B com free note

 By:B.B.Baral, M. Com, 8249989782,bbbaral4200@gmail.com

Hire purchase system, its features, merits and demerits. 

What is Hire purchase? Discuss its features

Hire Purchase System is a special system of purchase and sale. When goods are purchased on hire-purchase system, purchaser pays the price in installments, these installments may be Monthly, Quarterly or Yearly etc. Goods are delivered to the purchaser at the time of Hire Purchase Agreement but purchaser will become the owner of goods only on the payment of the last installments. All the installments paid are treated as hire charges till the last instalment is paid. 

the important features of hire purchase system are as follows. 

Features of HP

(1) There is an agreement between the seller (called, hire seller or hire vendor) and the buyer 

(called, hire purchaser or hirer) and this agreement is called, hire purchase agreement. 

(2) Purchase price of the goods and services is paid in a number of agreed instalments (also called, 

hire). That means, purchase price is not paid in one lump sum. 

(3) As the purchase price is not paid in one lump sum at the time of time of purchase, it is a kind of credit purchase. 

(4) Under the system of hire purchase, the seller hands over the goods to the buyer on 

signing the agreement. In other words, the hire purchaser takes possession of the goods 

purchased on hire purchase basis. Therefore, the buyer is able to start using these goods for the 

intended purpose immediately after signing the agreement. 

(5) However, the legal ownership of the goods (i.e., title to the goods) remains with the seller and 

it is passed on to the hire purchaser only after the receipt of all instalments including the last 

instalment as per the agreement. As a result, the hire vendor continues to be the owner of the 

goods till the receipt of last instalment from the hire purchaser. 

(6) As the title to the goods is not transferred from seller to buyer till the receipt of last instalment 

in accordance with the Provisions of the agreement, all earlier instalments paid are considered hire charges. And the hire purchaser becomes the owner of the goods only after the payment of 

all instalments as per the Provisions of the agreement . 

(7) As already stated, the legal ownership of the goods sold on hire purchase system is not 

transferred to the buyer by the seller until the receipt of last instalment from the buyer. 

Therefore, if the hire purchaser fails to pay any of the instalments, the hire vendor has the right 

to take back (i.e., repossess) the goods from the hire purchaser. 

(8) Similarly, the hire purchaser also has an option to terminate the agreement any time but 

before the payment of last instalment and return the goods to the seller . 

(9) When the agreement is terminated the 

hire vendor need not return or refund the instalments already paid (by the buyer) to the buyer. 

Hence, the instalments already paid are considered as the hire charges for using the goods. 

(10) The unique feature of hire purchase system is that the payment of every instalment is 

considered as the payment of hire charges by the hirer to the hire vendor till the payment of 

the last instalment. After the payment of the last instalment, the amount of different 

instalments paid is appropriated towards the payment of the price of the goods sold and the 

ownership of the goods is transferred to the hire purchaser by the owner (i.e., hire vendor).

Merits of HP system: Hire-purchase trading has following merits :

1. People with limited means can purchase and enjoy costly articles. They can pay through easy instalments out of future earnings. In this way common man can improve his standard of living.

2. The system encourages thrift or saving among buyers. They remain under an obligation to pay instalments regularly after taking possession of the article.

3. Hire-purchase system is a useful device to push up the sales of costly articles. Due to the facility of credit and easy instalments, large number of customers can be attracted to purchase the goods. Mass selling encourages mass production.

4. Hire-purchase system is a boon to small-scale industries and farmers. They can purchase machinery and equipment on instalment basis and need not delay operations for want of funds. They can make payment in instalments out of the earnings from the use of machines and implements.

5. By purchasing goods on hire-purchase basis, well-to-do people can invest their surplus money in more profitable avenue. The seller can obtain loans against the goods sold one hire-purchase basis. At present, banks and finance companies help the hire-purchase sellers by providing finance and collection services. Hire-purchase business help to increase production, employment and national income in the country.

Demerits of HP system: The main drawbacks of hire-purchase are as follows :

1. It encourages prodigal expenditure and induces people to live beyond means. People with small means are tempted to purchase luxury products which they cannot afford. In order to pay instalments regularly they have to curtail their expenditure on the necessities of life. People have to mortgage their future income.

2. Prices under hire-purchase are high as the seller charges interest on unpaid amount. He also adds some margin for bad debt risk and collection charges. Many buyers are under severe strain to save compulsorily to pay instalments. Some of them cannot bear the burden and they have to surrender the goods at a later stage.

3. Sellers have to bear a high risk. In case of default in payment, they have the right to take back the goods but the recovered secondhand goods may not fetch sufficient prices’. Under instalment system, the seller has to waste time, money effort to take legal action for the recovery of payment from the defaulter.

4. Hire-purchase facility is available only to people with regular and sufficient income. The vendors do not sell goods on hire-purchase to people with uncertain or fluctuating income and to those having no security to offer for the goods purchased.

5. Large amount of capital investment is required to carry on hire-purchase business. A large part of investment remains locked up in book debts.

LEASING

Concept, advantages and disadvantages

Leasing is the process by which a firm can obtain the use of certain fixed assets for which it must make a series of contractual, periodic, tax-deductible payments. A lease is a contract that enables a lessee to secure the use of the tangible property for a specified period by making payment to the owner. 

Advantages of leasing to lessee

.1.100 percent financing

Lease agreement finances assets which require huge investment. The lessee is able to avail of 100 percent financing without resorting to any immediate down payment. Thus, the lessee experiences no hurdles in commencing his business without making any initial investment.

2. Alternative use of funds

Leasing facilitates the acquisition of equipment, plant and machinery without the necessary capital outlay. So, the financial resources of the business may be spared for alternative use. Internal accruals from the exploitation of the leased equipment enhance the working capital position of the firm.

3. Cheaper sources of finance

l.easing costs less than other alternatives available. Moreover, leasing permits firms to acquire equipment without going through stringent formalities. So, lease financing is faster as well as cheaper.

4. Use and control over assets

Leasing involves divorce of ownership from the economic use of equipment. Though ownership of the property rests with ‘ the lessor, lessee has a full control over the leased equipment in his possession. The other modes of long-term finance for example, equity or debentures dilute the ownership of promoters of the business.

5. Free from Restrictive covenants and conditions

Lease finance is considered preferable to institutional finance. The lessee feels free from restrictive covenants and conditions such as representation on the board, conversion of debt into equity, payment of dividends so on. So, lease finance is not an invasion on the financial freedom of the lessee.

6. Flexibility in structuring of rentals

Lease rentals can be structured to accommodate the cash flow position of the lessee. The lessee is able to pay the lease rentals from the funds generated from operations. The lease period is also chosen to suit the lessee’s capacity to pay rentals. But in institutional finance repayment in earlier years is burdensome wherein the project may not actually generate cash flows sufficient to pay rentals.

7. Faster and simple documentation

A lease finance arrangement is free from cumbersome procedures. It involves faster and simple documentation. But in institutional finance, compliance of covenants and formalities and bulk documentation cause procedural delays in getting loans.

. Tax concession

A lot of tax advantages can be derived by the lessee through suitably structured rental payments. In case of heavy taxation, rentals may be increased to lower taxable income. Rental payments are deductible from income. If the lessor is liable to tax, the rentals may be lowered. Less incomes attract less tax. The lessor can pass on a part of tax benefit to the lessee.

9. No risk of obsolescence

The lessor being the owner of the asset bears the risks of obsolescence. Further., the lessee at any time can replace the asset with latest technology.

Advantages or benefits of leasing to lessor

The following advantages are available to the lessor

1. Security: The lessor can repossess the leased equipment where the lessee defaults on payments. So, the lessor interest is fully secured.Tax benefits: The lessor can claim tax relief by way of depreciation. Depreciation is deductible from income. Less tax is charged for less income. Moreover, the lessor in high tax bracket can lease out assets with high depreciation rates. Resultantly, he can reduce his tax liability.

3. Profitability: The lease rentals are received from the lessee. The lessor can cover the capital outlay and earn sufficient profit. The rate of return is more than what the lessor pays on his borrowings.

4. Capital Gearing: Trading on equity is possible for lessors. With low equity capital and substantial borrowings, lessors can earn high return on equity.

5. Growth Potential: The leasing industry has a high growth potential. Even during recession where lessees are hard pressed for funds, they can acquire equipment for business use. This ultimately maintains growth pace even during recessionary period

Limitations of Leasing

The drawbacks of lease financing are given below.

1. The lessee is not free to make additions or alterations to the leased equipment.

2. A financial lease entails a higher payout obligations. The lease is non cancellable. If the equipment is not suitable, the lessee will suffer. Cancellation of lease is possible only at a very heavy cost.

3. The lessee is not the owner of the leased asset He is thus deprived of the residual value of assets. He is not even entitled to any improvement done by him. On the expiry of the lease period, the leased equipment reverts to the lessor.

4. Serious consequences of default: It the lessee defaults in paying lease rentals, the consequences for him are far more serious. The lessor may terminate the lease and repossess the equipment. In case of finance lease, the lessee has to pay for damages and accelerated rental payments.

5. Leased assets do not figure in balance sheet. So there is an effective understatement of assets value. However, leased assets are disclosed by way of footnote to the balance sheet

6. Lease financing costs more than debt financing.

Types of the Lease

Leasing takes different types which are given below;

• Based on Nature.
  1. Operating lease.
  2. Financial lease.
• Based on the Method of Lease.
  1. Direct lease.
  2. Sale & Leaseback.
  3. Leverage lease.

1. Operating Lease: An operating lease is a cancelable contractual agreement whereby the lessee agrees to make periodic payments to the lessor, often for 5 or fewer years, to obtain an asset set’s services. According to the International Accounting Standards (IAS-17), an operating lease is one that is not a finance lease.
2. Financial Lease: A financial (or capital) lease is a longer-term lease than an operating lease that is non-cancelable and obligates the lessee to make payments for the use of an asset over a predetermined .period of time. According to the International Accounting Standard (IAS-17), in a financial lease, the lessor transfer to the lessee substantially all the risks and rewards identical to the ownerships of the asset whether or not the title is eventually transferred.
3. Direct Lease: Under direct leasing, a firm acquires the right to use an asset from the manufacture directly. The ownership of the asset leased out remains with the manufacture itself.
4. Sale & Leaseback: Under the sale & leaseback arrangement, the firm sells an asset that it owns and then leases to the same asset back from the buyer. This way, the lessee gets the assets for use, and at the same time, it gets cash.
5. Leveraged Lease: Leveraged lease is the same as the direct lease, except that a third party, the lender, is involved in addition to the lessee & lessor. The lender partly finances the purchase of the asset to be leased; the lessor turns to be a borrower.

Distinguish between the Operating and Financial Lease

Topics	Operating Lease	Financial Lease
Definition	Operating lease is short term lease used to finance assets & is not fully amortized over the life of the asset.	A financial lease is the lease used in connection with long term assets & amortizes the entire cost of the asset over the life of the lease.
Duration	Short term leasing	Long term leasing
Cost	The lessor pays the maintenance cost.	Lessee pays the maintenance cost.
Cancel & Changeable	Cancelable lease & It is a changeable lease contract.	Non-cancelable lease & It is not a changeable lease contract.
Risk	lessor bears the risk of the asset.	The lessee bears the risk of the asset.
Purchase	At the end of the asset is hot purchasable.	At the end of the contract, the asset is purchasable.
Renew	It is a renewable contract.	It is not a renewable contract.
Other  name	Service lease, short term lease, cancelable lease.	A capital lease, long term lease, non-cancelable lease.

Auditing Free notes for BCOM

Auditing by B. B. Baral,

 lect. In. Commerce

Jagatsinghpur, odisha

Good to talk:8249989782

bbbaral4200@gmail.com

Q1. What is  auditing ?discuss its  advantages or importance .

     

   Introduction : Audit refers to adherence to the books of accounts of a business unit. In simple words audit is  an examination of the books of accounts and vouchers of a business . it helps to know  that the Balance Sheets is properly drawn up, so as to give a true and fair view of the state of the affairs of the business and  the profit and loss accounts gives a true and fair view of the profit or loss for the financial period . 

Definitions:

In the language of Montgomery
Auditing is a systematic examination of the books and records of a business or other organization, in order to ascertain or verify and report upon the facts regarding its financial operation and the result thereof.

In the language of Lawrence R. Dicksee
An audit is an examination of records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate. In some circumstances it may be necessary to ascertain whether the transactions are supported by authority

Advantages or importance of auditing

Auditing has the following advantages. 

1. Audit Helps To Detect And Prevent Errors And Frauds

An auditor's main duty is to detect and prevent errors and frauds,  trying  to avoid such frauds. So despite this is not  compulsory, almost all organisations conduct audit in order to detect and prevent errors and fraud. 

2. Audit Helps To Maintain Account Regularly

An auditor  demands explanations if accounts are not maintained properly. So, audit gives moral pressure on maintaining accounts regularly and properly. 

3. Audit Helps To Get Compensation

If there is any loss in the assets of business, insurance company gives compensation on the basis of audited statement of valuation made my the auditor. So, it helps to get compensation.

4. Audit Helps To Obtain Loan.financial institutions extend loan on the basis of audited statements. A business organization can avail loan considering the audited statement of last five years. So, an organization should make audit compulsory to obtain loan.

5. Audit Facilitates The Sale Of Business

Valuation of assets is made by the auditor. On the basis of valuation of assets and liabilities, businessman can sell his business. It helps to determine the price of business.

6. Audit Helps To Assess Tax

Tax authorities make  assessment of taxes on the basis of profit calculated by the auditor. In the same fashion sales tax authority calculates sales tax on the of sales shown in the balance sheet. 

7.Audit helps in comparison:

 Audit helps to compare books of accounts of current year with the accounting of the previous year. comparing the accounts of current with previous years helps to detect errors and frauds.

8. Audit Helps To Adjust Account Of Deceased Partner

Valuation of all the assets and liabilities of the business is made by the auditor while auditing books of account. Such valuation helps to clear the account of deceased partner.

9. Audit Helps To Present an evidence

If a  case is filed against the auditor regarding negligence, auditor can present audited report as an evidence to settle such case. So, it helps to present proof to settle such cases.

10. Audit Provides Information About Profit Or Loss

A businessman wants to know profit or loss of his business after a certain period of time. So, the owner of the business can get information about profit or loss after auditing the books of accounts.

11. Audit Helps To Prepare Future Plan 

After audit All the  financial statements are assumed true and correct. Such true and correct account helps to prepare for the future plans

12. Audit Helps To Increase Goodwill

Auditing shows the profitability and financial position of an organization which creates faith of public over the business. Thus, auditing helps to increase goodwill of an organization of auditing.