was changed by an ordinance. The ordinance gave the right and authority to federal government that she after consulting with bank would specify the amount of currency that is to be backed by gold and approved foreign exchange.
Afterwards in Dec. 1965, through a further notification, the level of currency backing was made fixed at Rs.1200 million. The state bank then could issue notes according to the requirements of the economy.
The system is more or less a form of minimum reserve system (MRS has been explained above in -detail). This system is flexible and safe. In this system SBP can increase or decrease the supply of currency in the country according to economic climate. Pakistan has adopted this system as it is beneficially capable and responsive to the needs of our slowly growing economy. Further this system is also flexible and enjoys a higher degree of safety. Under this system the quantum of notes issue reflect the demand of economy for currency. The state bank is in a better position to alter the supply of currency in response to changes in aggregate demand, aggregate supply, trends in general price level and state of economic activity. Also as we have studied above this system is more suitable for the modern economy. Further this system also helps the central bank to perform other monetary and fiscal operations easily. However, despite all this, we are facing problems in maintaining the value of our currency. Inflation trends have caused people to lose faith in the currency and mainly savings are held in dollar and gold.
Concluding it can be said that besides taking advantages of flexibility of minimum reserve system, SBP should take steps to strengthen the rupee and to restore confidence of people in it.
Minimum Reserves System
Minimum Reserves System
Under the Minimum Reserve System method of note- issue the central bank has to keep only a minimum amount of reserves, against all the notes issued. This means that any volume of currency can be issued by the central bank depending on the demands of economy. There is no fixed maximum limit under this system. Once a central authority decides a minimum value of reserves the issuing authority is at liberty to expand or contract supply of currency. The reserves are kept in the form of gold and foreign exchange. Usually 20% to 30% of the notes issued are backed by the reserves.
Merits:
(a) Elasticity:
The important merit of this system is elasticity. The state bank can increase or decrease the supply of currency in response to the changes in economic activities.
(b) Responsive:
This system has higher degree of responsiveness than other, systems. This means that if economy demands increase in the supply of currency then under this system appropriate immediate response can be undertaken by the central monetary authorities and supply of currency can be increased according to the requirements of the state of economy.
(c) Safety:
This system enjoys higher degree of safety. The central monetary authorities keep a close eye on the state of affairs of the economy. The notes are issued in response to changes in the market activity and demand for currency
Suitable for Modern World:
This system is widely practised in different modern economies. This system caters to the needs of the growing developed economies. It is also 'suitable for developing economies. The central monetary authorities is ,in a position to manage the supply of currency so as to achieve both short-term and long-term monetary and fiscal targets.
Demerits:
(a) Inconvertibility
The demerit is that - the paper currency under this method is absolutely inconvertible.
(b) No Intrinsic Value:
Major disadvantage is that currency issued under this system has no intrinsic value. This means that the worth of the paper is far less than the value that it claims due to its status of being a legal tender. In simple words, take the example often rupees note in your pocket. The worth of the paper of which the note is made is very low but it claims the purchasing power equivalent to ten rupees just because that it is a legal tender.
Under the Minimum Reserve System method of note- issue the central bank has to keep only a minimum amount of reserves, against all the notes issued. This means that any volume of currency can be issued by the central bank depending on the demands of economy. There is no fixed maximum limit under this system. Once a central authority decides a minimum value of reserves the issuing authority is at liberty to expand or contract supply of currency. The reserves are kept in the form of gold and foreign exchange. Usually 20% to 30% of the notes issued are backed by the reserves.
Merits:
(a) Elasticity:
The important merit of this system is elasticity. The state bank can increase or decrease the supply of currency in response to the changes in economic activities.
(b) Responsive:
This system has higher degree of responsiveness than other, systems. This means that if economy demands increase in the supply of currency then under this system appropriate immediate response can be undertaken by the central monetary authorities and supply of currency can be increased according to the requirements of the state of economy.
(c) Safety:
This system enjoys higher degree of safety. The central monetary authorities keep a close eye on the state of affairs of the economy. The notes are issued in response to changes in the market activity and demand for currency
Suitable for Modern World:
This system is widely practised in different modern economies. This system caters to the needs of the growing developed economies. It is also 'suitable for developing economies. The central monetary authorities is ,in a position to manage the supply of currency so as to achieve both short-term and long-term monetary and fiscal targets.
Demerits:
(a) Inconvertibility
The demerit is that - the paper currency under this method is absolutely inconvertible.
(b) No Intrinsic Value:
Major disadvantage is that currency issued under this system has no intrinsic value. This means that the worth of the paper is far less than the value that it claims due to its status of being a legal tender. In simple words, take the example often rupees note in your pocket. The worth of the paper of which the note is made is very low but it claims the purchasing power equivalent to ten rupees just because that it is a legal tender.
Proportionate Reserve System
Proportionate Reserve System:
Under this system the central bank is required to keep 100% reserves for a particular percentage of notes issued. The rest of the notes issued are backed by Government securities and Government bills. Usually 25% to 40% of notes issued are fully backed by gold and rest are backed by Government securities.
This system remained in force in many countries of the world such as in France, and Germany with 30% and 40% backing respectively.
Merits:
a! A Widely Prevailed System:
This system remained in -force in many parts of the world for different time period. This system is also adopted by United States and UK and many other economically stronger countries. This method ensures a considerable and moderate :rol over supply of currency.
Elastic:
This system is elastic in a sense that if economy is under expansion then naturally there will be a need to expand the.currency and credit. In such situations, central bank will be at case under this system to expand the supply of currency.
;c) High Degree of Safety:
This system is safer and more sound as compared to others. In this system the chances of over-issue of currency are less and so there is less danger of unwanted r nation.
(d) Responsive:
This system has higher degree of responsiveness. This means that if economy demands an increase in the supply of currency then under this system appropriate and .ediate response can be undertaken by the central monetary authorities.
Demerits:
' (a) Rigid:
This system is rigid. As notes cannot be issued over a particular limit without keeping Government securities, so this may lead to rigid supply of currency even when economic and fiscal situation demands expansion in the currency supply.
(b) Contraction in Money Supply::
An other disadvantage is that governments some times have to do unwanted contractions in money supply. This occurs when the gold reserves are diminishing. Then the central bank in such circumstances has to reduce the money supply. This can lead to various adverse effects on the economy provided that the ongoing situation demands expansion in currency supply.
Note: Pakistan also adopted the proportionate reserve system and remained on it till 1965.
Under this system the central bank is required to keep 100% reserves for a particular percentage of notes issued. The rest of the notes issued are backed by Government securities and Government bills. Usually 25% to 40% of notes issued are fully backed by gold and rest are backed by Government securities.
This system remained in force in many countries of the world such as in France, and Germany with 30% and 40% backing respectively.
Merits:
a! A Widely Prevailed System:
This system remained in -force in many parts of the world for different time period. This system is also adopted by United States and UK and many other economically stronger countries. This method ensures a considerable and moderate :rol over supply of currency.
Elastic:
This system is elastic in a sense that if economy is under expansion then naturally there will be a need to expand the.currency and credit. In such situations, central bank will be at case under this system to expand the supply of currency.
;c) High Degree of Safety:
This system is safer and more sound as compared to others. In this system the chances of over-issue of currency are less and so there is less danger of unwanted r nation.
(d) Responsive:
This system has higher degree of responsiveness. This means that if economy demands an increase in the supply of currency then under this system appropriate and .ediate response can be undertaken by the central monetary authorities.
Demerits:
' (a) Rigid:
This system is rigid. As notes cannot be issued over a particular limit without keeping Government securities, so this may lead to rigid supply of currency even when economic and fiscal situation demands expansion in the currency supply.
(b) Contraction in Money Supply::
An other disadvantage is that governments some times have to do unwanted contractions in money supply. This occurs when the gold reserves are diminishing. Then the central bank in such circumstances has to reduce the money supply. This can lead to various adverse effects on the economy provided that the ongoing situation demands expansion in currency supply.
Note: Pakistan also adopted the proportionate reserve system and remained on it till 1965.
Methods of note issue
METHODS OF NOTE ISSUE
Both the principles of note issue have merits and demerits. Based on these principles several systems and methods have been devised for the issuance of notes. These are as follows:
1. Fixed Fiduciary Issue:
This is widely recognised as an important method of note issue. Under tin's system a limit of volume of" currency has been fixed by central authority. This limit is called fiduciary limit. Any note issue in this fiduciary limit is to be backed by Government securities. However any note issued above this limit are to be 100% backed by gold. This system remained in force in many countries of the world at different times.
Following are the merits and demerits of the system:
Merits:
(a) Controlled Supply:
Under this system the supply of currency note can be held under control. The control can be exercised by way of fiduciary limit.
(b) No Danger of Over Issue:
Under this system, as notes issued above a particular limit are to be 100% backed, so there is not a danger of over issue. Any note above fiduciary limit are issued only after keeping 100% metallic reserves.
Demerits:
2 Inelastic:
This system was adopted by England in 1844 but it was subsequently abandoned :r, 1913. The major reasons were that of inelasticity and failure to response towards.the changing economic needs. This means that if economy is rapidly developing then there he increasing demand for the currency and credit. At this moment if required volume of gold is not available than bank will not be able to issue notes. This will produce adverse effects on the economy.
Both the principles of note issue have merits and demerits. Based on these principles several systems and methods have been devised for the issuance of notes. These are as follows:
1. Fixed Fiduciary Issue:
This is widely recognised as an important method of note issue. Under tin's system a limit of volume of" currency has been fixed by central authority. This limit is called fiduciary limit. Any note issue in this fiduciary limit is to be backed by Government securities. However any note issued above this limit are to be 100% backed by gold. This system remained in force in many countries of the world at different times.
Following are the merits and demerits of the system:
Merits:
(a) Controlled Supply:
Under this system the supply of currency note can be held under control. The control can be exercised by way of fiduciary limit.
(b) No Danger of Over Issue:
Under this system, as notes issued above a particular limit are to be 100% backed, so there is not a danger of over issue. Any note above fiduciary limit are issued only after keeping 100% metallic reserves.
Demerits:
2 Inelastic:
This system was adopted by England in 1844 but it was subsequently abandoned :r, 1913. The major reasons were that of inelasticity and failure to response towards.the changing economic needs. This means that if economy is rapidly developing then there he increasing demand for the currency and credit. At this moment if required volume of gold is not available than bank will not be able to issue notes. This will produce adverse effects on the economy.
Banking Principle
BANKING PRINCIPLE
Banking principle lies on the other end. This principle says that note issuance be dealt independently by central bank and it shall be allowed to issue notes to the ongoing circumstances. Also there is no need of full backing of gold ±is principle. Only a percentage of issued note are backed by gold. However all are issued with the guarantee of convertibility into gold.
Elastic Supply:
e principle gives an elastic supply of currency. As there is no restriction of MCS backing of gold, so central bank can issue currency in response to change in •ranomic and monetary situation.
Economical:
This principle is economical in a sense that only a percentage of notes issued are Mated by gold. So the rest of the gold can be used for other purposes.
Usage of Gold Reserves:
This system allows the govt. or issuing authority to make effective and efficient of gold and metallic reserves. As only proportional of notes issued are to be backed So major part of countries' gold reserves can be used to fulfil other economic
rc
Public Confidence:
• i This system also enjoys a good degree of public confidence just like the currency
- - - . People have a good trust on the currency as it has been declared as legal tender i-: issuing authority.
Suitable for Modern Economy:
This principle is suitable for the needs of modern economy. It is flexible and tc and more responsive to change in economic clirhate.
Helpful in Emergency:
This principle is helpful in emergency. This means that in times of need such as wars, or natural disasters govt. can print notes without keeping 100% reserves.
Demerits:
1. Danger of Over Issue:
The danger of over issue always exists in this principle. As no 100% backing is required so there is a tendency towards issuance of notes which may lead to inflation that can be disastrous for the economy.
2. Lack of Convertibility:
As there is no hundred percent backing, so bank failure may occur in a very-unlikely situation if all notes are presented for converting into gold.'However, there is a
very rare chance that such situation appears.
Banking principle lies on the other end. This principle says that note issuance be dealt independently by central bank and it shall be allowed to issue notes to the ongoing circumstances. Also there is no need of full backing of gold ±is principle. Only a percentage of issued note are backed by gold. However all are issued with the guarantee of convertibility into gold.
Elastic Supply:
e principle gives an elastic supply of currency. As there is no restriction of MCS backing of gold, so central bank can issue currency in response to change in •ranomic and monetary situation.
Economical:
This principle is economical in a sense that only a percentage of notes issued are Mated by gold. So the rest of the gold can be used for other purposes.
Usage of Gold Reserves:
This system allows the govt. or issuing authority to make effective and efficient of gold and metallic reserves. As only proportional of notes issued are to be backed So major part of countries' gold reserves can be used to fulfil other economic
rc
Public Confidence:
• i This system also enjoys a good degree of public confidence just like the currency
- - - . People have a good trust on the currency as it has been declared as legal tender i-: issuing authority.
Suitable for Modern Economy:
This principle is suitable for the needs of modern economy. It is flexible and tc and more responsive to change in economic clirhate.
Helpful in Emergency:
This principle is helpful in emergency. This means that in times of need such as wars, or natural disasters govt. can print notes without keeping 100% reserves.
Demerits:
1. Danger of Over Issue:
The danger of over issue always exists in this principle. As no 100% backing is required so there is a tendency towards issuance of notes which may lead to inflation that can be disastrous for the economy.
2. Lack of Convertibility:
As there is no hundred percent backing, so bank failure may occur in a very-unlikely situation if all notes are presented for converting into gold.'However, there is a
very rare chance that such situation appears.
Principles and Methods of money Issue
Principles and Methods of Note Issue
At the time of Bank Chartered Act in England in 1844 there was a huge
controversy over the matter as to what is the most suitable method and principle of issuing notes. Some economists favour the currency principle and other advocate for banking principle. Both these principles are discussed below:
CURRENCY PRINCIPLE
Theory:
The currency principle is based on 100% gold backing. According to this principle Central Bank must keep 100% reserves against each and every note issued. So there will be full convertibility under such system.
Merits:
1. Full Safety:
This principle is 100% safe as there is 100% backing. So Central Bank is able to convert any number of notes into equivalent reserves of gold. So there will be full safety and there will be no danger or fear of bank runs and panics.
2. No over issue:
The system will restrict the central authority from over issuing notes. Hence there will be an effective control over inflation.
3. Stability:
The 100% backing gives an element of stability to this system. The value of the currency remains stable and it enjoys a greater degree of public confidence.
4. Confidence:
As already stated the currency issued under this principle enjoys a complete confidence of public.
Demerits;
Following are the demerits of this principle: 1. Inelastic:
This system is highly inelastic and rigid. As 100% backing is required so when
gold reserves are not available central bank cannot issue nc. though the this book.
No Use of Gold:
Further this system makes an inefficient use of gold. Tons of gold is stored in and no effective use is made of it.
ot Suitable for Modern Economy:
he currency principle is not suitable for modern economy. It can not be y used in today's complex economic situation which changes very rapidly.
At the time of Bank Chartered Act in England in 1844 there was a huge
controversy over the matter as to what is the most suitable method and principle of issuing notes. Some economists favour the currency principle and other advocate for banking principle. Both these principles are discussed below:
CURRENCY PRINCIPLE
Theory:
The currency principle is based on 100% gold backing. According to this principle Central Bank must keep 100% reserves against each and every note issued. So there will be full convertibility under such system.
Merits:
1. Full Safety:
This principle is 100% safe as there is 100% backing. So Central Bank is able to convert any number of notes into equivalent reserves of gold. So there will be full safety and there will be no danger or fear of bank runs and panics.
2. No over issue:
The system will restrict the central authority from over issuing notes. Hence there will be an effective control over inflation.
3. Stability:
The 100% backing gives an element of stability to this system. The value of the currency remains stable and it enjoys a greater degree of public confidence.
4. Confidence:
As already stated the currency issued under this principle enjoys a complete confidence of public.
Demerits;
Following are the demerits of this principle: 1. Inelastic:
This system is highly inelastic and rigid. As 100% backing is required so when
gold reserves are not available central bank cannot issue nc. though the this book.
No Use of Gold:
Further this system makes an inefficient use of gold. Tons of gold is stored in and no effective use is made of it.
ot Suitable for Modern Economy:
he currency principle is not suitable for modern economy. It can not be y used in today's complex economic situation which changes very rapidly.
Banking 2010
Besides these forms, money can be classified into several other less important us. These include the following:
i a) Black Money: Black money is one which has been gathered through illegal means. All the wealth obtained through prohibited ways such as gambling, smuggling, crime, robbery etc can be called black money. An important characteristic of the black money is that it is not reported in the calculation of GDP or NI. These are unreported activities and form part of underground economy.
(b) White Money: White money is one which has been earned through legal and legitimate means. The holding of such a money is justifiable .on social, moral, legal and equity basis. Such a money is not merely a wealth but it has satisfaction, content, happiness, associated with it.
Cheap Money: Cheap money is one whose cost of borrowing is less than the standard rate of interest. In times of recessions banks are willing to lend money at a lower rate of interest that generally prevails in the economy. Such a money is called cheap money.
Dear money: In times of boom there is a high demand for money. To control it banks iy increase the interest rate above normal level. The cost of borrowing the money
ir.cn increases. Such a money is called the dear money.
important Note:
Under advantages of metallic money it is written that it can't be hoarded or
xeited. This means that if the value of content of coin is greater than its face value, then
people will melt it into metal block to take advantage of its high intrinsic value. To
understand this suppose government issue coins of 1 rupee. Further suppose thai [hey are
made up of! gm silver. This means the coin that is made up of ! gm silver has face value I rupee but intrinsic (internal) value of 1 gm silver ( Suppo>c 1 gm silver is equal to 5 :s) this will induce people to collect such coins, melt them in ordinary metal blocks •II them for Rs. 5 each. It's result will be that very soon coins will disappear from the
nirket and there will be liquidity problem.
i a) Black Money: Black money is one which has been gathered through illegal means. All the wealth obtained through prohibited ways such as gambling, smuggling, crime, robbery etc can be called black money. An important characteristic of the black money is that it is not reported in the calculation of GDP or NI. These are unreported activities and form part of underground economy.
(b) White Money: White money is one which has been earned through legal and legitimate means. The holding of such a money is justifiable .on social, moral, legal and equity basis. Such a money is not merely a wealth but it has satisfaction, content, happiness, associated with it.
Cheap Money: Cheap money is one whose cost of borrowing is less than the standard rate of interest. In times of recessions banks are willing to lend money at a lower rate of interest that generally prevails in the economy. Such a money is called cheap money.
Dear money: In times of boom there is a high demand for money. To control it banks iy increase the interest rate above normal level. The cost of borrowing the money
ir.cn increases. Such a money is called the dear money.
important Note:
Under advantages of metallic money it is written that it can't be hoarded or
xeited. This means that if the value of content of coin is greater than its face value, then
people will melt it into metal block to take advantage of its high intrinsic value. To
understand this suppose government issue coins of 1 rupee. Further suppose thai [hey are
made up of! gm silver. This means the coin that is made up of ! gm silver has face value I rupee but intrinsic (internal) value of 1 gm silver ( Suppo>c 1 gm silver is equal to 5 :s) this will induce people to collect such coins, melt them in ordinary metal blocks •II them for Rs. 5 each. It's result will be that very soon coins will disappear from the
nirket and there will be liquidity problem.
Banking
This means that if you take this note to the bank asking for conversion the bar. compelled to give you 100 rupees in any denomination. The value of the paper content of 100 rupee note is extremely low (almost nil) yet it commands purchasing power worth of 100 rupees. This is because of the fact that it has been declared as legal tender by the government and is generally accepted as a medium of exchange.
Bank Money:
Bank money means near money, which is not always legal tender but it is wi. accepted as a medium of exchange. (The meanings and importance of near money has been described in next question). Here what needs to be stressed is that near money is an important type of money in the modern economy and much of the business of world takes place in near money. Bank money mostly consists of cheques, drafts and bills of exchanges. These are briefly described below:-
(a) Cheque:
A cheque is a written instruction on a specified piece of paper from a client to h;s bank, instructing the later to pay a certain sum of money. The cheque would be "self i.e.. money is withdrawn by the client himself or it could be in the name of any third part> There are three kinds of cheques, these include bearer cheques, crossed cheques and order cheques (these are described in credit instrument section.)
(b) Bill of Exchange:
Bill of exchange is a convenient way to pay for commercial transaction in credit. The seller instead of taking cash from the buyer draws a bill on him which the bu>e: accepts by signing it. This bill can be a sight bill or a time bill. In case of sight bill the payment is made on demand and in case of time bill the payment is due after a particular time period.
(c) Draft:
Draft is just like a cheque. However, the difference is that it is drawn by a bank on its own branch or on any other bank's branch. So we can say that drafts are the cheque which are used by banks. A draft when drawn on a bank, directs it to pay a certain sum of money to a person named on it.
These are the four types of money. Besides these the fifth type which is rapidly gaining both the importance and the usage in the modern sophisticated world is called plastic money.
Plastic Money:
Plastic money means the credit cards and plastic cards which have silicon chips and a specially printed set of characters. These cards are used for making payments at -rdinary shops and at EFTPOS (Electronic Funds Transfer at Point of Sale).
The plastic money, smart cards and credit cards are described in the last section of this book .
Bank Money:
Bank money means near money, which is not always legal tender but it is wi. accepted as a medium of exchange. (The meanings and importance of near money has been described in next question). Here what needs to be stressed is that near money is an important type of money in the modern economy and much of the business of world takes place in near money. Bank money mostly consists of cheques, drafts and bills of exchanges. These are briefly described below:-
(a) Cheque:
A cheque is a written instruction on a specified piece of paper from a client to h;s bank, instructing the later to pay a certain sum of money. The cheque would be "self i.e.. money is withdrawn by the client himself or it could be in the name of any third part> There are three kinds of cheques, these include bearer cheques, crossed cheques and order cheques (these are described in credit instrument section.)
(b) Bill of Exchange:
Bill of exchange is a convenient way to pay for commercial transaction in credit. The seller instead of taking cash from the buyer draws a bill on him which the bu>e: accepts by signing it. This bill can be a sight bill or a time bill. In case of sight bill the payment is made on demand and in case of time bill the payment is due after a particular time period.
(c) Draft:
Draft is just like a cheque. However, the difference is that it is drawn by a bank on its own branch or on any other bank's branch. So we can say that drafts are the cheque which are used by banks. A draft when drawn on a bank, directs it to pay a certain sum of money to a person named on it.
These are the four types of money. Besides these the fifth type which is rapidly gaining both the importance and the usage in the modern sophisticated world is called plastic money.
Plastic Money:
Plastic money means the credit cards and plastic cards which have silicon chips and a specially printed set of characters. These cards are used for making payments at -rdinary shops and at EFTPOS (Electronic Funds Transfer at Point of Sale).
The plastic money, smart cards and credit cards are described in the last section of this book .
Friday, November 6, 2009
DIFFERENCE AMONG LIFE INSURANCE, FIRE INSURANCE, AND MARINE INSURANCE
DIFFERENCE AMONG LIFE INSURANCE, FIRE INSURANCE, AND MARINE INSURANCE..
Basis of Difference
Life Insurance
Fire Insurance
Marine Insurance
Risk
The risk of death is certain. The time and place of death is not known. The amount of policy is paid to the assured if the policy natures during his life time or to his nominee in case of death.
The risk is not certain. It is not necessary that the goods insured will catch fire.
The risk is not certain There m or may not be marine losses
Purpose.
The object of life insurance is to provide financial protection to the family members and promotion of thrift. It is a good investment.
The purpose is to get claim if the insured property catches
fire.
The object is to get compensat on actual loss.
3.
Time period.
The life insurance policy is for a longer period say 10, 15, 20 years.
This policy is sold for short period say one year. It may be renewed at the close of a year.
The marine policy, is for a speci short of time which does exceed 12 months or it is for specified voyage..
Premium,
The premium is worked out on the age of the insured and the time of the policy.
The premium is determined on the type of rick involved. The greater the risk of fire, the higher is the rate of premium and vice versa.
The premium is decided on nature of the risk undertake
Basis of Difference
Life Insurance
Fire Insurance
Marine Insurance
Risk
The risk of death is certain. The time and place of death is not known. The amount of policy is paid to the assured if the policy natures during his life time or to his nominee in case of death.
The risk is not certain. It is not necessary that the goods insured will catch fire.
The risk is not certain There m or may not be marine losses
Purpose.
The object of life insurance is to provide financial protection to the family members and promotion of thrift. It is a good investment.
The purpose is to get claim if the insured property catches
fire.
The object is to get compensat on actual loss.
3.
Time period.
The life insurance policy is for a longer period say 10, 15, 20 years.
This policy is sold for short period say one year. It may be renewed at the close of a year.
The marine policy, is for a speci short of time which does exceed 12 months or it is for specified voyage..
Premium,
The premium is worked out on the age of the insured and the time of the policy.
The premium is determined on the type of rick involved. The greater the risk of fire, the higher is the rate of premium and vice versa.
The premium is decided on nature of the risk undertake
Thursday, November 5, 2009
Life Insurance
Insurance Corporation. The Pakistan Insurance Corporation •as established in 1953 with an authorized capital of Rs. ten million. Federal Government hold 51% of the capital and the remaining 40% is subscribed by the pubte including national insurance companies. The Pakistan Insurance Corporation (PIC) provides (1) reinsurance facilities within the country and overseas (2) it helps the development of national insurance industry by helping in the promotion of new companies and rendering technical advice to such companies (3) it also promotes regional co-operation in the field of insurance (4) it also administers the Export Guarantee Scheme on behalf to the Government.
Export Credit Guarantee Scheme, It is entirely owned by the FederalGovernment and is managed by the Pakistan Insurance Corporation. It providessecurities to the commercial banks to advance money to the exporters toindemnify for the loss sustained due to non-realization of sale proceeds onaccount of political and commercial risks.
Regional Co-operation. It is an R.C.D. collaboration in the field ofinsurance for the purpose of reducing foreign exchange outflow and proving thestandard of insurance and reinsurance in Pakistan.
National Insurance Corporation. National Insurance Corporation wasset up in 1973 with a working capital of Rs.5 million to preserve the public sectorresources and also the provide general insurance service at lower cost to thepublic and semi-public organization. The profit darned is to be reverted to theGovernment. The Corporation has achieved some progress in respect ofreduction in the cost of insurance, early settlement of claims and reduction ofoutflow of foreign exchange on account of reinsurance premium.
Export Credit Guarantee Scheme, It is entirely owned by the FederalGovernment and is managed by the Pakistan Insurance Corporation. It providessecurities to the commercial banks to advance money to the exporters toindemnify for the loss sustained due to non-realization of sale proceeds onaccount of political and commercial risks.
Regional Co-operation. It is an R.C.D. collaboration in the field ofinsurance for the purpose of reducing foreign exchange outflow and proving thestandard of insurance and reinsurance in Pakistan.
National Insurance Corporation. National Insurance Corporation wasset up in 1973 with a working capital of Rs.5 million to preserve the public sectorresources and also the provide general insurance service at lower cost to thepublic and semi-public organization. The profit darned is to be reverted to theGovernment. The Corporation has achieved some progress in respect ofreduction in the cost of insurance, early settlement of claims and reduction ofoutflow of foreign exchange on account of reinsurance premium.
Wednesday, November 4, 2009
Business use of Life Insurance
Business use of Life Insurance..
1. Effect on business. If the sole proprietor has insured himseff for a big amount and he dies before the attainment of specified age in the contract, the beneficiaries can operate the business on receiving the claim from the insurance company. The business in thus not closed.
2 Availability of credit. The sole proprietor can obtain loan for meeting the operating cost of-a business against the life insurance policy.
Staying power. If the beneficiary is not able to run the business on thepremature death of insured, he can at least stay in the business for a short periodand sell the business in the running condition which certainly fetches a betterprice.
Shock absorber. The death of a sole proprietor completely upsets thebusiness. The payment of claim by the insurance company acts as a shockabsorber and promotes financial security for operating the business.
Payment of debts. If the sole proprietor is insured, the creditors haveinsurable interest in him They can receive the amount of loan on the settlementof claim on the sudden death of the proprietor
6- Financial strength. The periodic payments by the policy holder accumulates large saving which provides financial strength to the sole proprietor
Partnership insurance. In a business partnership, if the partners haveobtained a joint life policy, the surviving partner is not financially affected. He canpurchase the interest of the deceased partner.
Benefit to stock holders. The stock holders in a close corporation may
also have a joint life policy and thus ensure the availability of funds for the business.
9. Insurance of key executive. The life insurance companies also providethe benefit of insuring the key executive of the firm. If the key executive diesbefore the specified age, the firm is compensated of the loss as caused in the
disruption of the company.
10. Group Life Insurance. The firm can provide an added benefit to its employees by giving them a group life insurance policy. In the group insurance, the maximum limit of payment on the death of an employee is fixed by the insurance company. The employees, thus, also benefit from the life insurance
companies.
1. Effect on business. If the sole proprietor has insured himseff for a big amount and he dies before the attainment of specified age in the contract, the beneficiaries can operate the business on receiving the claim from the insurance company. The business in thus not closed.
2 Availability of credit. The sole proprietor can obtain loan for meeting the operating cost of-a business against the life insurance policy.
Staying power. If the beneficiary is not able to run the business on thepremature death of insured, he can at least stay in the business for a short periodand sell the business in the running condition which certainly fetches a betterprice.
Shock absorber. The death of a sole proprietor completely upsets thebusiness. The payment of claim by the insurance company acts as a shockabsorber and promotes financial security for operating the business.
Payment of debts. If the sole proprietor is insured, the creditors haveinsurable interest in him They can receive the amount of loan on the settlementof claim on the sudden death of the proprietor
6- Financial strength. The periodic payments by the policy holder accumulates large saving which provides financial strength to the sole proprietor
Partnership insurance. In a business partnership, if the partners haveobtained a joint life policy, the surviving partner is not financially affected. He canpurchase the interest of the deceased partner.
Benefit to stock holders. The stock holders in a close corporation may
also have a joint life policy and thus ensure the availability of funds for the business.
9. Insurance of key executive. The life insurance companies also providethe benefit of insuring the key executive of the firm. If the key executive diesbefore the specified age, the firm is compensated of the loss as caused in the
disruption of the company.
10. Group Life Insurance. The firm can provide an added benefit to its employees by giving them a group life insurance policy. In the group insurance, the maximum limit of payment on the death of an employee is fixed by the insurance company. The employees, thus, also benefit from the life insurance
companies.
Tuesday, November 3, 2009
KINDS OF LIFE INSURANCE POLICIES
KINDS OF LIFE INSURANCE POLICIES...
The principal types of life insurance policies which are ordinarily issued are as under:
(1) Whole life Policy. The whole life policy runs for the whole term of thelife of the insured, The insured pays premium throughout his life time. It is paid tothe beneficiary when the insured dies. There are three types of whole life policies(a) Straight Life (b) Limited Payment Life and (c) Single Premium Life.
Straight Life. Straight life is the policy in which the premiums arepayable every year as long as the insured lives in this world.
Limited payment life. If the insured is to pay the premium for a statednumber of years, the insurance is called limited payment life.
Single premium life. Single premium life involves only one premiumpayment by the insured.
Endowment Life Policy. This policy runs for a particular period or uptoa specified age. The payment of the stated money becomes payable at the end ofthe period mentioned in the policy. In case the insured dies before the policymatures, the payment of stated sum of money in the policy, becomes payable tothe beneficiary. However, the premium have to be paid till the time of maturity.The advantage of this policy is that it combines saving for old age and also givesprotection to the insured family in the event of premature death.
Term Life Policy. Term policy as the name say maximum for ten yearsmaximum signifies is an insurance policy for a specified period of time saymaximum for ten years maximum. If the assured person dies before a certaindate or age, the insurance company will pay the face value of the policy to thebeneficiary. Term policy can be compared to a fire or marine policy which givesinsurance coverage within the time limit of the policy. If a provision is made in theterms of the policy, the term policy can also be converted into or whole -ftendowment policy.
The principal types of life insurance policies which are ordinarily issued are as under:
(1) Whole life Policy. The whole life policy runs for the whole term of thelife of the insured, The insured pays premium throughout his life time. It is paid tothe beneficiary when the insured dies. There are three types of whole life policies(a) Straight Life (b) Limited Payment Life and (c) Single Premium Life.
Straight Life. Straight life is the policy in which the premiums arepayable every year as long as the insured lives in this world.
Limited payment life. If the insured is to pay the premium for a statednumber of years, the insurance is called limited payment life.
Single premium life. Single premium life involves only one premiumpayment by the insured.
Endowment Life Policy. This policy runs for a particular period or uptoa specified age. The payment of the stated money becomes payable at the end ofthe period mentioned in the policy. In case the insured dies before the policymatures, the payment of stated sum of money in the policy, becomes payable tothe beneficiary. However, the premium have to be paid till the time of maturity.The advantage of this policy is that it combines saving for old age and also givesprotection to the insured family in the event of premature death.
Term Life Policy. Term policy as the name say maximum for ten yearsmaximum signifies is an insurance policy for a specified period of time saymaximum for ten years maximum. If the assured person dies before a certaindate or age, the insurance company will pay the face value of the policy to thebeneficiary. Term policy can be compared to a fire or marine policy which givesinsurance coverage within the time limit of the policy. If a provision is made in theterms of the policy, the term policy can also be converted into or whole -ftendowment policy.
Monday, November 2, 2009
. HOW TO GET LIFE INSURANCE POLICY
. HOW TO GET LIFE INSURANCE POLICY
The method of procuring life insurance policy is very simple. The mair involved in effecting the life insurance policy are as under:
1 Selection of the company. A person who wants to get his life -r. must select an insurance company which has a good credit standing.
Proposal. The person desirous of being insured has to fill in theProposal Form. He has to abide by the basic principles of insurance explain
the true facts. The concealment of facts will lead to the cancellation of contract
Medical Examination. The company on receipt of the Proposal Formwill get the proposer medically checked up. On receipt of the doctor's report, thecompany will consider the proposal,
Acceptance of the Proposal, On receipt of the Proposal Form and thesatisfactory medical report, the company will issue a Letter of Acceptancerequesting to complete the transaction at the earliest so that the protection andsecurity guaranteed by the policy is issued to him by the company.
Payment of Premium. The risk of life is covered from the date, thepremium is paid. The premium may be paid in easy instalments monthly,quarterly, half yearly, or annually.
6.' Issue of Policy. On receipt of the premium, the Executive Director of Insurance company issues the Life Insurance, Policy of the Insured which states, name, policy number, commencement date, maturity date, amount of premium, name of the nominee
The method of procuring life insurance policy is very simple. The mair involved in effecting the life insurance policy are as under:
1 Selection of the company. A person who wants to get his life -r. must select an insurance company which has a good credit standing.
Proposal. The person desirous of being insured has to fill in theProposal Form. He has to abide by the basic principles of insurance explain
the true facts. The concealment of facts will lead to the cancellation of contract
Medical Examination. The company on receipt of the Proposal Formwill get the proposer medically checked up. On receipt of the doctor's report, thecompany will consider the proposal,
Acceptance of the Proposal, On receipt of the Proposal Form and thesatisfactory medical report, the company will issue a Letter of Acceptancerequesting to complete the transaction at the earliest so that the protection andsecurity guaranteed by the policy is issued to him by the company.
Payment of Premium. The risk of life is covered from the date, thepremium is paid. The premium may be paid in easy instalments monthly,quarterly, half yearly, or annually.
6.' Issue of Policy. On receipt of the premium, the Executive Director of Insurance company issues the Life Insurance, Policy of the Insured which states, name, policy number, commencement date, maturity date, amount of premium, name of the nominee
Sunday, November 1, 2009
LIFE INSURANCE DISTINGUISHED FROM OTHER TYPES OF
LIFE INSURANCE DISTINGUISHED FROM OTHER TYPES OF
INSURANCES...
The main difference between life insurance and other type of insurances are as follows:
1. Not a contract of Indemnity: Life insurance is not a contract of indemnity. In case of fire or marine insurance, the insured is entitled to claim the actual loss caused to the insured property within the insured amount. In life insurance, the indemnity principle does not apply as no upper limit can be fixed of the life of the insured.
2 Full payment of insured amount: In case of life insurance, if the insured attains the age prescribed in the life insurance contract, he would be paid the stipulated amount by the company. In case of other types of insurances, the premiums are never paid back to the insured.
Future income: Life insurance is the only form of insurance designed tocover the loss of future income as a result of death of the insured. In case of fireor marine insurances, the actual loss of the property is covered which is no caseexceeds the insured sum.
Element of Investment: The life insurance undertakes to protect theinsured's family, creditors and others who have insurabfe interest on the death of
a person. It also provides an opportunity of investment by making a period! payment (premium) to the company. The life insurance company pays th insured amount on the happening of death of the insured or to his dependants, the insured attains the specified age in the contract, the premiums and thi compound rate of interest is paid back in lump sum to the insured. Lif insurance thus combines the elements of Investment and protection. Tru fire or, marine or all other type of insurances give protection only to the insured t restore him to his original financial position in event of loss.
5. Time Element: Life insurance policy is issued for longer period of timi depending upon the age, health, and profession of the insured. The other form of insurances are issued for a short period of time. The fire insurance is renewei annually. The marine insurance is for the particular voyage etc.
6 Surrender Value: In the life insurance policy, the insured can give u the policy as and when he desires. If the policy is surrendered after a period c three years, the insurer will pay a certain percentage of the total premium to thi insured. In case of fire or marine insurance, the insured cannot give up thi insurance policy as the premium has already ben received by the insurer.
7.- Assignment of policy: A fire insurance policy can be assigned to i third party by the insured giving a due notice to the insurance company. In case a life insurance, the policy cannot be assigned to a third party without the prio approval of the insurer
INSURANCES...
The main difference between life insurance and other type of insurances are as follows:
1. Not a contract of Indemnity: Life insurance is not a contract of indemnity. In case of fire or marine insurance, the insured is entitled to claim the actual loss caused to the insured property within the insured amount. In life insurance, the indemnity principle does not apply as no upper limit can be fixed of the life of the insured.
2 Full payment of insured amount: In case of life insurance, if the insured attains the age prescribed in the life insurance contract, he would be paid the stipulated amount by the company. In case of other types of insurances, the premiums are never paid back to the insured.
Future income: Life insurance is the only form of insurance designed tocover the loss of future income as a result of death of the insured. In case of fireor marine insurances, the actual loss of the property is covered which is no caseexceeds the insured sum.
Element of Investment: The life insurance undertakes to protect theinsured's family, creditors and others who have insurabfe interest on the death of
a person. It also provides an opportunity of investment by making a period! payment (premium) to the company. The life insurance company pays th insured amount on the happening of death of the insured or to his dependants, the insured attains the specified age in the contract, the premiums and thi compound rate of interest is paid back in lump sum to the insured. Lif insurance thus combines the elements of Investment and protection. Tru fire or, marine or all other type of insurances give protection only to the insured t restore him to his original financial position in event of loss.
5. Time Element: Life insurance policy is issued for longer period of timi depending upon the age, health, and profession of the insured. The other form of insurances are issued for a short period of time. The fire insurance is renewei annually. The marine insurance is for the particular voyage etc.
6 Surrender Value: In the life insurance policy, the insured can give u the policy as and when he desires. If the policy is surrendered after a period c three years, the insurer will pay a certain percentage of the total premium to thi insured. In case of fire or marine insurance, the insured cannot give up thi insurance policy as the premium has already ben received by the insurer.
7.- Assignment of policy: A fire insurance policy can be assigned to i third party by the insured giving a due notice to the insurance company. In case a life insurance, the policy cannot be assigned to a third party without the prio approval of the insurer
. ESSENTIALS OF LIFE INSURANCE CONTRACT
ESSENTIALS OF LIFE INSURANCE CONTRACT...
The important essentials of life insurance contract are as follows:
Insurable Interest. Insurable interest is a legal requirement in all type:of insurance contracts. A person who wants to get his life insured for a specifieFraud or misrepresentation. The person desirous of getting a liftpolicy should not conceal any fact about his age, profession, disease etc Bottthe parties involved in the contract should be honest in their dealings.
Notice of Proof of loss. In case of the death of the insured person, th*person/persons having insurable interest must give immediate notice of the deatrof the insured to the insurance company.
4 Death due to war or aviation accident. If the insured person dies w war or from a certain aviational accident, which are excluded perils in life insu^ei contract, the insurer will not pay the claim.
5. Principle of Indemnity. The life insurance and most health insurance contracts are not subject to the principle of indemnity.
The important essentials of life insurance contract are as follows:
Insurable Interest. Insurable interest is a legal requirement in all type:of insurance contracts. A person who wants to get his life insured for a specifie
Notice of Proof of loss. In case of the death of the insured person, th*person/persons having insurable interest must give immediate notice of the deatrof the insured to the insurance company.
4 Death due to war or aviation accident. If the insured person dies w war or from a certain aviational accident, which are excluded perils in life insu^ei contract, the insurer will not pay the claim.
5. Principle of Indemnity. The life insurance and most health insurance contracts are not subject to the principle of indemnity.
Saturday, October 31, 2009
7. PROGRESS OF LIFE INSURANCE IN PAKISTAN
PROGRESS OF LIFE INSURANCE IN PAKISTAN
Pakistan is a developing country. The progress of insurance is at a very slow speed due to (1) illiteracy of the people (2) extreme poverty (3) lack of insurance mindedness (4) frequent political disturbance (5) slow economic development (6) lack of trained insurance personnel and above all the higher rate of interest
offered by saving schemes:
1 State Life Insurance Corporation. State Life Insurance Corporationwas established on November 1. 1972 to manage the life insurance business rPakistan. The life insurance business was nationalized on March '" The
paid up capital of the Corporation was raised to Rs 30 million in 1974.
Pakistan is a developing country. The progress of insurance is at a very slow speed due to (1) illiteracy of the people (2) extreme poverty (3) lack of insurance mindedness (4) frequent political disturbance (5) slow economic development (6) lack of trained insurance personnel and above all the higher rate of interest
offered by saving schemes:
1 State Life Insurance Corporation. State Life Insurance Corporationwas established on November 1. 1972 to manage the life insurance business rPakistan. The life insurance business was nationalized on March '" The
paid up capital of the Corporation was raised to Rs 30 million in 1974.
Life Insurance
Life Insurance is different from fire, marine and other kinds of insurances In all other forms of insurances except life, the insurance company undertakes to indemnify the loss caused by hazards mentioned in the policy to the policyholder The risks involved in fire, marine and accident insurance policies are uncertain The house may or may not catch fire.
So if the insured suffers no loss from fire etc. during the period of insurance policy, no payment will be made to the insured In case of life insurance, the contingency insured against is death Death is universal and certain. The uncertainty is about the place and time of occurrence. Life Insurance is primarily designed to cover the death and offers financial protection to the dependants in case of the death of the insured.
The insurer or assured takes out a policy for a specified number of years. If he survives to the end of the period, he receives the amount paid as premium along with any bonus his policy has earned. In case he dies within the period insured, full amount of the policy will be paid to the nominee of the deceased (insured)
Definition of life insurance
Life insurance is defined as a contract whereby the insurer in consideration of a premium paid in lump sum or in periodic instalments undertakes to pay a specified sum either on the death of the insured or on the expiry of specified number of years in the policy."
So if the insured suffers no loss from fire etc. during the period of insurance policy, no payment will be made to the insured In case of life insurance, the contingency insured against is death Death is universal and certain. The uncertainty is about the place and time of occurrence. Life Insurance is primarily designed to cover the death and offers financial protection to the dependants in case of the death of the insured.
The insurer or assured takes out a policy for a specified number of years. If he survives to the end of the period, he receives the amount paid as premium along with any bonus his policy has earned. In case he dies within the period insured, full amount of the policy will be paid to the nominee of the deceased (insured)
Definition of life insurance
Life insurance is defined as a contract whereby the insurer in consideration of a premium paid in lump sum or in periodic instalments undertakes to pay a specified sum either on the death of the insured or on the expiry of specified number of years in the policy."
Thursday, October 29, 2009
Accounts
that Accounting starts where Book-Keeping ends. The function of Book-Keeping ends with the recording 4 transactions in the books of account. But the function of Accounting is to classify the recorded transaction summarise them, interpret them and collect and communicate necessary information to the management afl other interested persons. Management performs its function on the basis of this information, e.g. lay» down rules and regulations, taking so many vital decisions etc. Thus we may say that the function of Bool Keeping is primarily of clerical nature, while that of Accounting is concerned with organisational ad administrative matters (it is more important and responsible.
Apparently, the functions of Book-Keeping seem to be less important than Accounting, bi. : necessity can hardly be denied. Just an article cannot be produced without raw material, similvf accounting function cannot be done without obtaining necessary data from Book Keeping. Again, if i: any defect in raw material the article produced out of it will also be defective. Similarly, if there be m error or mistake in Book-Keeping, the accounting job will also be wrong and create anomalous situauoa Thus we can conclude that 'Book-Keepers perform the routine, repetitive tasks of collecting and proi financial information. Accountants are responsible for designing the systems within which Book-Keepol work; supervising the day-to-day work of book-keepers; recording unusual and complex trama, preparing, analysing and interpreting accounting reports; auditing the records; and performing a'van other complex accounting activities.
ACCOUNTING VERSUS ACCOUNTANCY
The two words "Accounting" and "Accountancy" are often used to mean the same thing. But it 1 not correct. Accountancy is the main subject(Accounting is one of its branches. The word "Accountan. far extensive; i.e. the scope of accountancy is far wide and extensive compared to Accounting. It covers m entire body of theory and practice, e.g. Book-keeping, Accounting, costing, auditing, Taxation etc.
BRANCHES OF ACCOUNTING
In order to meet the ever increasing demands made on accounting by different interested paroJ (such as owners, management, creditors, taxation authorities etc.) the various branches of accounting km come into existence:
1. FINANCIAL ACCOUNTING:
The main purpose of financial accounting is to ascertain the true result (profit or loss) o: :~t business operations during a particular period of time and to state the financial position of the business orJ particular point of time. Financial accounting produces general purpose reports for use by the great vanJ of people who are interested in the organisation but who are not actively engaged in its day-tcnM operation.
2. COST ACCOUNTING:
The main object of cost accounting is to determine the cost of goods manufactured or prod i the business. It also helps the management of the business in controlling the costs by indicating avoidM losses and wastes.
3. MANAGERIAL ACCOUNTING:
The object of this accounting is to communicate the relevant information periodically management of the business to enable it to take suitable decisions,
It should be remembered that in this book, we are concerned only with financial account** Financial accounting is the oldest and the other branches have developed from it. The objects of fmancfl iccounting can only be achieved by recording business transactions in a systematic manner according tol set of principles.
Apparently, the functions of Book-Keeping seem to be less important than Accounting, bi. : necessity can hardly be denied. Just an article cannot be produced without raw material, similvf accounting function cannot be done without obtaining necessary data from Book Keeping. Again, if i: any defect in raw material the article produced out of it will also be defective. Similarly, if there be m error or mistake in Book-Keeping, the accounting job will also be wrong and create anomalous situauoa Thus we can conclude that 'Book-Keepers perform the routine, repetitive tasks of collecting and proi financial information. Accountants are responsible for designing the systems within which Book-Keepol work; supervising the day-to-day work of book-keepers; recording unusual and complex trama, preparing, analysing and interpreting accounting reports; auditing the records; and performing a'van other complex accounting activities.
ACCOUNTING VERSUS ACCOUNTANCY
The two words "Accounting" and "Accountancy" are often used to mean the same thing. But it 1 not correct. Accountancy is the main subject(Accounting is one of its branches. The word "Accountan. far extensive; i.e. the scope of accountancy is far wide and extensive compared to Accounting. It covers m entire body of theory and practice, e.g. Book-keeping, Accounting, costing, auditing, Taxation etc.
BRANCHES OF ACCOUNTING
In order to meet the ever increasing demands made on accounting by different interested paroJ (such as owners, management, creditors, taxation authorities etc.) the various branches of accounting km come into existence:
1. FINANCIAL ACCOUNTING:
The main purpose of financial accounting is to ascertain the true result (profit or loss) o: :~t business operations during a particular period of time and to state the financial position of the business orJ particular point of time. Financial accounting produces general purpose reports for use by the great vanJ of people who are interested in the organisation but who are not actively engaged in its day-tcnM operation.
2. COST ACCOUNTING:
The main object of cost accounting is to determine the cost of goods manufactured or prod i the business. It also helps the management of the business in controlling the costs by indicating avoidM losses and wastes.
3. MANAGERIAL ACCOUNTING:
The object of this accounting is to communicate the relevant information periodically management of the business to enable it to take suitable decisions,
It should be remembered that in this book, we are concerned only with financial account** Financial accounting is the oldest and the other branches have developed from it. The objects of fmancfl iccounting can only be achieved by recording business transactions in a systematic manner according tol set of principles.
Wednesday, October 28, 2009
Accounting Details
ACCOUNTING
It is all the more necessary for an organisation or a concern to keep proper accounts. At the end of the year the true result of the economic activities of a concern must be made available otherwise it will nod be possible to run the concern. In case of a business concern the profit or loss at the end of a year must be ascertained, because, the amount of profit must be adequate in relation to that of investment made in the business. If it is not so or if there is a loss, it is an indication of some defects existing somewhere in the management of the business. All such defects need to be detected and analysed and appropriate measured taken for their, rectification. But it is only possible, if proper books of accounts are maintained in the business concern. So, the importance of book-keeping to a business is the same as that of fresh air to • man to exist. Without book-keeping records a business would meet death, though not instantly, but in < short time.
Moreover, if proper books of accounts are not kept in a business, the amount of profit cannot be ascertained and it will not be possible to distribute the profit among the owners of the business. The income tax dues to the Government cannot also be paid. In the absence of books of accounts misuse or defalcatio* of money will remain undetected. The owner and other parties interested will not be able to have any information about the condition of the business. For the same reason in the case of non-trading concern* like, schools, clubs, colleges, universities, hospitals etc. the need for accounting is universally recognised.
Thus we see that the necessity of keeping accounts is not only confined to business concerns but tj is also useful for all classes and grades of people and organisations.
ACCOUNTING: A BUSINESS LANGUAGE
Accounting is a language, a system that communicates information. It is often referred to as thej language of the business, although it is just as important in the operation of government agencies, clubsj colleges and other kinds of organisations.
You probably have some idea already of what the term accounting means. It is frequently used u every day conversation to mean "answering for responsibility," Managers of business concerns an answerable to owners, creditors, labour unions and Government agencies etc. Managers of governmeM units are answerable to chief executives, boards, taxpayers and others. In fact, accounting was developed b] people, who were seeking better ways to gather and report useful information about organisations.
Some type of orderly system is needed to account for an organisation of any size and complexitjJ An accounting system is used to collect, process and report needed data about a business, government uniu or other type of association. Information1 is usually collected, processed and reported in financial temj which simply means that 'money' is the basis of measurement.
Many authors have defined the term "Accounting" in different ways. There is difference of opimo^ among the authors as to its precise definition as the term 'accounting is so broad that it is difficult to gi\e precise definition. However, several possible definitions are given below:
"The act of collecting, processing, reporting, analyzing, interpreting and projecting financuinformation".
he system of providing quantified information about an organisation to people who need siinformation."
The process of identifying, measuring, and communicating economic information to perrinformed judgments and decisions by users of the information."
Of all the definitions available the most accepted is the one given by the American Institute Certified Public Accountants Committee on Terminology According to it.
"Accounting is the art of recording, classifying and summarising in a significant manner and it terms of money, transactions and events, which are, in part at least, of a financial character, and interpret the result thereof. An analysis of the definition will enable us to have a thorough idea of the functions accounting. The salient features of the definition are Read more....
It is all the more necessary for an organisation or a concern to keep proper accounts. At the end of the year the true result of the economic activities of a concern must be made available otherwise it will nod be possible to run the concern. In case of a business concern the profit or loss at the end of a year must be ascertained, because, the amount of profit must be adequate in relation to that of investment made in the business. If it is not so or if there is a loss, it is an indication of some defects existing somewhere in the management of the business. All such defects need to be detected and analysed and appropriate measured taken for their, rectification. But it is only possible, if proper books of accounts are maintained in the business concern. So, the importance of book-keeping to a business is the same as that of fresh air to • man to exist. Without book-keeping records a business would meet death, though not instantly, but in < short time.
Moreover, if proper books of accounts are not kept in a business, the amount of profit cannot be ascertained and it will not be possible to distribute the profit among the owners of the business. The income tax dues to the Government cannot also be paid. In the absence of books of accounts misuse or defalcatio* of money will remain undetected. The owner and other parties interested will not be able to have any information about the condition of the business. For the same reason in the case of non-trading concern* like, schools, clubs, colleges, universities, hospitals etc. the need for accounting is universally recognised.
Thus we see that the necessity of keeping accounts is not only confined to business concerns but tj is also useful for all classes and grades of people and organisations.
ACCOUNTING: A BUSINESS LANGUAGE
Accounting is a language, a system that communicates information. It is often referred to as thej language of the business, although it is just as important in the operation of government agencies, clubsj colleges and other kinds of organisations.
You probably have some idea already of what the term accounting means. It is frequently used u every day conversation to mean "answering for responsibility," Managers of business concerns an answerable to owners, creditors, labour unions and Government agencies etc. Managers of governmeM units are answerable to chief executives, boards, taxpayers and others. In fact, accounting was developed b] people, who were seeking better ways to gather and report useful information about organisations.
Some type of orderly system is needed to account for an organisation of any size and complexitjJ An accounting system is used to collect, process and report needed data about a business, government uniu or other type of association. Information1 is usually collected, processed and reported in financial temj which simply means that 'money' is the basis of measurement.
Many authors have defined the term "Accounting" in different ways. There is difference of opimo^ among the authors as to its precise definition as the term 'accounting is so broad that it is difficult to gi\e precise definition. However, several possible definitions are given below:
"The act of collecting, processing, reporting, analyzing, interpreting and projecting financuinformation".
he system of providing quantified information about an organisation to people who need siinformation."
The process of identifying, measuring, and communicating economic information to perrinformed judgments and decisions by users of the information."
Of all the definitions available the most accepted is the one given by the American Institute Certified Public Accountants Committee on Terminology According to it.
"Accounting is the art of recording, classifying and summarising in a significant manner and it terms of money, transactions and events, which are, in part at least, of a financial character, and interpret the result thereof. An analysis of the definition will enable us to have a thorough idea of the functions accounting. The salient features of the definition are Read more....
Tuesday, October 27, 2009
DEPRECIATION AND PROVISION & RESERVE
Various Definitions ot Depreciation Causes of Depreciation Need for Provision of Depreciation Depreciation Vs. Fluctuation Characteristics of Depreciation Methods of Charging Depreciation Distinction between Fixed Instalment Mtibd and Reducing Instalment Method . Methods of Depreciation Accounting Distinction between Depreciation A/C and Depreciation Reserve A/C Distinction between General Reserve o. Distinction between Reserve ami Prmi* Distinction between Reserve.
Accounting Conventions
Accounting Conventions:
The term 'conventions' includes those customs or traditions which guide the accountant while ommunicating the accounting information. The following are the important accounting conventions:
(i) Convention of conservatism (ii) Convention of full disclosure
(Hi) Convention of consistency (iv) Convention of materiality.
ACCOUNTING CONCEPTS
Separate Entity Concept:
Accounts are kept for entities, as distinguished from the persons who are associated with these ties. In recording events in accounting, the important question is: "How do these events affect the iy?" How they affect the persons who own, operate, or otherwise are associated with the entity is relevant. For example, when a person invests Rs. 200,000 into business it will be deemed that the owner has given that money to the business which will be shown as a 'liability' in the books of the business. In ok the owner withdraws Rs, 30,000 from the business, it will change the position and the net amount :jtyable by the business to the owner will be shown only as Rs. 170,000.
The concept of separate entity is applicable to all forms of business organizations. For example, in of a sole proprietorship or partnership business, though the, sole proprietor or partners are not as separate entities in the eyes of law, but for accounting purposes they will be considered as •qptrate entities.
Going Concern Concept:
According to this concept it is assumed that an entity is a going concern — that it will continue to aerate for an indefinite time period there is no intention to liquidate the particular business venture in the fcreseeable future. On account of this concept, the accountant while valuing the asset does not take into jcxHint the sale value of assets. Moreover, he charges depreciation on fixed assets on the basis of their
life rather than on their market values.
For example, suppose that a company has just purchased a three-year insurance policy for ^.-15000. If we assume that the business will continue in operation for three years or more. We will outsider the Rs.45000 cost of insurance as an asset which provides services to the business over a three-jar period. On the other hand, if we assume that the business is likely to terminate in the near future, the •surance poricy should be reported at its cancellation value i.e. the amount refundable upon cancellation.
Moreover, the concept applies to the business as a whole. When an enterprise liquidates a branch segment of its operations, the ability of the enterprise to continue as a going-concern is not impaired jaBnnally. The' enterprise wilVnot be considered as a going-concern when it has gone into liquidation.
Money Measurement Concept:
In financial accounting, a record is made only of those information that can be expressed in »:neiary terms. In other words, no accounting is possible for an event or transaction which is not j Measurable in terms of money, e.g. passing an examination, delivering lecture in a meeting, winning a prize sl These are events no doubt, but since these are not measurable in terms of money, there is no question of accounting.
Measurement of business events in money helps in understanding the state of affairs of business in ;h better way. For example. If a business owns, 1 500 kg of stock, one car, 1 500 square feet of building etc. these amounts cannot be added to produce a meaningful total of what the business owns. :ver, if a these items are expressed in monetary terms such as stock Rs.24000, car Rs. 300,000 and ig Rs. 500,000, all such items can be added in better way and precise estimate about the assets of ss will be available.
The term 'conventions' includes those customs or traditions which guide the accountant while ommunicating the accounting information. The following are the important accounting conventions:
(i) Convention of conservatism (ii) Convention of full disclosure
(Hi) Convention of consistency (iv) Convention of materiality.
ACCOUNTING CONCEPTS
Separate Entity Concept:
Accounts are kept for entities, as distinguished from the persons who are associated with these ties. In recording events in accounting, the important question is: "How do these events affect the iy?" How they affect the persons who own, operate, or otherwise are associated with the entity is relevant. For example, when a person invests Rs. 200,000 into business it will be deemed that the owner has given that money to the business which will be shown as a 'liability' in the books of the business. In ok the owner withdraws Rs, 30,000 from the business, it will change the position and the net amount :jtyable by the business to the owner will be shown only as Rs. 170,000.
The concept of separate entity is applicable to all forms of business organizations. For example, in of a sole proprietorship or partnership business, though the, sole proprietor or partners are not as separate entities in the eyes of law, but for accounting purposes they will be considered as •qptrate entities.
Going Concern Concept:
According to this concept it is assumed that an entity is a going concern — that it will continue to aerate for an indefinite time period there is no intention to liquidate the particular business venture in the fcreseeable future. On account of this concept, the accountant while valuing the asset does not take into jcxHint the sale value of assets. Moreover, he charges depreciation on fixed assets on the basis of their
life rather than on their market values.
For example, suppose that a company has just purchased a three-year insurance policy for ^.-15000. If we assume that the business will continue in operation for three years or more. We will outsider the Rs.45000 cost of insurance as an asset which provides services to the business over a three-jar period. On the other hand, if we assume that the business is likely to terminate in the near future, the •surance poricy should be reported at its cancellation value i.e. the amount refundable upon cancellation.
Moreover, the concept applies to the business as a whole. When an enterprise liquidates a branch segment of its operations, the ability of the enterprise to continue as a going-concern is not impaired jaBnnally. The' enterprise wilVnot be considered as a going-concern when it has gone into liquidation.
Money Measurement Concept:
In financial accounting, a record is made only of those information that can be expressed in »:neiary terms. In other words, no accounting is possible for an event or transaction which is not j Measurable in terms of money, e.g. passing an examination, delivering lecture in a meeting, winning a prize sl These are events no doubt, but since these are not measurable in terms of money, there is no question of accounting.
Measurement of business events in money helps in understanding the state of affairs of business in ;h better way. For example. If a business owns, 1 500 kg of stock, one car, 1 500 square feet of building etc. these amounts cannot be added to produce a meaningful total of what the business owns. :ver, if a these items are expressed in monetary terms such as stock Rs.24000, car Rs. 300,000 and ig Rs. 500,000, all such items can be added in better way and precise estimate about the assets of ss will be available.
Problem with Solution and accounting concepts
For example, we sold goods to a customer for Rs. 1000 and he paid cash to us Rs. 1000 revenue will be equal to inflow of cash Rs. 1000. But if the customer has paid only Rs. 500 a remaining amounts he agreed to pay at some future date, again in that case the revenue will be eqi Rs. 1000 (inflow of cash Rs. 500 + Rs. 500 receivable).
TYPES OF REVENUE:
1. Sales: The_total price of goods sold
2. Interest earned
3. Fees earned
4. Rent earned
5. Commission earned
22. EXPENSES:
Expenses are the costs of the goods and services used up in the process of obtaining revenue.
Or Expenses are the cost of producing revenue in a particular accounting period.
Or
An expense is a sacrifice, or cost incurred to generate revenue.
For example, salaries for employees, telephone charges, rent of the building, insurance transportation etc. AH these costs are necessary to attract and serve the customers and thereby to ob^ revenue. Expenses are sometimes also referred to as the "cost of doing business" or "expired costs".
23. NET INCOME OR NET PROFIT:
Net income or net profit is simply the amount by which the "revenue" for a particular period time exceed the "expenses" incurred to generate them.
Net income or net profit = Revenue- Expenses:
ACCOUNTING PRINCIPLES
It has already been stated in this chapter that Accounting is the language of business threw which economic information is communicated to all the parties concerned. In order to make this langu easily understandable all over the world, it is necessary to frame or make certain uniform standards wri are acceptable universally. These standards are termed as "Accounting Principles".
Accounting principles may be defined as those rules of action or conduct which are adopted by accounts universally while recording accounting transactions. They are a body of doctrines commc associated with the theory and procedures of accounting. They are serving as an explanation of cun practices and as a guide for selection of conventions or procedures where alterhatives exist. Tl principles can be classified into two groups. .
(i) Accounting concepts (ii) Accounting conventions.
Accounting Concepts:
Going concern concept Cost concept
Accounting period concept Realisation concept.
The term 'concepts' includes those basic assumptions or conditions on which the scienc accounting is based. The following are the important accounting concepts:
(i) Separate Entity Concept (ii)
(iii) Money measurement concept (iv)
(v) Dual Aspect concept (vi)
(vii> Matching concept
TYPES OF REVENUE:
1. Sales: The_total price of goods sold
2. Interest earned
3. Fees earned
4. Rent earned
5. Commission earned
22. EXPENSES:
Expenses are the costs of the goods and services used up in the process of obtaining revenue.
Or Expenses are the cost of producing revenue in a particular accounting period.
Or
An expense is a sacrifice, or cost incurred to generate revenue.
For example, salaries for employees, telephone charges, rent of the building, insurance transportation etc. AH these costs are necessary to attract and serve the customers and thereby to ob^ revenue. Expenses are sometimes also referred to as the "cost of doing business" or "expired costs".
23. NET INCOME OR NET PROFIT:
Net income or net profit is simply the amount by which the "revenue" for a particular period time exceed the "expenses" incurred to generate them.
Net income or net profit = Revenue- Expenses:
ACCOUNTING PRINCIPLES
It has already been stated in this chapter that Accounting is the language of business threw which economic information is communicated to all the parties concerned. In order to make this langu easily understandable all over the world, it is necessary to frame or make certain uniform standards wri are acceptable universally. These standards are termed as "Accounting Principles".
Accounting principles may be defined as those rules of action or conduct which are adopted by accounts universally while recording accounting transactions. They are a body of doctrines commc associated with the theory and procedures of accounting. They are serving as an explanation of cun practices and as a guide for selection of conventions or procedures where alterhatives exist. Tl principles can be classified into two groups. .
(i) Accounting concepts (ii) Accounting conventions.
Accounting Concepts:
Going concern concept Cost concept
Accounting period concept Realisation concept.
The term 'concepts' includes those basic assumptions or conditions on which the scienc accounting is based. The following are the important accounting concepts:
(i) Separate Entity Concept (ii)
(iii) Money measurement concept (iv)
(v) Dual Aspect concept (vi)
(vii> Matching concept
Accounts Details 2010
DEBTORS OR ACCOUNTS RECEIVABLE:
When goods are sold to the customers on credit basis (credit sales are made to customers), debtors come into existence. Debtors are the persons or customers to whom goods have been sold on credit basis and from whom the business is to receive money in near future. The accounts of such customers are known as "Accounts Receivable". For example, we sold goods to A for Rs. 3000, to B for Rs. 2000 and to C for Rs. 4000 on credit basis. The amount receivable from them (A, B and C) is known as "Debts" and the three customers, A, B and C are our debtors or accounts receivable.
15. CREDITORS OR ACCOUNTS PAYABLE:
When goods are purchased from the suppliers (sellers) on credit basis, creditors come into existence. Creditors are the persons or suppliers from whom goods have been purchased on credit basis and to whom me money is to be paid in near future. The accounts of such persons (suppliers) are known as accounts payable". Accounts payable means, the amount which a business expects to pay to its suppliers for goods purchased or services received from them on credit basis.
The person or business who will receive the money - Creditor. The person or business who will pay the money -- Debtor.
16. CASH DISCOUNT:
It is a deduction or allowance given by a creditor to a debtor if the amount due is paid by the debtor before the due date, or it is a reduction in price (usually 2% or less) offered by manufacturers or wholesalers (creditors) to encourage customers (debtors) to pay their debts within a specified discounted period. For example, X sold goods to Y (a customer) for Rs. 1000 on credit basis. It means, X is creditor and Y is debtor. X offers an allowance of 2% to Y, if he will pay his debts within 15 days. It means, if Y pays his debts within 15 days, then he will pay only Rs. 980 (1000 - 20) to X. Such a discount is known as "Cash Discount".
17. CAPITAL OR OWNER'S EQUITY:
To understand, this term, recall that business is an entity (organisation) separate from its owner or owners. Equities mean tne sources eft \un6s provibeu to start or to operate a "business entity ~S; . question is: who provides funds to a business unit. Mainly there are two sources of funds:
(a) Funds supplied by the owner/owners.
(b) Funds supplied by the external parties like bank etc.
So, the amount of cash or goods invested (supplied) by the owner/owners in a unit is known as "capital" or owner's equity.
Or
Capital is the money or moneys worth borrowed by a business unit from its owver afl
owners.
Or
It is the claim or right of the owner/owners against the assets (properties etc. business) of the business.
Or It is the source of funds provided by the owner/owners of the business.
Or It is a part of the total equity which is supplied by the owner/owners.
When goods are sold to the customers on credit basis (credit sales are made to customers), debtors come into existence. Debtors are the persons or customers to whom goods have been sold on credit basis and from whom the business is to receive money in near future. The accounts of such customers are known as "Accounts Receivable". For example, we sold goods to A for Rs. 3000, to B for Rs. 2000 and to C for Rs. 4000 on credit basis. The amount receivable from them (A, B and C) is known as "Debts" and the three customers, A, B and C are our debtors or accounts receivable.
15. CREDITORS OR ACCOUNTS PAYABLE:
When goods are purchased from the suppliers (sellers) on credit basis, creditors come into existence. Creditors are the persons or suppliers from whom goods have been purchased on credit basis and to whom me money is to be paid in near future. The accounts of such persons (suppliers) are known as accounts payable". Accounts payable means, the amount which a business expects to pay to its suppliers for goods purchased or services received from them on credit basis.
The person or business who will receive the money - Creditor. The person or business who will pay the money -- Debtor.
16. CASH DISCOUNT:
It is a deduction or allowance given by a creditor to a debtor if the amount due is paid by the debtor before the due date, or it is a reduction in price (usually 2% or less) offered by manufacturers or wholesalers (creditors) to encourage customers (debtors) to pay their debts within a specified discounted period. For example, X sold goods to Y (a customer) for Rs. 1000 on credit basis. It means, X is creditor and Y is debtor. X offers an allowance of 2% to Y, if he will pay his debts within 15 days. It means, if Y pays his debts within 15 days, then he will pay only Rs. 980 (1000 - 20) to X. Such a discount is known as "Cash Discount".
17. CAPITAL OR OWNER'S EQUITY:
To understand, this term, recall that business is an entity (organisation) separate from its owner or owners. Equities mean tne sources eft \un6s provibeu to start or to operate a "business entity ~S; . question is: who provides funds to a business unit. Mainly there are two sources of funds:
(a) Funds supplied by the owner/owners.
(b) Funds supplied by the external parties like bank etc.
So, the amount of cash or goods invested (supplied) by the owner/owners in a unit is known as "capital" or owner's equity.
Or
Capital is the money or moneys worth borrowed by a business unit from its owver afl
owners.
Or
It is the claim or right of the owner/owners against the assets (properties etc. business) of the business.
Or It is the source of funds provided by the owner/owners of the business.
Or It is a part of the total equity which is supplied by the owner/owners.
Problem with Solution
For example, Mr. X started a business with Rs. 100000. Out of Rs. 100000, Rs. 70000 have been provided by the owner, X and Rs. 30,000 have been borrowed from a bank. Now, the equity (total funds) of the business is Rs. 100000 but owner's equity (capital) of the business is Rs, 70,000.
18. ASSETS:
Assets are the economic resources (having certain value) owned by a business on a particular date and which are expected to benefit the future operation of the business.
Or
Assets are the properties and possessions of a business both tangible (have physical existence) and intangible (have no physical existence).
Or
Assets are the things having certain value possessed by a business and receivable by a business on i particular date. For example, cash, furniture, building, land, machinery, stock of goods. Debtors or Accounts receivable, Bank balance, Goodwill etc.
19. LIABILITIES:
Liabilities are the debts or obligations of a business.
Or
The outsider's (creditors etc.) claims against the assets of the business are known as "Liabilities". There are two main parties who have claims, against the assets of a business; (a) Owner's claim; (b) Outsiders' claims. The owner's claim against the assets of a business is known as owner's equity and outsider's claims against the assets of the business are known as "liabilities."
Or
Liabilities mean the total amount which a business is legally bound to pay to the outsiders, e.g. ^editors, Bills payable, Accounts payable, Bank loan etc.
20. ACCOUNTING PERIOD:
It is a span of time for which a business generally prepares its financial statements (the statement prepared to know the profit or loss of a business and to Icnow its financial position). Mostly the financial reports are prepared for one year but they may also be prepared for one month or for one quarter.
21. REVENUE:
All business organisations are engaged in providing goods or services to their customers. The «nount which a business charges its customers for these goods or services, measures the revenue of the business.
• Or
It is the price of goods sold or services provided by a business to its customers.
Or
Revenue is the inflow of assets (cash or debtors) in return for services performed or goods delivered (sold) during an accounting period.
Chit is inflow of cash and debtors (receivable) in exchange for goods sold or services rendered during • accounting period.
18. ASSETS:
Assets are the economic resources (having certain value) owned by a business on a particular date and which are expected to benefit the future operation of the business.
Or
Assets are the properties and possessions of a business both tangible (have physical existence) and intangible (have no physical existence).
Or
Assets are the things having certain value possessed by a business and receivable by a business on i particular date. For example, cash, furniture, building, land, machinery, stock of goods. Debtors or Accounts receivable, Bank balance, Goodwill etc.
19. LIABILITIES:
Liabilities are the debts or obligations of a business.
Or
The outsider's (creditors etc.) claims against the assets of the business are known as "Liabilities". There are two main parties who have claims, against the assets of a business; (a) Owner's claim; (b) Outsiders' claims. The owner's claim against the assets of a business is known as owner's equity and outsider's claims against the assets of the business are known as "liabilities."
Or
Liabilities mean the total amount which a business is legally bound to pay to the outsiders, e.g. ^editors, Bills payable, Accounts payable, Bank loan etc.
20. ACCOUNTING PERIOD:
It is a span of time for which a business generally prepares its financial statements (the statement prepared to know the profit or loss of a business and to Icnow its financial position). Mostly the financial reports are prepared for one year but they may also be prepared for one month or for one quarter.
21. REVENUE:
All business organisations are engaged in providing goods or services to their customers. The «nount which a business charges its customers for these goods or services, measures the revenue of the business.
• Or
It is the price of goods sold or services provided by a business to its customers.
Or
Revenue is the inflow of assets (cash or debtors) in return for services performed or goods delivered (sold) during an accounting period.
Chit is inflow of cash and debtors (receivable) in exchange for goods sold or services rendered during • accounting period.
Definations 2010
Purchase Return
is known as "Purchases returns" or "Returns lo suppliers". For example, we purchased 100 radio sets (goods) from Lahore Electronics for Rs. 15000. On receiving the delivery of goods, it is found that 10 radio sets are of inferior quality. The return of these 10 radio sets to the seller (Lahore Electronics) will be a case of purchases returns.
7. PURCHASES DISCOUNT AND SALES DISCOUNT:
The Concession given by the supplier to the buyer on purchases of goods is known as "Purchases discount" to the buyer and "Sales discount" to the seller (supplier).
8. ALLOWANCES:
Sometimes, the customers (buyers) find that goods purchased have minor defects. In that case, the seller may agree to reduce the price of damaged or defective goods to induce the buyer to keep the goods. Such reduction in price is known as "Purchases allowance" to the buyer and "Sales allowance" to the seller.
9. SALES:
We know that goods are purchased for selling purposes. When these goods are sold to customers at a specific price, it is said that sales have been made. For example, we purchased goods worth Rs. 5000 (our purchases). Suppose, these goods have been sold at a price of Rs. 6000 — in accounting language it will be said that sales have been made at Rs. 6000. So goods sold are called "Sales".
10. CASH SALES:
If goods are sold to customers at a specific price and price of the goods is received from them at the time of sale of goods, such sales are known as "Cash sales". For example, we sold goods to a customer, Mr. A for Rs. 2000 on 10th January, 2005 and received the cash from him on the same date, it will be a case of cash sales.
11.
CREDIT SALES:
If goods are sold to a customer and he does not pay the price of goods at the same time but agrees to make payment on some future date, the sales are called "credit sales" or "Sales on account," For example, we sold goods to Mr. X for Rs. 3000 on 15th January, 2005 and he agreed to make payment on 31st January, 2005, it will be a case of credit sales or sales on account.
12. SALES RETURNS OR RETURNS INWARDS:
If a customer to whom goods have been sold finds that the goods are defective, unsatisfactory, below standard or not according to specification, he may return these goods to the seller. To the seller, such return of goods is known as "Sales returns" or "Returns Inwards" or "Returns from customers.
13. TRADE DISCOUNT:At the time of selling goods, the manufacturer or wholesaler allows retailers such a discount (concession). It is allowed at a certain percentage of the listed or catalogue price. For example, the list price of the goods is Rs. 30000, and the wholesaler allows a trade discount of 10% on the listed price to the retailer. It means the net price of the goods is 27000 (30000-3000). The trade discount enables the retailer to sell goods at the listed price; and the customer can be sure about the fair price of the goods. It may be noted that both the buyer and seller will record Rs. 27000 (not Rs. 30,000) in their books of account. In other words trade discount is not recorded in books of account. Thus, discount allowed by manufacturer or wholesaler at the time of selling goods to retailer as a deduction from the listed price or catalogue price, is called Trade Discount
is known as "Purchases returns" or "Returns lo suppliers". For example, we purchased 100 radio sets (goods) from Lahore Electronics for Rs. 15000. On receiving the delivery of goods, it is found that 10 radio sets are of inferior quality. The return of these 10 radio sets to the seller (Lahore Electronics) will be a case of purchases returns.
7. PURCHASES DISCOUNT AND SALES DISCOUNT:
The Concession given by the supplier to the buyer on purchases of goods is known as "Purchases discount" to the buyer and "Sales discount" to the seller (supplier).
8. ALLOWANCES:
Sometimes, the customers (buyers) find that goods purchased have minor defects. In that case, the seller may agree to reduce the price of damaged or defective goods to induce the buyer to keep the goods. Such reduction in price is known as "Purchases allowance" to the buyer and "Sales allowance" to the seller.
9. SALES:
We know that goods are purchased for selling purposes. When these goods are sold to customers at a specific price, it is said that sales have been made. For example, we purchased goods worth Rs. 5000 (our purchases). Suppose, these goods have been sold at a price of Rs. 6000 — in accounting language it will be said that sales have been made at Rs. 6000. So goods sold are called "Sales".
10. CASH SALES:
If goods are sold to customers at a specific price and price of the goods is received from them at the time of sale of goods, such sales are known as "Cash sales". For example, we sold goods to a customer, Mr. A for Rs. 2000 on 10th January, 2005 and received the cash from him on the same date, it will be a case of cash sales.
11.
CREDIT SALES:
If goods are sold to a customer and he does not pay the price of goods at the same time but agrees to make payment on some future date, the sales are called "credit sales" or "Sales on account," For example, we sold goods to Mr. X for Rs. 3000 on 15th January, 2005 and he agreed to make payment on 31st January, 2005, it will be a case of credit sales or sales on account.
12. SALES RETURNS OR RETURNS INWARDS:
If a customer to whom goods have been sold finds that the goods are defective, unsatisfactory, below standard or not according to specification, he may return these goods to the seller. To the seller, such return of goods is known as "Sales returns" or "Returns Inwards" or "Returns from customers.
13. TRADE DISCOUNT:At the time of selling goods, the manufacturer or wholesaler allows retailers such a discount (concession). It is allowed at a certain percentage of the listed or catalogue price. For example, the list price of the goods is Rs. 30000, and the wholesaler allows a trade discount of 10% on the listed price to the retailer. It means the net price of the goods is 27000 (30000-3000). The trade discount enables the retailer to sell goods at the listed price; and the customer can be sure about the fair price of the goods. It may be noted that both the buyer and seller will record Rs. 27000 (not Rs. 30,000) in their books of account. In other words trade discount is not recorded in books of account. Thus, discount allowed by manufacturer or wholesaler at the time of selling goods to retailer as a deduction from the listed price or catalogue price, is called Trade Discount
IMPORTANCE OF ACCOUNTING 2009
IMPORTANCE OF ACCOUNTING:
We live in a world where people need things from the day they are born to the day that they die.
imk of these 'needs' are physical needs, a need for goods of various sorts, food, clothing, shelter, and so Some of them are emotional 'wants', a need for education, entertainment, or recreation. In satisfying needs businessmen perform useful services to their fellow humans. In return they expect to earn noble reward for their efforts in the form of profits.
Cutyour coat according to your cloth".-- so goes the saying. Even a king becomes a pauper, if"
h feb to exercise economy in his expenditures. In other words, every individual will have to plan his according to his income. Obviously the question arises -- why is this planning necessary? The
of such planning arises as our wants or desires or needs for goods and services are unlimited, while cans, i.e. the income with which to buy such goods and services are limited. Where, however, goods services are available free of cost, i.e. gifts of nature, such as ajr, water (not in cities) etc., there is no of economy. But the necessity of economy is undeniable, where goods or services are not available fat of cost and their supply is limited. A proper and fair planning of expenditures helps us to ensure proper use of our income. Of course, s rue that the quantity of goods or money cannot be increased by making a proper planning. But crainh we can ensure most economic use of goods or money at our disposal.
Most of us do maintain some kind of a written record of our income and expenditure. The idea tetrad maintaining such record is to know the correct position regarding income and expenditure. The need r keeping a record of income and expenditure in a clear and systematic manner has given rise to the - jcct of 'book-keeping1. Some individuals do not recognise the necessity of keeping accounts of their day-to-day •peaditures, since they spend their own income and are not required to account for it to anybody else. But not an idea is wrong. A family, however, small it may be, must exercise proper control over its ipcnditures so as to ensure future security. A family has two-fold responsibilities - one is that of ensuring id welfare of the family and the other is the social responsibility. Needless to say, money is the most sentiat pre-request for ensuring peace and happiness of a family, which each and every member desires.The quantum of money must be adequate in relation to the needs. But mere adequacy of money will not do; cae has to take care of its proper utilization. For this it would be necessary to exercise economy and certain proper books of account. On the other hand each and every family must save a portion of its income for future contingencies. It is possible to increase the amount of saving through proper management nid effective control of the family expenses. Through such saving the family helps materialising theeconomic planning of the country.its totally
We live in a world where people need things from the day they are born to the day that they die.
imk of these 'needs' are physical needs, a need for goods of various sorts, food, clothing, shelter, and so Some of them are emotional 'wants', a need for education, entertainment, or recreation. In satisfying needs businessmen perform useful services to their fellow humans. In return they expect to earn noble reward for their efforts in the form of profits.
Cutyour coat according to your cloth".-- so goes the saying. Even a king becomes a pauper, if"
h feb to exercise economy in his expenditures. In other words, every individual will have to plan his according to his income. Obviously the question arises -- why is this planning necessary? The
of such planning arises as our wants or desires or needs for goods and services are unlimited, while cans, i.e. the income with which to buy such goods and services are limited. Where, however, goods services are available free of cost, i.e. gifts of nature, such as ajr, water (not in cities) etc., there is no of economy. But the necessity of economy is undeniable, where goods or services are not available fat of cost and their supply is limited. A proper and fair planning of expenditures helps us to ensure proper use of our income. Of course, s rue that the quantity of goods or money cannot be increased by making a proper planning. But crainh we can ensure most economic use of goods or money at our disposal.
Most of us do maintain some kind of a written record of our income and expenditure. The idea tetrad maintaining such record is to know the correct position regarding income and expenditure. The need r keeping a record of income and expenditure in a clear and systematic manner has given rise to the - jcct of 'book-keeping1. Some individuals do not recognise the necessity of keeping accounts of their day-to-day •peaditures, since they spend their own income and are not required to account for it to anybody else. But not an idea is wrong. A family, however, small it may be, must exercise proper control over its ipcnditures so as to ensure future security. A family has two-fold responsibilities - one is that of ensuring id welfare of the family and the other is the social responsibility. Needless to say, money is the most sentiat pre-request for ensuring peace and happiness of a family, which each and every member desires.The quantum of money must be adequate in relation to the needs. But mere adequacy of money will not do; cae has to take care of its proper utilization. For this it would be necessary to exercise economy and certain proper books of account. On the other hand each and every family must save a portion of its income for future contingencies. It is possible to increase the amount of saving through proper management nid effective control of the family expenses. Through such saving the family helps materialising theeconomic planning of the country.its totally
Monday, October 26, 2009
Accounting Definations
Partnership:
In a partnership, ownership is divided between two or more persons who agree to share t? property and skills to start and operate a business. Like the single proprietorship, a partnership busines simple to organise.
(c) Joint Stock Company:
A joint stock company is formed under the Companies Ordinance, 1984 and has the legal righ: act as a person. It may be owned by many people. A company has its own name, in which it can bu>. and sell property; make contracts; borrow money; and take court action. The persons who have m investment in the company are known as shareholders.
2. GOODS OR MERCHANDISE
In accounting the word "Goods" has a special meaning. It refers to something which has bi purchased by a trader for resale purposes or anything which has been manufactured for selling purpo* For example, if a trader purchases furniture for use in the business, it will not be regarded as "goods", bu it is purchased for resale, it will be regarded as "goods". The same article may be "goods" for one trader may not be so to another trader. For example, furniture is not "goods" for a book seller; but it will regarded as "goods" to a furniture -dealer.
Thus, cloth will be "goods" to a cloth dealer
Watches will be "goods" to a Watch dealer
Books will be "goods" to a Book - Seller
Stationery will be "goods" to a Stationery dealer. But watches, books or stationery will not be considered as "goods" to a cloth dealer.
3. PURCHASES:
In accounting language the word "Purchases" has a special meaning. When saleable gt ioil-bought in a business, it is said that "purchases" have been made. For example, to a cloth dealer, when cloth is purchased, it will not be necessary to mention that cloth has been purchased ( simply it will be s that purchases have been made. On the other hand, if stationery is purchased, then it will be essential mention that stationery has been purchased.
4. CASH PURCHASES:
If goods are purchased from a supplier and payment is made to him at the same time, purchases are known as "Cash Purchases". For example, Mr. X purchased goods from a seller, Mr. Y. Rs. 5000 on 1st January, 2005, and payment is made to the seller (Mr. Y) at the same date (1.1.2005), it i be a case of cash purchases.
5. CREDIT PURCHASES OR "PURCHASES ON ACCOUNT:
When goods are purchased from a seller and payment is not made to him at the same time, rat the payment is arranged to be made at some future date, such purchases are known as "credit purchases' "Purchases on account". For example, Mr. A purchased goods from Mr. B for Rs. 5000 on 1st Jam 2005 and Mr. A agreed to make the payment of goods on 15th January, 2005 (payment has not been on i.1.2005), it will be a case of credit purchases. On 15th January Mr. A will pay Rs. 5000 to Mr. B.
6. PURCHASES RETURNS OR RETURNS OUTWARDS:
Goods once purchased may subsequently be sent back to the seller for certain reasons, i.e. gc are defective, not according to specification, damaged or below standard. Such return of goods to the set
In a partnership, ownership is divided between two or more persons who agree to share t? property and skills to start and operate a business. Like the single proprietorship, a partnership busines simple to organise.
(c) Joint Stock Company:
A joint stock company is formed under the Companies Ordinance, 1984 and has the legal righ: act as a person. It may be owned by many people. A company has its own name, in which it can bu>. and sell property; make contracts; borrow money; and take court action. The persons who have m investment in the company are known as shareholders.
2. GOODS OR MERCHANDISE
In accounting the word "Goods" has a special meaning. It refers to something which has bi purchased by a trader for resale purposes or anything which has been manufactured for selling purpo* For example, if a trader purchases furniture for use in the business, it will not be regarded as "goods", bu it is purchased for resale, it will be regarded as "goods". The same article may be "goods" for one trader may not be so to another trader. For example, furniture is not "goods" for a book seller; but it will regarded as "goods" to a furniture -dealer.
Thus, cloth will be "goods" to a cloth dealer
Watches will be "goods" to a Watch dealer
Books will be "goods" to a Book - Seller
Stationery will be "goods" to a Stationery dealer. But watches, books or stationery will not be considered as "goods" to a cloth dealer.
3. PURCHASES:
In accounting language the word "Purchases" has a special meaning. When saleable gt ioil-bought in a business, it is said that "purchases" have been made. For example, to a cloth dealer, when cloth is purchased, it will not be necessary to mention that cloth has been purchased ( simply it will be s that purchases have been made. On the other hand, if stationery is purchased, then it will be essential mention that stationery has been purchased.
4. CASH PURCHASES:
If goods are purchased from a supplier and payment is made to him at the same time, purchases are known as "Cash Purchases". For example, Mr. X purchased goods from a seller, Mr. Y. Rs. 5000 on 1st January, 2005, and payment is made to the seller (Mr. Y) at the same date (1.1.2005), it i be a case of cash purchases.
5. CREDIT PURCHASES OR "PURCHASES ON ACCOUNT:
When goods are purchased from a seller and payment is not made to him at the same time, rat the payment is arranged to be made at some future date, such purchases are known as "credit purchases' "Purchases on account". For example, Mr. A purchased goods from Mr. B for Rs. 5000 on 1st Jam 2005 and Mr. A agreed to make the payment of goods on 15th January, 2005 (payment has not been on i.1.2005), it will be a case of credit purchases. On 15th January Mr. A will pay Rs. 5000 to Mr. B.
6. PURCHASES RETURNS OR RETURNS OUTWARDS:
Goods once purchased may subsequently be sent back to the seller for certain reasons, i.e. gc are defective, not according to specification, damaged or below standard. Such return of goods to the set
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