introduction to business notes b.com part1

Introduction to Business

Written by; Ahmed Raza (MBA, ACMA) providing quality education of ACCOUNTING, B.LAW, AUDITING, MBF, ITB

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Important questions

Introduction to business

B.com part 1st

What are the features of a business?

1. What are the components /divisions / branches of business?(

2006,2008,2009,2010,2011)

2. What are the qualities of good businessman? (2007)

3. What is the importance of business? (2006-2007-2008-2009)

4. Explain the different forms of business (2010)

5. Explain the advantages and disadvantages of sole trader ship (2006-07-08-09 sup

2009)

6. Explain the advantages and disadvantages of partnership (SUP-2008)

7. What is co-ownership? Explain the difference between partnership and co-owner ship

(2010)

8. Explain the difference between partnership and sole trader ship

9. What are the kinds of partner?

10. Explain the right duties and liabilities of partner in a firm (2009- sup 2007)

11. Define the dissolution of firm and also explain the circumstances under which a form

may be dissolved (2006-08-10, sup 2010)

12. Describe the advantages and disadvantages of joint stock company

13. What are the types of joint stock company (2006-08-09, sup 2007)

14. Differentiate between partnership and public company (2007, sup 2006-08)

15. differentiate between private company and public company (2006-08-09, sup 2007)

16. What is the procedure of formation of joint stock company (2006-08-09, sup 2006-

07)

17. What are the three legal documents of company [2006-07-10, sup 2010-11

18. Explain the types of meeting and also state the purpose of such meeting [ sup 2008]

19. What are the advantages and disadvantages of co-operative societies [2009, sup 2006-

07]

20. Explain various kinds of cooperative society. [2006-08]

21. Difference between joint stock company and cooperative society [2007]

22. Define share capital. What are the various forms of share capital [2010]

23. What is business combination? Explain the causes of its growth [2006-08-09-11]

24. What is business combination also explain its various types [2007-10-11, sup2006-09]

25. Define marketing also explain the functions of marketing [2007-10]

26. Define advertising. what are the various types of advertising [2009-10]

27. What is insurance. explain the different types of insurance also describe its merits and

demerits [2007, sup2007]



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Define business? What are the characteristics / Features of a

business?

A business should have the following characteristics

1. Deals in goods and services

2. Economic activities

3. Profit motive

4. Regular transactions

5. Element of competition

6. Size

7. Management

8. Innovation

9. Capital

10. Social process

11. Business is a system

12. Art as well as science

13. Registration of business

14. Transfer of title

15. Element of risk

16. Reliability

1. Deals in goods and services

Business always deals in goods and services. Goods include consumer ( ) goods and

industrial goods. Such as cloth, shoes, sugar, raw material etc. services include insurance

companies, teachers, lawyers, doctors etc.

2. Economic activities

Economic activities mean exchange of goods and services for the purpose of earning money.

Purpose of every business is to perform some economic activities. If a business is not

performing economic activities it cannot be called business.

3. Profit motive

Business must be formed to earn profit. If an organization is formed to serve the nation and

its primary motive is not to earn profit it cannot be called business

4. Regular transactions

Note

To remember headings

easily, focus on the first letter

of every heading it is forming

a specific name and in this

question it is

DEPRES MICS BARTER



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There must be regularity ( ) in transactions of business. Only one or fewer

transactions cannot be called business. For example if a student sold his books to his friend or

at book shop it cannot be called business because of irregularity

5. Element of competition

Competition exists in every kind of business. There should be a healthy competition between

the businesses for good quality at reasonable prices.

6. Size of business

Business may be started at different levels it can be of small or large size (national and

international level). There is no restriction ( ) on the size of business.

7. Management

Management is a backbone ( ) of every business, without management business

cannot achieve its objectives or aims. So manager can control affairs of business to achieve

its objectives

8. Innovation

Business can be successful only when it introduces new and innovative product. Innovative

and new products increase consumer satisfaction.

9. Capital

Capital means the investment made by the owner in the business. Business cannot be started

without the help of capital. More the capital is more the larger scale of business is. Owner can

provide capital from his personal sources or he can borrow it from his friends, family or

Banks.

10. Social process

Business is a social process, because owner runs business with the help of persons of society

such as customers, employees and professionals.

11. Business is a system

System means a proper plan to achieve the objectives of business. To run the business

successfully, businessman should perform activities according to well established plan.

12. Art as well as science

Business is an art because experience and skills are required to run business. It is a science

because it is also based on laws and principles.

13. Registration of business

Registration of business depends upon the size and nature of business.



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In sole proprietorship registration is not required

In partnership registration is optional.

In case of Joint Stock Company it is compulsory.

14. Transfer of title (ownership)

Transfer of title means that the change of ownership from one hand to another. In business

goods are purchased with intention to sale them. When goods are sold, ownership transfers

form seller to buyer.

15. Element of risk

Risk means the possibility of loss. The business may suffer losses due to change in customer

taste and fashion.

16. Reliability

The goods and services produced by the business should be reliable, so that business can

achieve goodwill.



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Q#1 what are the components/ divisions/ branches of business?

Or

Explain the scope of business

Or

Explain the industry, commerce and trade

Components of business

Business includes the following components

Industry

Commerce

Industry

Industry is a part of business in which goods & services are produced. Industries convert raw

material into finished and semi finished goods. Industry has two types.

1) Primary industry

2) Secondary industry

1) Primary industry

Primary industry is engaged in the production and extraction ( ) of natural

sources from earth which are used in the secondary industry. Primary industry can be divided

into two parts.

i. Extractive industry

ii. Genetic industry

i. Extractive industry

Extractive industries are those which raise or produce natural sources from below the surface

of earth. Such as fishery, extraction of oil, gas and coal.

ii. Genetic industries

Genetic industries are those that are engaged in reproducing and multiplying the certain

species of animals and plants. Such as poultry farm, fishing farm, nursery.

2) Secondary industry

These industries use finished goods of primary industries as raw material. Secondary

industries manufacture the products that can be used by the consumer. Secondary industry

has three types.



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a. Constructive industry

b. Manufacturing industry

c. Services industry

a. Constructive industry

These industries are engaged in the construction of dams, bridges and roads

b. Manufacturing industry

These industries convert raw material into finished or semi finished goods. Such as textile

mills, sugar mills, flour mills.

c. Services industry

These industries are engaged in providing the services of professionals according to their

expertise. Such as lawyer, doctors, teachers, accountants.

Commerce

Commerce includes all those activities that facilitate transferring goods from place of

production to final customer.

Components of commerce

1. Trade

2. Aids to trade

1. Trade

Trade is the process of transferring goods from industries and persons to their final

customers. In other words trade is the process of buying and selling.

Trade has two types:

i. Home trade

ii. Foreign trade

i. Home trade

The purchase and sale of goods inside the country is called home trade. Home trade can be of

two types.

a. Whole sale trade

Selling of goods at large scale to the shopkeepers is called wholesale trade. Shopkeepers

resale those products to customers.

b. Retail trade

Selling of goods at small scale to customers is called retail trade

ii. Foreign trade



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The purchase and sale of goods between two or more countries is called foreign trade. It is

also called international trade. Foreign trade has three types.

a. Import trade

When goods or services are purchased from other countries it is called import trade.

b. Export trade

When goods or services are sold to other country it is called export trade.

c. Enter port trade

When goods are imported from one country with a view to export them in other country.

2. Aids to trade

Aids to trade include all those activities that support trade. Following are the common aids to

trade.

1. Advertisement

It is an easy way to inform large number of customers about the availability of product.

Advertisement can be made through, news papers, radio T.V

2. Agents

Agents are those persons who buy or sale goods for their principal.

3. Banking

Bank facilitates the buyer and seller for the settlement of payments both in home trade and

foreign trade. They also grant loans to businessmen.

4. Insurance

Insurance companies help trader in transferring goods from one place to another safely.

5. Transportations / Logistics

Means of transportation transfer the goods from factory to customer. Examples of

transportation are: railway, by road, by air, by sea,

6. Warehousing

Warehousing the process of storing goods that are produced by the manufacturers



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Q#2 what are the qualities of good businessman?

A good businessman should have the following qualities to run business successfully

17. Professional qualities

18. Personal qualities

Professional qualities

1. Market information

2. Innovative

3. Technical skills

4. Ability to plan

5. Coordination

6. Motivating power

7. Analysis power

8. Financial soundness

9. Ability to take decisions

10. Time management

1. Market information

A business man should have the complete information about likings, disliking, taste and

fashion of his customer. A good businessman always keeps an eye on the trends and demand

of market.

2. Innovative

A good businessman should have the quality to manufacture new products according to the

taste and demand of customer. If a businessman ignores ( ) the taste and trend (

) of customer he may suffer great lose.

3. Technical skills

A businessman can run business successfully only, when he have adequate ( )

technical skills and command over specialized knowledge.

4. Ability to plan

Plan is a set of predetermined actions. Businessman should have the ability to plan the

activities of business. More the plans are strong, more the business is profitable

Note

To remember headings easily,

focus on the first letter of every

heading it is forming a specific

name and in this question, it is

MIT, ACMA, FAT



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5. Coordination

A businessman should have the cooperation with his employees and customers. Coordination

helps businessman to make business more profitable and successful.

6. Motivating power

A good businessman should have the ability to inspire his customers and employees. If

employees are motivated they will work with more devotion ( )

7. Analysis

A businessman should have the quality to analyze the performance of business, so that he can

improve the management of business.

8. Financial soundness

Finance or cash is an important factor in the success of business. A business should have

enough cash to meet the day to day requirements.

9. Ability to take decisions

A businessman should have the ability to take quick and wise decisions. If he fails to decide

or he has low decision making power he may lose growth opportunities.

10. Time management

Time management is an art of scheduling and arranging business activities. Time

management is not only important in business life it is also important in social life.

Personal qualities

Following are the personal qualities of a businessman.

1. Honesty

2. Attitude

3. Patients

4. Intelligent

5. Hardworking

6. Ability to forecast

7. Personality

8. Initiative

1. Honesty

A businessman should be honest with his employees and customers. If a business shows

dishonesty to his customers and employees, than he may lose the goodwill of business.

Note

To remember headings easily, focus on the first letter of every

heading it is forming a specific name and in this question, it is

HAPI, HAPI



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2. Attitude

The attitude of businessman should be ethical. Ethical attitude means that there should not be

cheating and fraud. Cheating and fraud in business affairs results in loss of customer.

Incomes earned by cheating and fraud are illegal.

3. Patients

Patients mean controlling temper at the time of anger of problem. A businessman should

show patients in daily affairs of business. If he loses his temper he suffer lose.

4. Intelligent

Intelligent means taking right decision at the right time. An intelligent businessman can

handle his affairs at the right time in the right way.

5. Hardworking

Another quality of good businessman is that he should be hardworking. A lazy man cannot

run his business successfully.

6. Ability to forecast

A good businessman should have the ability to anticipate the future circumstances to take

correct action. For example if he is forecasting increase in demand then he may increase

level of production.

7. Personality

Personality of businessman should be cheerful & smiling face. A cheerful greeting may help

him to attract customers.

8. Initiative

Initiative means the ability to start and complete the work. A business man should have the

ability to initiate.



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Q#3

Explain the importance of business

Business

Any legal activity undertaken to earn profit is called profit.

Importance of business

Business is playing a vital role in the economic development of company. Business is

organized and run by the entrepreneurs to earn profit. They make the best use of available

resources and provide goods and services to the people. Importance of business can be jugged

form the following points.

1. Variety of products and services

Businesses are producing variety of products. Customer may choose those products that are

suitable to his taste and choice and purchasing power.

2. Better living standard

Business improves the living standard of the people by providing quality products at low

rates.

3. Source of employment

Business provides employment to large number of people. It is not possible for the

government to provide jobs to whole population, business helps government in solving the

problem of unemployment.

4. Investment opportunities

Business provides investment opportunities to the general public. People can invest their idle

savings in any profitable business to earn profit on it.

5. Innovation



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Business introduces new and innovative products that may best suit their life style. Research

and development process of business helps consumers by providing innovative products

6. Mobility of labour

The labour can move from one place to another place in search of work better pay and

promotion. Mobility of labor is possible with the help of business.

7. International relationship

Imports and exports of goods bring two countries closer by creating strong relationship with

each other. Due to close relationship countries may share ideas and new techniques of

production with each other

8. Use of resources

It makes possible to sue idle resources of country with the help of business. In the absence of

business the natural goods like crude oil, gas, coal, and iron etc. remain idle.

9. Creation of customers

The business of today is creating markets for its markets all over the world by introducing

new products and new methods of products

10. Change in consumer mind

Business is going to change the mind of customer with the passage of time. The products

which are used now are quite different from those of thirty years back

11. Increase in national income

Business is providing revenues in form of taxes to the government that is used on the welfare

of the society.

12. Indicates rate of development

Production level indicates the rate of economic development. More the production is made in

an economy more the developed country would be. Business plays vital role in the economic

development.



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Q#4

Explain the different forms / types of business

1. Sole proprietorship

Sole tradership is the oldest from of business organization which is managed owned and

controlled by a single person. This form of business can be easily formed without any legal

formality. One man invests his capital in the business. He alone is responsible for the profit

and loss of business. He manages business by using his skills. Sole proprietor has unlimited

liability which means that personal property of the owner can be sold for the payment of

debts.

2. Partnership

When two or more person carries on business for the purpose of earning profit is called

partnership. Such types of business can be formed easily without any legal formality. Each

partner invests his money in business. Profit and losses of the business are distributed

between the partners. Partners are responsible for the management of business. They use their

skills to run business. Liability of partners in partnership is unlimited which means that their

personal property can be sold for the payment of debts.

3. Joint stock company

A joint stock company is voluntary association of different persons created by law. A

company is formed under company’s ordinance 1984.company issue shares for the

accumulation of capital. General public and other financial institutions invest in company.

Company has many kinds but most popular form of company is public limited. Liability of

members is limited to the value of their share in company. Joint Stock Company is managed

by the skilled and experienced directors.

4. Cooperative society

A cooperative society is a voluntary association of individuals for the common interest of its

members. It is form in various sectors like trading, commerce, industrial and technical. Its



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capital is generally divided into numbers of share shares of equal value. In such form of

organization all the members have the equal right of ownership and management

It is formed under cooperative society’s act 1925. It can be formed with limited and unlimited

liability.

5. Business combination

When two or more business units combine to carry on business together for the economic

benefit, combination take place. if object of business is against public interest it would be

considered unlawful. Combination can be temporary and permanent.

6. Joint Hindu family business

When a business is run by the persons of same family and they run the business as family

business, it is called joint Hindu family business. Such business is run only in India. Joint

Hindu family business is governed under Hindu law.

7. Public corporation

Public corporation is formed under the act of parliament. The acts define the powers, objects

and limits of corporation. Pakistan air lines and state life insurance are the examples of public

corporation



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Q#5

Define sole proprietorship. What are the merits and demerits of

sole proprietorship?

Or

What are the advantages and disadvantages of one man business?

Or

One man control is best, explain. (Only advantages)

Sole proprietorship

A business which is carried on under the ownership of one person is called sole

proprietorship

Advantage/ Merits of sole proprietorship

1. Easy formation

Formation of business is easy. Any legal business can be started without any legal formality

2. No legal Formality

There is no legal formality is required in sole proprietorship. Because registration and other

legal documents are not required to start the sole proprietorship

3. Entire profit

Sole proprietor manages all the activities of business himself and he is the sole owner of

business, so he enjoys entire or whole profit of the business.

4. Low cost

In sole proprietor are the sole owner, manager and controller of business. He look after all the

matters of business himself, in this way he can save the cost of management.

5. Tax saving

Sole owner can get the advantage of tax saving because tax is only paid on the personal

income of owner.

6. Less chances of fraud



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Another advantage of sole proprietorship is that there are the less chances of fraud because

owner performs all the activities himself

7. Easy transfer of ownership

Sole owner can sale his business to other person without any legal formality.

8. Easy dissolution

Dissolution means when the activities of business come to an end. Sole owner can easily

dissolve his business at any time.

9. Quick decision

One man control is best to take quick decision because there is no need to consult any other

person.

10. Direct relation with customers

Sole owner has the direct relation with customers. In this way he can understand the needs,

wants and demand of customer which may help him for the growth of business.

11. Direct relation with employees

Sole owner has direct relation with his employees. In this way he can understand the

problems of his employees. He may help them in completing their task.

12. Credit facility

Sole trader has unlimited liability. It means that his personal assets can be sold for the

payment of debts. Due to unlimited liability lenders do not hesitate in granting loans.

13. Control on monopoly

Sole proprietorship businesses are in large numbers and they cannot create monopoly. There

is competition among them which helps in controlling price level.

Disadvantage/ Demerits of sole proprietorship

Following are the disadvantages of business

1. Low capital

One man invests from his limited personal resources. There are always low investments in

such type of business. Due to low capital owner can not expand his business on a large scale.

2. Unlimited liability

The second main drawback of sole owner business is that the liability of owner is unlimited.

It means that the personal property can be sold if his insolvency



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3. Entire loss

Sole owner enjoys the whole profit of the business and he is alone responsible for the profits

and losses of business therefore he suffers the whole loss of business.

4. Limited size of business

Sole owner has limited capital and limited skills which do not allow him to expand his

business on large scale. Normally his business limited to one city or small area of a city.

5. Lack of skilled persons.

The sole owner cannot hire the services of qualified and experienced persons due to limited

sources and small scale of business which restrict innovation and new ideas.

6. Lack of management

One man performs all the activities of business himself but he may not be expert in

performing every activity. If he is a good accountant, he may not be a good manager.

7. Lack of advertisement

Advertisement is best to inform customers about the availability of the products. There is a

lack of advertisement in sole proprietorship because he cannot afford advertisement expenses.

8. Lack of public confidence

Public shows less confidence because this type of business is not registered and there are no

legal rules to control such type of business.

9. Lack of inspection

In sole proprietorship there is no need of audit therefore some time owner is found in illegal

activities like smuggling.

10. Difficulty in borrowings

The banks and other financial institutions hesitate to advance loans to sole proprietor.



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Q#6

Define sole partnership. What are the merits and demerits of sole

partnership?

Or

What are the advantages and disadvantages of partnership?

Partnership

Partnership is association of two to twenty people who agree to carry on business together for

the purpose of earning profit.

Advantage/ Merits of Partnership

14. Easy formation

Formation of business is easy. Two to twenty people can start business without any legal

formality.

15. No legal Formality

Legal formalities are not compulsory to start the partnership business. It can be started at any

time with the consent of partners.

16. Low cost

In many partners, manage and control business. They look after all the matters of business

themselves, in this way they can save the cost of management.

17. Tax saving

Firm can get the advantage of tax saving because tax is only paid on the personal

income of partners.

18. Less chances of fraud

Another advantage of partnership is that there are the less chances of fraud because partners

perform all the activities themselves.

19. Easy dissolution

Dissolution means when the activities of business come to an end. Partners can easily

dissolve business at any time.

20. Better decision

Partners can consult each other all the matters of business. They can take better decisions in

this way.



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21. Direct relation with employees

Partners have direct relation with their employees. In this way they can understand the

problems of employees. They may help them in completing their task.

22. Credit facility

Liability of partners is unlimited. It means that personal assets of partners can be sold for the

payment of debts. Due to unlimited liability lenders do not hesitate in granting loans.

23. Direct relation with customer

Partners have the direct relation with the customers; they can understand the likings and

disliking of their customers.

24. Strong management

Management is backbone of every business. Partners can manage the business easily because

every partner works according to his skills and abilities.

25. Business expansion

Expansion of partnership is easy as compared to the sole tradership because every partner

invest money to grow business more and more.

26. Change in business

The change in business is simple. All the partners must agree to change the nature of

business. For example a firm dealing in cloth can decide to buy and sell books.

27. Secrets

Secrets of the business remain with the partners. There is no legal requirement to publish

business accounts for general public.

Disadvantage/ Demerits of Partnership

Following are the disadvantages of business

11. Low capital

Partners invest from their limited personal resources. There are always low investments in

such type of business. Due to low capital expansion of business is not possible on large scale.

12. Unlimited liability

The second main drawback of partnership business is that the liability of partners is

unlimited. It means that the personal property can be sold in case of insolvency

13. Lack of public confidence



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Public shows less confidence because this type of business is not registered and there are no

legal rules to control such type of business.

14. Lack of inspection

In partnership there is no need of audit therefore some time partners are found in illegal

activities like smuggling.

15. Difficulty in borrowings

The banks and other financial institutions hesitate to advance loans to firms because they are

not registered.

16. Limited life

Life of partnership firm is limited because if a partner dies or declared insolvent partnership

comes to an end

17. Lack of mutual cooperation

There is lack of cooperation between the partners because every partner has different opinion

about the matter.

18. Transfer of share

Partners cannot transfer their share to any other person easily. Share can be transferred with

the consent of all the partners

19. Limited size of business

Partners have limited capital and limited skills which do not allow them to expand business

on large scale.

20. Chances of fraud

There are always chances of fraud. A dishonest partner may involve in theft of business cash

and goods.

21. Lack of management

The small capital keeps the business small. They cannot hire the services of experts

22. Lack of advertisement

Advertisement is best to inform customers about the availability of the products. There is a

lack of advertisement because they cannot afford advertisement expenses.



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Q#7 Define Co – ownership. Differentiate between co-ownership and

partnership.

Co-ownership

It is the joint ownership of more than one person without the intention to carry on business.

For example, if two or more persons purchased land without the intention to carry on

business on it, it is called co ownership.

Difference between partnership and co ownership

Partnership co ownership

1. Purpose

Purpose of partnership is to carry on

business.

Purpose of co ownership is to not to carry on

business

2. Agreement

Partnership is the result of agreement

Agreement is not necessary for the formation

of co-ownership

3. Laws

Partnership is formed under partnership act

1932

There is no separate law for the formation of

co-ownership

4. Number of members

Maximum number of partners is twenty.

There is no restriction for the maximum

numbers of co owners

5. Profit & loss

Partners share profit and loss of business

There is no concept of profit. only income

earned form property is shared


Partner cannot transfer his share to another

person without the consent of all the partners

Co owner has right transfer his share to

another person without the consent of other co

owners

7. Minor

A minor cannot become a regular partner

A minor can become regular co- owner

8. Division of property

Partner cannot divide property of business in

parts Co owner has the right to separate his property

9. Dissolution

Partnership can be dissolved if a partner

dies or become insolvent.

Co ownership cannot be dissolved due to any

such reasons.

10. Relation

Every partner is an agent of every other

partner. A co owner is not the agent of other co owners

11. Liability

Liability of partners is unlimited they are

responsible for the payment of debts.

Liability of co owner is limited only to his

share in property



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Q#8 Differentiate between partnership and sole proprietorship.

Difference between partnership and sole proprietorship

Partnership Sole proprietorship

1. Agreement Agreement is not required to start this type

of business Partnership is the result of agreement

2. Laws

There is no separate law for the formation of

sole proprietorship


1932

3. Number of members There is only person who is responsible for

the activities of business Maximum number of partners is twenty.

4. Profit & loss Sole owner enjoys the whole profit and bears

whole. Partners share profit and loss of business


Co owner can freely transfer his right to

other person.

Partner cannot transfer his share to another

person without the consent of all the partners

6. Minor There is no restriction on minor to start this

type of business A minor cannot become a regular partner

7. Dissolution

Sole ownership is dissolved if sole owner

dies, or become insolvent

Partnership can be dissolved if a partner

dies or become insolvent.

8. Relation

As the sole owner runs business alone, so

there is no relation of agent and principal

Every partner is an agent of every other

partner.

9. Suitability It is suitable for the medium scale business It is suitable for small scale business

10. Management

All the partners are responsible for the

management of business

A sole owner is responsible for the

management of whole business

11. capital

All the partners invest in the business Only one person invests in the business

12. Chances of growth

There are more chances of growth because

of larger capital.

There are limited chances of growth because

of lack of capital

13. Accountability

Every partner is answerable to other person

about the expenses and incomes of business

Sole owner is not answerable to any other

person

14. decisions

All the partners decide all the matters of

business by the mutual consent

Only the one person is responsible to handle

and to take decisions



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Q#9 What are the kinds of partner?

Partnership can be classified into following kinds

1. According to age

2. According to experience

3. According to liability

4. According to participation

5. General partner

1. According to age

i. Major partner

A person who is over 18 years of age is called major partner. Major is partner in profit and

losses of firm.

ii. Minor partner

A person who have not attained the age of majority (or) other words a person who is below

18 year of age is called minor. Minor is partner in profits of the firm only

2. According to experience

i. Senior partner

A person who has invest large amount of capital and he has more experience than other

partners. Senior partner has more share in profit of the company

ii. Junior partner

A person who has small investment in company and he has less experience than the senior

partner. Junior partner has less share in the profit of the company

3. According to liability

i. Unlimited partner

A partner who has unlimited liability is known as unlimited partner. He and his personal

property both are liable for the payment of debts.

ii. Limited partner

A partner whose liability is limited to his share in business is called limited partner. Limited

partner has no right to take active part in the management of firm

4. According to participation

i. Active partner

A person who invests capital in the business and takes active part in the affairs of the

business, such partner is called active partner. He is liable for the debts of firm



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ii. Sleeping partner

A partner who invests his capital in the business but does not take active part in the affairs of

the business, is called sleeping partner

iii. Nominal partner

A partner who neither invests capital nor take part in the activities of business, He lend his

name due to his goodwill or repute.

iv. Secret partner

Secret partner invests his capital in business and he takes active part in the business but

public does not know him as a partner. Secret partner is responsible for the debts of business

v. Silent partner

A partner who does not take part in the management of business but public knows him as a

partner.

5. General partner

i. Incoming partner

A person who is newly admitted in the firm with the consent of all the partners is called

incoming partner

Incoming partner is not responsible for any act performed before his admission

ii. Partner in profits only

If a partner is entered in to the profits of the firm only and he is not liable for the loses of firm

Partner in profits is not allowed to take part in the management of firm

iii. Deceased partner

A partner whose life has expired is known as deceased partner. The share in capital of that

partner is paid to his legal heirs.

iv. Retired partner

A partner who leaves firm due to certain reasons is known as retired partner or outgoing

partner.

v. Quasi partner

A partner who has retired from active participation but he has left his capital in the firm.

Capital of quasi partner is considered as loan.



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Q#10 what are the rights, duties and liabilities of partner in absence of

agreement?

Rights of partner

1. Right to take part

Every partner has right to take part in the activities of business.

2. Right to share profit

Every partner has right to share profit equally

3. Right of opinion

Every partner has right to give opinion before the matter is decided

4. Right of salary

If a partner is performing extra ordinary duties, than he has right to get salary for the duties

performed.

5. Right to use property

Every partner has right to use the property of business for the business use

6. Right to inspect

Every partner has right to inspect the books of accounts. He can check the performance of

business.

7. Right of agent

Every partner has right to act as an agent on behalf of remaining partners

8. Right to receive damages

If a partner personally suffer loss due to any act of other partner than he has right to recover

damages

9. Right to retire

A partner has right to retire from business after giving notice of retirement to the other

partners

10. Right of existence

A partner cannot spell other partner because every partner has right to live in the business



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11. Interest on capital

Partner has a right to receive interest on the amount of capital according to the terms and

conditions.

12. Right to exercise powers

Every partner has right to exercise his powers to run the business successfully.

Duties of partner

1. Common benefit

It is the duty of every partner to work for the common benefit.

2. Personal use of property

Partners should not use the business property for their personal use.

3. Communication

It is the duty of every partner to communicate information to other partners about the

business dealing.

4. Act within authority

It is the duty of every partner to act within the scope of authority given to him

5. Immoral activities

It is the duty of every partner to avoid doing illegal activities that are against the benefit of

firm.

6. Honesty & sincerity

Every partner should be honest and he must attend the activities of business carefully and

honestly

7. Willful neglect

If firm suffers loss due to the willful negligence of any partner than it is the duty of partner to

repay the amount of loss


Any partner should transfer his share to the other person without the consent of all partners

9. Work without remuneration

In the absence of agreement, all the partners are bound to perform the activities without

salary.



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10. Abide by decision

A partner should accept decisions taken by the majority of partners

Liabilities of partners

1. Joint liability

All the partners are jointly liable for the debts of firm. Personal property and business

property can be sold for the payment of debts

2. Liable for fraud

If a partner or partners commit fraud then he will be liable to compensate the loss suffered by

the firm

3. Liability of insolvent partner

The firm is not liable for any transaction of insolvent partner after the date of his insolvency

4. Liability of incoming partner

An incoming partner is liable for all the obligations incur after his admissions. Incoming is

not liable for the obligations before his date of admission

5. Liability of retired partner

A retired partner is not liable for the obligations occurred after his retirement but he is liable

for all the obligations that arises before his retirement

6. Liability of deceased partner

Property of deceased partner is not liable for the obligations arising after his death

7. Liability of expelled partner

A person who is terminated form partnership will not be responsible for the debts of firm

arising after his termination

8. Liability to pay loss

It is the liability of all the partners to pay losses of firm

9. Liability of minor

A minor is not responsible for the losses of the firm because he is partner in profits of the

firm only



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Q#11 what are the ways in which a firm can be dissolved?

Dissolution of firm

Dissolution of firm means when the activities of the business come to an end it is called

dissolution of firm. When a firm is dissolved, partnership is also dissolved.

Dissolution of partnership

Dissolution of partnership means when a partner dies, become insolvent or become of

unsound mind the partnership is dissolved but the remaining partner can continue business

Ways of dissolution

There are the five different ways for the dissolution of firm

1. Dissolution by agreement

2. Compulsory dissolution

3. Contingent dissolution

4. Dissolution by notice

5. Dissolution by court

1. Dissolution by agreement

A firm may be dissolved with the consent of all the partners or in accordance with the

contract between the partners

2. Dissolution by notice

The firm may be dissolved at any time if a partner gives notice of 14 days to all the partner of

his intention to dissolve the firm.

3. Compulsory dissolution

Following are the causes for the compulsory dissolution

i. Insolvency

If one partner or all partners become insolvent the firm is dissolved

ii. Unlawful business

If any event happens due to which business become unlawful than the firm is dissolved

4. Contingent dissolution

A firm may be dissolved due to the following reasons.



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i. Expiry of period

If a partnership is formed for a fixed period, firm will be dissolved on the completion of time

period

ii. Completion of venture

If a firm is formed to perform a particular venture, the firm will be dissolved on the

completion of venture.

iii. Death of partner

A firm may also be dissolved when a partner dies.

iv. Insolvency

If a partner becomes insolvent the partnership is dissolved

5. Dissolution by court

The court may dissolve the firm on the following grounds

i. Case of unsound mind

A partnership may be dissolved by the court if a person become of unsound mind

ii. Incapability of partner

Court may dissolve partnership if any partner become permanent incapable of performing his

duties

iii. Transfer of share

If a person has transferred his share without the consent of other partners, the court may order

to dissolve partnership

iv. Continuous losses

The court may order to dissolve firm if business is suffering losses continuously.

v. Other reasons

Court has right to accept or reject the application of dissolution. He may or may not order to

dissolve the firm on any other reason.



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Q#12

What are the advantages and disadvantages of Joint Stock Company?

Joint stock company

Company is an association of persons created by law with long-lasting run and common seal

Joint Stock Company is the biggest form of business organization. It is formed and registered

under company’s ordinance 1984.

Merits of company

Following are the advantages of business

1. Expansion of business

The main advantage of Joint Stock Company is that its business activities can be expanded

easily because there is large capital.

2. Larger capital

Joint Stock Company can collect large amount of capital by issuing shares and debentures to

general public because there is no limit for the number of owners in company.

3. Limited liability

Liability of owners in Joint Stock Company is limited to the value of shares held by them.

For example if a person holds the 100 Rs share of company, he would be liable for the debts

of 100 Rs.

4. Easy transfer of share

Shareholders of public limited company can easily transfer (sell) their share to other person.

There is no need to get consent of other shareholders.

5. Increase in employment

Joint stock companies are also playing a very important role in providing employment to

many unemployed persons. This improves the living standard of society.

6. Large scale production

Joint Stock Company produces goods on large scale. Large scale production reduces the cost

of production.

7. Public confidence

Joint Stock Company is registered form of business which enables him to win public

confidence.



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8. Credit facility

Joint stock company is registered form of business so the banks and other financial

institutions do not hesitate in granting loan to company. Company issues debentures to

borrow money.

9. Larger profit

With the help of better management, services of experts and reduction in cost, company can

increase rate of profit.

10. Better management

Joint Stock Company is administrated by the qualified and experienced directors which

increases efficiency of business.

11. Spread of loss

The loss of company is divided among the number of share holders, so the loss per

shareholder becomes very low.

12. Quality products

As the cost of production of company is low so it can produce quality products which

improves the living style of a society

13. Investment opportunities

Joint Stock Company has made it possible for the poor people to invest in a large and secure

form of business. People can invest their savings in company to earn profit

14. Long run

Joint Stock Company has permanent life if one or more shareholders become insolvent, dies

or sell their share. It does not affect the solvency of company

15. Expert’s services

Joint Stock Company has strong financial position; it may hire the services of experts and

skilled person.

16. Recognized legal entity

Company is registered under company’s ordinance as a spate legal entity. It can enter into

contract and borrow money with its own name.

Demerits of company

1. Complicated formation



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Formation of Joint Stock Company is so complicated because many legal formalities are to

be fulfilled.

2. Corruption

There are the several chances of corruption. Managers and directors may shape the policies

for their personal interest.

3. Double tax

Joint Stock Company has to pay double tax. Firstly tax is paid on the income of company,

secondly share holders pay tax on their personal income

4. Lack of secrecy

A joint stock company cannot maintain secrecy of accounts because it has to submit various

reports to general public.

5. Misuse of funds

As all the power is in few hands, they may misuse funds of company

6. Centralization of power

In Joint Stock Company the whole power is in few hands and the share holders are not

allowed to participate in the activities of business

7. Lack of responsibility

There is lack of responsibility and interest everybody tries to transfer his responsibility to

other person.

8. Lack of quick decision

In joint stock company there is lack of quick decision because a meeting of directors of or

managers is necessary to solve the problem.

9. Speculation

Due to easy transfer of share and limited liability the speculation in stock market take place.

Which effects economy

10. Favoritism

In joint stock company directors employee their inefficient and incapable relatives and

friends on key jobs which affects the performance of company.

11. Labor disputes

In large companies, workers do not have close contact with owners. This leads labor union to

fight against management



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Q#13

Define Joint Stock Company. What are the kinds of company?

Joint stock company

Company is an association of persons created by law with long-lasting run and common seal

Joint Stock Company is the biggest form of business organization. It is formed and registered

under company’s ordinance 1984.

Kinds of companies / classifications of company

Following are the five main classifications of company

A) According to formation

1. Chartered company

A company which is formed by the royal orders is called chartered company. This type of

company is not formed in present world. Examples of such type of companies are chartered

bank of England, east India bank

According to Formation

chartered company

statutory company

registered company

According to Ownership

Private ltd Company

public limited company

Holding Company

subsidiary Company

Goverment company

According to

liability

company limited by gurantee

company limited by

shares

unlimited company

According to Nationality

Domestic company

Foreign

company

Other companies

single member company

Modarba company

Leasing company

associated comPany

licensed company



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2. Statutory company

A company formed by order of president, governor general or prime minister is called

statutory company. National bank of Pakistan, state bank of Pakistan is the examples of

statutory company.

3. Registered company

A company formed and registered under company’s ordinance 1984 is called registered

company.

B) According to ownership

4. Public limited company

A company which has right to issue shares to general public and liability of shares holder’s

is limited to the value of their share in company. Minimum number of member in public

company must be seven but there is no limit of maximum number of members. Public limited

company has two types; listed companies and unlisted companies

5. Private limited company

A company which cannot issue shares to general public and the liability of share holder’s is

limited to the value of their share in company. Minimum number of members in private

company must be two and maximum is fifty.

6. Holding company

A company which buys 50% or above shares of other company is called holding company or

parent company

7. Subsidiary company

A company whose 50% shares are held by other company is called Subsidiary Company.

8. Government company

A company which sells 50% shares to government is called Government Company.

C) According to liability

9. Company limited by guarantee

A company whose members give the guarantee to pay a specific amount on winding up of

company is called company limited by guarantee

10. Company limited by shares



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A company in which liability of share holder’s is limited to the value of their share in

company is called company limited by shares. Company limited by shares has two types:

public limited company and private limited company.

11. Unlimited company

A company in which liability of share holder is unlimited, it means that the personal property

of share holder’s can be sold to pay the debts of company. This type of company does not

exist in Pakistan

D) According to nationality

12. Foreign company

A company which is registered and having head office outside Pakistan outside Pakistan is

called Foreign Company

13. Domestic company

A company which is formed and registered inside Pakistan is called domestic company.

E) Miscellaneous company

14. Single member company

A company which is managed and owned by a single member is called single member

company.

15. Modarba company

A company in which one person invests his money and other person devote his skills, time

and management.

16. Leasing company

A company which is doing the business of leasing is called leasing company.

17. Associated company

A company whose 20% or more shares are held by the other company is called associated

company.

18. Licensed companies

These are the non trading concerns who work for the welfare of society. The aim of Licensed

Company is not earn profit. Federal government grant them license to perform social

activities.



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Q#14

Differentiate between partnership and public limited company

Partnership Public Ltd company

1. Formation

Joint stock company is formed under

companies ordinance 1984


1932

2. Number of members

There must be minimum 2 members and no

limit for the maximum members

There must be minimum 2 members and

maximum limit is 20


Share holders can freely transfer shares to

other person

Partner cannot transfer his share to other person

without the consent of other person

4. Dissolution

Company is dissolved under the provisions of

company’s ordinance 1984

Partnership is dissolved if a partner dies,

become insolvent or become of unsound mind

5. Relationship

Share holder are not the agent of each others Every partner is agent of every other partner

6. Suitable Company is suitable for the large scale

business Partnership is suitable for small scale business

7. Management Directors and skilled managers are

responsible for the management of company.

Share holders are not allowed to take part in

the management.

All the partners are responsible for the

management of firm

8. Accountability Share holders are not answerable to other



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Every partner is answerable to other person

about the expenses and incomes of business

shareholders of the company


There are more chances of growth because of

large capital

There are less chances of growth as compared to

the company

10. Liability

Liability of members is limited to the value of

their share in company.

Liability of partners is unlimited. Unlimited

liability means that the personal property of the

partners can be sold for the payment of debts

11. Legal entity

Company is a separate legal entity from its

owners

Firm is not separate from its owners, liability of firm

is the liability of partners

12. Audit Audit of accounts is compulsory by the

chartered accountant Audit of firm is optional

13. Issuance of prospectus Public company has right to issue share for

raising funds A firm cannot issue prospectus for raising capital

14. Change in business nature

A firm cannot change nature of business.

Nature of business can be changed with the consent

of partners.

15. Issuance of debenture Public company has right to issue share for

fund raising A firm cannot issue debentures for the fund raising

16. Annual reports Public ltd company is bound to publish

reports an A firm cannot publish financial reports of business



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Q#15

Differentiate between private Ltd Company and public limited company

Private Ltd Company Public Ltd company

1. Number of members There must be minimum 7 members and no limit

for the maximum members

There must be minimum 2 members and

maximum limit is 50


Members of public ltd company can freely

transfer shares to other person

Members of private company cannot

transfer their share

3. Issuance of prospectus

Public company has right to issue share to general

public for raising funds

Private company cannot issue shares to

general public

4. Issuance of debenture

Public company has right to issue share for fund

raising

A private company cannot issue

debentures for the fund raising

5. Number of directors There must be at least seven directors

There must be at least two directors

6. Prospectus

Public ltd company has right to issue prospectus to

general public

Private company cannot issue prospectus

to general public for subscription in shares

7. Tax relief

Tax relief is given to the share holders of public

company

Tax relief is not given to the Share holders

of private company



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8. Loans to directors Public company cannot give loans to directors

Private company can give loans to

directors

9. Suitability

Public company is suitable for both medium and

large scale business

Private company is suitable for medium

scale business

10. Title

Every public company has to write word “ltd” after

its name.

Every private company has to write word

“private” after its name

11. Statutory meeting Public ltd company is bound to hold statutory

meeting at regular intervals

It is not required to hold statutory meeting

12. list on stock exchange

Public can be listed on the stock exchange

Private company cannot be listed on stock

exchange

13. certificate of

incorporation

it can start business after receiving

certificate of incorporation

Public company cannot start business on receiving

certificate of incorporation unless it receives


14. Minimum subscription

Public company cannot get certificate of

commencement without fulfilling requirement of

minimum subscription.

Private company can start business without

fulfilling the conditions of minimum

subscription



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Q#16

What is the procedure for the formation or incorporation of Joint

Stock Company?

Formation of joint stock company

Following are the four steps in the formation of Joint Stock Company

A) Promotion stage

It is the first stage in the formation of Joint Stock Company. At this stage initial steps are

taken for the formation of company. The persons who take initial steps in the formation of

company are called promoters.

1. Idea generation

At this stage, promoters generate different ideas about the nature of business. They may

generate different alternatives.

2. Investigation

When the nature of company business is decided, the promoters go in the investigation stage

and make plans about the availability of capital, labour, electricity, gas, water and other

sources

3. Assembling various factors

Promotion Stage

idea

inestigation

Assembling of factors

Financial reources

essential documnets

incorporation stage

submission of application

payment of registration

fee

verification of application


Subscription Stage

raising capital

Certificate of comencement

issue of prospectus

alootment of shares

minimum subscription



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At this stage different factors of business are accumulated. Promoters arrange license,

copyright, and appointment of necessary employees.

4. Finance planning

At this stage promoters estimate the total amount of capital that is needed and the ways

through which capital can be raised.

5. Preparation of essential documents

In addition to the above discussed matters the promoters also prepare the essential documents

that are to be submitted to the registrar. These documents are;

i. Memorandum of association

ii. Articles of association

iii. Prospectus

B) Incorporation stage

The second stage in the formation of company is to get it registered.

1. Submission of application of registration

At this stage, application of registration is submitted to the registrar along with the following

documents;


ii. Articles of association

iii. List of directors

iv. Consent of directors

v. Prospectus

vi. Qualification shares

vii. Statutory declaration


A document containing the name, address, object, authorized capital etc

ii. Article of association

A document containing laws and rules about the management of company is called article of

association.

iii. List of directors

A list containing the name, address, occupation and other details about the directors

iv. Written consent of directors



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A document showing the willingness of them to act as directors

v. Qualification shares

An undertaking signed by the directors that they are agree to take and pay for the

qualification shares

vi. Prospectus

Promoters have to submit prospectus to the registrar.

vii. Statutory declaration

A statutory declaration has to be sent to the registrar that all the legal formalities has been

completed

2. Payment of registration fee

The registration fee of the company is also paid to the registrar.

3. Verification of application

The registrar verifies to the promoters about the completion of document

4. Certificate of incorporation

If registrar is satisfied and he thinks that all the formalities are fulfilled then he issues a

certificate of incorporation to promoters

C) Capital subscription stage

The third stage is to make arrangements for raising capital. Company can raise capital by

issuing shares and debentures.

D) Certificate of commencement

A public company cannot start business without getting certificate of commencement.

Company can obtain certificate of commencement after fulfilling the following conditions


At this stage, Promoters issue prospectus to invite general public for subscription of shares

and debentures. A private company cannot issue prospectus.

2. Allotment of shares

When applications for subscription have been received then the promoters allot shares on

these applications.

3. Minimum subscription

It is also certified that the shares have been allotted up to or more than the minimum

subscription.



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Q#17

What are the three important documents of Joint Stock Company?

Every company has to submit legal documents for the registration of company but out of

these documents following three documents are important

1. Memorandum of association

Memorandum of association is the constitution of company. It is also known as chartered of

company. This document defines the limits, object and powers of company. Through this

share holders can know the range of business activities. Any work or business that is not

stated in the memorandum cannot be started by the management

Contents of memorandum

1. Name

Full name of company with the word “ltd” after its name, name of company should be

different from the existing company

2. Head office

Complete address of registered head office must be given. A company must have the head

office in that state where it is registered.

3. Object

In this clause it is mentioned that what type of business a company will do. If the company

does not work according to the object, than it will be considered illegal

4. Capital

Basic legal documents

Memorandum of

Association Article

of

Associaiton

Prospectus



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It is also mentioned that what will be the authorized capital, its division in shares and value of

each chare.

5. Liability

It is clearly Witten that the liability of shareholders is limited or unlimited.

Alteration in memorandum

Company can alter its memorandum with the sanction of court or central government.

2. Article of association

Article of association includes the rules and regulations necessary to manage the internal

affairs of company and to achieve objectives stated in the memorandum.

Article states the regulation about the following matters

i. Total capital

ii. Rules regarding change in capital

iii. Total number of shares

iv. Value of each share

v. Kinds of shares

vi. Rules regarding issuance of shares

vii. Rules regarding the transfer and registration of share

viii. Rights and duties of share holders

ix. Voting right of share holders

x. Power, duties and remuneration of management

xi. Total number of directors

xii. Appointment of directors

xiii. Appointment of auditors, their rights and duties

xiv. Rules regarding issue of debenture

xv. Procedure of winding up of company

xvi. Declaration of dividend and company reserve

xvii. Seal of the company

Alteration in article



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Shareholders of company can change the contents of article by passing special resolution.

But this change should not be against the memorandum and company’s ordinance 1984.

3. Prospectus

A document, advertisement, notice, circular or other invitation to the general public for the

subscription in shares is called prospectus. A private company cannot issue prospectus to

invite public for the subscription in shares

Contents of prospectus

1. Brief history

Brief history of company

Object of company

Information about its plant, machinery, and raw material etc

2. Financial information

Financial information of company

Auditor report

Auditor’s certificate on share capital

3. Board of directors

Name address, occupation and address of the directors

4. Remuneration of directors

Remuneration to be paid to the chief executive, directors and secretary

5. General information

Appointment of chief executive

Election of directors

Borrowing power of directors

Transfer of shares

Voting right of share holders

6. Miscellaneous

Address of registered office and factory

Banker of the company

Legal advisor and consultant

7. Application and allotment

The procedure of applying of share & their allotment is also made

clear



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Q#18

Define meeting. What are the types of meeting?

Meeting

When two or more persons gather to discuss some matters in order to make decision is called

meeting

Company’s meeting

When the members of company gather to discus business matters to make decision it is called

company’s meeting.

Types of business meeting

Following are the types of business meeting.

Share holder’s meeting

The meeting which is called to discuss the affairs of business with shareholders is called

shareholder’s meeting.

Types of shareholder’s meeting

Shareholder’s meeting is further sub divided in to the;

i. Statutory meeting

ii. Annual general meeting

iii. Extraordinary meeting

i. Statutory meeting

Statutory meeting is held only once in a life of company. It is the first meeting of the

members of a public limited company. Object of this meeting is to provide information to the

shareholders about the affairs of company.

i. By whom;

Following companies must hold statutory meeting

Business

Meeting

shareholder's

Meeting

Direcorts's Meeting



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a) Company limited by shares

b) Company limited by guarantee

c) Private company converted into the public company

ii. Purpose of meeting

a. To give idea about the working of company

b. To introduce directors with share holders

c. To give details about the use of capital

iii. Time of meeting

Every public company shall hold the meeting within the period of not less than 3months and

not more than 6 months after getting the certificate of commencement

iv. Notice

A written notice to every shareholder must be given 21 days before meeting.

v. Default in holding statutory meeting

A company may be wound up if it fails to submit statutory report to the registrar and holding

statutory meeting

2. Annual general meeting

Annual general meeting is also called ordinary meeting. Every company is bound to hold

meeting of share holders once in a year. In this meeting, shareholders discuss the efficiency

and performance of directors and other officers that are running business.

i. By whom;

Every listed company is bound to hold annual general meeting.

ii. Time of meeting

First general meeting can be held within 18 months from the date of incorporation and once

in every financial year. The gap between two general meetings should not be more than 15

months.

iii. Notice


iv. Place of meeting

In case of listed (registered) company the meeting should be held in that city where the head

office of the company is situated.

v. Purpose of meeting

Followings are the objects of annual general meeting



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a. Appointment of auditor

b. Elections of director

c. To declare the profit of company

d. Declaration of dividend

vi. Default in holding statutory meeting

If company fails to hold meeting, than every officer shall be liable to fine. Court may wind up

company if it fails to hold two consecutive annual general meeting.

2. Extra ordinary general meeting

All the meetings other than the annual general meeting and statutory meeting are called extra

ordinary meeting. The directors may call extra ordinary meeting for doing some urgent

business. The meeting can also be called by the directors on the request of shareholders

i. Notice


ii. Object

Such meeting is conducted for doing some special nature of business

a) For issuing debentures

b) For making alteration in memorandum or article of association

c) For making alteration in share capital of the company

3. Directors’ meeting

The person who run the management as representative of company are called directors

All the business affairs are settled with the mutual consultation of directors. So the meeting

called for directors to discuss the affairs of business is called directors meeting.

i. Time of meeting

The meeting must be held once in 3 months and at least four times in a year.

ii. Object

a) To issue shares of company

b) To invest companies fund

c) To make calls for meeting of company

d) To appoint the officer of the company

e) To check and approve the accounts of company

f) To declare the profit of the company



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Q#19

Define share capital. What are the different types of share

capital?

Share capital

The amount of money invested in business by its shareholders (owners) is called share

capital.

Types of share capital

Share capital of the company is divided into the following types

1. Authorized capital

The amount of capital with which a company is registered is called authorized capital.

Company cannot issue shares more than the authorized capital. The authorized capital of the

company is mentioned in the memorandum of association. If company wants to raise the

limit of authorized capital, then alteration in memorandum of association is required to be

made after the approval of the registrar. Authorized capital is also called nominal capital and

registered capital.

2. Issued capital

The part of authorized capital that is issued to the general public for subscription is called

issued capital. Company may issue entire authorized capital at one time or in parts, how

much amount is to be issued, depends upon the need of funds.

3. Unissued capital

The amount of authorized capital that is not offered to the general public is called unissued

capital. Company may issue this capital later on at the time of need of funds.

4. Subscribed capital

The part of issued capital purchased or taken up by the general public is called subscribed

capital. An application form is to be submitted along with the value of shares for the



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subscription in shares. The application received may be more or less than the offered shares.

If company received more application, it is known as over subscription. If applications are

less than the offered shares, it is known as under subscription.

5. Paid up capital

The part of subscribed capital against which money has been received is called paid up

capital. For example if a share has face value of Rs 100 and the company has received Rs 100

or any other amount less than Rs100 ) against issue of share, that amount is called paid up

capital.

6. Called up capital

It is that part of subscribed capital which is subscribed from subscribers. The company may

not demand entire amount of subscribed capital at once. Amount of shares may be collected

in installments. The amount of each installment that is demanded by the company is called up

capital. For example a company has issued a share of Rs 100, but it demanded Rs 30 to be

submitted with application and balance is paid afterwards. The amount of Rs 30 is the paid

up capital. Installment system is not used in Pakistan; according to the company’s ordinance

1984 the joint stock company can issue only fully paid shares.

7. Uncalled capital

The part of subscribed capital which has not yet been demanded by company is called

uncalled capital in the above example the balance of Rs 70 is uncalled capital.

8. Reserve capital

Reserve capital is the part of uncalled capital which is demanded at the time of winding up of

company. Reserve capital is created by passing a special resolution in general meeting.

9. Redeemable capital

A company can also raise capital by issuing redeemable capital. Company may issue

participation term certificate, musharika certificate, term finance certificate and other

securities that are not based on interest.



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Q#20

Define cooperative society. Explain the merits and

drawbacks of cooperative society

Cooperative society

Cooperation means working together for achieving some common goal. Cooperative society

is a voluntary association of person who work together for their self help and mutual help.

Purpose of cooperative society is to help the members of society by providing the necessities

of life at cheaper rate. Purpose of society is not to earn profit

Advantages of cooperative society

1. Easy formation

Formation of joint stock is easy as compared to the joint stock company. 10 persons who

have attained the age of majority can apply for the registration of society.

2. Management

There is democratic system in society very person in cooperative society has the right to vote

and elect the management.

3. Limited liability

Liability of members of society is limited to the value of their investment in the society.

4. Low prices

Members of society are the buyers and distributers of goods, in this way the role of

middlemen is eliminated. Thus members are in a position to purchase goods at cheaper rate

5. Low costs

The members of society belong to the small income group. They individually cannot produce

goods at large scale. When a cooperative society is formed they gather their sources and

produce goods at large scale which enable them to minimize the cost of production

6. Employment opportunities

Societies give employment to its own members, which play a vital role in growth of

economy.



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7. No monopoly

Cooperative societies discourage monopoly. The societies provide goods at cheaper rate

which eliminate monopoly of some firms and consumer can get goods at reasonable price.

8. Exemptions

Cooperative society enjoys the exemption of tax. Tax is not paid on the income of society.

9. Economic development

Society plays a vital role in the economic development of country by producing goods at

large scale and cheaper rate.

10. Better living standard

Cooperative society helps its members in improving their living standards by providing

employment, job opportunities, goods at cheaper rate and increases the income of members.

In this ways society helps in improving living standard of members.

11. Equal distribution of wealth

Profit earned by the society is distributed between the members. In this way the profit goes in

the hands of general public (small income group) instead of industrialists.

12. Promotion of savings

The savings of the members is used in productive purposes that motivated them to save more

for the investment purpose. Savings and investments are not only beneficial for the members

but also for the members of society.

13. Low expenses

Cooperative societies are managed and run by its members, in this way they can save

administration and management cost which maximizes the profit of society.

Disadvantages of cooperative society

1. Lack of capital

Generally all the members of a society belong to the small income group. They have small

savings and investments. Thus there is always lack of capital.

2. Poor management

Society is run and managed by the members of society. Generally the managers and

administrative are not experienced enough to manage the society.

3. Lack of motivation



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Cooperative societies are not formed to run earn profit. This does not provide motivation to

the members to work hard.

4. Lack of technology

The resources of a society are limited. It cannot use new and innovative techniques of

production which is necessary for the success of business.

5. Legal restrictions

Society has to follow many legal restrictions imposed by the registrar. This becomes the

hurdle in the success of business

6. Lack of research and development

There is lack of research and development because of insufficient funds. Research and

development helps in introducing verity of products which increases the consumer

satisfaction.

7. Chances of disputes

All the matters of the society are decided after the consultation it with all the members. The

dispute may arise if any member does not agree with other members.

8. Chances of loss

The members of society are uneducated. They cannot make the best use of resources so

society may suffer loss due to inefficiencies.

9. Lack of secrecy

All the members take active part in the management of society. They take all the decisions of

business, so the business secrecy is impossible and due to this business may suffer loss



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Q#21

What are the types of cooperative society?

There are many societies which have been started. Few of them are given below

1. Producer’s cooperative societies

When the members of society combine their resources for the production of goods and

services are called producer’s cooperative society. Members of this society produce goods in

their houses. The facilities are provided by the society. The output is collected by the society

and sold wholesale rate. The profit is then distributed by the members in proportion to the

output.

2. Consumer’s cooperative society

The societies are working to provide goods to the members at low price. The main purpose of

such society is to eliminate the role of middlemen and distributers which reduces the price of

goods. They purchase goods at wholesale rate and sell them to members at low rate.

3. Fisherman societies

These societies are working to provide different facilities to the poor fishermen. Society

provides them loans to purchase fish trap and other tools. In Pakistan there were 110 societies

up to 2004.

4. Rural societies

Rural societies are working to protect rights of people of rural area. These societies help to

provide goods at lower rate to its members.

5. Dairy farming society

People linked with dairies form such society. The dairy owners keep cows and buffalos. They

make arrangements to sell milk and products that are made of milk. Numbers of such

societies are working for the benefit of dairy owners in Punjab.

6. Housing societies

Cooperative societies are working to provide loan facilities to the poor members for the

construction of houses. Housing society provides land to its members for the construction of

houses. They also provide gas, water and electricity facility to its members.

7. Labour cooperative societies



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These societies are working to provide the employment to the unskilled labour. This labour

force is used for the construction of houses, bridges and roads. Individual labour has low

contractual powers.

8. Storage cooperative societies

These societies provide storage facility to its members for perishable and non perishable

goods at lower rate.

9. Credit societies

These societies are working to provide loan facility to its small business owners at lower rate

of interest. These societies also provide credit facility to the farmers. Loans are granted for

the purchase of seeds, castles fertilizers, raw material etc.

10. Insurance cooperative society

Insurance cooperative provide insurance facility to its members. Cooperative society may

take purchase group insurance policy at lower rate. Sometimes society may issue insurance

policy to the general public

11. Marketing cooperative society

A group of producers may start its own marketing network by forming a cooperative society.

Marketing societies make the arrangements for the sale of goods. They often sell their goods

without the help of middlemen and distributers which maximizes their profit.

12. Farming societies

These societies are formed to facilitate the poor farmers who have low produce and cannot

use the new techniques of cultivation. Farming societies provide machinery, financial help

and help in using new methods of production.

13. Miscellaneous cooperative societies

The cooperative society may be formed for other purposes like fisheries and poultry farming

etc. societies provide financial assistance to its members in their specific field of life

The main purpose of society is to provide financial help to its members.



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Q#22 Differentiate between cooperative society and Joint Stock

Company

Cooperative society Joint stock company 1. Formation

Joint stock company is formed under companies

ordinance 1984

It is formed under the cooperative

society’s act 1925

2. Number of members There must be minimum 7 members and no limit for

the maximum members. In private company there

must be at least 2 members and it cannot exceed 50

number of members

There must be minimum 10 members

who have attained the age of majority

(18 years)


Share holders can freely transfer shares to other

person

Member can transfer his share to other

person as per the laws of society. If the

transfer of share is restricted than it

cannot be transferred

4. Dissolution

Company is dissolved under the provisions of

company’s ordinance 1984

Cooperative society has a short life. it

may be dissolved due to the lack of

interest of members

5. Object Object of company is to earn profit.

The object of cooperative society is the

welfare of its members. Society is not

formed to earn profit

6. Suitable

Company is suitable for the large scale business

Cooperative society is suitable for small

scale business

7. Management Directors and skilled managers are responsible for

the management of company. Share holders are not

allowed to take part in the management.

All the members are responsible for the

management of firm

8. Locality

Share holders of a company are from the different

territories (areas).

Members of a society belongs to the

same village, town or group


There are more chances of growth because of large

capital

There are less chances of growth as

compared to the company



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10. Liability

Liability of members is limited to the value of their

share in company.

Liability of members of a society is

limited only when it is registered as

limited liability society

11. Distribution of wealth Company becomes the cause of unequal distribution

of wealth Cooperative society is removing the unequal

distribution of wealth

12. Voting rights

In company right to vote depends upon the amount of

capital invested in the company

Its members have equal voting right

regardless of their investment.


Public company has right to issue prospectus for

raising funds

A society cannot issue prospectus for

raising funds

14. Tax Exemptions Tax exemption is not given to the company. Certain tax exemptions are available to it.

15. Issuance of debenture

A society cannot issue debentures for

the fund raising

Public company has right to issue share for fund

raising

16. Annual reports

Public ltd company is bound to publish reports.

A society cannot publish financial

reports of business

17. Role of middlemen

Middlemen plays a vital role in the business of

company

Cooperative society eliminates the role

of middlemen.

18. Registration in stock exchange

A company can be registered in stock exchange.

A society cannot be registered in stock

exchange

19. Capital

Company has the right to issue share to general

public. It can also raise capital by issuing debentures

The society can increase the capital by

increasing the number of members. It

cannot issue share to general public.



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Q#23

Define business combination. What are the causes of

its growth?

Business combination

Business combination is joining of two or more businesses to form a single business to

perform the business activities jointly.

Combination takes place due to the tough competition. Competition reduces the profit of

business which affects the solvency of business. Combination takes place to remove the

competition elements and to make sure the solvency of business. Combination can be

temporary or permanent.

Causes or reasons of its growth

Following are the reasons for the formation of business combination

1. Competition

The tough completion in business has increased the solvency risk and decreased the profit of

business. Business combination takes place to make sure the survival in the market and to

increase the profit ratio by joining their business

2. Over production

Over production also becomes the reason for the business combination. When produce more

than the demand in market, it reduces the profit margin of business. Business combination

may check on the production and level and help in maintaining the supply and demand level

which stables the price of goods.

3. Shortage of capital

The small scale business cannot compete large scale business due to the shortage of capital. If

small scale business joins any small or large or large scale business, then it may help in

accumulation of capital.



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4. Modern technology

The purpose of combination may be to improve the quality of product by improving methods

of production. So technology also becomes the cause of business combination.

5. Creation of monopoly

Sometimes the businessmen combine their business activities to create monopoly in the

market. Such combination help producer to charge prices of their own choice but it is not

favorable for the general public and consumers

6. High cost

The small businesses may combine with other business to reduce cost of production ad other

expenses, because cost of production decreased per unit at large scale production

7. Effects of trade cycle

The effects of trade cycle also become the cause of combination. During depression phase the

inefficient firms are unable to survive, so they may join and efficient firm to survive in the

market.

8. Credit facility

Small firms may face difficulty in borrowing loans from the banks and institutions due to the

weak financial position. The business combination increases the financial worthiness of

combined business and they can return loan from their joint funds. So the banks and other

financial institutions do not hesitate in granting loans

9. Adoption of same policy

Adoption of the same policy is by the different firms is only possible by the business

combination. It may reduce the cost and competition and increases the profit.

10. General tendency

When combination becomes the trend in an industry, other industries also affected. So they

form combination for their common objective



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11. Status in the market

A small firm may join a large firm to enjoy the higher status in the market because a larger

firm has the higher status and repute in the market

12. Management

A small firm cannot hire the expert and skilled managers because of limited resources. They

may join a large firm to get the benefit of skilled management

13. Modern transportation

Combination may take place to share transport system with each other. Quick and fast

transportation give an edge to business over others

14. Lack of research

The lack of research is also the reason of combination. Success of every business depends

upon the research and development. A small firm cannot conduct research due to limited

resources but with the help of combination such problem can be solved.

15. Reduction in marketing expenses

Combination may help firms to control the advertising expenses of its products which

increase the profit margin of firms.



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Q#24

What are the various types of business combination?

1. Horizontal combination

When two or more firms relating to a similar business are combined under the same

management is called horizontal combination for example if number of steel mills combined

under the same management is called horizontal management. It can be explained with the

help of following diagram.

Advantages or objectives

1. To reduce cost of management

2. To reduce cost of production

3. To eliminate competition

4. To reduce selling expenses

5. To increase profit margin

6. To use new methods of production

7. To control over production

8. To supply goods at lower price

2. Vertical combination

When various departments of large industrial units combine under the single management it

is called vertical combination. Under vertical combination, form purchasing of raw material

to selling of goods, all stages are linked up by the combination. For example if a business unit

is engaged in cotton spinning, cotton weaving, cotton processing and cotton wholesaling are

combining together, it is called vertical combination

Managemnet

steel mill B

steel mill A

Marketing

steel mill C



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Advantages or objectives

Regular supply of raw material

1. Economy in purchasing raw material

2. For better selling of goods

3. To eliminate the role of middlemen

4. For better management

5. To reduce per unit cost

6. To control over production

3. Circular combination

When the business of different nature combines into a single large company it is called

circular combination. It is also called mixed or complementary combination

For example if sugar, chemical, paper and glass industries are combine together under single

management it is called circular combination

spinning

weaving

processing

selling

Managment

Management

glass Industry

paper industry

chemical industry

sugar industry



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Advantages / objectives

1. For better management

2. For saving in cost

3. For saving in advertisement expense

4. For better credit facility

5. To establish relationship between the firms

6. For better research system

7. To increase the efficiency of business

4. Diagonal combination

When a business unit is combined with different business units which supply him helping

goods and services it is called diagonal combination.

For example a distributing unit and repairing unit is combined with textile industry. It is

called diagonal combination

Advantages / objects

1. To maintain the quality of products

2. To reduce per unit cost

3. To increase efficiency of business

4. To overcome various expenses

5. To reduce the selling cost

5. Lateral combination

When the different business units combine their business activities on the basis of associated

nature of work is called lateral combination

Lateral combination is possible only when different business units are producing different

products and supplying them to the one big business.

Distribution unit

• Textile industry

Repairing unit



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For example the paper mill, ink company, printing company and binding firm can combine

their work to supply products to publishing house.

6. Divergent lateral combination

Divergent combination take place when using the common raw material, different products

are produced.

For example a steel mill is producing steel and it is used in making of ships, trains, cars and

machines

Binding firm Paper mill Ink, co Printing co,

Publishing house

Books

Steel mills

Ship Train Car factory Machine Factory

Education

introduction to business notes b.com part1