The Business Studies Syllabus in the National Curriculum is
designed to foster an understanding of the underlying business
concepts, the general strategies of problem solving and aesthetics
of businesses as an important and powerful tool in everyday
life. Business Studies subject will help students to choose the
right path and will enable students to customize their secondary
education and improve their prospects for success in school and
in their life.
The eight key competencies laid in down in the National
Curriculum Framework emphasises on developing and preparing
the student mentally and spiritually to the world surrounding
them in order to be competent to face the real world challenges
in order to succeed. This curriculum is also prepared as such
that these key competencies are addressed throughout.
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ISBN 978-1-316-64670-0
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Exploring Business Studies 8
This books aims to deliver the contents of the Business Studies
Syllabus through six main subject areas or strands. While
the learning process of this subject involves more than the
understanding of basic concepts, it also focuses on enabling
the students to acquire knowledge, skills and attitudes so as
to develop an informed and critical understanding of, business
environment and to understand key economic issues faced in
every economy with active participation and interaction with
businesses through activities such as field visits.
Exploring
Business Studies
8
Exploring Business Studies
8
A joint publication of National Institute of Education, Maldives
and Cambridge University Press, India
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Preface
This book intends to assist in the teaching and learning of Business Studies in
the Maldivian Schools based on the Business Studies Syllabus developed in
line with the New National Curriculum of the Maldives and rolled out in the year
2015. The Business Studies Syllabus in the National Curriculum is designed
to foster an understanding of the underlying business concepts, the general
strategies of problem solving and aesthetics of businesses as an important
and powerful tool in everyday life. This books aims to deliver the contents of
the Business Studies Syllabus through six main subject areas or strands. While
the learning process of this subject involves more than the understanding of
basic concepts, it also involves constructing meaning or knowledge based
on experiences and understanding the application of business concepts in
students’ daily life. Although, this book intends to cover the basics; a deeper
understanding of the subject can only be achieved through active participation
and interaction with businesses through activities, such as field visits.
Our sincere gratitude and appreciation is extended to Cambridge University
Press for partnering with us on this endeavour and the members of the NIE
Curriculum Team for the support rendered.
Author: Waseema Fikuree
Contributing Author: Nishan Mohamed
Professional Guidance: Ahmed Yusuf, NIE
© Cambridge University Press
Contents
1.
Business Fundamentals . . . . . . . . . 1
4.
Business Organisations . . . . . . . 127
4.1 Type of Business
Organisations . . . . . . . . . . . . . . 127
1.1 Basic Economic Concept. . . . . . . 1
1.2 The Factors of Production . . . . . 17
4.2 Companies . . . . . . . . . . . . . . . 133
1.3 Stakeholders . . . . . . . . . . . . . . . 22
4.3 Private Sector Business . . . . . 137
2.
Basic Financial Accounting . . . . . 30
4.4 Public Sector Business. . . . . . . 139
2.1 The Role of Accounting . . . . . . . 30
4.5 Multi-national Companies . . . . . 140
2. 2 The Double Entry System of
Book-keeping . . . . . . . . . . . . . . . 35
4.6 Nationalisation and
Privatisation . . . . . . . . . . . . . . . 142
2.3 Documentary Records and
Books of Prime Entry . . . . . . . . . 44
3.
5.
Financial Institutions . . . . . . . . . . 150
2.4 Sole Trader Financial
Statements . . . . . . . . . . . . . . . . . 62
5.1 Exchange. . . . . . . . . . . . . . . . . 150
Entrepreneurship . . . . . . . . . . . . . . 98
5.3 Banking System. . . . . . . . . . . . 156
3.1 Allocation of Resources . . . . . . 98
5.4 Stock Exchange. . . . . . . . . . . . 163
3.2 Economic systems. . . . . . . . . . 100
3.3 Production . . . . . . . . . . . . . . . . 106
3.4 Methods of Production . . . . . . 108
3.5 Sectors of Production . . . . . . . 112
3.6 Division of Labour . . . . . . . . . . 113
3.7 Cost of production . . . . . . . . . . 115
3.8 Promotion . . . . . . . . . . . . . . . . 117
© Cambridge University Press
5.2 Evolution of Money . . . . . . . . . 152
6.
Population . . . . . . . . . . . . . . . . . . 168
6.1 Demography . . . . . . . . . . . . . . 168
6.2 Population Distribution . . . . . . . 173
6.3 Developed and Developing
Economies . . . . . . . . . . . . . . . . 183
Chapter 1 Business Fundamentals
1
Business Fundamentals
1.1 Basic Economic Concept
The most basic economic concept is economic
You will learn
problem. Every society faces this reality due to its
• Analyse needs and wants
people’s unlimited wants and limitation in resources.
• Different types of goods
The purpose of economics involves how best the
• Alternative uses of resources
scarce resources can be used in order to make
• Scarcity
goods and services to satisfy as many wants as
• Opportunity cost
possible. Goods and services that we need are
• Price mechanism
things which are compulsory to live or survive.
Examples of needs are food, clothing and shelter.
Humans also have other needs, such as sleep and love, but they are not considered as a
part of economics. That is because there is no process that uses resources to bring about
the satisfaction of these needs.
Figure 1.1.1: Needs and wants
1
© Cambridge University Press
Exploring Business Studies
In contrast, the goods and services that we want are things that bring pleasure but which
are not a necessity to live. For example, television. In other words, wants are the things that
you would like to have, but these are not necessary for survival and you can live without.
Wants are desires that can be satisfied by consuming or using a good or service. Human
wants are unlimited. This is because when one want is fulfilled there is always a desire for
another. For example, to have expensive perfumes, toys, CDs, etc.
Activity 1.1
Aisha and Sarah are two classmates. Aisha is from a well-off family where all her
needs and wants are mostly fulfilled. Sarah is from a less fortunate family struggling
to survive. Their whole class decides to go for a picnic. On their way to the picnic
island, the sailing boat lost the route and landed on another island. These students
were left with few food items and water. They had to manage with these for as long as
they could. Some of the students started to look for alternatives for food and searched
for water too.
Given this situation answer the following questions.
a) What were Aisha’s needs before she got stuck at the uninhabited island?
b) What were Sarah’s needs before she got stuck at the uninhabited island?
c) Is there any difference in their needs before they got stuck? Justify.
d) What were Aisha’s wants before she got stuck at the uninhabited island?
e) What was Sarah’s wants before she get stuck in the uninhabited island?
Is there any difference in their wants before they got stuck? Justify.
f)
g) Is there any difference in their wants after they got stuck? Justify.
Alternative Uses of Resources
Human wants are unlimited while the resources to produce goods and services to fulfil
these wants are limited. Therefore, nobody can have sufficient goods and services to fulfil
all their needs and wants. This leads people to make choices. Scarce resources can be
used in a lot of ways to make different goods and services. For example, in Male’, land is
scarce. A piece of land in Male’ can be used in different ways, such as to build a hospital,
a playground or a school. Another example in Maldives would be the uninhabited islands.
The government can use these resources (islands) in many different ways, such as leasing
for resort development, industrial development and agricultural development, or perhaps for
urbanisation. Thus, one resource can have may uses. Governments and people around the
world must choose how scarce resources can be best utilised.
2
© Cambridge University Press
Chapter 1 Business Fundamentals
Our scarce resources are best utilised when they are
economised for the production of goods and services
increasing their sustainability. Economising is making
the most of what we have, that is, using the limited
resources in such a way that it gives the maximum
benefit and reduces wastage. For the individual,
this means using one’s abilities and spending one’s
income in a way that gives the most satisfaction or
benefit. For the community as a whole, it means using
people’s skills and energy, the land, the buildings, the
machinery and other economic resources so as to
obtain the highest possible standard of living.
Figure 1.1.2: Land can be used for
different purposes
Activity 1.2
Maldives has many uninhabited islands which can be used in different ways. A small
island with attractive white beach can be used in many different ways.
a) List three possible ways this resource can be used.
b)Suppose this small island is used as a picnic island. What would be the
opportunity cost of using the island as a picnic island?
c) In your opinion, explain how this resource can be best utilised.
Activity 1.3
Local councils are under pressure from the people on how their budget is spent. While
some people may want to upgrade an old hospital with new equipment which can give
them good health care, others may want to improve the transport system.
Divide the class into two groups; one group who wants to upgrade the hospital
and the other group who wants to improve transport system. Choose one pair from
opposing groups and debate on the topic. Rest of the students will act as the council
who will decide by majority vote how to spend their money.
While resources are limited, human wants remain unlimited with a new want created once
one want is fulfilled. Scarcity is the economic problem of humans with unlimited wants and
limited resources to fulfil their need. Every society faces the problem of scarcity, leading
to make choices. For example, breadfruit is seasonally grown and scarce due to seasonal
harvest. Scarcity results the prices of breadfruit to increase.
3
© Cambridge University Press
Exploring Business Studies
Activity 1.4
Your friend in class has got a diamond ring as a birthday gift. Assume that most of the
students in your class would like to have a diamond ring.
a) Is it possible for all the students to have a diamond ring?
b) Justify your answer to part (a).
c) What type of resource is a diamond? Explain.
Scarcity forces us to make choices. Choice is the selection between two or more
commodities. We are forced to make choices because our resources are limited and
wants are unlimited. When we make a choice we select the commodity that would give us
maximum satisfaction. On a daily basis, choices are made by all consumers, firms and
governments. Choices create opportunity cost.
Opportunity cost is the next best alternative foregone in terms of a choice made. In other
words, it is the alternative that could be enjoyed if an alternative action was taken. It is the
real cost of choosing something.
For example, you have got only MVR 10 and you want to buy a chocolate and a soft drink.
You may not be able to buy both because your resources are not enough to buy both the
goods. Therefore, you have to make a choice between them. This means that you will
have to forgo either one of it. Suppose, you decided to buy the soft drink instead of the
chocolate, the opportunity cost of buying the soft drink will be the chocolate you have
foregone.
Opportunity cost is not how much money people spend on goods, but the other goods and
services that could have been bought with the money. Opportunity cost also includes other
relevant costs, such as the value of time spend and the value of the opportunities we forgo.
Suppose your friend has agreed to help you for an hour with pending work of the day you
were absent from school. On the same day your family is going to a party which will be
held in Villingili. Now, you are considering either to do the pending work with your friend or
to go to the party with
your family. Your friend
is not charging anything
to help you with the
pending work, but you
will have to spend one
hour with your friend.
Going to Villingili will
have a transport cost.
Figure 1.1.3: Opportunity cost
4
© Cambridge University Press
Chapter 1 Business Fundamentals
Is your friend helping you complete your work for free? No, because if you are completing
your work with your friend then you are giving up on going to the party or some other work
you could have done during this hour. Therefore, the opportunity cost of doing your pending
work is missing the party or any other work you could have done during this hour. The
opportunity cost of going to the party will be the good you could bought with the money you
spend on the transport and the time you spend with your friend.
Activity 1.5
You are planning on a trip with your classmates to Hulhumale’ for a barbeque.
However, due to time constraints you all decided to go to Villingilli. Therefore, instead
of a barbeque, everyone decided to have a tea party with short eats, tea and coffee.
Discuss the opportunity cost of having the gathering in Villingilli instead of Hulhumale’.
y
Activity 1.6
Use the given figure to answer the following questions.
a)State the maximum number of radio the country can
produce if it devotes all of its resources to produce
radios.
b)Calculate the opportunity cost of increasing output of
TV from 35 to 50 units.
Radio
MG
Production Possibility Curve (PPC) is a
graphical representation of maximum output of
80
two products and the possible combination of
68
these two goods with constant resources and
54
technology. Production possibility curve illustrates
35
the opportunity cost of choice. Figure 1.1.4 shows
that a country can produce either 80 units of
manufactured goods or 75 units of agricultural
x
goods or a range combination of both the goods.
35 50 65 75 AG
If the country decides to produce 68 units of
Figure 1.1.4: Production Possibility Curve
manufactured goods it can only produce 35
units of agricultural goods. And, if the country decides to produce 65 units of agricultural
goods it will have resources available to produce only 35 units of manufactured goods.
Thus, the opportunity cost of producing extra 30 units of agricultural goods is 33 units of
manufactured good.
80 A
68
54
35
B
C
D
E
35 50 65 75 TV
5
© Cambridge University Press
Exploring Business Studies
Goods and Services
Good is anything that is tangible and which
can satisfy human wants. Tangible things
are those things which we can see, feel and
touch. Services are intangible things which
we can’t see, feel or touch. Services would
be the performance of any duties or work for
another, either helpful or professional activity.
Examples of services are a service of a teacher
or a physician providing health care or a bank
Figure 1.1.5: Air and sea water are
providing a range of financial services.
free goods
Goods can be divided into two broad categories.
They are free goods and economic goods. In every day terms, one would define free good
as something that one does not have to pay for. However, in economics, a free good is a
good which has no resources involved in its production and no involvement of opportunity
cost. Therefore, we can say that free goods are gifts of nature with no cost of production
and no price to pay resulting in no opportunity cost. For example, river water, sunlight and
air have no cost of production and are freely available without a price.
Economic goods are man-made goods which involve a cost of production and hence
an opportunity cost. Economic goods are limited in supply. For example, your classroom
is an economic good. The material and the labour used to build it could have been used
for the production of other facilities. Almost all
the goods and services are economic goods
as they involve a cost of production and an
opportunity cost.
Economic goods can be divided into consumer
goods and producer goods. Consumer goods
are goods produced for direct consumption.
Consumption means using up of goods and
services to satisfy wants. Consumer goods are
also known as final goods that are ultimately
consumed rather than used in the production
of another good. An example of consumer
good is a refrigerator which is used as a home
appliance. Consumer goods can be divided
into durable consumer goods and non-durable
consumer goods. Durable consumer goods
6
© Cambridge University Press
Figure 1.1.6: Economic goods
Chapter 1 Business Fundamentals
are goods which last for a long period of time. Examples of durable goods include cars
and furniture which last for a long period of time. Non-durable consumer goods are fast
moving consumer goods which do not last for a long period of time or have a shorter shelf
life. Examples of non-durable goods include cosmetics, fruits and vegetables. Producer
goods are goods used for the production of other goods and services. These goods are
not used for direct consumption. They are also known as intermediate goods. For example,
a photocopy machine used for printing will be a
producer good. In addition to this, goods can be
DID YOU KNOW
classified as merit goods and public goods. Merit
goods are those goods that the government
Rice is the major source
thinks that people should have. Individuals may
of calories for half the
not be able to buy enough merit goods, such as
world’s population. It is the
education and health at the market price in a
single largest source of
market economy. The reason could be that these
employment and income for
might not be affordable to individuals or they
rural people.
may not realise the importance of merit goods.
There could be under-provision of merit goods
by the private sector if these goods are not provided by the government. Therefore, many
governments reject the free market as a way of supplying merit goods. The government is
concerned to increase or maximise the consumption of merit goods which is considered
to be highly desirable for the welfare of the citizens. Public goods are goods that cannot
be confined to those who have paid for it (non-excludability) and the consumption of one
individual does not reduce the availability of goods to others (non-rival consumption).
Characteristics of public goods is non-excludability and non-rivalry. Non-excludability is
when we cannot stop one from using it even though they do not pay for it. Non-rivalry is
when someone else’s consumption of the good does not reduce the other person’s ability to
consume it. Examples of public goods are street lighting and police service. Since payment
for these goods and services could not be made on a voluntary basis, the government
needs to finance for these goods and services.
Activity 1.7
Given below are some goods used in our daily life.
Books
Housing
Air
Sea water
Street lights
a) Identify and list down the free goods and economic goods.
b) Compare your list with another student and discuss on any differences with
reasoning HOTS .
7
© Cambridge University Press
Exploring Business Studies
Activity 1.8
Identify the type of good from the list of goods given below according to their category.
You may mark more than one category.
Good
Sun light
Electricity
Water bottle
Health care
Villingili beach
Public library
Economic
Free
Consumer Producer
Merit
Public
Assume that one of your friends had marked Villingili beach as a consumer good. Do
you agree, or disagree with your friend. Justify your reason. HOTS
Demand is the quantity of a commodity that consumers are willing and able to buy at a
given price over a given period of time. Demand in economics means effective demand.
Demand is effective when it is backed by purchasing power which is the ability to pay.
Demand can be expressed as a schedule or a curve. Demand schedule lists the different
quantities demanded of a product, at different prices over a given period of time, while
demand curve is a graph drawn for the demand schedule.
Table 1.1.1: Typical demand schedule
Price (MVR)
10
20
30
40
50
Quantity demanded
500
400
300
200
100
Figure 1.1.7 shows the demand for a good at different
prices. When the price of good is MVR 40, quantity
demanded is 200 units. When the price of good is
MVR 10, quantity demanded is 500 units. Demand
and price are inversely related. That is, when price
increases, demand decreases and price decreases
when demand increases. Increase in price results
in the diminished willingness and ability to buy the
product. Thus, with higher prices people tend to switch
to substitute products resulting in less people willing to
buy the product.
8
© Cambridge University Press
Price
50
40
30
Demand
20
10
0
100
200
300
400
500 Quantity
Figure 1.1.7: Typical demand curve
Chapter 1 Business Fundamentals
The law of demand states that the quantity demanded will drop as the price rises, ceteris
paribus or ‘all other things being equal’.
Activity 1.9
Given below is the demand schedule for domestic air ticket.
Price (MVR)
Number of tickets
2500
10
2200
20
2000
35
1800
55
1000
90
a) Using the above data, draw a demand curve.
b) Explain what happens to demand for air ticket when price changes.
Effects of a change in price on demand
As the law of demand suggests, a fall in price of
a product is likely to raise its demand and vice
versa. Figure 1.1.8 shows that when price is P2,
quantity demanded is Q1 and when price reduces
to P1, quantity demanded increases to Q2. This
is called an extension in demand that is when
prices falls, quantity demanded increases. Thus,
a movement along the demand curve from A to
B can be observed. This change occurs due to
changes in price of the product. In contrast, a raise
in price will cause contraction in demand as shown
in Figure 1.1.9. When price is P1 quantity demanded
is Q2, when price increases to P2 quantity demanded
decreases to Q1. Any changes in price of a product
causes movement along the demand curve. Changes
in any other factor other than price may cause
demand curve to shift.
Price
P2
A
B
P1
Demand
Q1
Q2
Quantity
Figure 1.1.8: An extension in demand
Price
P2
P1
A
B
Demand
Q1 Q2
Quantity
Figure 1.1.9: A contraction in demand
9
© Cambridge University Press
Exploring Business Studies
Activity 1.10
School canteen has changed the price of sandwich from MVR 5 to MVR 7. As a
result of this, many of your friends have switched to tuna buns. Now, the demand for
sandwich has changed from 50 to 20 sandwiches.
a) Illustrate this information on a demand curve.
b) Explain what happenes to quantity demanded as price changes.
c) Identify whether the demand has extended or contracted. Explain.
Individual and Market Demand
Both individual and market demand is important in analysis of demand and supply.
Individual demand is the amount of product an individual is willing and able to buy at
different prices. Market demand is the total of all the individual demands for a product or
service at different prices.
Activity 1.11
Local tourism (guest houses in inhabited islands) is a newly grown concept and many
producers in service industry are joining this service. These producers have the
following information regarding the amount of rooms tourists booked each year given
the number of possible prices. The market demand schedule is as follows:
Price of rooms
Market demanded per month
MVR 5000
1000
MVR 4000
1500
MVR 3000
2000
MVR 2000
2800
MVR 1000
3500
a)
Draw a market demand curve for the rooms
b)
Use the graph to work out how many rooms would be demanded at a price of
i) MVR 3500
ii) MVR 1500
c) If the guest house owners together wished to sell the following amount of rooms
each year, what price should they charge:
10
© Cambridge University Press
Chapter 1 Business Fundamentals
i) 3000
ii) 2500
iii) 1700
d)
Explain why market demand curve for rooms slopes downwards.
Supply is the quantity of a commodity that the producers are willing to offer at a given price
over a given period of time. Supply is not the same as production. Some of the products
produced may be stored to sell at a later date. Supply is the difference between output and
stock. Supply schedule lists the different quantities that can be supplied, at different prices
over a given period of time. A supply curve is a graph drawn for the supply schedule.
Table 1.1.2: Typical supply schedule
Supply of fish
(Thousands of tonnes)
900
800
700
600
500
Price per tonne
(MVR)
110
100
90
80
70
Price
Figure 1.1.10 shows the supply of fish at
different prices. When the price of fish is MVR
Supply
110 producers are willing to supply 900 tonnes 110
of fish. When the price of fish reduces to MVR
70 suppliers are willing to supply a quantity 100
of 500 tonnes. The supply of a product and 90
its price is directly related. Which means that
when prices increase producers are willing to 80
supply more and when the prices fall suppliers
70
decrease their quantity of supply. This is called
0
the law of supply where the quantity of a good
500 600 700 800 900
Quantity
supplied increases as the market price of the
good raises, and falls as the price falls.
Figure 1.1.10: Typical supply curve
11
© Cambridge University Press
Exploring Business Studies
Activity 1.12
Given below is the supply schedule for domestic production of watermelon.
Price per kg of chilli (MVR)
Supply per month (kg)
100
4000
90
3000
80
2000
70
1000
60
500
a) Using the above data, draw a supply curve.
b) During Ramadan people start to buy more watermelon:
i. Explain the effect on price of watermelon.
ii. Explain the possible reaction of producers of watermelon.
Effects of a Change in Price on Supply
As the law of supply suggests a fall in the price of a product is likely to decrease its supply
and vice versa. Figure 1.1.11 shows that when price is P1 quantity supplied is Q1, and
when price increases to P2 quantity supplied increases to Q2. This is called an extension
in supply where there is an increase in price and quantity. This results a movement along
the supply curve from position A to position B. In contrast, as shown in Figure 1.1.12 when
there is a reduction in price from P2 to P1, the quantity supplies also reduces from Q2 to
Q1. Hence, there is a movement along the supply curve from position B to position A. The
reduction in supply and price is called a contraction in supply. Thus, changes in price of
a product causes movement along the supply curve and changes in any other factor other
than price could result in a shift in supply the curve.
Price
Price
Supply
P2
P1
B
P1
A
Q1 Q2
Quantity
Figure 1.1.11: An extension in supply
12
© Cambridge University Press
Supply
P2
B
A
Q1 Q2
Quantity
Figure 1.1.12: A contraction in supply
Chapter 1 Business Fundamentals
Activity 1.13
Assume that the quotes given below are from a newspaper.
“petrol prices fall for the second time during this year”,
“price of video games is set to fall again”
“price of foreign holidays increases”
Explain whether the producers of the relevant companies
i) Are likely to raise or cut back on production as a result of these news items.
Explain your reasons.
ii) What is the term used for this rise or cut down of production?
Individual and Market Supply
Individual supply is the supply of one producer where as the market supply is the total
supply of a product by all the producers in the industry. Market supply is calculated by
adding all the individual supply of all the producers.
Activity 1.14
Ahmed is a farmer who sells eggs and chicken to the shops in his island and to nearby
islands.
a) During Ramadan people prepare more food with eggs. What would be the demand
for eggs?
b) What might happen to the price of eggs?
c) Island council is leasing a nearby small uninhabited island for agricultural purpose.
Ahmed had leased this island. What could be the effect on supply of eggs and
chicken? Explain.
d) During Eid celebrations, many people want to make feast. Would the demand for
chicken be higher, lower or normal? Explain.
e) Do you think that Ahmed would like the demand for eggs and chicken be lower or
higher. Explain your answer.
Market price is the economic price at which buyers and sellers of a good or service agree
to trade in an open market at a given time. While market forces move price towards the
equilibrium, the market price of a good or service is determined by the available supply
of the good or service and the market demand for it. For each good or service, there is a
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supply and a demand schedule. If the two schedules are combined in a graph, it can be
seen that the demand curve intersects the supply curve at one point. This is the market
price where the commodity will be sold in a general market condition. If a firm sets a price
above the equilibrium price, it will not be able sell all of the products, causing a product
surplus. To ensure that firms sell all its products, they will lower the price until market clears.
This will be the point where quantity demanded is equal to quantity supplied.
Price mechanism is the system of interdependence between supply of a good or service
and its price in a free market whereby a market price is determined for the goods and
services. Changes in a condition of demand or supply is reflected on the market price
of a good or service with the price increasing or decreasing. The changes in price acts
as a signal to consumers and producers to change quantity bought and sold along with
changes in the allocation of resources. The price allocation for goods, services and
resources are determined by the interaction of buyers and sellers. The price mechanisms
is concerned with how buyers and sellers interact together in order to arrive at a market
price. In a perfectly competitive market, when buyers and sellers interact, equilibrium price
is automatically reached.
Equilibrium price is the market price where the quantity supplied is equal to the quantity
demanded. Figure 1.1.13 shows the equilibrium price marked as E where the price is
equal to P1 and the quantity demanded Q1. The equilibrium price is also the position where
the demand curve and the supply curve intersect. At this point there is no shortage or
excess in the market. If prices are set below or above the market price, market forces will
automatically move the price to equilibrium.
In Figure 1.1.14 when market price is initially set
at MVR 4 which is below the equilibrium level, the
demand exceeds the supply. In this case, there
is an excess demand for the product, and some
customers are willing to pay a higher price due
to the shortage in supply. When customers are
willing to pay a higher price, suppliers recognise
this demand and increases the price. As shown
in Figure 1.1.15 the price is pushed upward to the
equilibrium price level of MVR 6 and accordingly the
quantity demanded reduced to 40 units.
Price
Supply
P1
E
Demand
0
Q1
Figure 1.1.13: Equilibrium price
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Quantity
Chapter 1 Business Fundamentals
Price
Price
8
8
6
6
Demand
4
0
Demand
4
0
30
40
50
Quantity
Figure 1.1.14: Demand exceed supply
30
40
50
Quantity
Figure 1.1.15: Return to equilibrium price
Due to the excess demand suppliers tend to increase the capacity of production to meet
the demand. This results in increased supply of products to the market. As shown in
Figure 1.1.16 the suppliers are willing and able to sell 6000 units of a product at the price
of MVR 15. However, consumers are willing to buy only 2000 units at that price. In this
case, creating an excess supply of 4000 units. This results a fall in price causing demand
to extend and supply to contract till the price reaches the equilibrium level as shown in
Figure 1.1.17.
Price
Price
Supply
Supply
15
15
10
10
Demand
5
0
2000
4000
6000
Quantity
Figure 1.1.16: Supply exceed demand
Demand
5
0
2000
4000
6000
Quantity
Figure 1.1.17: Return to equilibrium price
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Activity 1.15
During Ramadan prices of food items increase, specially the price of onion, potato and
eggs. Shops in Male’ always reported that demand for these food items increases and
there is a shortage of supply.
a) On a demand and supply diagram, illustrate the market for potatoes before
Ramadan.
b) What could be the effect on the price of potatoes in this situation? Using a
diagram, explain your answer.
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Chapter 1 Business Fundamentals
1.2 The Factors of Production
Economic resources are comprised of human labour
You will learn
and all other things which are used to produce
• Factors of production
goods and services. The economic term for these
• Role of entrepreneur
resources is factors of production. Factors of
production can be classified into four groups. They
are natural resources, human resources and manufactured resources. Fourth factor of
production is the entrepreneur, who organises all the other factors of production. Each
factor plays a unique role in the production of goods and services, and each factor is clearly
distinguishable from the other three.
LAND
(natural resources)
LABOUR
(human resources)
CAPITAL
(manufactured resources)
Brought together and organised by
THE ENTREPRENEUR
Figure 1.2.1: Factors of production
Land
Land is Allah’s Gift to mankind which is used to produce goods and services. In economics,
land is natural a resource. It includes metal ores, gas, coal, water, sea and air. Land also
refers to all the natural resources on Earth which are available to us for the satisfaction of
our needs and wants. It refers to everything in the atmosphere, sea and ground. Land is the
passive factor in production. The price paid or the reward for the land is rent.
Most of the Earth’s surface is covered with ocean leaving about 28 percent as land.
Of this land much of it will not be suitable for human settlement, as there are mountains,
desserts or land covered by ice or jungle. There are renewable and non-renewable
resources found in land. Renewable resources are those which can be replaced by natural
process. Example of a renewable resource is water. Non-renewable resources are those
which cannot be replaced or produced as much as being consumed. It is because these
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resources often exist in fixed amounts or are consumed much faster than nature can create
them. Example of non-renewable resource is natural gases.
Land has no cost of production involved as it is a natural resource. Supply of land is limited,
this means the supply of land does not increase or decrease on its own. However, the size
of land may differ in relation to factors, such as land reclamation and erosion. Hulhumale’ is
an example of reclaimed land. Reclaimed land is expensive though naturally available land
has no cost of production. In considering natural resources, the ocean is classified as land.
For example, the ocean could be used for water sports as a means to attract tourism.
Land is occupationally mobile; a piece of land can be used for various purposes. It could be
used for farming, housing, business, social welfare or any other purpose that may require
land. Therefore, land has alternative uses, meaning the same piece of land can often be
put into different uses. However, land is geographically immobile, this means that land
cannot be moved from one place to another.
Activity 1.16
a) Identify two forms of land used by Resorts in the Maldives.
b) Prepare a presentation on how these land and other factors of production were
used to provide services in the resorts.
Labour
Labour refers to all kinds of human effort whether physical,
mental, skilled or unskilled. For example, someone who
sweeps the school, who works as an office assistant and
your teacher or the doctor you visit when you fall sick.
Labour can be divided into two broad categories of skilled
and unskilled labour. Unskilled labour have limited skills
and are likely to be involved in economic activities of lesser
Figure 1.2.2: Human Labour
value. This sort of work usually requires no technical
expertise or training. Whereas, skilled labour are the
segment of workforce who perform work of significant economic value and probably are
better paid compared to unskilled labour due to their expertise and skills. For example, the
person who sweeps your school can be considered as unskilled labour while your teacher
is considered as skilled labour. However, if the sweeping requires the use of technical
equipment with skills then it can be considered as skilled labour. The reward for labour is
wage or salary.
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Chapter 1 Business Fundamentals
Labour is one of the active factors of production and has
its own distinguishable characteristics. It is considered
as labour when one works for a reward and not for self.
Therefore, labour creates capital. For example, a gardener
working for a person is considered as labour, but a gardener
who attends his own garden is not considered as labour.
Labour is perishable, meaning that labour cannot be stored
for later use. The labourer has to be present for labour to
happen. Unlike the other factors of production, labour is
inseparable from its owner which is the labourer. It is the
labour being sold, not the labourer. Not each labourer is the Figure 1.2.3: Capital good
same. As individuals each person has personal differences
in attitudes, ethics and behaviour. This results in differences in efficiency of labour.
Activity 1.17
a) What are the types of labour that you can identify in your own community?
b) Explain the characteristics of the identified labour.
Capital
Capital refers to man-made resources which are used in the production of goods and
services. It can also be referred as the money invested by owner for the use of production.
Capital can be divided into fixed capital and working capital. The reward for capital is
interest. Fixed capital refers to things which are long-lasting and which do not change
their form in the process of production. A manufacturing firm would describe its factory as
fixed capital. For a farmer, fixed capital would comprise of assets, such as machines and
equipment. Working capital refers to things which are used in the production process.
These things also change their form in the process of production. Working capital is
considered a part of operating capital. For example, raw materials, such as wood is
required for the production of paper. Thus, the
production process transforms wood into paper.
DID YOU KNOW
Capital is a produced factor of production and
the result of human labour. Without labour
capital cannot function on its own. Thus, capital
is considered as a passive factor of production.
The supply of capital is variable depending on
the availability of investments. For example, if a
For every $1.00 spent in
manufacturing, another
$1.81 is added to the
economy. That is the highest
multiplier effect of any
economic sector.
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community earns more and has excess funds, they can invest in various economic activities
with benefits. While capital can be considered as the most mobile factor of production,
capital depreciates and loses value over time. For example, when machines and other
equipment are used over a period of time its value gets depreciated. Similarly, the value of
money also gets lowered due to factors, such as inflation and changes in exchange rates.
Activity 1.18
Aisha works in a small photocopying shop in her island. The major works in the shop
are photocopying, binding, scanning, typing and layout designing. There are five
workers in the shop. Manager Ahmed, started the business with his personal savings.
During the last December holidays when Aisha visited her aunt in the capital city Male’,
she worked in a photocopying shop and gained additional experience in operating copy
machines with special features. Due to the increase in demand, in order to expand, the
manager applied for a loan from the bank and got it approved. He bought a laminating
machine and office equipment from the capital raised.
a) Identify the fixed capital involved in the business.
b) Can Aisha’s work be considered as skilled labour? Explain your opinion.
c) In your opinion what could have the Manager of the shop done to improve or to
expand his business.
Entrepreneur
Entrepreneur refers to the person who undertakes the responsibility and risks of
employing land, labour, capital and who decides on how these resources are to be used.
Entrepreneurs are unique because they are capable of bringing together the money, raw
materials, manufacturing facilities, labour and land or buildings required to produce a
product or service. The reward for the entrepreneur is profit or loss. An entrepreneur has
four different roles. That is of an organiser, an innovator, a decision maker and a risk bearer.
As an organiser the entrepreneur plans and organises the production process by combining
all the other three factors of production (land, labour and capital) in a competitive manner
so as to get the maximum output and benefit. With a passionate desire to do things better
and to improve their product or service an entrepreneur is an innovator constantly seeking
improvements. Entrepreneurs are creative, innovative and resourceful. If something is not
favourable for them they find alternative solutions. They know the importance of staying on
top of their industry. Managing the combination of factors of production requires decision to
be made. Entrepreneurs are skilled at selling against the competition by creating difference
and uniqueness in their product and services. Hence, they make decisions on what to
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Chapter 1 Business Fundamentals
produce, how much to produce and for whom to produce. Most of all entrepreneurs are
optimistic and future oriented; they believe that success is possible and are willing to risk
their resources in pursuit of profits. They are fast moving and willing to try many different
strategies to achieve their goal of making profits.
Each entrepreneur has his or her own set of skills in combining the other factors of
production. Therefore, entrepreneurship is a heterogeneous factor. The limitation in skills
and resources in individuals makes an entrepreneur unique and a scars human resource.
Unlike other factors of production, entrepreneurship cannot be bought and sold in a factor
market. The production is not possible in the absence of an entrepreneur. Therefore,
entrepreneurship is an indispensable factor in coordinating the other factors of production.
Activity 1.19
Refer to activity 1.18.
a) Who is the entrepreneur in the photocopying business?
b) Give a reason of your choice.
c) Collect information and prepare a presentation on great entrepreneurs in the
Maldives.
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1.3 Stakeholders
Stakeholders are individuals or groups who affect
and are affected by a business activity. There
are many stakeholders and their interest in the
business differs. The relationship between different
stakeholders can be very complex and even conflicts
can arise at times. Stakeholders can also have
different roles in the business.
You will learn
•
Role of stakeholder in a
business.
•
Internal and external
stakeholders.
•
Responsibility of stakeholder.
Businesses normally have two types of stakeholders.They are internal and external
stakeholders. Internal stakeholders are individuals, organisations and businesses directly
affected by the actions of a business. The external stakeholders consists of others who are
indirectly affected by the action of a business.
EXTERNAL
Internal Stakeholders
Internal stakeholders are those within an
organisation with an interest in its success
and failure. Another name for the internal
stakeholder is primary stakeholder.
STAKEHOLDERS
SUPPLIERS
INTERNAL
STAKEHOLDERS
LOCAL
EMPLOYEES ORGANISATION
CUSTOMERS
MANAGERS PRESSURE
COMMUNITY
Owners and managers: A business owner
GROUPS
is a person who has contributed his or her
SHAREHOLDERS/
own money to develop the business, because
INVESTORS
of this the owner has a right to participate
ENVIRONMENT
GOVERNMENT
in decision making. A manager is someone
who makes decision about the way in which
business operates. A manager or an owner
Figure 1.3.1: Internal and External
plays different roles in different types of
stakeholders of a business.
companies. For example, in a sole trader
business the business manager and owner is same. A partnership has two or more owners
and they jointly manage the business. However, a partnership may also employ a manager.
Shareholders: Not all the businesses have shareholders. Only companies have
shareholders. In private limited companies, shareholders are restricted to family member,
friends and employees. In public limited companies, shares can be bought and sold in a
share market, which is the Stock Exchange. Though employees have shares, they cannot
interfere in business decisions, except in the Annual General Meeting (AGM).
Employees: They are those who are paid to do different jobs in a business. Employees
perform different tasks, such as production and delivery. A manager is also an employee
who makes decision in the running of the business.
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Chapter 1 Business Fundamentals
External Stakeholders
External stakeholders are people who are impacted by an organisation’s actions as clients
or constituents, community partners, and others.
Customers: They are an important part of the business, without them there will not be a
business. Customers provide the revenue that is needed for the cash flow. Therefore, one
of the biggest concern of a business would be to gain customers loyalty.
The government: They are stakeholders for many reasons, such as government collects
taxes from business, business are affected by government economic policy and government
also creates legislations that affects business. Government legislations, such as import and
export regulations and revision on duties and taxes can affect any business. In addition
to this, business will also be affected if the central bank decides to increase or decrease
interest rates.
Suppliers: Business needs raw materials to provide goods and services to their customers.
A business needs to have a good relationship with their suppliers in order to deliver the right
quantity on time. When good relationships are established with suppliers, businesses may
enjoy benefits, such as discounts and trade credits.
Pressure groups: These groups may have a particular interest. For example, a group may
be interested to create awareness on environment friendly products and initiate campaigns
to stop the use of a particular product. Therefore, the campaign could influence the
government on changing to create policies that are in favour of pressure groups which may
affect an organisation output.
The local community: A business may have contact with local community by employing
labour from the community. A business is likely to do their cooperate social responsibility
(CSR) by helping the community in different ways. For example, a resort helping the
neighbouring islands to periodically spray the islands to prevent the spread of mosquito
transmitted diseases.
Roles and Responsibilities of Stakeholders
Owners and shareholders: Owner’s main role is to provide capital for the business. In
return the owner gets a profit. In sole traders and partnerships, the owners may get profit
as increase in their salary or withdrawing some capital. In sole traders and partnerships,
owners are likely to make business strategic management and operational management.
That is the owner will be making important decisions about the future of the business and in
daily operation of the business. In private limited companies and public limited companies
the part of the profit given to shareholder is called dividend. The dividend payable to
shareholders will be decided in the Annual General Meeting (AGM). In addition to this
owners and shareholders have responsibilities towards their employees, other shareholders
and to the community.
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It is the owner or the shareholders’, responsibility
DID YOU KNOW
to provide fair remuneration on time to employees
and to provide good working conditions which
Starbucks’ round tables
are not engaging in any illegal business activity.
were created specifically so
Toward themselves a shareholder’s duty is to
customers would feel less
maximise profit so that there can be a higher
alone.
dividend payout. The responsibility towards the
community is to ensure the business is legal
and goods and services are of good quality. Businesses also have cooperate social
responsibilities (CSR) towards the community.
Roles of Employees and Managers
Managers and employees are paid a salary for their work in the organization. In addition,
employees may receive incentives, such as company cars, holiday expenses and private
healthcare. In large companies, managers are employed at different levels, such as
managing director, middle manager or line manager. Managing directors’ role is concerned
with the strategic management of the business. While the middle manager’s responsibility
is to make strategic decision for his or her department and line managers responsibility is
to carryout operational management. Some companies may have a Chief Executive Officer
(CEO) to handle the organisation.
Roles of Customers and Supplies.
A business buys raw materials or semi process goods and equipment from the suppliers
to fulfil customers’ needs. Therefore, customers and suppliers provide a link between
production and cash flow. If the suppliers were not able to deliver the goods ordered on time
at the right price and on good quality, then the business cannot satisfy customers needs.
This will lead to customers to switch their service provider or product. Without customers
there is no need of suppliers, and business may have to shut down.
Conflicts among the Stakeholders
Overlapping of roles and responsibilities among groups can create conflicts. There can be
conflicts both within the group and between the groups. For example, owners may disagree
about the strategic direction of the company. In a private limited company there can be
disagreement about how to go forward with the business. Managers and shareholders
may disagree about the dividends. Shareholders may want the full profit declared for
dividends while the manager may want to reinvest part of it. Managers and employees
may have conflict about better pays and good working condition. When employees want a
pay increase the manager may think that the company is not in a position to increase pay.
Suppliers may have conflicts with business if they are not receiving prompt payment and
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Chapter 1 Business Fundamentals
at the same time businesses may complain about the poor quality and late delivery from
suppliers. Local community may also have conflicts with businesses if they are to pollute
the environment in which they live in.
Activity 1.20
Refer to Activity 1.18
a) With reference to this business Identify:
i) Internal stakeholders
ii) External stakeholders
iii) What do you think would be the reaction of internal and external stakeholders
towards Ahmed’s decision to buy new capital goods?
Key Terms
Capital: human made good used for production.
Demand: the willingness and ability of an individual or group to buy a product.
Economising: making the most of what we have.
Economic good: a product which requires resources for its production and has an
economic value.
Entrepreneur: someone who undertakes the responsibilities and risks of employing
the factors of production with an intention of making a profit.
Equilibrium price: the price at which the demand and supply are equal.
Free good: a product which does not require any resources to make it and has no
opportunity cost.
Fixed capital: things which are long lasting and do not change their form in the
process of production.
Labour force: people who are working and seeking work.
Market demand: total demand for a product.
Market supply: total supply of a product
Opportunity cost: the next best alternative forgone.
Scarcity: a situation where there is not enough to satisfy everyone’s wants.
Stakeholders: are individuals or groups who affects and are affected by a business
activity.
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I Learnt
Choose a local company.
a) Identify the factors of production used in your chosen company.
b) Does your chosen company produce goods or services?
c) Who started this company? What is the economic term for the person?
d) Identify the ways in which capital was raised to start the company?
e) Take a product or service provided by the organization, illustrate the demand and
supply for this product or service.
Key competencies
Practising Islam: Islam teaches us on economising and reduction of
waste. Through this chapter students learn on ways to maximise the use
of our limited natural resources in the most beneficial manner in order to
satisfy the desired needs and wants leading to economies of scale. The
Qur’an states “…eat and drink from the provision of Allah, and do not
commit abuse on the Earth, spreading corruption” (Qur’an, 2:60).
Using sustainable practices: The subject opportunity cost, broadens
the thinking of students towards making decisions on the most beneficial
manner in which decisions are made based on the most favourable
outcomes for the future.
Relating to people: While needs and wants are daily norms, behaviours,
such as responsible use of limited resources make the difference within
the society. The students also understand the consequences of their
actions and responsibility towards the community enabling them to
communicate effectively and work towards a common goal.
Thinking critically and creatively: Scarcity, demand, supply and price
mechanism are important areas where the student learn to use their
judgment when analysing the economy in different perspectives in relation
to changing environments. Further, the factors of production explores on
areas, such as entrepreneurs who take the challenge of bringing together
the other factors of production in order to provide the customer their desired
goods and services. This would enhance student’s thoughts on taking risks
towards delivery of a beneficial good or service for a return.
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Chapter 1 Business Fundamentals
Understanding and managing self: The basic economic concepts
revolves around being self-sufficient, making decisions and judgements
to yield the best economic value. Thus, these are only possible through
confidence and well organised planning.
Living a healthy life: Stakeholders in every aspect are important. Thus,
understanding on internal and external environment of stakeholders
and the importance of their relations enables students to strategically
think on balancing stakeholders for positive relationships.
Using technology and the media: At various stages of this chapter
importance is given on ways to improving and efficient use of resources to
reduce wastage. Modern technology enables to deliver goods and services
through enhancements in production and use of technology in service
delivery. Thus, students explore various possibilities with the use of modern
technologies through examples of current practices in organisations.
Making meaning:Terms used in the business world can be different
than the normal communications in our daily life. Therefore,
understanding the terms is important to deal confidently in the business
world. Through this chapter an introduction to these terms will open
students’ minds to relate the terms appropriately in relevant situations.
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Self-Assessment
Topic
Definition of needs and wants
Identify alternative uses of resources
Definition of scarcity
Relationship between choice and opportunity
cost
Graphical representation of opportunity cost
Differentiate between economic goods and
free goods
Characteristics of money
Definition of price mechanism
Explain demand and supply curve
Definition of factors of production
Factors that affect labour supply
Factors that affect efficiency of labour
Role of entrepreneur
Role of stakeholder
Identify internal and external stakeholders
Responsibility of stakeholder group
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I have understood
I need help
Chapter 1 Business Fundamentals
Review Questions
1. People cannot obtain all the things they would like to have. Would this economic
problem be solved if everyone had lots of money to spend? Explain your answer.
2. Assume there is a sale in a supermarket. For the duration of the sale there is a
promotion which says buy one and get one free. If you buy a bottle of coffee you
get one packet of milk free. Explain in an economist’s point of view why the milk
bottle you got is not a free good.
3. Explain the relationship between choice and opportunity cost.
4. Ali has decided to go to university for two years to study a teaching diploma. He
could have taken a job which would have paid him MVR 12000 per month. After
graduating he is expected to earn 15000 a month. What is the opportunity cost of
going to the university?
5. Explain the relationship between demand and price.
6. Explain the relationship between supply and price.
7. Explain what is meant by equilibrium price.
8. What does a market supply curve represent?
9. What is the main reason for people being worried about the future supply of oil?
10. Many people would like ‘to be their own boss’, in economics what would it be
called?
11. What would happen to the country’s supply of labour if:
a) retirement age is increased
b) school leaving age is raised
12. Which factor of production’s function is to make decisions and to take risks?
13. Which type of factor of production is a bridge? Explain.
14. A country produces 4000 new capital goods in a week. 300 of these replace worn
out capital good.
What is the economic term used for wearing and tearing of capital goods?
15. List stakeholder groups of a business. Identify external and internal stakeholders.
16. Discuss two conflicts which may occur among external stakeholders or internal
stakeholders.
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2 Basic Financial Accounting
2.1 The Role of Accounting
Book-keeping is the accurate and systematic
recording of transactions according to the set
rules.Book-keeping is mostly the clerical side of
accounting, the recoding of routine transactions and
day-to-day record keeping.
You will learn
•
Difference between accounting
and book-keeping
•
Benefits of Information and
Communication Technology
•
The accounting equation
•
Balance sheet
Accounting is the process of recording,
summarising, reporting, analysing and interpretation of financial information relating to
an organisation, and which stakeholders make use of to make decisions. Thus the role
of accounting is to communicate financial information that is useful for decision-making
purposes.
The Role of Information and Communication Technology (ICT)
Computers can be used for all the aspects of the accounting system. The use of computers
in maintaining accounting records brings out certain benefits. These benefits include the
following:
Accuracy: When the data or inputs are correctly fed, the output from the computers will
be free from errors. Errors occur only when information is fed incorrectly as the computer
cannot think or judge on its own.
Speed: Unlike the manual system, computers have the capacity to speed up processing.
Processing of multiple transactions simultaneously are more time-saving and more efficient.
High volumes of information: The use of
computers enable businesses to process high
volumes of information with less man power.
However, for the same reason a business would
require large number of office workers if it had to be
processed manually.
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DID YOU KNOW
The earliest evidence of
accounting records were found on
clay tablets, dated back to as far
as 3500 BC. All tablets bore the
seal or ‘signature’ of the scribe.
Chapter 2 Basic Financial Accounting
Capacity of information storage: The use of computers enables vast amount of data
to be stored easily in the form of disks using little space. However, if the same is to be put
physically using a manual system, a large number of filing cabinets would be required.Thus
occupying a huge area when compared to computerised storage.
The Accounting Equation
Classification of Assets, Liabilities and Capital
Assets are the resources owned by or owed to the business. Assets can be classified into
non-current assets and current assets. Non-current assets are not bought primarily for
resale and are expected to be used in the business for a long time (more than one financial
year). Non-current assets are also known as long-term assets or fixed assets. These
assets will indirectly help the business to earn a revenue. Examples of Non-current assets
include buildings, equipments, motor vehicles etc. Current assets are expected to change
within the accounting period and they arise from normal trading activities. Current assets
are also known as short-term assets. Examples of current assets include inventory, cash,
bank balance and the amounts owed by trade receivables for goods and services sold or
provided on credit.
Liabilities are debts owed by the business to parties outside the business. A business
can borrow money from external parties in various forms. Liabilities can be classified into
non-current liabilities and current liabilities. Non-current liabilities are debts which are not
due for repayment within the financial year. They are also known as long-term liabilities.
Examples of non- current liabilities include long-term loan from bank or outsiders. Current
liabilities are debts which have to be settled within the financial year and they arise from
normal trading activities.They are also known as short-term liabilities. Examples of current
liabilities include bank overdraft and amounts owed to trade payables for goods and
services bought or provided on credit.
Owners provide the business with funds called capital and therefore, have rights to its
assets. This owners’ claim on the assets of the business is called owner’s capital. The
owners are kind of creditors or trade payables of the business because the business is
regarded as a separate entity and owes this money to the owners in return. However, unlike
the trade payables, owners have controlling powers over the operations of the business
money to the owners. Therefore what is owed to the owners are known as capital and not
liabilities. Capital is not classified into groups. Capital increases with owner’s contribution
and decreases when the owner withdraws goods, cash, cheque and non-current assets
from the business for his own use.
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The Accounting Equation
The entire accounting process is based on one simple equation called the accounting
equation. The total resources owned by the business (Assets) will always be equal to
resources provided by the owner (Capital) and resources supplied by the outsiders
(Liabilities). The relationship between the assets, liabilities and capital can be expressed in
an equation form as follows:
Assets = Capital + Liabilities
Activity 2.1
Draw a table with four columns, label the columns for Non-current assets, Current
assets, Non-current liabilities and Current liabilities. List down as many items as
possible under each heading.
Equality of the Accounting Equation
Every transaction affects two items. The effect could be on two assets, asset and a liability
or asset and capital etc. However, even after taking into account the effect, accounting
equation will still remain balanced.
Example
The effect of each of these nine accounting transactions on the accounting equation is
shown below:
HOTS
Transactions
Effect on Assets, Liabilities and
Capital
Equality of accounting
equation
Assets
MVR
Liabilities
MVR
Capital
MVR
Assets = Liabilities +
Capital MVR
Owner contributed MVR 50000
cash as capital
Cash + 50000
No effect
Capital
+50000
+50000 = 0 + 50000
50000 = 50000
Office equipment worth MVR
2000 bought on credit from Erin
Equip.
Office
Equipment
+2000
Erin Equip
(Trade Payable)
+2000
No effect
+2000 = +2000 + 0
2000 = 2000
Bought goods MVR 13000
paying by cash
Inventory
+13000
Cash –13000
No effect
No effect
+13000 – 13000 = 0 + 0
0=0
Sold goods MVR 1050 and
received a cheque
Inventory
–1050
Bank +1050
No effect
No effect
–1050 + 1050 = 0 + 0
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Chapter 2 Basic Financial Accounting
Bought goods MVR 2300 on
credit
Inventory
+2300
Trade Payable
+2300
No effect
+2300 = +2300 + 0
2300 = 2300
Pay the credit supplier by cash
MVR 2300
Cash –2300
Trade Payable
–2300
No effect
–2300 = –2300 + 0
–2300 = –2300
Sold goods on credit to Asra
MVR 4000
Inventory
–4000
Asra (Trade
receivable)
+4000
No effect
No effect
–4000 + 4000 = 0 + 0
0=0
Asra paid the debt by cheque
MVR 4000
Bank +4000
Asra (Trade
receivable)
–4000
No effect
No effect
+4000 – 4000 = 0 + 0
0=0
Withdrew cash MVR 1400
from the business for owner’s
personal use
Cash –1400
No effect
Capital
–1400 + 0 + (–1400)
–1400 = –1400
HOTS
–1400
Activity 2.2
For the effects shown, write the possible transactions that could have taken place and
also prove the equality of the accounting equation.
Transactions
Effect on Assets, Liabilities and
Capital
Assets
(MVR)
Liabilities
(MVR)
Capital
(MVR)
+12 000
+12 000
No effect
–12 000
–12 000
No effect
+20 000
No effect
+20 000
Equality of
accounting equation
Assets = Liabilities +
Capital
(MVR)
The Balance Sheet
The accounting equation is also known as balance sheet equation. Balance sheet is a
statement which shows the financial position of a business on a particular date. It shows
the three elements of the accounting equation, Assets on one side, while liabilities and
capital on the opposite side.
The balance sheet will be affected every time the business makes changes to the assets,
liabilities or capital. However, balance sheet will not be prepared after each transaction,
instead balance sheet is prepared periodically.
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The layout of the balance sheet is as follows:
Always remember to write
the title and the date
Name of business
Balance Sheet as at ……………
Assets
MVR
Liabilities and capital
MVR
Activity 2.3
Use the totals given in the accounting equation below and list down possible assets
and liabilities and write amounts for each assets and liabilities ensuring totals of all
the assets and liabilities are equal to the totals given for assets and liabilities. Illustrate
your answer using a simple balance sheet.
Assets = Capital + Liabilities
MVR 70000 = MVR 40000 + MVR 30000
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Chapter 2 Basic Financial Accounting
2. 2 The Double Entry System of Book-keeping
Double-entry system records the double aspects
of a transaction. It replaces the need to prepare a
balance sheet after each transaction. It works on
the principle that every debit has a corresponding
equal credit. Double entry rules for assets,
liabilities, capital, expenses, incomes, drawings
and carriages takes into account ‘the increase and
decrease’ or ‘the receiving and the giving’.
A ledger account or commonly known as ‘T’
account is used to record using the double entry
system. The left side of the account is known as
debit side and the right side is known as credit side.
You will learn
•
Ledger accounts for assets,
liabilities, capital, incomes,
expenses, drawings and
carriages
•
Balancing off ‘T’ accounts
•
Extraction of trial balance
•
Ledger accounts using running
balance format
The layout of the ledger account
Credit side abbreviated
as ‘Cr’.
Debit side abbreviated
as ‘Dr’.
Dr
Title of the account
Cr
Left-hand side
Right-hand side
This is the debit side
This is the credit side
The name of the account appears across the top of the T. Increases are recorded on one
side of the account while decreases are recorded on the other side of the account. Whether
increases are recorded on the debit or credit side of the account will depend on the type of
the account.
Activity 2.4
Write a short paragraph about Lucas Pacoli, the father of Accounting.
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Double Entry Rule for Assets, Liabilities and Capital
The double entry rule ‘debit the receiving account and credit the giving account’ is applied
for assets, liabilities and capital. When an asset increases, in other words the business is
receiving the asset, therefore double entry rule for increase in asset is debit. When an
asset decreases, in other words the business is giving away the asset, therefore double
entry rule for decrease in asset is credit.
Dr
+
Asset Account
Increase
Decrease
–
Cr
When liability or capital increases, in other words an outside party or owner is giving the
credit facility or funds to the business, therefore increase in liability or capital is credit. When
liability or capital decreases, in other words the business is paying back to the outside party,
or owner is withdrawing from the business, therefore decrease in liability or capital is debit.
The double entry rules for liabilities and capital can be illustrated using the T accounts
below:
Dr
Dr
–
–
Liability Account
Decrease
Increase
Capital Account
Decrease
Increase
+
+
Cr
Cr
It is important to note that the rules for assets accounts are opposite of owner’s capital and
liabilities accounts as they appear on the opposite sides of the accounting equation and the
rules are such that the accounting equation is always kept in balance.
To increase
To decrease
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Assets
Debit
Credit
= Liabilities +
Credit
Debit
Capital
Credit
Debit
Chapter 2 Basic Financial Accounting
Double Entry for Inventory
Double entry rules for Inventory accounts depend on the movement of the inventory.
Being an asset, Inventory increases debit and decreases credit. Purchases and Sales
Returns account always debit as they increase the inventory. On the other hand Sales and
Purchases Returns account always credit as they decrease the inventory.
Double entry rule for inventory accounts is explained in a tabular format as follows:
Debit
Purchases
Increases
the inventory
Sales Returns
{
Credit
Sales
Purchases Returns
}
Decreases
the inventory
Double Entry Rule for Incomes and Expenses
Money spent to run the business on a day-to-day basis is known as expense.The running
expenses include administrative expenses, selling expenses, financial expenses and cost
of maintenance and running the non-current assets. Income earned from normal trading
activities is known as income. Examples of incomes include sales commission received,
interest received on investments etc. When a business is paying for expense, the expense
account is receiving the money, therefore expenses accounts are always debit. On the
other hand, when the business receives an income, the income account is giving the value
to the business, therefore income accounts are always credit.
Double Entry for Drawings
The value withdrawn by the owner for personal use is known as drawings. The owner’s
withdrawal could be cash withdrawn, cheque withdrawn, non-current assets and goods
withdrawn from the inventory for personal use.
Owner’s personal withdrawals result in reduction of capital contributed by the owner.
Drawings decrease the capital – capital decreases debit rule can be applied for Drawings.
Therefore, Drawings account is always debit.
Double Entry for Carriages
Cost of transporting goods from one place to another is the carriage cost. Goods bought
from suppliers that are to be carried to the business are known as carriage inwards or
goods may have to be delivered to customers which is known as carriage outwards. In
both the cases, the expense is incurred by the business, therefore same double entry rule
as expenses can be applied, which means both carriages, carriage inwards and carriage
outwards are debit.
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Balancing Off Accounts
It is necessary to balance off the accounts at the end of every month and balances are
carried forward to the following month. The balance is the difference between the two sides
of the account. Double entry rules for assets, liabilities and capital can be recalled. The
double entry rules established ensure that the total debits are equal to total credits. The
total of increase usually recorded in an account is equal or greater than the decreases
recorded in the account. For this reason, the normal balance of an account appears on the
same side which receives the increase.
Example
Stage 1: Before balancing of account
Dr
Date
20..6
Mar 11
15
15
Sama Account
Details
Purchases returns
Bank
Discount
MVR
150
900
100
Date
20..6
Mar 1
9
Sum of debits = MVR 1150
(Decrease)
Cr
Details
Purchases
Purchases
MVR
500
2 000
Sum of credits = MVR 2500
(Increase)
Sum of debits < Sum of credits
MVR 1150 < MVR 2500
Decreases < Increases
(decrease side needs a balance to balance
the two sides of the account)
Stage 2: After balancing of account
Dr
Date
20..6
Mar 11
15
15
31
Sama Account
Details
Purchases returns
Bank
Discount
Balance c/d
MVR
150
900
100
1 350
2 500
Date
20..6
Mar 1
9
Apr 1
This is the balancing figure
for both sides
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Cr
Details
MVR
Purchases
Purchases
500
2 000
Balance b/d
2 500
1 350
This is the normal balance of a trade payable account.
It shows amount owed by the business to the trade
payable. It is a liability for the business.
Chapter 2 Basic Financial Accounting
These two columns are identical
Account
Assets
Capital
Drawings
Liabilities
Incomes
Expenses
Increase
Decrease
Debit
Credit
Debit
Credit
Credit
Debit
Credit
Debit
Credit
Debit
Debit
Credit
Normal
balance
Debit
Credit
Debit
Credit
Credit
Debit
The Trial Balance
The balances that remain in the accounts are transferred to the Trial balance at a given
date. A trial balance is a two-column schedule showing account titles with the balances.
Debit balances on the debit side of the trial balance and credit balances on the credit side
of the trial balance.
The Purpose of a Trial Balance
The main purpose of trial balance is to prove the arithmetical accuracy of the T accounts
(i.e the debits equal credits after posting). If the debits and credit do not agree, the trial
balance can be used to detect errors in the journalising and posting process. In addition,
the trial balance is also used as a basis for preparation of financial statements.
The Preparation of Trial Balance
Before preparing the trial balance, all the transactions should be recorded in various
accounts so that the effect of all the transactions will be reflected in the ledger accounts.
The list of balances in various accounts are then used to prepare a trial balance.
The following steps are taken in preparing a trial balance:
1. List the accounts and enter their balances in the debit or credit columns of the trial
balance. (Depending on balance b/d side)
2. Total the debit and credit columns of the trial balance.
The layout of a trial balance is as follows:
Name of business
*Trial balance as at...................
Details
Debit
MVR
Credit
MVR
*The trial balance should be headed with the term ‘trial balance’ along with the date on which it was
prepared.
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Example
The following accounts were extracted from the books of Asra, a trader.
Dr
Capital account
Date
Details
20..4
May 31 Balance c/d
Dr
June 1
Details
Balance b/d
Capital
15 000
Balance b/d
15 000
13 300
Details
June 1
Balance b/d
Dr
MVR
Details
Purchases
Balance b/d
1700
1700
1700
Details
Balance c/d
Sales account
Date
Details
20..4
May 31 Balance c/d
Dr
MVR
1800
1800
Details
Date
Details
20..4
May 5
Sama
June 1
Balance b/d
MVR
Date
Sales
1800
20..4
May 6
May 31
Balance b/d
1800
1500
MVR
1 700
13 300
15 000
MVR
1700
1700
Cr
Sama account
Date
15 000
15 000
15 000
Cr
Date
20..4
May 31
MVR
Cr
Purchases account
Bank
© Cambridge University Press
June 1
20..4
May 3
May 31
20..4
May 3
40
Bank
Date
Date
June 1
Details
20..4
May 1
MVR
Dr
20..4
May 5
15 000
15 000
Date
Bank account
Date
20..4
May 1
MVR
Cr
MVR
1800
1800
1800
Cr
Details
Sales Return
Balance c/d
MVR
300
1500
1800
Chapter 2 Basic Financial Accounting
Dr
Sales return account
Date
Details
20..4
May 6
Sama
June 1
Balance b/d
MVR
Date
20..4
May 31
300
300
300
Cr
Details
Balance c/d
MVR
300
300
Asra
Trial Balance as on 31 May 20...4
Details
Capital
Bank
Purchases
Sales
Sam (trade receivable)
Sales returns
Debit
MVR
Credit
MVR
15 000
13 300
1 700
1 800
1 500
300
16 800
16 800
Limitations of Trial Balance
The trial balance is used to prove the arithmetical accuracy of the double entry system of
recording but it has certain limitations.
A trial balance that balances does not necessarily prove that all the transactions have been
recorded or that the accounting process is error-free. This is because errors may have
been made even though the trial balance totals are in agreement. As long as double entry
is made for each transaction even though a wrong amount or wrong account is used, trial
balance will arithmetically remain in balance.
Three Column Running Balance Accounts
In practice, accounts are usually prepared in three column ledger account or running
balance method, when business uses an integrated computerised system. A familiar
example of this form of account is a bank statement issued periodically by banks to their
account holders. The major advantage of this form is that it shows the latest account
balance at a glance. This form of account has six columns.
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The layout of the running balance format ledger account
Date
Details
Folio
Debit
MVR
Credit
MVR
Balance
MVR
In manual accounting, this is time consuming and may lead to errors, however, using
computerised accounting systems, balances are automatically calculated so there are less
chances of errors.
Example
The following account of Sama, a trade receivable is presented using both T account
format and three column running balance format.
Dr
Sama account
Date
20..4
June 1
6
July 1
Details
MVR
Cr
Date
Balance b/d
Sales
1 500
3 040
Balance b/d
4 540
1 900
20..4
June 8
12
12
29
30
Details
Sales return
Bank
Discount allowed
Cash
Balance c/d
MVR
140
1 400
100
1 000
1 900
4 540
Sama account
Date
20..4
June 1
6
8
12
12
29
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Details
Balance b/d
Sales
Sales returns
Bank
Discount allowed
Cash
Folio
Debit
MVR
Credit
MVR
Balance
MVR
140
1 400
100
1 000
1 500 Dr
4 540 Dr
4 400 Dr
3 000 Dr
2 900 Dr
1 900 Dr
3 040
Being a trade
receivable,
Sama will
have a debit
balance. The
amount owing
will increase
by debit entries
and decreases
by credit entries
Chapter 2 Basic Financial Accounting
Activity 2.5
Divide the class into groups (5 students in each group). Do the given exercise in
groups.
For the transactions given below, prepare the following accounts both in T account
format and running balance format.
a) Bank account
b) Cash account
c) Purchases account
d) Sales account
e) Azeez account
f)
Avin account
20..4
July 1 Bank account has a balance of MVR 15000 and cash of MVR 1000
2 Owner brought additional cash MVR 10000
4 Purchased office equipment and paid by cheque, MVR 8800
6 Bought goods for MVR 6500 on credit from Azeez
8 Sold goods for cash MVR 2000
15 Paid a cheque MVR 6500 to Azeez in settlement of his account
18 Paid rent of premises MVR 7000 by cheque
20 Sold goods on credit to Avin MVR 2000
27 Received a cheque from Avin for MVR 2000
29 Deposited MVR 10000 cash into the bank account
Present to the class the account prepared. Give a short explanation about the nature
of the account, the kind of balance etc.
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Exploring Business Studies
2.3 Documentary Records and Books of Prime Entry
Source Documents
A source document is the original record of a
transaction. It provides written acknowledgement
that the transaction took place. It gives details of the
business transactions. All the accounting entries are
based on the information derived from such source
documents.
Types of Source Documents
You will learn
•
Business documents and six
types of books of prime entry
•
Difference between trade
discount and cash discount
•
Dual function of cash book
both as a book of prime entry
and as a ledger account
Invoice: When a customer buys goods on credit
from the supplier, the supplier issues a document known as invoice. The seller keeps a
duplicate copy of the invoice for recording and auditing purposes. The duplicate copy of the
invoice issued represents credit sales for the business and the credit customer who bought
goods on credit receives the original invoice which represents credit purchases for the
buyer. Therefore, invoice is the source document for both credit sales and credit purchases.
Invoice also informs the credit customer of the amount payable for goods sold on credit.
In order to encourage customers to buy in bulk quantities, often suppliers offer a trade
discount. Trade discount is the reduction in the selling price of the goods and usually
the rate of this discount varies with the quantity purchased. Trade discount allows small
businesses to buy goods in bulk from wholesalers (suppliers) at a cheaper rate which
enable them to make a profit. Trade discount is shown as a deduction on the invoice before
calculating net amount payable. Therefore, it appears only in the invoice and no double
entry is required for trade discount.
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Chapter 2 Basic Financial Accounting
Below is an invoice issued by Raveri Traders (Supplier) to Gadir Shop (Customer).
Date: 2 May 20..7 Raveri Traders
Raveri Magu
K. Male’, Maldives
Phone no. 39989000
INVOICE NO. 875/..7
Quantity
30 cases
15 cases
10 cases
Details
Mannie Brand Noodles
Romi Biscuits
Sona Brand diapers (24 M)
Less:10% Trade discount
To: Gadir Shop
Rehendi Magu
K.Male’, Maldives
Unit
Price
MVR
100
250
1 000
Total
MVR
3 000
3 750
10 000
16 750
(1 675)
15 075
Terms 2/1/2 % cash discount if paid by 30 June 20..7.
Debit note: When the customer receives the goods, the customer should check that goods
received are in satisfactory condition and they are exactly what was ordered. In case if
there are any shortages, damages or overcharges, the supplier must be informed by issuing
a debit note. Therefore, debit note is a document sent by the customer to the supplier
requesting to reduce the total of the original invoice.
Below is a sample debit note issued by Gadir Shop (customer) to Raveri Traders (Supplier).
DEBIT NOTE NO. 007/..7 Raveri Traders
Raveri Magu
K.Male’, Maldives
Quantity
2 cases
1 case
Gadir Shop
Rehendi Magu
K.Male’, Maldives
Phone no. 39976000
Date: 5 May 20..7
Details
Romi Biscuits – Expired
Sona Brand diapers (24 M) – Damaged in transit
Less:10% Trade discount
Price
per unit
MVR
250
1 000
Total
MVR
500
1 000
1 500
(150)
1 350
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Credit note: When the supplier receives a debit note reporting that goods are faulty,
damaged or there has been an overcharge on an invoice, the supplier in return may issue
a credit note. This credit note issued represents sales return for the supplier and the credit
note received represents purchases return for the customer. Therefore, credit note is the
source document for both sales returns and purchases returns.
Below is a sample credit note issued by Raveri Traders (Supplier) to Gadir Shop (customer).
Date: 8 May 20..7
Raveri Traders
Raveri Magu
K.Male’, Maldives
Phone no. 39989000
CREDIT NOTE (NO. 045/..7)
Quantity
2 cases
1 case
Details
Romi Biscuits – Expired
Sona Brand diapers (24 M) – Damaged in transit
To: Gadir Shop
Rehendi Magu
K.Male’, Maldives
Unit
Price
MVR
250
1000
Less:10% Trade discount
Total
MVR
500
1 000
1 500
(150)
1 350
Statement of account: It is a monthly report sent by the supplier to the customer, giving
summary of the transactions taken place during the month. It acts as a reminder to the
credit customers to settle the accounts on time.
Date: 31 May 20..7
Raveri Traders
Raveri Magu
K.Male’, Maldives
Phone no. 39989000
Statement of Account – May (No. 20..7/05–080)
To: Gadir Shop
Rehendi Magu
K.Male’, Maldives
Date
20..7
May 02
May 08
Details
Invoice No. 875/..7
Credit note No. 045/..7
Terms 2/1/2 % cash discount if paid by 30 June 20..7.
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Dr
MVR
Cr
MVR
Balance
MVR
1 350
1 5075
1 3725
15 075
Chapter 2 Basic Financial Accounting
Bank and cash documents: A chequebook will be issued when a customer opens a bank
account. The cheques can be used to make payments out of the bank account. A cheque
book consists of many cheque leaves. A cheque leaf contains all the important information
necessary for a bank transaction, such as cheque number, payee’s name, amount to be
paid and the date of payment. The cheque counterfoil is that portion of the cheque book
that is retained by the business as a source document.
When the cheque or cash is paid into the bank, a pay-in slip is completed. Pay-in slips can
be used as a document which shows cheque or cash is deposited in the bank.The pay-in
slips received from the bank act as a source document for cheque or cash deposited in the
bank.
If the cheques are paid or received through the banking system, business need not to issue
a receipt. However, if cash is received or paid by the business, the receipt issued acts as a
proof of payment. Hence a receipt is a written document which can be used as a proof of
receipt or payment of cash.
Figure 2.3.1: Sample Documents related to Bank
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Exploring Business Studies
Activity 2.6
Present a small skit to the class.
Choose students for each character
a) Two businessmen
b) Two helpers
c) Supplier
d) Two Customers
e) Bank cashier
Materials required: Invoices, debit notes, credit notes, cheques, pay-in slips, receipts,
statement of account, few items to display as goods, books, calculators, and pens for
shop-keepers.
Present the scenes in the order given in the teachers’ handbook.
Books of Prime Entry
Financial data arising out of daily business transactions are documented using various
source documents. Books of prime entry are also known as books of original entry,
subsidiary books, journals or daybooks. From source documents, the data are first recorded
into the books of prime entry or day books.
The diagram below illustrates the function of books of prime entry:
Transactions
Source documents
Books of Prime entry
Depending on their purposes, they can be classified as follows:
Special Journals
1. Sales journal: The sales journal records sales of goods on credit to customers. Sales
journal is written up using copies of invoices retained by the supplier. Sales of goods for
cash and the disposal of used non-current assets are not recorded in the sales journal.
If the credit sales transaction carries a trade discount, the amount recorded in the sales
journal should be after deducting the trade discount. Sales Journal records important
details of the credit sales transactions taken place, such as date, name of the credit
customer, folio number and the amount after trade discount.
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Chapter 2 Basic Financial Accounting
Example
Riya’s credit sales for the month of April 20..6 were:
20..6
April 2
5
9
Customer
Jiyan
Kinan
Sira
List price
MVR
500
2 000
3 000
Trade
discount
rate
2%
5%
10%
Invoice amount
MVR
(500*2%=10)
(2000*5%=100)
(3000*10%=300)
500–10=490
2000–100=1900
3000–300=2700
REQUIRED
Prepare the sales journal for the month of April 20...6.
Solution
Sales Journal
Date
20..6
April 2
5
9
30
Details
Folio
Jiyan
Kinan
Sira
Transfer to sales account
Amount
MVR
490
1 900
2 700
5 090
2. Sales returns journal: The Sales returns journal or return inwards journal records
returns of goods previously sold on credit to customers. If the goods previously sold carry a
trade discount, it has to be taken into account at the time of return. Goods returned should
not be valued at list price. Sales returns journal is written up using the copies of the credit
notes issued to the customers.Sales returns journal records important details of the sales
returns transactions that have taken place, such as date, name of the credit customer, folio
number and the amount.
Example
Riya’s sales returns for the month of April 20...6 were:
20..6
April 7
12
Customer
Kinan
Sira
List price
MVR
300
700
Trade
discount
rate
5%
10%
Invoice amount
MVR
(300*5%=15)
(700*10%=70)
300 – 15 = 285
700 – 70 = 630
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REQUIRED
Prepare the sales returns journal for the month of April 20...6.
Solution
Sales returns journal
Date
Details
Folio
20..6
April 7 Kinan
12 Sira
30 Transfer to sales returns account
Amount
MVR
285
630
915
3. Purchases journal: The purchases journal records purchases of goods on credit from
suppliers. This purchase of goods should be for resale. Purchases journal is written up
using original invoices received from suppliers. Purchases of goods for cash and purchases
of non-current assets are not recorded in the purchases journal.
Example
Riya’s credit purchases for the month of April 20...6 were:
20..6
April 3
8
10
Supplier
Yusuf
Hussain
Easa
List price
MVR
3 500
6 000
4 200
Trade
discount
rate
5%
10%
10%
Invoice amount
MVR
(3500*5%=175)
(6000*10%=600)
(4200*10%=420)
3500 – 175 = 3325
6000 – 600 = 5400
4200 – 420 = 3780
REQUIRED
Prepare the purchases journal for the month of April 20...6.
Solution
Purchases journal
Date
20..6
April 3
8
10
30
50
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Details
Yusuf
Hussain
Easa
Transfer to purchases account
Folio
Amount
MVR
3 325
5 400
3 780
12 505
Chapter 2 Basic Financial Accounting
4. Purchases returns journal: The purchases returns journal or return outwards journal
records returns of goods previously bought on credit from suppliers. If the goods previously
bought carry a trade discount, it has to be taken into account at the time of return. Goods
returned should not be valued at list price. Purchases returns journal is written up using
the copies of the credit notes received from the suppliers.
Example
Riya’s purchases returns for the month of April 20...6 were:
20..6
April 4
11
Supplier
Yusuf
Easa
List price
MVR
800
1 000
Trade
discount
rate
5%
10%
Invoice amount
MVR
(800*5%=40)
(1000*10%=100)
800 – 40 = 760
1000 – 100=900
REQUIRED
Prepare the purchases returns journal for the month of April 20..6.
Solution
Purchases returns journal
Date
Details
20..6
April 4 Yusuf
11 Easa
30 Transfer to purchases returns account
Folio
Amount
MVR
760
900
1660
Posting from Books of Prime Entry to Ledger Accounts
Transactions which are documented using source documents are first recorded in the books
of prime entry. From the books of prime entry the entries are posted to the ledger accounts.
With the high volumes of transactions involving personal accounts and non-personal
accounts,need arises to maintain the accounts separately.Having accounts kept in separate
ledgers facilitates easy reference and improves efficiency. As such ledgers are divided into
the following three types:
Sales ledger
The individual trade receivables (credit customers) accounts are kept in
the sales ledger.
Purchases ledger The individual trade payables (credit suppliers) accounts are kept in the
purchases ledger.
General ledger
This is also referred to as nominal ledger. All the non-personal
accounts except cash and bank accounts are kept in the general
ledger. Cash and bank accounts are kept in the cash book. This ledger
will contain real accounts and nominal accounts. Assets accounts are
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known as real accounts. Accounts for expenses, income and capital
are known as nominal accounts.
Cash book
Ledger accounts which contains both cash and bank accounts.
Types of Ledgers
Sales Ledger
Purchases Ledger
Individual
Trade receivables
accounts
Individual
Trade payables
accounts
General Ledger
Nominal Accounts
Real Accounts
Temporary
accouns
Eg. Incomes a/c,
Expenses a/c,
Drawing a/c
Permanent
accouns
Eg. assets a/c,
liabilities a/c,
capital a/c
Figure 2.3.2: Subdivision of ledgers
Posting from Sales Journal and Sales Returns Journal to the Ledger Accounts
Credit sales and sales returns by the customers are first recorded in the sales journal and
sales returns journal respectively. The individual entries in the sales journal and sales
returns journal are posted to appropriate personal accounts in the sales ledger. The total of
the sales journal and sales returns journal are posted to sales account and sales returns
account in the general ledger.
We shall be using the examples shown in sales journal and sales returns journal.
Example
Sales Journal
Date
20..6
April 2
5
9
30
Details
Folio
Jiyan
Kinan
Sira
Transfer to sales account
Amount
MVR
490
1 900
2 700
5 090
Sales returns journal
Date
Details
20..6
April 7 Kinan
12 Sira
30 Transfer to sales returns account
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Folio
Amount
MVR
285
630
915
Chapter 2 Basic Financial Accounting
Sales Ledger
Dr
Individual trade receivables
accounts are maintained in the
sales ledger.
Cr
Jiyan Account
Date
20..6
April 2
Details
Sales
MVR
Date
Details
MVR
490
Dr
Cr
Kinan Account
Date
20..6
April 5
Details
Sales
Dr
MVR
Date
1 900
20..6
April 7
Details
Sales returns
MVR
285
Cr
Sira Account
Date
20..6
April 9
Details
Sales
MVR
Date
2 700
20..6
April 12
General Ledger
Dr
Details
Sales returns
MVR
630
All the non-personal accounts
except cash and bank are
maintained in this ledger.
Cr
Sales Account
Date
Details
MVR
Date
20..6
April 30
Dr
Details
Total for the month
MVR
5 090
Cr
Sales returns Account
Date
20..6
April 30
Details
Total for the month
MVR
Date
Details
MVR
915
Posting from Purchases Journal and Purchases Returns Journal to the Ledger
Accounts
Credit purchases and purchases returns to the suppliers are first recorded in the purchases
journal and purchases returns journal respectively. The individual entries in the purchases
journal and purchases returns journal are posted to appropriate personal accounts in the
purchases ledger. The total of the purchases journal and purchases returns journal are
posted to purchases account and purchases returns account in the general ledger.
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We shall be using the examples shown in the purchases and purchases returns journal.
Example
Purchases journal
Date
20..6
April 3
8
10
30
Details
Folio
Yusuf
Hussain
Easa
Transfer to purchases account
Amount
MVR
3 325
5 400
3 780
12 505
Purchases returns journal
Date
Details
Folio
Amount
MVR
20..6
April 4 Yusuf
11 Easa
30 Transfer to purchases returns account
Purchases Ledger
Dr
760
900
1660
Individual trade payables
accounts are maintained in the
purchases ledger.
Cr
Yusuf Account
Date
20..6
April 4
Details
Purchases returns
Dr
MVR
Date
760
20..6
April 3
Details
Purchases
MVR
3 325
Cr
Hussain Account
Date
Details
MVR
Date
20..6
April 8
Dr
Details
Purchases
MVR
5 400
Cr
Easa Account
Date
20..6
April 11
Details
Purchases returns
MVR
Date
900
20..6
April 10
Details
Purchases
MVR
3 780
General Ledger
Dr
Cr
Purchases Account
Date
20..6
April 30
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Details
Total for the month
MVR
12 505
Date
Details
MVR
Chapter 2 Basic Financial Accounting
Dr
Cr
Purchases returns Account
Date
Details
MVR
Date
20..6
April 30
Suppliers
Purchases
MVR 12505
Purchases
Return
MVR 1660
Riya’s
Business
Details
MVR
Total for the month
Sales
MVR 5090
1 660
Customers
Sales Return
MVR 915
Figure 2.3.3: Movement of inventory in and out of the business
Activity 2.7
The following are the addresses of a supplier and a credit customer:
Supplier
Customer
Aveli Store
Nira Shop
Aveyli Magu
Hiya Magu
Tel: 30000100
Tel: 30002200
The following are the transactions taken place between the supplier and the customer.
20..6
May 2
May 5
May 7
Goods sold on credit at list price MVR 1000, less a trade discount of 5%.
Customer returned faulty goods to supplier MVR 100, less a trade
discount of 5%.
The supplier issue the necessary document confirming the acceptance of
the return and allowances made.
Draft the source documents necessary to record the above transactions on May 2, May
5 and May 7.
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5. The Journal: The Journal or General Journals not a part of double entry book-keeping.
It is used to record transactions which will not be recorded in any other books of prime
entry.
Format of The Journal is as follows:
The Journal
Date
Details
Account to be debited
Account to be credited
(Narrative – a brief explanation of
what is being recorded and why the
entry is being made)
Dr
MVR
*xxx
Cr
MVR
*xxx
Total amount debited and total
amount credited should always
be equal
Uses of the General Journal
Opening entries are the general journal entries needed to open a new set of accounts
based on the double entry system. When a business is first set up or when an existing
business started using the double entry system, all the assets and liabilities must be
accounted from various documents, hence capital figure can be calculated by using the
accounting equation.
Capital = Assets – Liabilities
Purchases and sales of non-current assets on credit cannot be recorded in the sales
journal or purchases journal, which are specifically for credit sales and credit purchases of
goods. Therefore, the purchase or sales of non-current assets have to be recorded in the
general journal. The source document to record purchases of non-current assets on credit
are the invoices received from the suppliers. The source document to record sales of noncurrent assets on credit are the invoices issued to customers.
Some other transactions which can be recorded using general journal are non-regular yearend adjustments like drawings of goods by the owner for personal use.(There are other
uses of general journal which are beyond the scope of this book).
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6. Cash book: It is not safe for a business to keep all its cash in the office. So only a small
amount of money is kept in the business for day-to-day expenses while the rest is kept in
a current account at a bank. Since money is kept in two places, need arises to maintain
the two cash accounts separately, the money in the business cash till as ‘cash account’
and money with the bank as ‘bank account’. The cash and the bank account which
usually contain greatest number of entries compared to other ledger accounts, are usually
taken out of the ledger and recorded separately in another book called the cash book.
Cash book serves as a book of prime entry where information from source documents is
recorded first in the cash book. Unlike the other five books of prime entry, cash book plays
a dual function of a book of prime entry and also serves as a ledger as it contains both
cash account and bank account. Since both cash and bank are assets, the double entry for
assets will apply. Therefore, any increase in cash or bank will be debited and any decrease
in cash or bank will be credited.
The cash book only with the cash and bank column side-by-side on both debit side and
credit side is known as two-column cash book. Three-column cash book includes one
more column on both the sides to record cash discount.
Format of the Cash book (Three column) is as follows:
Dr
Date
Receipts
Details
Three-column Cash Book
Discount Cash Bank
Discount Allowed
Total will be posted to debit
side of discount allowed
account and credit side of
individual trade receivable
account
Date Details
Two separate columns
on each side are used to
separate cash and bank
transactions
Payments
Discount Cash
Cr
Bank
Discount Received
Total will be posted to credit
side of discount received
account and debit side of
individual trade payable
account
Cash Discount
Cash discount is an incentive given to encourage prompt payment. The amount of the
reduction of the sum to be paid is known as cash discount. Cash discounts are classified
into discount allowed and discount received.
Discount allowed is the cash discount allowed by a business to its customers when they
settle the accounts within the given time. The cash discount given by the trader to his
customer is considered a cost to the trader because he receives a lesser amount than what
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is owed to him. Therefore, the discount allowed is an expense to be charged against the
profit of the business.The double entry rule for increase in expense debit will be followed
and discount allowed account always will be debited.
Example
20..7
Feb 8 Sold goods to Nadir on credit MVR 2000
18 Nadir paid the amount owed by cheque and received a cash discount of *10%
*Note: Terms of Payment:10% if settled within 15 days
Entries for the above transactions are shown as follows:
Dr
Date
20..7
Feb 18
Three-column Cash Book
Details
Nadir
Discount Cash
200
Increase in expenses
Dr
Bank
Date
Details
Discount
Cash
Cr
Bank
1 800
Increase in asset
Nadir Account
Date
20..7
Feb 8
Details
Sales
MVR
Date
2 000
20..7
Feb 18
Feb 18
Amount
Nadir owes
Cr
Details
Bank
Discount Allowed
Payment received from Nadir
is reduced by the amount of
Discount Allowed
MVR
1 800
200
Discount
reduces the
amount payable
Discount received is the cash discount received by a business from its suppliers when
the accounts are settled within the given time. The cash discount received by the business
from the suppliers are considered as an income for the business as the business is paying
a smaller amount than what is owed. Therefore, the discount received is an income that will
increase the profit of the business. The double entry rule for increase in income credit will
be followed and discount received account always will be credited.
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Example
20..7
Feb 10 Bought goods on credit from Rashid MVR 1500
21 Paid Rashid the amount owed by cheque less 5% cash discount
*Note: Terms of Payment: 5% if settled within 15 days
Entries for the above transactions are shown as follows:
Three column Cash Book
Dr
Date
Details
Discount Cash
Bank
Date
Details
20..7
Feb 21 Rashid
Discount
75
Increase in incomes
Dr
Cash
Cr
Bank
1 425
Decrease in asset
Rashid Account
Date
Details
20..7
Feb 21
Feb 21
Bank
Discount received
Payment made to Rashid is
reduced by the amount of
Discount Received.
MVR
Date
1 425
20..7
Feb 10
Cr
Details
MVR
Purchases
1 500
75
Discount
reduces the
amount payable
Amount owed to
Rashid
Contra Entries
Since money is kept in two-places, often surplus cash from the cash till it could be
deposited into the bank or money could be withdrawn from the bank and put into the cash
for day-to-day running of the business. Such kind of transactions which appear on both the
sides of the cash book are known as contra entries. Since both the cash and bank are
assets, the double entry rule for assets will apply in case of contra entries too. The account
receiving the money is debited and the account giving the money is credited. Contra entries
are made to record the following transactions:
When money from the bank is withdrawn for business use
Debit the cash account and credit the bank account
When surplus cash is deposited into the bank
Debit the bank account and credit the cash account
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Example
20..7
Feb 15 Withdrew MVR 1500 from the business bank account for office use
27 Deposited cash MVR 750 into the business bank account
Entries for the above transactions are shown as follows:
Dr
Date
Details
20..7
Feb 15 Bank (c)
27 Cash (c)
Three column Cash Book
Discount Cash
Bank
1 500
750
Date
Details Discount
20..7
Feb 15 Cash (c)
27 Bank (c)
Increase in asset
Cash
Cr
Bank
1 500
750
Decrease in asset
Drawing up Three-column Cash Book
Since cash discounts are related to receipts and payments of cash and bank, an extra
column is inserted on each side of the cash book for recording discounts. This results in a
three-column cash book. Discount allowed is related to receipts from customers, hence
the column for recording discount allowed is added to the debit side of the cash book. This
can be justified as an increase in expense always debit. Discount received is related to
payments made to suppliers, hence the column for recording discount received is added to
the credit side of the cash book. This can be justified as an increase in income always credit.
Example
Amina started business on 1 March 20...7 with a capital of MVR 50000 which was paid
into a business bank account.
Transactions for the month of March 20...7 were:
20..7
Mar 2 Amina brought additional cash MVR 10000
4 Purchased office equipment and paid by cheque, MVR 8800
6 *Bought goods for MVR 6500 on credit from Azeez
8 Sold goods for cash MVR 2000
15Paid a cheque MVR 6000 to Azeez in settlement of his account,after deducting
a cash discount of MVR 500
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18 Paid rent of premises MVR 7000 by cheque
20 *Sold goods on credit to Avin MVR 2000
27Received a cheque from Avin for MVR 1800 in full settlement of his account
MVR 2000
29 Deposited MVR 10000 cash into the bank account
*Credit purchases are recorded in the purchases journal
*Credit sales are recorded in the sales journal
REQUIRED
Enter the above transactions in Amina’s three-column cash book for the month of
March 20...7.
Three-column Cash Book
Dr
Date
20..7
Mar 1
2
8
27
29
Details
Capital
Capital
Sales
Avin
Cash (c)
Discount
Balance b/d
Bank
200
12 000
2 000
1 800
10 000
61 800
40 000
Cr
Date
Details
Mar 4
Office
equipment
Azeez
Rent
Bank (c)
Balance c/d
50 000
10 000
2 000
200
Apr 1
Cash
15
18
29
31
Cash and bank columns
are balanced separately
and balances are brought
forwarded to the next period
Discount
Cash
8 800
6 000
7 000
500
500
Bank
10 000
2 000 40 000
12 000 61800
Discounts columns
are not balanced but
totalled for the month
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2.4 Sole Trader Financial Statements
A sole trade business is a form of business owned and managed
by only one person (owner). The owner usually manages
the business with the help of family members or a few paid
employees. The owner contributes all the capital, takes all the
profits and bears all the losses as well.
The business may engage in providing services, such as a
restaurant, insurance agency, salon etc. or the business may be a
sole trader involved in buying and selling of goods at a profit.
You will learn
•
Financial
statements for both
trading business
and service
business
•
Ledger accounts
transfers
Making a profit is the main reason why people start up a business.The profit or loss or
the financial position of the business is calculated using financial statements which are
usually prepared at the end of each financial year. Financial statements consist of income
statement and balance sheet. Income statement comprises of two sections:
1. Trading Account Section of the Income Statement
The trading account is concerned with buying and selling of goods. Normally the goods
are sold at a profit, thus the trading result is calculated in the trading account section. This
trading result is known as gross profit. The basic formula to calculate gross profit is:
Sales – Cost of Sales = Gross Profit
Sales represents the net sales less any sales returns.The cost of sales represents the
cost of the goods actually sold during the year. This is necessarily not equal to the goods
purchased during the year. Often inventory of goods will be maintained throughout the
year which would mean the inventory remaining unsold during the financial year will get
transferred to the following financial year. Hence need arises to make adjustments for
inventory before calculating the cost of sales. Therefore, the formula to calculate cost of
sales is:
Cost of Sales = Opening Inventory + Purchases – Closing Inventory
There may be costs or deductions associated with purchases. The purchases figure
represents total cost of purchases less any purchases returns. If the goods purchased
involve any carriage charges the carriage charges should be added too. If the goods
meant for resale are withdrawn by the owner for personal use, goods drawings need to be
deducted. The purchases figure that remains after making this necessary adjustments are
known as net purchases. The formula for calculating net purchases is:
Net Purchases = Purchases – Purchases Returns + Carriage Inwards – Goods Drawings
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These calculations needed to calculate gross profit is included in the trading section of the
income statement. Trading account can be prepared in two ways – horizontal and vertical.
Horizontal format is similar to a ledger account where debit and credit are followed. Using
the horizontal format, revenue or sales is credited and cost of sales is debited. The
difference between the two sides is the gross profit or loss for the year. If the sales or credit
side exceeds the cost of sales or debit side, the difference is gross profit. If the cost of
sales or debit side exceeds the sales or credit side, the difference is gross loss. Horizontal
format trading account is as follows:
Name of the owner/business
Income Statement (Trading account section) for the year ended…………………………….
Details
MVR
Opening inventory
Purchases
Less: Purchases returns
Less: Goods for own use
Add: Carriage inwards
(-)
(-)
-
Less: Closing Inventory
Cost of Sales
Gross profit c/d
MVR
-
Details
Revenue (Sales)
Less: Sales returns
MVR
MVR
(-)
-
(-)
Gross Profit b/d
-
2. Profit and Loss Account Section of the Income Statement
The profit and loss account section determines the final net profit or loss for the year.
The final profit or loss is calculated after taking incomes and all the running expenses into
account. The formula to calculate profit or loss is:
Profit / Loss for the Year = Gross Profit + Other Incomes – Expenses
Like trading account, profit and loss account can also be prepared using both horizontal
and vertical format. Using the horizontal format, gross profit and incomes are credited and
expenses are debited. The difference between the two sides is the profit or loss for the year.
If the incomes or credit side exceeds the expenses or debit side, the difference is profit for
the year. If the expenses or debit side exceeds the incomes or credit side, the difference is
loss for the year. Horizontal format profit and loss account is as follows:
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Name of the owner/business
Income Statement (Profit and loss account section) for the year ended……………………….
MVR
Expenses
Salaries and wages
Rent and rates
Motor vehicle expenses
Finance costs
Profit for the year
MVR
-
Details
MVR
Gross profit b/d
Incomes
Discount received
Commission received
MVR
-
-
Both trading account and profit and loss account can be combined together known as the
Income Statement. When Income Statement is prepared using vertical format, it looks like
an arithmetical calculation. The format of Income Statement (both trading account and
profit and loss account) in vertical format is as follows:
Name of the owner/business
Income Statement for the year ended……………………………….………………….
MVR
Sales
Less: Sales returns
MVR
(-)
MVR
Less: Cost of sales
Opening inventory
Add: Net Purchases
Purchases
Less: Purchases returns
Less: Goods drawings
Add: Carriage inwards
Less: Closing Inventory
Gross profit
Add: Other Incomes
Commission received
Rent received
Discount received
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(-)
(-)
-
(-)
-
(-)
-
-
Chapter 2 Basic Financial Accounting
Less: Expenses
Wages and salaries
Rent and rates
Motor vehicle expenses
Finance costs
Profit (or loss) for the year
-
(-)
-
Income Statement of a Service Business
A service business is one which does not buy and sell goods (trading). Examples of service
businesses include travel agencies,Saloons and spas,consultancy firms etc. At the end of
the financial year, even service businesses need to prepare financial statements. However,
the trading account section of the income statement is not prepared as no goods are
bought and sold. Only the profit and loss section of the income statement and a balance
sheet are prepared.
In the income statement all the items of revenue received, such as fees from clients,
commission and other income are credited and expenses are debited. The balance sheet is
same as the balance sheet of a trading business.
Service business
Trading business
Figure 2.4.1: Type of Businesses
Transferring Ledger Accounts Totals to Income Statement
The horizontal format Income statement proves the fact that income statement is part
of the double entry system of book-keeping. The entries on the debit side of the income
statement will have a corresponding credit on the respective accounts. Similarly, the entries
on the credit side of the income statement will have a corresponding debit on the respective
accounts.
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It is important to remember that if an item is deducted on the debit side of the income
statement it is equal to crediting the income statement, so the corresponding entry in the
ledger is debited. Similarly, if an item is deducted on the credit side of the income statement
it is equal to debiting the Income statement, so the corresponding entry in the ledger is
credited.
Example
The following are completed accounts where total is shown. The entries shown as ‘totals
to date’ represent total of the individual entries.
Dr
Sales Account
Date
20..7
April 30
Details
MVR
Income Statement
85 000
85 000
Cr
Date
20..7
April 30
Details
Total to date
MVR
85 000
85 000
Income Statement for the year ended 30 April 20..7
MVR
MVR
Revenue (Sales)
85 000
Purchases
Purchases account
Date
20..7
April 30
Details
Total to date
MVR
50 000
50 000
Date
20..7
April 30
Details
Income Statement
MVR
50 000
50 000
Commission received account
Date
20..7
April 30
Details
Income Statement
MVR
890
890
Date
20..7
April 30
Details
Cash
MVR
890
890
Income Statement for the year ended 30 April 20..7
MVR
Rent
3 000
MVR
Gross Profit b/d
Commission received
890
Rent account
Date
20..7
April 30
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Details
Total to date
MVR
3 000
3 000
Date
20..7
April 30
Details
Income Statement
MVR
3 000
3 000
Chapter 2 Basic Financial Accounting
All the other items in the income statement (excluding inventory, gross profit and net profit)
have similar transfers from the appropriate ledger accounts.
The gross profit has both debit entry and credit entry within the income statement. The
entries for inventory and net profit are explained below.
Income statement contains both opening inventory and closing inventory. The opening
inventory appears as a debit balance in the inventory account. The transfer entry is made
by crediting the inventory account and debiting the income statement. The closing entry is
shown as a deduction on the debit side of the inventory account (which is equal to crediting
the income statement, so the transfer entry needs a debit entry in the inventory account.
The inventory account appears in the general ledger as shown below:
Inventory account
Date
20..6
May 1
20..7
April 30
20..7
May 1
Details
MVR
Date
Balance b/d
5 100
20..7
April 30
Income Statement
5 100
Income Statement
3 700
8800
April 30
Balance c/d
3 700
8800
Balance b/d
3 700
Closing inventory is
recorded in the debit
side of the inventory
account and credited to
the income statement.
However, it is presented
as a ‘less’ on the debit
side of the income
statement to calculate
cost of sales.
Details
MVR
Opening
inventory is
transferred
to the debit
side of the
income
statement
Income Statement for the year ended 30 April 20..7
MVR
Opening Inventory
Purchases
Less: Closing Inventory
Cost of sales
5 100
(3 700)
-
MVR
Revenue (Sales)
-
The net profit belongs to the owner of the business. It represents the return on the owner’s
investment. This appears as a debit entry in the income statement and should be credited
to capital account as it increases the amount owed by the business to the owner of the
business. Similarly, net loss will appear as a credit entry in the income statement and it
should be transferred to the capital account as a debit entry as it reduces amount owed by
the business to the owner of the business.
When preparing the capital account, it is important to consider the effect of drawings.
Drawings reduces the amount owed by the business to the owner of the business. Hence
a debit entry is necessary in the capital account and a credit entry in the drawings account.
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The capital and drawings account appear in the general ledger as shown below:
Capital account
Date
Details
20..7
April 30
Drawings
April 30
Balance c/d
MVR
2 500
75 200
77 700
Date
20..6
May 1
20..7
April 30
20..7
May 1
Details
MVR
Balance b/d
70 000
Net profit
7 700
77 700
Balance b/d
75 200
Drawings account
Date
20..7
April 30
Details
MVR
Total to date
2 500
2 500
Date
20..7
April 30
Details
Capital
MVR
2 500
2 500
Income Statement for the year ended 30 April 20..7
MVR
Cost of sales
Gross profit c/d
Expenses
Net profit
MVR
12 300
7 700
-
Gross profit b/d
Incomes
12 300
-
Gross profit
has both debit
entry and credit
entry within
the income
statement
-
Net profit is debited to income statement
and credited to capital account. Crediting the
capital account would mean that it increases
the amount owed by the business to the owner.
Balance Sheet
At the end of the financial year, after all the incomes and expenses account balances
have been transferred to the income statement, the balances of assets, liabilities and
capital account will remain. The balance sheet is a financial statement showing the assets,
liabilities and capital at a specific date. The balances in the balance sheet reflect the
financial position of the business at a specific date.
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Balance sheet can be prepared in two ways – horizontal and vertical. A horizontal balance
sheet is prepared in a two-sided format. Usually assets are listed on the left side and
liabilities and capital are recorded on the right side. However assets can also be recorded
on the right side while liabilities can be recorded on the left side.Horizontal format balance
sheet is as follows:
Name of the owner/business
Balance sheet as at …………………………….
MVR
Non-Current Assets
Land and Buildings
Fixtures and Fittings
Motor vehicles
Current Assets
Closing Inventory
Trade Receivables
Bank
Cash
MVR
-
-
Capital
Opening balance
Plus Profit for the year
Less drawings
Non-current liabilities
Long-term loan
Current liabilities
Trade payables
-
MVR
MVR
(-)
-
-
These two balances must be equal
So Assets = Liabilities + Capital
and point two arrows to both the sides.
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When balance sheet is prepared using vertical format, the assets are listed first followed by
capital and liabilities. The format of balance sheet in vertical format is as follows:
Name of the owner/business
Balance sheet as at …………………………….
Cost
MVR
Depreciation
to date
MVR
Book
Value
MVR
Land and Buildings
-
(-)
-
Fixtures and Fittings
-
(-)
-
Motor Vehicles
-
(-)
-
-
(-)
-
Non-Current Assets
Current Assets
Closing Inventory
-
Trade Receivables
-
Non-Current Assets
Land and Buildings
-
(-)
-
Fixtures and Fittings
-
(-)
-
Motor Vehicles
-
(-)
-
-
(-)
-
Current Assets
Closing Inventory
-
Trade Receivables
-
Bank
-
Cash
-
Total assets
-
Liabilities and Capital
Capital
-
Add: Net Profit for the year
-
Less: Drawings
(-)
-
Non – Current liabilities
Long-term loan
-
Current liabilities
Trade payables
Total liabilities
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Three additional details, such as working capital, capital owned and capital employed can
be obtained and analysed from the balance sheet.
Working capital is the excess of current assets over current liabilities. This is the amount
available to the business to meet day-to-day running expenses.
Working Capital = Current Assets – Current Liabilities
Capital owned or owner’s capital refers to the owner’s claim on the net assets of the
business. It is the excess of assets over liabilities. It also represent the net worth of the
business.
Capital Owned = Total Assets – Total Liabilities
Capital employed refers to the long term funds used by the business for its business
operations. It includes funds from owners (capital owned) and funds obtained from external
parties (long-term loan/mortgage).
Capital Employed = Capital Owned + Long-term Loan
Activity 2.8
Distinguish between each of the following pairs of terms.
a) Trading business and service business
b) Trading account and profit and loss account
c) Gross profit and net profit
d) Incomes and expenses
e) Assets and liabilities
f) Non-current assets and current assets
g) Non-current liabilities and current liabilities
h) Current assets and current liabilities
i) Trade receivables and trade payables
j) Cash in hand and cash at bank
k) Opening inventory and closing inventory
l) Loan from Shah and Loan to Shaheem
m) Capital and drawings
n) Capital owned and capital employed
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Key Terms
Accounting: the process of recording, summarising, reporting, analysing and
interpretation of financial information of an organisation.
Accounting equation: the relationship between the assets, liabilities, and capital.
Assets: resources owned by a business.
Balance sheet: statement which shows the financial position of a business.
Book-keeping: detailed recording of all the financial transactions.
Books of prime entry: the books where transactions are first recorded.
Capital: amount owed by the business to the owners.
Capital Employed: long term funds which include funds from owner and funds
obtained from external parties.
Capital Owned: owner’s claim on the net assets of the business.
Carriage inwards: cost of carrying goods from suppliers to the business.
Carriage outwards: cost of delivering goods to the customers.
Cash book: a book which contains cash and bank account and the book of prime
entry to record cash and bank transactions first.
Cash discount: a deduction allowed by the seller of goods or by the provider of
services in order to motivate the customer to pay within a specified time.
Cheque counterfoil: important information about the cheque can be written so as to
use this information later as a document.
Contra entries: kinds of transactions which appears on both the sides of the cash
book are known as contra entries.
Credit note: sent by the supplier to the customer confirming the acceptance of return.
Credit side: the right side of the account.
Debit note: sent by the customer to the supplier requesting to reduce the total of the
original invoice.
Debit side: the left side of the account.
Discount Allowed: the cash discount allowed by a business to its customers when
they settle the accounts within the given time.
Discount Received: the cash discount received by a business from its suppliers when
the accounts are settled within the given time.
Drawings: withdrawals by the owner in kinds,cash or cheques from the business for
personal use.
Expenses: costs incurred to run the business on a day to day basis.
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General ledger: ledger which contains real accounts and nominal accounts.
Gross profit: trading result of the business (Sales less Cost of sales).
ICT: Information and Communication Technology
Income statement: a financial statement that measures the final trading result of the
business.
Incomes: the incomes resulting from normal day to day business transactions.
Inventory accounts: Sales, Sales returns, Purchases and Purchases returns
account.
Invoice: a demand for payment.
Liabilities: debts that a business owes to external parties.
Net profit: Gross profit plus other incomes less all the running expenses.
Pay-in slip: document which shows cheque or cash is deposited in the bank.
Profit and loss account: used to calculate the final net profit (or loss) for the year.
Purchases journal: where credit purchases are first recorded.
Purchases Ledger: ledger which contains the individual trade payables (credit
suppliers) accounts.
Purchases Returns journal: where goods returned to the supplier are first recorded.
Receipt: act as a proof of payment.
Sales journal: where credit sales are first recorded.
Sales Ledger: ledger which contains individual trade receivables (credit customers)
accounts.
Sales Returns journal: where goods returned by the customer first recorded.
Service business: a type of business which does not buy and sell goods but provide
services to the customers.
Sole trade business: a business that is owned and controlled by one person.
Sole trader: a person who owns and controls the sole trade business.
Source documents: written document which gives details of business transactions.
Statement of account: shows summary of the transactions for a month.
Trading account: used to calculate trading result of the business.
Transaction: events which result in changes.
Trade discount: a deduction on the invoice before calculating net amount payable.
Trade receivables: credit customers who owe money to the business for the goods or
services provided to them on credit.
Trade payables: credit suppliers to whom business owes money for the goods or
services provided on credit.
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Trial Balance: a two-column schedule showing account titles with the debit balances
and the credit balances of all the accounts in the ledger at a given date.
Working Capital: the excess of current assets over current liabilities, which is the
amount available to the business to meet day-to-day running expenses.
I Learnt
Answer to Review Questions 7,10,13,16,25,28 and 39 on your own and submit your work
as an assignment.
Key competencies
Practising Islam: The Qur’an states “…eat and drink from the
provision of Allah, and do not commit abuse on the earth, spreading
corruption” (Qur’an, 2:60). Definitely with systematic book-keeping and
accounting helps to maintain proper records which allows the users to
prepare accounts, balance and check. Thus narrowing the chances of
frauds and corruptions.
Using sustainable practices: The book-keeping, maintenance of
source documents, recording the entry first in the books of prime entry
and posting to individual ledger accounts, balancing off the accounts
and extraction of trial balance broadens the thinking of students
towards business and help them understand the importance of
maintenance of records. Furthermore using the trial balance as a basis
for preparation of financial statements thus reporting profit or loss for
the year and revealing the financial position of the business, help the
business to make important decisions in the future.
Relating to people: Business transactions take place between people
or between organisations. The systemic record keeping and application
of accounting concept - duality as double entry system explains the dual
aspect of the transaction. The giver, the receiver, the increase or the
decrease and fixation of double entry rules on those conditions help the
learner to appreciate the book-keeping system. Its logical and practical
application when the double entry emphasises to ‘debit the receiver
and credit the giver’ applying to any circumstance, thus the learner
understand and appreciate such logical system of book-keeping.
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Thinking critically and creatively: Effect of business transactions on the
accounting equation and application if duality concept prove the equality of
accounting equation after each transaction. This amuse the learner and
help them to critically analyse the effects. This understanding of the basics
accounting equation upon which the whole system depends will give ample
opportunities for students to process accounting data and use double entry
rules for each item separately, however the balancing off accounts and
extraction of trial balance, thereby again trial balance acting as a two
column schedule showing total of debits and total of credits for a particular
period (being the debit equals to credit) help the students to critically
analyse the function of accounting equation and double entry system.
Using technology and the media: Use of Information and
Communication Technology (ICT) and explaining its benefits with valid
practical examples help the students to understand use of ITC in the
business field. Furthermore maintenance of ledger accounts in running
balance format using computerised software help them to understand
the elimination of manual system altogether by some businesses and
how it helps the businesses to store their data electronically instead of
using huge physical spaces. Availability of such data just at the touch of
a button strengthen the students’ understandings of the importance of
using technology in this technological era.
Understanding and managing self: The basic accounting principles
help the learner to understand the importance of managing the financial
resources effectively. It highlights the business transaction and its impact
on the basis upon which the business functions known as ‘accounting
equation’. How the business handles the data and process it with a
system known as ‘double entry system of book-keeping’ emphasises
on the importance of having a logical sequential flow to manage the
resources in order to ensure business headed to right direction. This
would definitely help in managing oneself.
Making meaning: Terms used in the business world can be
different than the normal communications in our daily life. Therefore,
understanding the terms are important to deal confidently in the
business world. Every transaction and how it process upon the
basic accounting equation will help to broaden the knowledge on
the functioning of the business. The technical understanding of the
business world, familiarisation of business jargons might instil an
everlasting impression on the minds of the learner.
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Self-Assessment
Topic
Difference between book-keeping and
accounting
State benefits of ICT
State the accounting equation
Classify the items into non-current assets,
current assets, non-current liabilities and
current liabilities
Write the effect upon Assets, Liabilities and
Capital for the given business transactions
Apply the accounting equation in a simple
balance sheet
Prepare a simple Balance sheet
Explain briefly the term ‘double entry system’
Explain double entry rules for assets, liabilities
and capital
Name the inventory accounts and double entry
rule for each account
Define the term expenses and incomes and
double entry rule for each
Explain the three kinds of drawings and
double entry for each kind
Prepare ‘T’ accounts for transactions involving
assets, liabilities and capital
Prepare ‘T’ accounts for transactions involving
expenses and incomes
Prepare ‘T’ accounts for three kinds of
drawings
Explain briefly the terms-Expenses, Incomes,
Drawings and carriages
Explain briefly the purpose of each business
document
Give reason why the use of business
documents are important
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I have understood
I need help
Chapter 2 Basic Financial Accounting
List down important information of the
document
Define the use of each book of prime entry
Write up the source documents, books of
prime entry and double entry for different
transactions
Differentiate between two column and three
column cash book
Draw two and three column cash book and
record different transactions
Formulas to calculate Cost of sales, Gross
profit, Net profit, Working capital, Capital
owned and Capital employed
Difference between trading business and
service business
Difference between horizontal format and
vertical format
Preparation of a simple Income statement and
a Balance sheet (in vertical format)
Review Questions
1. Explain the difference between accounting and book-keeping.
2. Explain three benefits of Information and Communication Technology.
3. Define the terms Assets, Liabilities and Capital.
4. Prepare a simple Balance sheet and calculate capital from the following items
MVR
Land and buildings
80 000
Motor vehicles50 000
Inventory of goods
36 000
Trade receivables12 000
Trade payables13 500
Loan from BML repayable in 5 years
Cash
20 000
1 500
Loan repayable within 10 months
4 000
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5. Write true or false.
a) The prime function of book-keeping is to classify and record business
transactions.
b) Unlike the manual system, computers have the capacity to speed up
processing.
c) Assets + Liabilities = Capital
d) Non-current assets are not bought primarily for resale and are expected to be
used in the business for a long time.
e) Non-current liabilities are debts which are due for repayment within the
financial year.
f) Debts owed for less than one accounting period is known as short term/
current assets.
g) Capital decreases with owner’s contribution and increases with drawings.
h) Accounting equation can be applied to balance sheet.
6. Fill in the blanks.
a) The part of accounting that is concerned with recording data is known as
_________.
b) The accounting equation is _____________+____________=____________.
c) ICT stands for ______________ and ______________ _____________.
d) Debts owed by the business to outsiders are known as _________________.
e) Balance sheet has Assets on one side, while _________________ and
________________ on the opposite side.
f) Balance sheet shows the ________________ ________________ of the
business at a particular date.
7. Ahmed started business on 1 January 20...6 with a motor van MVR 3500,
inventory MVR 1200, office equipment MVR 2700 and cash MVR 2000. To start
the business he had borrowed MVR 5000 from bank (repayable in 20..9).
REQUIRED
a) State the accounting equation.
b) State one asset and one liability of Ahmed’s business.
c) From the above information, calculate the capital of Ahmed’s business on 1
January 20...6. Show your workings.
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8. Classify the following items into Non-current assets, current assets, Non-current
liabilities and current liabilities.
Trade receivables
Loan due in five years
Loan due within nine months
Inventory
Cash in hand
Trade payables
MachineryMotor Vehicles
PremisesCash at Bank
9. State how each of the following transactions affect the assets, liabilities and capital
of Malsa who owns a factory.
Transaction
a)
b)
c)
d)
e)
f)
g)
h)
Effect on
Assets
Effect on
Liabilities
Effect on
Capital
Bought goods for cash MVR 1200
Bought machine on credit
MVR 4500
Paid trade payable by cheque
MVR 780
Sold goods on credit MVR 3500
Received a bank loan in cash
MVR 6000
Owner brought his own motor
vehicle worth MVR 9000 to use in
the business
Bought goods on credit MVR 350
Returned goods to supplier MVR 75
10. Complete the columns to show the effects of the following transactions. The first
transaction has been done for you as an example.
Transaction
a)
Assets
Cash
+ MVR 2000
Effect upon
Liabilities
No effect
Capital
Capital
+ MVR 2000
a) Owner contributed cash into the business MVR 2000
b) Bought goods by cheque MVR 560
c) Sold goods on credit MVR 430
d) Goods retuned by credit customer MVR 50
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e) Bought furniture paying by cash MVR 3000
f) Owner withdrew cash for personal use MVR 1700
g) Bought goods on credit from Luna MVR 1200
h) Paid the amount due to Luna by cheque.
11. For each row of items, identify the item that is different from the other three items.
For each explain your answer:
Example: Buildings, Motor Vehicles, Trade receivables, Loans
Item: Loans
Reason: Loan is a liability whereas other items are assets.
a) Sales, Sales Returns,Purchases returns and Discount Allowed
b) Insurance, Rent payable, Advertising, Rent receivable
c) Bank overdraft, Cash, Capital, Purchases returns
d) Fixtures and fitting, Machinery, Property and land, Trade receivables
12. Write true or false.
a) An increase in Asset is always debit.
b) An increase in liability is always debit.
c) Incomes are always credit and expenses are always debit.
d) Sales and Purchases returns increases the inventory.
e) A cheque can be withdrawn by the owner for personal use.
f) Owner’s personal drawings reduces the capital.
g) Carriage inwards is an expense incurred by the supplier.
h) Carriage outwards is an expense incurred by the customer.
13. Reena is a sole trader dealing in general goods. The following are her
transactions for the month of April 20..5.
20..5
April 1 Reena paid capital MVR 50000 into the business bank account
2 Bought premises MVR 25000 and paid by cheque
6 Bought equipment MVR 4000 and paid by cheque
10 Bought goods MVR 1500 on credit from AB Mart
15 Paid advertising expenses MVR 60 by cheque
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19 Sold goods MVR 200 and received a cheque
23 Sold goods MVR 310 on credit to Ali
27 Ali returned damaged goods MVR 20
29 Paid MVR 1000 by cheque to AB Mart
REQUIRED
a) Enter the above transactions in Reena’s bank account, AB Mart account and
Ali account.
b) Balance the accounts on 30 April 20...5 and bring down the balance on 1 May
20...5.
14. Complete the following table.
Account to be
debited
a)
b)
Account to be
credited
Sold goods for cash MVR 1300.
Paid Alsa, a trade payable by cheque
MVR 1500.
Sold goods on credit to Muaz MVR 3200.
Muaz returned faulty goods MVR 300 to
the business.
Received interest by cheque MVR 1600.
The owner brought more cash MVR 12000
into the business.
Paid rent by cash MVR 2400.
A loan of MVR 7000 is received from
Aman.
Withdrew cash MVR 1900 from the
business for personal use.
c)
d)
e)
f)
g)
h)
i)
15. Azima started a business on 1 May 20...5. The following transactions took place
during the first month of trading.
20..5
May 1 Started business with MVR 25000 in the bank.
8 Bought a motor vehicle on credit from Motor Stores MVR 10000.
15 Bought goods MVR 2000 on credit from Quick supplies.
22 Sold goods MVR 1000 on credit to Asma.
28 Paid rent by cheque MVR 5000.
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REQUIRED
a) Enter the following transactions in the ledger accounts of Azima for the month
of May 20...5.
b) Balance the accounts on 31 May 20...5 and bring down the balance on 1 June
20...5.
c) Extract a trial balance on 31 May 20...5 from the list of balances in the
accounts.
16. Abdulla Shinan runs his business from rented premises. The following balances
were extracted from his books on 31 July 20...4.
MVR
Inventory
4 000
Sales
80 000
Purchases
62 000
Trade receivables
10 000
Trade payables
9 000
Electricity
3 000
General expenses
7 000
Cash at bank
5 000
Drawings
8 000
Rent and Insurance
6 000
Equipment
29 000
Capital
45 000
REQUIRED
a) Define trial balance.
b) Prepare a trial balance for Abdulla Shinan at 31 July 20...4.
c) State one use of a trial balance.
d) Explain how a trial balance is different from a balance sheet.
17. Halaf started business on 1 August 20...4. The following transactions took place
during the first two weeks of trading.
20...4
Aug 1 Halaf introduced capital of MVR 20000 which was deposited in the
business bank account
8 Purchased goods MVR 1500 on credit from Amir
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15 Returned damaged goods to Amir MVR 100
20 Paid Amir MVR 1000 by cheque
26 Halaf withdrew MVR 200 cash from business bank account for his
personal use
REQUIRED
a) Record the above transactions in T accounts. Balance the accounts on 31
August and bring down the balances on 1 September 20...4.
b) Prepare a trial balance for Halaf at 31 August 20...4.
c) State one use of a trial balance.
18. The following transactions took place in Maryam’s books in the year 20...9.
20..9
Jan 1 Maryam deposited MVR 70000 cash into the bank account (opened in
the business name) to start a business
Feb 6 Maryam withdrew cheque MVR 2000 for family expenses
Apr 2 Maryam withdrew goods MVR 1200 from the inventory for her home use
June 9 Maryam brought family car worth MVR 40000 to use in the business and
placed office name board in it
July 18 Maryam brought from home a computer valued at MVR 9000
Sep 16 Maryam contributed MVR 5000 cash as additional capital
Oct 10 Maryam withdrew MVR 1000 cash to pay for her son’s tuition fees.
REQUIRED
Write up the Drawings account and Capital account for the year ended 31
December 20..9. [Hint: Capital always credit & Drawings account always debit]
19. Fatima started a business on 1 April 20..5. The following transactions took place
during the first month of trading.
20..5
April 1 Fatima deposited MVR 10000 in the bank account, which was opened in
the name of the business.
4 Bought office equipment on credit from Vian Stores MVR 10000.
6 Bought a motor vehicle worth MVR 25000 on credit from Neesha Motors
7 Bought goods MVR 10000 on credit from Daily goods Store
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9 Sold some of the office equipment MVR 3000, not suitable for the
business, on credit to Amy Shop
14 Paid amount owed to Daily goods store by cheque
20 Fatima bought office equipment MVR 3000 paying from her private bank
account.
20 Received a cheque from Amy Shop for MVR 2000
REQUIRED
a) Record the given transactions in the ledger T accounts using the double
entry system for the month of April 20...5 and balance off the accounts where
necessary and bring down the balance on 1 May 20...5.
b) Prepare a trial balance for Fatima at 30 April 20...5.
20. The following account of Nusra appeared in the books of Yusuf.
Nusra Account
Date
20..6
Mar 8
10
10
Details
Returns
Bank
Discounts
MVR
200
2 000
200
Date
20..6
Mar 1
5
Details
Balance b/d
Purchases
MVR
1 300
3 100
REQUIRED
a) State if Nusra a trade receivable or a trade payable?
b) State the ledger under which the account of Nusra will be kept.
c) What does the balance on 1 March 20..6 indicate.
d) What kind of returns is given on 8 March 20..6?
e) What kind of cash discount is given on 10 March 20..6?
f) Balance the account of Nusra for the month of March 20..6 and bring down
the balance on 1 April 20..6.
g) Complete the table below
Transactions
March 5
March 8
March 10
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Source document
Book of prime entry
Chapter 2 Basic Financial Accounting
21. Name the source document and book of prime entry for each of the following
transactions
Item
Transactions
a)
b)
c)
Bought goods for cash
Sold goods on credit to Fiyaz
Fiyaz returned damaged goods to the
business
Bought goods on credit from Baqir
Returned faulty goods to Baqir
Settled Baqir account by cheque
Fiyaz paid his account in cash
Owner deposited a cheque as capital
contribution
d)
e)
f)
g)
h)
Source
Document
Book of prime
entry
22. Azhad commenced a business on 1 May 20..6. He has provided the following
transactions for the month of May 20..6.
20..6
May 1 Owner started the business with MVR 40000 deposited in the business
bank account and with a cash in hand of MVR 10000
3 Bought fixtures and fittings worth MVR 5000 by cheque
5 Paid rent by cheque MVR 7000
10 Bought goods on credit from Blue Wave with a list price of MVR 4000,
subject to 10% discount
12 Returned damaged goods to Blue Wave with list price MVR 100
14 Bought goods from Blue Wave by cheque MVR 3600
15 Sold goods on credit to Hashim MVR 1500
17 Hashim returned damaged goods to the business MVR 240
18 Sold goods to Solah for cash MVR 2200
21 Withdrew goods from the inventory for personal use MVR 600
23 Bought a Motor van on credit from Speedy Motors MVR 10000
25 Paid the amount outstanding to Blue Wave by cheque MVR 3490, having
deducted MVR 20
26 Sold some fixtures on credit to Rilwan, a friend for MVR1200
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27 Azhad brought his own Motor bike worth MVR 9000 to use in the
business
29 Sold goods on credit to Zain MVR 1200
30 Bought goods on credit from Muaz MVR 7000
REQUIRED
a) Name the type of the discount offered to Azhad on May 10 and the reason for
offering the discount.
b) Name the type of the discount offered to Azhad on May 25 and the reason for
offering the discount.
c) Using the relevant transactions from the transactions of Azhad’s business for
the month of May 20..6, prepare the following journals:
i)
Sales Journal
ii)
Sales returns Journal
iii)
Purchases Journal
iv)
Purchases returns Journal
v)
The Journal
d) Complete the table below. The first one has been completed as an example.
Transactions
May 3
Source document
Cheque counterfoil
Account to be
Account to be
Debited and amount credited and amount
Fixtures and Fittings
Bank
MVR 5000
MVR 5000
May 10
May 12
May 15
May 17
May 18
May 25
23. The following transactions took place between Rehendhi and Khadeeja. Both are
retailers.
20..6
June 5 Khadeeja sold goods on credit to Rehendhi MVR 2300
7 Rehendhi returned quarter of these goods to Kahdeeja
15 Rehendhi paid the outstanding amount by cheque
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REQUIRED
a) Name the documents used by both Khadeeja and Rehendhi to record each of
the above transactions in their respective books.
Transactions
Source document used
by Khadeeja
Source document used
by Rehendhi
June 5
June 7
June 15
b) If Rehendhi does not fully settle her debt on 15 June 20..6, what document do
you think Khadeeja will send to Rehendhi at the end of June?
c) Prepare the account of Rehendhi in the books of Khadeeja.
24. The following account of Raya appeared in the books of Wahid.
Raya Account
Date
20..6
Aug 1
10
Details
MVR
Balance b/d
Sales
1 430
4 500
Date
Details
20..6
Aug 15 ............... Returns (i)
20 Bank
20 Discount ............... (ii)
MVR
900
3 700
300
REQUIRED
a) State if Raya is a trade receivable or a trade payable?
b) State the ledger under which the account of Raya will be kept.
c) Fill the blanks (i) and (ii), specifying the type of return and cash discount.
d) Complete the table below
Transactions
August 10
August 15
August 20
Source document
Book of prime entry
25. The following documents were sent by Thani to Sara during the month of July 20..6.
20..6
July 2 An invoice for MVR 750
10 A credit note for MVR 90
15 Another invoice for MVR 1000
23 A rerceipt for MVR 500
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REQUIRED
a) Describe the transaction that gave rise to each document sent by Thani to Sara
from 1 July to July 31. The first transaction has been completed as an example.
20..6
July 2 Sold goods on credit to Sara MVR 750
b) Name the book of prime entry Thani would use to record the details of each
document in the following table
Document
Invoice
Credit note
Invoice
Receipt
Book of prime entry
c) Prepare Sara’s account in the books of Thani and balance off the account.
d) Name the ledger under which Sara account will appear in the books of Thani.
26. The table below contains some transactions carried out during August 20..6.
Complete the table for each transaction, stating the source document, books of
prime entry and double entry, stating the account to be debited and account to be
credited with the amount.
The first transaction has been completed as an example.
Transaction
Bought goods on credit
from Saina MVR1400
Bought office equipment
paying by cash MVR8000
Sold goods on credit to
Diya MVR880
Returned goods to Saina
MVR170
Diya settled her account
by cheque
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Source
Document
Books of
prime entry
Purchases
Invoice
Purchases
Journal
Double entry
Account to Account to
be debited be credited
Purchases
Saina
MVR1400
MVR1400
Chapter 2 Basic Financial Accounting
27. The following is a list of Ziyad’s assets and liabilities when he first started his
business on 1 September 20..6.
MVR
Motor Vehicles
20 000
Fixtures
30 000
Inventory
23 400
Bank
6 500
Loan from Nilam
26 000
The following transactions occurred during the first week of trading
20..6
September 3Bought additional fixtures and fittings MVR 5000 on credit from
ANAS Fix
September 5Sold fixtures (which could not be fixed properly) on credit to Rim
Store MVR 2200
REQUIRED
a) Prepare the general journal and record the opening entries at 1 September
20..6 to show the capital at that date. A narrative is required.
b) Prepare the general journal and record the transactions on September 3 and
September 5. Narratives are not required.
28. Lisa started business on 1 October 20..6. She recorded all transactions in the
ledger before recording them in the general journal.
Capital account
Date
Details
MVR
Date
20..6
Oct 1
Details
Bank
MVR
23 500
Bank account
Date
20..6
Oct 1
20
Details
Capital
Kiyan Loan
MVR
Date
Details
MVR
Details
MVR
23 500
10 000
Motor Vehicles account
Date
20..6
Oct 7
Details
Samira
MVR
Date
40 500
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Samira account
Date
Details
MVR
Date
20..6
Oct 7
Details
Motor Vehicles
MVR
40 500
Kiyan Loan account
Date
Details
MVR
Date
20. .6
Oct 20
Details
Bank
MVR
10 000
REQUIRED
a) Record in the General journal the above transactions.
b) Name the source document used to record the transaction on 7 October 20..6.
c) Write the transaction that must have taken place on 20 October 20.7.
29. Imna started business on 1 November 20..6 with a capital of MVR 45500 which
was paid into a business bank account.
Transactions for the month of November 20..6 were:
20..6
Nov 2 Imna brought additional cash MVR 10000
4 Purchased goods paying by cheque MVR 1530
6 Sold goods for MVR 500 cash
8 Bought goods on credit from Bakuru Store MVR 9000
11 Faulty goods returned to Bakuru Store MVR 200
15 Sold goods on credit to Dhimna MVR 900
16 Paid a cheque to Bakuru Store in full settlement of the account ,after
deducting a cash discount of MVR 300
18 Paid rent of premises MVR 6000 by cheque
20 Received a cheque from Dhimna for the amount outstanding MVR 900,
less 5% cash discount.
25 Imna withdrew MVR 1200 cash from the bank for personal expenses
REQUIRED
a) Enter the above transactions in Imna’s three column cash book for the month of
November 20..6
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b) From the above transactions identify and complete the table below by
indicating source document and double entry in each case.
No.
Transactions
Source
Documents
(i)
(ii)
(iii)
(iv)
November 4
November 8
November 11
November 20
Double entry
Debit
Credit
30. Khalid had the following transactions for the month of December 20..6.
Three - column Cash Book
Dr
Date
20..6
Dec 1
6
15
27
Details
Discount
MVR
Balance b/d
Zuha
Bank (c)
Sales
REQUIRED
Cash
MVR
1 200
100
1 000
3 200
Bank
MVR
Date
20..6
15 200 Dec 5
2 300 10
15
22
25
Details
Purchases
Drawings
Cash (c)
Rent
Samra
Cr
Discount
MVR
Cash
MVR
Bank
MVR
500
2 500
1 000
3 500
100
1 100
a) Write up the transactions for the following entries. The first one has been
completed as an example.
20..6
Dec 5
Bought goods paying by cheque MVR 500
Dec 6
Dec 10
Dec 15
Dec 27
b) Identify one trade receivable and one trade payable from the above cash book
entries.
c) Balance the cash book for the month of December 20..6 and bring down the
balance on 1 January 20..7.
31. On 1 January 20..7, Fazna has a debit balance of MVR 1230 in the cash account
and a debit balance of MVR 7540 in the bank account. Her cash book was
prepared by an inexperienced bookkeeper and some items in the cash book have
been entered in the wrong column or have been unintentionally left out.
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Three - column Cash Book
Dr
Date
20..7
Jan 1
6
20
25
Details
Discount
MVR
Balance b/d
Amra (trade
payable)
Cash
MVR
1 230
100
Wages
Drawings
200
REQUIRED
Bank
MVR
Date
Cr
Details
Discount
MVR
20..7
7 540 Jan 4 Sales
9 Azra
1 900
(trade
receivable)
800 15 Cash
22 Interest
received
27 Rent
Cash
MVR
Bank
MVR
500
20
800
1 000
650
3 000
a) Make the necessary corrections and rewrite the cash book for the month of
January 20..7.
b) Balance the cash book for the month of January 20..7 and bring down the
balances on 1 February 20..7.
c) What is the rate of cash discount given to Fazna by Amra on January 6?
d) Name the type of the cash discount given to Fazna by Amra on January 6.
32. The following balances are extracted from Amsa’s books on 31 May 20..6 after
the preparation of the Income statement
MVR
Capital at 1 June 20..5
60 650
Profit and loss account
8 000
Trade receivables
14 800
Trade payables
16 700
Motor vehicles
35 000
Office equipment
20 700
Inventory
12 200
Bank
7 650
Long-term loan from Shaya
19 000
Drawings
13 300
REQUIRED
Calculate the following for Amsa
a) The Non-current assets
b) The Current assets
c) The Non-current liabilities
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Dr
Cr
Chapter 2 Basic Financial Accounting
d) The Current liabilities
e) The Owner’s capital
f) The working capital
g) The Capital employed
33. The Balance sheet of Sama, a wholesaler, is shown as follows:
Sama
Balance sheet as at 30 June 20..6
Assets
MVR
Non-Current Assets
Buildings
Motor vehicles
Furniture and Fittings
Current Assets
Closing Inventory
Trade Receivables
Bank
Cash
MVR
50 000
20 500
32 000
102 500
12 300
10 500
11 900
7 200
Liabilities and Capital
Capital
Opening balance
Plus Profit for the year
Less drawings
MVR
MVR
70 000
10 200
80 200
(8 000)
72 200
Non-current liabilities
Long-term loan
Current liabilities
Trade payables
41 900
144 400
60 000
12 200
144 400
REQUIRED
a) From the above Balance sheet, calculate or write down the following
information:
(i)
Owner’s capital
(ii)
Capital employed
(iii)
Working capital
34. The following information relates to Shahid, a sole trader, as at 31 July 20..6.
Premises
MVR
60 650
Office Equipment
8 000
Trade receivables
14 800
Trade payables
16 700
Bank overdraft
35 000
Long term loan from Biz Bank
20 700
Inventory
12 200
Cash
7 650
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REQUIRED.
Prepare a Balance sheet as at 31 July 20..6 and calculate capital (Use vertical
format).
35. Masian is a trader. His financial year ends on 31 October. He provided the
following information after the preparation of his income statement for the year
ended 31 October 20..6.
MVR
Trade payables
13 200
Trade receivables
9 400
Inventory 31 October 20..6
12 900
Premises
83 000
Equipment
35 500
Bank overdraft
4 200
Cash
200
Loan repayable 31 December 20..6
10 000
Loan repayable 31 October 20..9
20 000
Motor vehicles
18 700
Capital at 1 November 20..5
115 000
Drawings
16 000
Profit for the year
13 300
REQUIRED
a) Indicate with a tick ( ) the section of Masian’s balance sheet where each item
would appear.
Noncurrent
assets
Trade payables
Trade receivables
Inventory 31 October
20..6
Premises
Equipment
Bank overdraft
Cash
Loan repayable 31
December 20..6
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Current
assets
Current
liabilities
Noncurrent
liabilities
Capital
Chapter 2 Basic Financial Accounting
Loan repayable 31
October 20..9
Motor vehicles
Capital at 1
November 20.5
Drawings
Profit for the year
b) Calculate the following:
(i)
The total of non-current assets
(ii)
The total of current assets
(iii)
The total of current liabilities
(iv)
The capital at 31 October 20..6
36. Shaihan is a business consultant. He provided the following information at the
end of his financial year on 30 September 20..6.
Fees received
General expenses
Insurance
Printing and stationary
Loan interest
MVR
62 350
8 670
900
16 700
3 500
Wages
20 700
Rent received
12 200
Commission received
7 650
REQUIRED
a) Prepare the income statement for Shaihan for the year ended 30 September
20..6.
b) Explain the difference between trading business and service business.
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37. Afsa is a trader. She provided the following information for the year ended 31
October 20..6
MVR
Revenue (sales)
345 000
Purchases
264 000
Returns inwards
1 200
Returns outwards
3 750
Wages
32 460
Motor expenses
7 990
Carriage inwards
1 740
Carriage outwards
1250
Inventory 1 November 20..5
21 250
General expenses
13 440
Additional information:
1. The inventory at 31 October 20..6 was valued at MVR 23 660.
2. Afsa took goods costing MVR 2000 for her own use. No entries have been
made in the accounting records.
REQUIRED
Prepare the income statement for Afsa for the year ended 31 October 20..6.
38. The following balances have been extracted from the books of Rani Shopping on
31 October 20..7.
Revenue
Finance income
Purchases
Carriage charges
Sales returns
MVR
198 000
900
53 000
6 900
300
Rent
25 300
Office Salaries
26 200
Discount allowed
100
Stationery
2 400
Other operating expenses
8 700
Electricity
7 200
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Bank
4 700
Inventory 1 November 20..6
39 000
Trade receivables
10 000
Trade payables
11 300
Office furniture
8 000
Motor vehicles
37 300
Premises
85 400
10% long-term loan from Bank
20 000
Financial cost paid
Capital
Drawings
Dr
2 000
100 300
14 000
Additional information:
1. Inventory on 31 October 20..7 was valued at MVR 41 000.
2.Carriage charges, 60% relates to cost of goods carrying from suppliers and
remaining 40% relates to cost of goods delivering to customers.
REQUIRED
a) Prepare the Income Statement of Rani Shopping for the year ended 31
October 20..7.
b) Prepare the Balance Sheet of Rani Shopping as at 31 October 20..7.
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3
Entrepreneurship
3.1 Allocation of Resources
Human needs and wants are unlimited. Scarcity
You will learn
exists when the resources are limited and are not
• Resource allocation and its
enough to cater for the needs and wants. This results
relevance in economy.
in choices to be made. Therefore, resources need
to be utilised in the most economic manner in order
to gain the maximum benefit from those limited resources. The strategic process whereby
the organisation plans in using the available resources in order to produce goods and
services of economic value are known as the allocation of resources. In order to do this an
organisation needs to answer three basic question of what to produce, how to produce
and whom to produce. Even though these questions are common to any organisation in
allocating its resources, the answer may vary depending on the economy. Also, the answers
may vary depending on the time at which the resources are to be used. This is because
the means and resources required for production differs depending on time and economic
situation.
For proper and ideal allocation of resources each economy or organisation should consider
answering the three questions, what to produce, how and how much to produce and for
whom shall it be produced.
Resource allocation and its relevance in
production
While resources are consumed or used up in production
of goods and services that satisfies human needs and
wants, it is important to understand the relevance of
resource allocation and production. For a production
to happen resources are essential. Market forces
of demand and supply determine the feasibility of
the production of a product. The resources should
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Figure 3.1.1: Natural Resources
Chapter 3 Entrepreneurship
be allocated to where it is most needed or to the product which has the most demand.
However, regardless of the demand, certain social services require resources to be
allocated to them. Therefore, the allocation of resources and production are interrelated.
The way in which a country allocates its resources could be a determinant of its economic
system.
Activity 3.1
Aisha and Sarah are two classmates. Aisha is from a well-off family where all her
needs and wants are mostly fulfilled. On contrary, Sarah is from a less fortunate family
struggling to survive. Their whole class decided to go for a picnic. While going to the
picnic island the boat got lost and landed in another island. These students are left
with few food items and water. They will have to manage with this for as long as they
can. Some of the students have started looking for water and alternatives of food.
a) Identify and explain at least two problems that these students will face.
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3.2 Economic systems
You will learn
•
Economic System
An economic system can be defined as the way in which
a nation or state handles its resources in utilising it to the
benefit of the community. There are four types of economic systems. They are traditional,
market, command and mixed economic systems.
Fee Market: United States of America
Efficient
Big gaps – Poverty present
Democratic
Same factors
present:
producers,
consumers, etc.
Private ownership
Free trade
Economic
Systems
Mixed: Maldives
Both other systems
present
High taxes
Command:
Cuba
Public ownership
Inefficient
Equal and fair
Figure 3.2.1 Economic systems
Market economic system
A market economic system is where most of the resources are controlled and owned by
individuals and the decisions on economic activities are determined by the demand and
supply. The prices of goods and services are determined through voluntary transactions
governed by the interaction of demand and supply. The market involves in the exchange of
one resource to another. For example, people exchange money with goods and services.
The prices of goods and services are determined by the level of scarcity of a good or
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service. The economic growth in a market system is determined by the risks and rewards
for a particular economic activity. If the risk is high and rewards is low of an activity then
there may not be entrepreneurial initiatives towards that activity. The involvement of the
government in planning and disseminating economic activities is very low and resources of
the economy are owned by the private sector. Therefore, in practice it can be said that there
are no pure market economic systems in the world.
There are a number of advantages and disadvantages in a market economic system. The
market system economy operates on the invisible forces of demand and supply which
results in the efficiency of business through reduced costs and enhanced production. While
entrepreneurs and consumers act on their own motive where consumers seek the lowest
prices and entrepreneurs seek the highest wealth, producers are encouraged to invest in
research and development leading to innovation. In an effort to differentiate themselves
business offer a variety of goods and services which gives a variety of choice to the
consumer. There is freedom of choice for the consumer as long as it can be afforded.
On the contrary, when wealth generates wealth, a disparity in wealth exists between the
rich and the poor. The inequality makes it difficult for the poor to become wealthy, rather
helps the wealthy to become wealthier. When there is less interference by the government
in economic activities, businesses tend to employ methods which may cause environmental
damage rather than employing environmental friendly methods in order to save costs and
increase revenue. Any factor that may lead to reduced profits could hardly be exercised by
businesses. As such, without much control of the government the businesses may tend to
give less importance to issues, such as health and safety which may result in poor working
conditions. Also, areas less profitable but socially required for the public can be overlooked
with less attention due to distortion in investment priorities. While industrialisation and use
of modern equipment could lead to unemployment with the people feeling vulnerable and
socially insecure in a society where almost everything is self-motivated.
Figure 3.2.2: Buying and selling of goods
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Activity 3.2
Amina has 20 employees working for her garment business. She owns a big tailoring
shop, where she sew scarf. Amina would like to make as much profit as possible for
herself. This is the aim of her business. At present she use her scarce resources to
make scarf which is mostly worn by women at the age of 20–40 years.
The young generation in the Maldives now wears different types of head covering.
Amina had noticed that sales of her scarf is falling, which means market of scarf is
shrinking. Now women rarely wear scarfs, and are not willing to spend for scarfs. It is
identified that teenagers are willing to pay high prices for colourful, designed shawls.
In other words market for shawl is expanding.
As her profit began to fall Amina realised that more money could be made by
producing colourful shawls. Therefore, she employs her resources in producing
shawls instead of scarfs.
Now Amina has a problem to choose which way to produce shawl. The first method
only requires 16 workers of her 20 workers and eight machines. It will cost MVR 50 to
produce a shawl. The second method requires all her workers with five machines, and
each shawl will cost her MVR 90. Amina had decided to use the first method because
she wanted to make as much profit as possible from the sales of shawl.
After a short period of time Amina’s business observed a dramatic increase in profits.
The supply from Amina also satisfied part of the demand for shawls.
Questions
This scenario describes a typical business condition in a market economy. Use the
scenario to answer the following questions.
a) What is the main aim of a business producing goods and services in a market
economy?
b) How do firms in this type of economy decide what to produce?
c) In a market system how do firms decide how to produce goods and services?
d) In deciding to produce shawl Amina chose the cheapest method which meant
she needed less workers than she already had. Explain what will happen to four
workers who are not involved in the production?
e) Did Amina take the best choice for production? Explain your answer in 100–150
words.
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Activity 3.3
The gap between the rich and the poor keeps widening, the Organisation for
Economic Cooperation and Development (OECD) says.
In its 34 member states, the richest 10% of the population earns 9.6 times the income
of the poorest 10%. There is no standard measure of inequality but most indicators
suggest it slowed or fell during the financial crisis and is now growing again. The
OECD warns that such inequality is a threat to economic growth. The report says
this is partly because there is a wider gap in education in the most unequal countries,
which leads to a less effective workforce. OECD member states include most of the
European Union as well as developed economies, such as the US, Canada, Australia
and Japan.
Source: http://www.bbc.com/news/business-32824770
Evaluate and explain how some people can be so rich while some are very poor in
market economy.
Command economic system
The command economic system has state and
private owned institution which are controlled
by the state. The people at authoritative levels
determine on the allocation of resources. A
command economic system persists when a
government has control over its resources and
decides on what to produce, how to produce and
how much to produce. Further, the government
controls the prices of goods and services. A
communist society is resembled by a command
economy.
DID YOU KNOW
Paper Money Isn’t Actually
Paper: Ever wonder why a
dollar bill still looks like a
dollar bill after a trip through
the laundry machine? That’s
because paper currency isn’t
actually paper. Dollar bills are
made of cloth, a combination
of linen and cotton
Features of command economy
The government creates a central economic plan while having a control over all of the
resources. The control over the resources is aimed at providing the most efficient and
economic solutions with the available factors of production with an intension to provide
equal employment opportunities to the best depending on individual’s abilities. While
the government monopolises the essential businesses, it prioritises on even provision of
goods and services which are basic necessities or of concern to the public. Further, the
implementation of the central economic plan is governed by laws and regulations.
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The advantages are that when the central economic plan is governed by laws and
regulations the government can act with power and authority towards its implementation.
Thus, all planned economic activities can be executed and completed with no friction by
a lawsuit of any nature. Further, it is much easier for command economies to transform
societies towards the government’s vision by nationalising, re-assigning of jobs or any other
means.
The command economies usually tend to produce too much of one thing and not enough
of the other which may cause negligence of societal needs. When the economy doesn’t
produce goods that are needed by the society, it can lead to the development of a shadow
economy or a black market. When businesses focus on producing according to directives, it
limits the creativity and lacks on innovation.
Activity 3.4
An economic system organises ways to allocate its resources to produce goods
and services. There are no pure market or command economic system. However,
understanding assumptions of pure market system and command system helps to
understand one economic system model, understanding the assumptions underlying
a pure command system and a pure market system can clarify the economic system
and the choices.
a) All the economic systems have three basic questions. Identify the three basic
economic questions every society must answer.
b) Differentiate on how these questions will be addressed by a market or command
economic system.
Mixed economic system
A mixed economic system is where the private and public sector, both exercises the
economic control. It has features of both the market and the command economy. The mixed
economy has both public private sector entities which features both the planning and price
mechanism.
In a mixed economy, there is private and government involvement in the economic
development. Although there is always the potential of a monopoly, the government closely
observes the actions of the monopoly. In some mixed economic systems governments may
have control over and lead sectors, such as healthcare and or welfare areas.
The mixed economic system is inclusive of all the positive features of a market economic
system and a command economic system creating a general balance between the private
sector and the public sector. Factors, such as freedom of consumption, price mechanism
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and profit motive leads to the efficient allocation of resources. However, when there is
misallocation of resources, rules and regulations guide towards the right direction.
Regardless of the efforts to create a balance between the private sector and public sector,
often there are frictions between both sectors. The private sector is usually heavily taxed
with lot of restrictions through laws and regulations. However, the public sector enjoys
various concessions or subsidies in its operations. Further, the improper mix of socialism
and capitalism could lead to economic fluctuations.
Activity 3.5
Write a report about the economic system that the Maldives should follow. Specify
whether it is command, market or mixed economic system. Your arguments can
include research about economic systems of different countries or economic systems
that were seen throughout different periods of history.
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3.3 Production
Goods and services need to be produced for the
You will learn
consumption in order to satisfy wants and needs.
• Production and productivity
Production is the process by which raw materials are
• Capital intensive production
turned into finished products which are of economic
• Labour intensive production
value. If the finished products have no economic value
then the resources which could have been used for an
alternative product would have gone to waste. While it is the aim of an organisation to earn
profits an organisation should identify ways in which the resources can be used in the most
economic manner.
In order to produce goods and services in the most effective manner, proper allocation
of resources are required. The allocation of resources can be a difficult task, which
involves in making decisions on how to allocate money, people, time, infrastructure and
other resources. Once resources are allocated, organisations should identify and employ
the most appropriate method of production to
produce goods and services in order to maximise
the profits. This involves in employment of the
best method of production which suites the
production of the intended product.
Production can be capital intensive or labour
intensive. Capital intensive productions require
high financing costs, whereas labour intensive
methods require more labour involvement.
In order to make the best use of resources,
producers should identify the most suitable
method of production which would eliminate
wastage and increase productivity.
Production vs productivity
Figure 3.3.1: Production process in progress
Production is the process by which raw materials, either tangible or intangible are converted
into finished products of goods and services. While production is to combine the factors of
production in order to create a good or service, productivity is the number of additional unit
produced in the production process. Therefore, productivity can be referred to as the rate at
which goods and services are being produced. However, production is only concerned with
creating an output from an input.
Productivity is more related with the efficient use of factors of production, eliminating waste
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and facilitating the comparison between rivalry organisations. Further, it helps in identifying
areas of development and areas having comparative benefits.
Technology plays a vital role in enhancing production as with the use of technology some
tasks can be completed much quicker than getting them done by manual labour. Also,
technology eliminates the possibility of boredom faced by individuals when been employed
in repetitive work. Nevertheless, to make the best use of technology the skills of labour
have to be improved.
Activity 3.6
a) Does productivity means producing more goods? Explain.
b) Differentiate between production and productivity.
Activity 3.7
From the given list below. Identify labour intensive production and capital intensive
production.
a) Food processing
b) Transport
c) Car manufacturing
d) Hotels & restaurants
e) Fruit farming
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3.4 Methods of Production
You will learn
Depending on the market size and the type of
product that needs to be produced, an organisation
• Different methods of production
can adopt a method that will best suit to achieve its
goals. Production methods can be classified into three categories. They are job production,
batch production and flow production.
Job production
Job production is usually for a single unique
product that is produced from the start to end
which usually requires manual work. While job
productions are labour intensive, these jobs
often require skilled labour. Jobs are done
mostly based on special requirements of the
customer. A distinct feature of job production
is that jobs are usually customised and do not
have a specific standard.
When products are produced for a single job,
the job gets the full attention of the worker
resulting in high quality products. As these
products are unique with special skills required
to produce them, workers get motivated and
Figure 3.4.1: Job production
take pride in their work.
Due to its nature the production requires highly skilled labour which increases the unit cost
of the product. Thus, resulting in a higher sale price. Another reason for the product to
be more expensive is that unlike mass produced products, products made for jobs cannot
achieve economies of scale.
Batch production
Batch production is where a group of products
are made together. Each batch gets completed
before another batch could be commenced.
This method of production can be suitable
for products that are produced for a limited
time or in a limited amount of quantity. Batch
production offers the flexibility of mass
production and a certain level of customisation
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Figure 3.4.2: Batch production
Chapter 3 Entrepreneurship
to meet the requirements of a specific customer order assuring a higher level of productivity
and reduced cost.
When products are produced in batches it reduces the unit cost of the product. This also
enables the producer to purchase the resources or materials required for the production
in bulk. Bulk purchases often attract discounts resulting in cheap material cost. Although
batch production offers a variety to customer the variety is limited.
Workers involved in job production become less motivated in their work due to repetitive
work. The production is made for expected sales, therefore the products stay in storage
until it is sold. Storage can be costly depending on the type of products as some may
require larger spaces or special storage requirements. Further, batches of the finished
products require space to be moved around the premises which may cause inconveniences
or additional space. Besides the finished products, the organisation would require to store
its raw materials required for the production process which could demand additional space
or facilities.
Flow production
Flow production method is whereby standardised
similar items are produced through an interrelated
process on production lines. This means that there
will be no point at which the production would stop.
Thus, one task is initiated as soon as the other has
been completed. This type of production is most
suitable for products that require to be produced
in mass. For example, cars are produced using
production lines and electronic robot arms do most
of the assembling works. However, some specialised
tasks, such as fixing of wire harnesses are assigned
to workers who are skilled and specialised.
Figure 3.4.3: Flow production
Flow production has a number of advantages.
A large production would require a large quantity of raw materials for the production.
Therefore, materials required can be purchased in bulk which often attract discounts.
When products are produced in large quantity the average cost of the product could be
reduced as such the organisation can have competitive pricing. Flow production mostly
uses assembly lines which are mechanised and require less workers to get involved. This
reduces the labour cost of the production.
The flow production process has disadvantages as well. The investment to establish a flow
production can be costly due to the high costs involved in buying the machinery required
for the production. With an interrelated process for production, if there is a breakdown in a
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single process it would lead to a halt in the entire process. Further, there is little flexibility in
a flow process and may not be convenient to adapt required changes to the product. In a
flow production the workers can be demotivated by the nature of work which can involve in
repetitive work.
Activity 3.8
Choose three businesses and identify the method of production used by the business.
Justify your classification.
Business
Product
Production
process
Reason
Difference between batch and flow production
Regardless of similarities between batch production and flow production methods, both
methods can be easily distinguished. While a gap is required between batches in the batch
production, a flow production stays continuous without any interruptions to the production.
The continuous process in a flow production restricts any variation in the product being
produced. However, the batch production allows a variation in the process resulting in
different products or product grades with the use of the same equipment. A flow process
requires more advanced equipment and less man power whereas the batch production
requires more man power and less advanced equipment. The advanced equipment used in
flow production makes the investment more costly compared to equipment used for batch
production.
Product inventories
DID YOU KNOW
Depending on the size of business, almost all
businesses would hold some form of inventory.
The three wealthiest families
One may wonder why a business should require an
in the world have more assets
inventory to be held when it would raise the costs of
than the combined wealth of
the business. An organisation can hold inventories for
forty eight poorest nations
many reasons. Some businesses may want to take the
advantage of getting a lower price by ordering in large
quantities. Therefore, businesses can capitalise on low cost offers. Others may require an
inventory for continuous production. Businesses involved in products with seasonal demand
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would also require having an inventory for the production in accordance to the demand.
Further, in cases where there is a long lead time in the procurement of raw materials or the
delivery of raw materials and the product is in high demand, the business would require to
have an inventory in order to have continuity in producing for the demand. However, there
are costs associated with holding inventory. Therefore, businesses holding inventories must
manage the inventory properly for efficient performance of the business.
The concept of lean manufacturing or lean production eliminates waste while ensuring high
quality. Lean manufacturing involves in creating value to customer with fewer resources
and continual improvement in the job processes. The ultimate focus of a lean process is to
maximise the value created for the customer through a production process which has zero
waste.
A number of methods can be applied in order to achieve the most of lean production. Some
methods used by organisations include just-in-time inventory management and Kaizen.
Just-in-time is an inventory management strategy whereby the inventory is received only
when the product is to be produced. This results in decreased costs of holding inventory
and reduces waste. Kaizen can be referred to as the improvement on all the aspects of the
process of a manufacturing process including all the functions and employees performance
of an organisation.
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3.5 Sectors of Production
There are three main sectors that are involved in the
production process. They are the primary sector, the
secondary sector and the tertiary sector.
You will learn
•
Sectors of production
The primary sector involves in the extraction of natural
resources. It is the only sector that makes direct use of natural resources. For example, the
extraction of natural gases, minerals and oil.
The secondary sector is where the process of assembling and manufacturing takes place.
The raw materials are turned into products and services that can actually be used by
customers.
The tertiary sector or industry usually provides the support services required for the product
to reach the customer. These include the transport services, advertising and storage.
Although Maldives is a small country heavily depending on imports, the three sectors of
production exists in the Maldives economy. The primary sector can be seen as the fishing
industry where the extraction of fish (natural resource) is being carried out. The fish caught
is also processed in the factories in the form of tuna cans which can be the secondary
industry. Further, the tertiary sector involvement as transportation, marketing and selling.
A correlation exists between all the three sectors of production whereby one sector
is dependent on the other for the supply of its input until the product reaches the end
customer. If there is a lack of one sector then it may not be possible to deliver the products
and services according to the needs and wants of prospective customers.
Figure 3.5.1: Primary sector
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Figure 3.5.2: Secondary sector
Figure 3.5.3: Tertiary sector
Chapter 3 Entrepreneurship
3.6 Division of Labour
Division of labour is to split out the work process
You will learn
into small specialised tasks so that the worker or
• Division of labour
workers can be specialised in one task within the
• Advantages and disadvantages of
work process. Thus, each task is assigned to a
division of labour
person or group. By doing so organisations intend
to increase its efficiency. Simply put, division of
labour is the ways of organising works such that the whole process is spilt down into
individual tasks performed by people assigned to each task. Therefore, multiple tasks
within a process can be processed at the same time. Although it is referred to as division of
labour, it is appreciated in a much broader perspective in the modern society, relating to all
factors of production. There are three main different forms of division of labour. They are
specialisation by work, country and location.
Certain jobs require workers to have special skills in order to complete the work.
Therefore, specially trained workers are required in the production process. As it suggests
specialisation by work is referred to divisional areas of occupations. For example,
carpenters, teachers and farmers are specialised by nature of their work. These works
cannot be carried out by a normal worker who does not have the specialised skills.
Similarly, some countries have better resources than the others for production of certain
goods and services. In this case, the country specialises in the production of such goods
and services. This means that these
countries could produce the goods and
services more effectively than other
countries, reflecting a high productivity.
For example, the productivity of
Bangladesh in producing textiles is
higher compared to other countries.
This has lead Bangladesh to be one
of the leading producer and exporter
of textiles. Specialisation can be in a
regional level as well. Often regional
specialisation is also referred to as
specialisation by location. This means
that certain works are carried out in
a specific area of the world or the
country. It can be either because of the
Figure 3.6.1: Division of labour
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availability of natural resources in a specific region or the availability of skilled people who
have the know-how of certain works being confined to a certain region. For example, the
coal mining in Yorkshire or in the case of Maldives, the lacquer works done in Baa Atoll.
Limitations of division of labour
Although division of labour may bring about positive improvements to a production process,
there are limitations as well. While division of labour involves splitting of work into smaller
tasks, some tasks or processes are not divisible. Division of labour also depends on the
nature of a good or service. Some goods and services are not suitable for mass production
which may not require division of labour. Also, it may not be convenient to standardise some
goods and services, making division of labour not possible. Division of labour involves in
continuous repetitive tasks being performed by workers which may result in boredom and
the worker taking less pride in his or her work. This would also reduce the mobility of labour
as workers may have to gain additional training to shift jobs. When split down into tasks, the
production process becomes interdependent on these tasks. Therefore, a breakdown or
slowdown in one task would affect the total production process. As the business expands
the supervision and management of small diverse individual tasks become more difficult.
Further, the responsibility cannot be levied on a single worker as the worker would be
performing only a part of a greater process.
Activity 3.9
Describe how division of labour can exist in a;
a) school
b) restaurant
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3.7 Cost of production
Cost of production is the resources that are
You will learn
required for a production. Any input can be valued
• Cost of production
in monetary terms. Therefore, it’s necessary to
understand how much money is required for the
production of a specific good or service. The cost of production is the total amount of
money that is required for the production of a specific good or service at a given quantity.
The cost of production can be broadly classified into two areas of fixed costs and variable
costs.
Table 3.7.1: Total and average cost
Out put
Total fixed
cost (MVR)
Variable
cost (MVR)
Total cost
(MVR)
Average
cost (MVR)
0
1
2
3
4
20
20
20
20
20
0
20
38
58
92
20
40
58
78
112
40
29
26
28
Average
fixed cost
(MVR)
20
10
6.67
5
Total cost (TC) is the cost of producing a given output. Average cost is the unit cost which is
calculated by dividing total cost by output. Table 3.7.1 shows fixed cost, variable cost, total
cost, average cost and average fixed cost of an item at different outputs.
Fixed costs remain fixed throughout regardless of the production and do not change in
accordance with the level of output. For example, eventhough a factory does not produce
goods, the cost of the factory remains constant. Whereas, variable costs vary with the
amount of goods and services produced and directly relate to the goods and services
produced. The total cost is the total of all the costs incurred for the productions of a specific
good or service. It is the sum of fixed costs and variable costs. The total cost increases as
the organisation increases its output. This is because more resources are required for the
increased output. Total cost should not be confused with average cost. The average cost
is the cost of producing one unit in terms of total cost. It can also be referred to as the
cost per unit of output. Whereas, the total cost is the total cost incurred in the production
of a specific amount of good or service. An organisation could benefit from the decreased
average cost when the output is increased. However, this would also depend on the variable
costs which would raise in relation to the increased production. The higher the rate of
variable cost the lower the profit margin becomes. Therefore, organisations should consider
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the marginal cost and the viability of increasing production. Marginal cost is the additional
cost incurred in the production of an additional good or service.
revenue
TC1
TC
VC1
FC
VC
Figure 3.7.1 Cost curves
Figure 3.7.1 shows the fixed cost (FC), variable cost (VC), total cost (TC) and revenue. The
fixed cost remains fixed regardless of any revenue. The variable cost is proportionate to
the revenue. The total cost is the sum of fixed cost and variable cost. The graph shows that
an increase in variable cost to VC1, has no affect on the revenue. Therefore, margin gets
reduced with a greater break-even to achieve.
Activity 3.10
a) Complete the table below which gives the total cost at different outputs.
Output
TC
0
70
1
120
2
160
3
190
4
210
5
240
TFC
TVC
AC
AFC
AVC
b) Evaluated the affects of fixed cost and variable cost in the short run production.
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3.8 Promotion
A product will have no economic value if there is no
You will learn
demand for the product. This could either be that a
• Promotion
wrong product has been produced or that people are
not aware of the products existence. It could also be
that customers may not be willing to try the product for different reasons regardless of them
being aware of the products existence. Therefore, promotion is essential in educating or
informing the prospective users or consumers of the product and its relevance to them.
Promotion is the process of creating brand awareness and loyalty by increasing the
awareness of consumers towards the product or service with the intention of generating
sales. While the aim of an organisation is to make profits it would require to generate more
customers of the product in order to maximise its profits. Therefore, promotion becomes
one of the key areas for any business to focus in order to succeed in a competitive market.
Promotions depends on various aspects, such as market size, nature of product, product
life cycle and availability of means. Therefore, promotion methods can differ between
different products and services. Another important aspect that should be considered in
international marketing is cultural issues. Organisations should consider the culture of
a society before any promotion is carried out in order to avoid a negative impact from
the promotion. For example, certain gestures or behaviours which are not considered
as offensive in one society can be offensive in another. Other aspects include literacy
percentage and their ability to access modern means of promotion.
Aims of promotion
The main aim of promotions are to increase customer
DID YOU KNOW
awareness and to increase the consumer base of a
product or service. While promotions are intended
Cereal is the second-largest
advertiser on television today,
to increase brand awareness it could also serve to
behind automobiles
persuade new prospective consumers of the product to
try the product creating new consumers of the product
or service. Promotions could be done either on brand new or existing products or services.
Depending on the organisation and type of product or service, the aim of a promotion may
differ and it could be either short-term or long-term. Therefore, to achieve these aims of the
organisation various forms and means of promotional techniques are employed.
Although some aims of promotion in individual organisations differ, in general organisation
focus on the same aspects. When new products are developed, people are not aware
of its existence. Therefore, people need to be informed of the new product so that it
becomes relevant to the customers for them to make a choice. Regardless of a new
product or an existing product, an organisation benefits from the awareness of the product
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or improved brand image of the product and the organisation itself. This makes it easy for
the organisation to compete against its competitors. Ultimately, all these efforts of effective
promotion leads to increased sales.
Activity 3.11
Identify any local company or organization which recently conducted a promotional
activity. Write a report of 100 – 150 words on the event.
Types of promotions
Any promotions that are conducted should reach its intended target. It could be either
geographical, demographic, gender or any other categorised group. If the intended target
population is not reached, then the promotion may be less effective and may result in
waste of valuable resources. Therefore, promotions should be carefully planned and the
appropriate means and ways should be used. Promotions could be through various means
and ways.
Promotion can be classified into four broad categories:
a. Advertisements
b. Promotion
c. Personal Selling
d. Public relations
Advertising is the creation or production of something which calls for the attention of the
public, especially through paid means. It could also be referred to messages paid by a
sender sent to an audience with an intention to influence their behaviour. Advertisements
are considered to be a method of mass promotion where a single message could
be reached out to a larger number of people. The advertising industry consists of
organisations who advertises on behalf of companies that produce goods and services.
They act as professional consultants who suggest the best means that an organisation
could use towards delivering their messages in order to maximise its outcome. In today’s
world it can be seen
that the advertising
industry has broadened
its perspectives and
includes all possible
means to advertise
products and services.
Figure 3.8.1: Advertising
Some of the most
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common means of advertising that can be seen are television, print (newspapers,
magazines, journals etc.), online, posters, sponsorships, clothes, internet, visuals and
sound. Further, it could also be seen that people are also being used in advertisements
as endorsements. Advertising can be broken down into three categories. These are
informative, persuasive and reassuring advertising.
Promotion: These are usually short term strategies
used to attract new and existing customers conducted
for a limited time. These sort of promotions are
sometimes referred to as ‘below the line promotions’.
There are various ways in which these promotions are
conducted. However, the most commonly used are:
a. Price reductions / discounts: offers a reduction
in price. This is mostly to encourage customers
on repeating a purchase. A price reduction or a
discount can be given through means, such as a
discount voucher or immediate sales discount.
Figure 3.8.2: Promotional Activities
b. Gifts: it can be seen that sometimes businesses offer varieties of giveaways for
purchases of products or services. The most commonly seen is ‘buy one get one free’
offers where an additional item of the product are offered free with any purchase.
Businesses also offer free complementary products when customers purchase certain
good or service.
c. Point-of-sale displays: this is where the attention of the customer could be grabbed
before he or she leaves the store. Businesses often display special offers and small
items that usually can be missed during a shopping. Some businesses also display
candies and chocolates which can attract accompanying young customers.
d. Credit: cash is often a limitation to many of the customers. Although a customer may
want a specific product or service they may not have the required capital to purchase it.
Therefore, organisations arrange credit schemes whereby a customer could pay on a
later date or on instalments.
e. Free products, demos and samples: free products can be a means to lure customers
into a certain business. These can include merchandise that carry the brand image
or any other product offered on visit to a store. Another way of attracting people is to
conduct demos and offer free samples. For example, samples of a food product can be
offered for people to taste.
f.
After-sales services: this is a reassurance given to the customer that the organisation
will provide its assistance in case if something goes wrong with the product or service.
Personal selling: This involves face-to-face selling. Personal selling is rare in the case of
products but are more common in areas of services. Usually a sales agent is the person
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promoting the product or service on behalf of an organisation. For example, financial
services offered by an organisation which cannot be properly expressed through other
forms of media could suite more on personal selling as the sales agent would be able to
explain all aspects of the service in details through interactive conversation with the client.
Public relations: This can be considered as free publicity. However, it could turn out
bad or good depending on the public reaction. Some large companies have their own
personal relations department to handle all related stories in a positive manner. Sometimes
organisations create publicity stunts which are news developed by the organisation within
themselves. Organisation often pay for its products to be used on television programs or
within movies to gain publicity.
Different situations or different products require different methods to be applied for its
promotions.
Table 3.8.1: Advantages and disadvantages of different methods of promotion
Media
Television
Radio
Newspaper
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Advantages
• A larger population
of the world can be
reached
• Presentation of the
product can be made
very attractive and
appealing
• Convenient mode of
reaching towards the
target audience
• Ads can be made
memorable by use of
catchy songs or tunes
• Cheaper considered to
television
• Cheap (local papers)
• Can reach a wider
audience
• Adverts are permanent
and remain in the paper
• Adverts can carry a lot
of information
Disadvantages
Examples
• Usually costly
•
•
•
•
Household items
Cars
Food
Drinks
• No visual messages
• Expensive compared to
other mediums which
deliver equally
• Limitation in audience
• If not designed properly
it may not be very eye
catching
• Adverts are often
overlooked
• Local services
• State messages
• Shops
• Local products and
services
Chapter 3 Entrepreneurship
Magazines
Posters /
Billboards
Leaflets
Internet
Merchandise
• Specific target audience
can be reached through
specialist magazines.
• Colourful well designed
advertisements can be
very attractive
• Cheap
• Stays for a reasonable
period of time
• Seen by anyone
passing by
• Cheap
• Reach a wider
population
• Can be delivered to
households
• Can be stored for later
reference
• Can include
promotional aspects,
such as vouchers
• Possibilities to have
instant orders
• Accessible to everyone
around the world
• Details can be included
along with pictures and
illustrations
• Cheap
• Can be attractive
• Magazines may not
be published very
frequently
• More expensive than
newspapers
• Luxury products and
services, such as
perfumes and fashion
products
• Detailed information
cannot be included
• Can be missed and
or might not catch the
attention of the passerby if lack in creativity
• Can be overlooked and
not read
• Events
• Products and services
• Events
• Local stores
• Educational institutes
• Website many not
• Any product or service.
appear in internet
• Online auctions
searches if the website
is not optimised and
search engine friendly.
• Limitation on internet
access to some regions
of the world.
• Security issues
can decrease the
confidence on internet
purchases.
• Might not be seen by
all.
• Advertisements on
shopping bags
• Free give away with
product or company
name.
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Activity 3.12
Imagine you are the marketing manager of ABC company, selling baby products in
Male’. Your company wants to expand the business to the atolls and islands.
a) Identify one promotional activity which could make this market penetration
successful.
b) Explain why you think that the identified promotional activity is the most relevant.
c) Discuss the advantages and disadvantages of the identified promotional activity.
Key Terms
Allocation of resources: how scarce resources are distributed between competing
uses.
Division of Labour: workers specialising in a particular task.
Economic system: how a country decides what to produce, how to produce and for
whom to produce is called its economic system.
Market economy: an economy where consumers determine what is produced,
resources are allocated by the price mechanism and land and capital are privately
owned.
Mixed economy: an economy in which both the private and public sectors play an
important role.
Planned economy: an economy where government makes the critical decisions, land
and capital are state owned and resources allocated by directives.
Primary industry: industry that extracts raw materials from the earth, such as coal,
fish or wheat.
Productivity: is the amount output that can be produced from a given input of
resources
Promotion: raising customer awareness of a product or brand, generating sales, and
creating brand loyalty
Secondary Industry: industry that process primary products into manufactured
goods.
Tertiary industry: industry that provide a service.
Total product: is the overall quantity of output that a firm produces
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I Learnt
Choose a country of your choice and a company from that country. Use the chosen
company to answer the following questions. Write a report about 150 words. You may
include the following
a) The main product.
b) Is the product labour intensive or capital intensive? Explain.
c) The type of production used.
d) What is the method of production?
e) The main methods of promotion.
Key competencies
Practising Islam: Islam is a religion of peace, equality and just. It
teaches on the economising and the best use of available resources.
Students understand that although promotion is encouraged, misleading,
wastage and unhealthy competition is discouraged.
Using Sustainable Practices: Students are able to determine the most
economic and sustainable ways in allocating the limited resources that
are available and relate it to their self and the community as a whole.
Relating to People: While different individuals or groups have different
set priorities a single resource might have multiple uses. Students build
the capacity to liaise, understand and respect the different views and
communicate to bring out the best possible outcome.
Thinking critically and creatively: Resource allocation is important
to identify the best possible use of a resource. With the help of their
knowledge and understanding on the subject, students are able to relate,
analyse and apply their skills towards making the best use of resources
available to them.
Understanding and managing self: Students understand on reasons
for making choices and are able to make their own decisions based on
the resources available to them. Students also become more confident
in understanding the means to fulfil their needs and wants through selfmanagement.
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Living a healthy life: Students are made aware of ethical behaviours
which should be considered during promotion of products and services.
These could include public cautionary notices and appropriate use of
promotion which do not mislead customers.
Using technology and the media: Technology is one important aspect
in the production process which can be seen in the modern factories and
assembly lines. Students relate the use of technology with enhanced
performance and increased productivity.
Self-Assessment
Topic
Allocation of resources
Economic system
Maldives economic system
Production
Capital intensive production
Labour intensive production
Methods of production
Job production
Batch production
Flow production
Sectors of production
Primary production
Secondary production
Tertiary production
Division of labour
Productivity
Total product
Marginal product
Average product
Promotion
Different types of promotion
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I have understood
I need help
Chapter 3 Entrepreneurship
Review Questions
Choose the best answer
1. What is the most common method for allocating resources in the Maldives?
a) Force?
b) First come-first serve
c) First to old people
d) Market
2. The biggest advantage of allocating resources through markets are that it:
a) Motivates people to produce more of the goods and services that people
want most.
b) Eliminates scarcity faster than other ways of allocating.
c) Makes sure everyone gets as much as they want.
d) Doesn’t require any government involvement.
Answer the following questions
3. Compare how individuals and governments utilise scarce resources (human,
natural and capital) in traditional, command, market and mixed economies.
4. Analyse a market economy in terms of economic characteristics, the roles they
play in decision making and the importance of each role
5. What type of economic system is in the Maldives? Explain your view.
6. What is the aim of producing goods and services for firms in:
a) A planned economy
b) A market economy
7. Explain what is meant by job, batch and flow production, using relevant examples.
8. Production can be labour intensive or capital intensive. Explain labour intensive
and capital intensive production.
9. What are the main sectors of production?
10. With relevant examples, explain sectors of production.
11. Explain three advantages and disadvantages of division of labour.
12. The table below gives total fixed cost and total variable cost at different output
levels. Complete the table.
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Output
TC
0
TFC
60
1
50
2
90
3
120
4
140
13. What is promotion?
14. Explain different types of promotion.
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4
Business Organisations
Individuals desire to get their needs and wants fulfilled. However, some resources cannot
be consumed directly and have an economic cost for transformation into a consumable.
Hence, a mediator is required for the coordination of this transformation process. Thus,
creating opportunities for business activities. This results in people engaging either
individually or in groups in the process of delivering goods and services offering their skills
and expertise for a fee resulting in various economic activities.
4.1 Type of Business Organisations
Businesses engage in the provision of goods and
services to satisfy the human needs and wants.
Therefore, a business can be defined as an
organisation or an enterprising entity that offers goods
and services in exchange, usually for money. Once a
business is set, there are a number of things that need
to be done in terms of management and progress. The
main functions of a business are production, marketing,
financing, managing human capital and administration.
Apart from these, modern business organisations play
an important role in research and development.
You will learn
•
Business organization.
•
Sole trader and
partnerships.
•
Private and public sector
business.
•
Privatisation and
nationalisation.
A business organisation is a legal entity formed by an individual or a group of individuals
for the purpose of carrying out commercial activities to achieve common goals. Business
organisations can be classified into three categories. They are sole proprietorship,
partnership and limited companies.
Sole Trader
A sole trader is a business owned and operated by a single person who invests and is
personally responsible for any debts. The business of a sole trader is not distinct from the
owner. Therefore, the owner is personally liable for any losses. However, a sole trader can
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be the most convenient form of business and
one could establish it with a small amount
of capital investment. Sole traders can be
an ideal form of business for individuals
venturing into a new business which requires
a smaller amount of capital and requires a
personal contact with the customers. As any
other business would do, the sole trader is
also faced with challenges while it enjoys a
number of advantages.
Advantages and Disadvantages of a Sole
Proprietorship
It is convenient and easy in setting up a sole
trader with less legal formalities. The sole
trader can take instant decisions as he or
she is the single owner of the business. This
Figure 4.1.1: A soletrader business
provides the sole trader more control over the
business with freedom to exercise instant changes which could raise customer satisfaction
through personal contact. While these things assist in establishing a good customer relation
the owner is able to enjoy all of the businesses profits. This motivates the sole proprietor
to continue the business while enjoying complete secrecy as the owner is not required to
share information with any other besides the tax authority.
On the contrary, due to lack of financing opportunities a sole proprietor may lack expansion
and growth. This is mainly because a sole trader has unlimited liability and lack of
continuity. Thus, a sole trader becomes personally liable for any losses that may incur. With
lack of continuity, the business is not carried on upon the demise of the sole trader as the
legal identity is lost. While a sole proprietorship is a business depending on a single person,
without the owner, the business will not function resulting in losses. Further, opinions or
expertise in various specialised areas, such as accounting may not be convenient and
limited to the capacities of the owner. Due to the nature of sole proprietorships, these type
of businesses do not benefit from economies of scale.
DID YOU KNOW
Wal-Mart averages a profit of $1.8 million every hour.
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Activity 4.1
Use your local neighbourhood to identify three sole trader busineses.
Carry out an interview with one of these sole traders. In your interview you may
include.
a) How was the business started?
b) How was the necessary finance raised?
c) Who helped in the initial stage of the business?
d) What are the major challenges faced when starting your own business?
e) What is your advice to people who would like to start their own business?
f)
Write a report based on the above information.
Activity 4.2
Read the scenario given below and answer the following questions.
Fast Repair
Faisal is the owner of a small cycle repairing garage, Fast Repair in Male’. Faisal was
asked why he was interested to open this garage.
“I was unemployed for a long time, “explained Faisal.” By running my own business, I
am ensured a job and I get all the profits. But it is not an easy job. I have to work very
hard and run the business on my own. Starting my own business is expensive as I had
to use most of my savings to get the company off the ground, and I also got a small
loan from the bank which was given to small and medium businesses. With the rent of
the garage, electricity bills, hire of machinery, and worker I had to earn MVR 15000 a
month for the garage before I break even. Of course, if I can’t break even I am out of
work again and left with all the debts.”
With a good location in Male’, Faisal may be able to look forward to a lots of customers
and an expanding business opportunity.
Faisal continued, “I hope to expand the business and I can even give other people jobs
to do, but still I will be the boss, my own boss, where I don’t have to answer to anyone.”
a) Is Faisal a sole trader? Explain.
b) With reference to the article explain the advantages of a sole trader business.
c) Explain the disadvantages of a sole trader business.
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Partnerships
A partnership is a business venture where more than one individual engages in business
pooling money and other resources while sharing profits and liabilities in percentages
agreed. The understandings between the partners are laid down in a partnership
agreement. A partnership is ideal when a group of individuals want to engage in a larger
business than a sole proprietor but with less legal complications. Also in some countries
professionals, such as doctors and lawyers are not allowed to form companies except for
partnerships. It is important to understand that in some countries limited partnerships can
exist. Although the partnership have limited liability in such cases, the shares are nontransferable. A limited liability partnership is usually seen to be abbreviated as LLP.
Different Types of Partners in a Partnership
A partnership is the entity formed by a group of partners. The partners are the
shareholders of a partnership. A partnership exists with two or more partners. There can be
different types of partners in a partnership. The main types of partners are:
Active partner: These are the partners who operate the partnership on behalf of the other
partners. They actively participate in the daily management of the business, contribute
capital and are unlimitedly liable for any losses or profits gained by the partnership.
Sleeping or dormant partner: A partner who has no active participation or involvement
in the daily operations of the business. However, a sleeping partner also contributes to the
capital and is unlimitedly liable for losses or profits made by the organisation.
Nominal partner: He is one who allows his or her name to be used in the business and
makes no contribution to the business in terms of capital and management. A nominal
partner has no share in profits or losses of the partnership. However, a nominal partner is
liable for third parties in respect to repayments of the partnerships debts.
Secret partner: These type of partners are similar to an active partner with involvement in
the management of business. A secret partner also shares profits, losses and has unlimited
liability. However, the distinct feature is that these partners are not known to the general
public as a partner of the partnership or business.
Partner by estoppel: When a person is declared to the public as a partner of the business
and when the individual does not deny it, legally that individual is tied to the business.
Therefore, although that person may not have an involvement in the business, he or she
is legally held liable for debts of the business as others provide credit based on his or her
representation in the business.
Features of a Partnership
Partnerships are quick and easy to setup. A partnership is generally owned by two to twenty
people. However, in cases where the partners are professionals, the number of partners
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can exceed twenty. A partnership is not a legal entity meaning that partners are held
responsible for any actions of the partnership. Each partner in the partnership is personally
liable for any debts or losses incurred by other partners. Therefore, partners have unlimited
liability. Further, while a partnership cannot own assets, a partnership can sue and be sued
in the partnership’s name.
Advantages and Disadvantages of Partnerships
With more partners as owners, a partnership will be able to raise more capital than a sole
proprietor. Since there are more partners, the responsibilities of the operations of the
partnership is split among the partners. Further, in case of any losses, it is shared among
the partners as agreed in the deed of partnership.
Like any other business the partnership also has its drawbacks. The greatest drawback
being unlimited liability of the partners and the lack of continuity as there is no legal identity.
This also means that losses incurred by any unethical behaviour of one partner has to
be borne by all the other partners. The decision making process in a partnership can be
difficult as there can be disagreement between partners which may slow down decision
making on critical aspects. Although a partnership may be able to raise more capital than
a sole proprietor, the capital raised is limited due to the limitation in the number of partners
that a partnership can have.
Activity 4.3
Look around your local area and try to identify businesses which are a sole trader.
Explain why you think the business, could be a sole trader.
Activity 4.4
Read the article below and list at least three advantages and disadvantages of forming
a partnership.
It was a year of success for the Fast Repair garage in Activity 4.2.
So what would be the success of Faisal’s repairing shop?
Definitely there is a market for cycle repairing as there are many people in Male’ and
many owns motor cycles. Especially, Fast Repair offers friendly and personal services
that his large competitors seems to lack. As a result customers come repeatedly for
the friendly service. Faisal also has a discount system for the regular customers.
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Now, with the huge success of sales for one year, Faisal is thinking of opening another
shop with more equipment and capacity to repair any type of auto vehicle. Faisal
has acquired a premises but some of the machinery is yet to be bought. Banks were
unwilling to lend him money because of the risks such an outlet faces from increasing
competition from established auto repairing garages.
But luckily Faisal met his old school friends who were willing to finance the business.
They are not only giving large sum of money but also helping to relieve some of the
responsibilities Faisal was taking all by himself. Aisha is a qualified accountant who
resigned from her accountant job to take care of her kids. Now Aisha wants to start
work again. Ahmed is a mechanic who had worked for some famous auto repairing
garages.
Aisha and Ahmed are the two new partners in Fast Repair. Running a business is a
challenge, it poses many risks and the collapse of the firms could lead to all those
personally involved losing their possessions to repay debts. So why would Aisha want
to take the risk? Aisha explained, ‘It is a challenge, I was an accountant, my kids are
grown, so I want to do something to keep me occupied.’
What problems can the partners face? They explain, ‘Initially we had a disagreement
where to start the second garage, in Male’ or Hulhumale’. But now it is all solved. After
all we are good business partners who respect each other.’
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4.2 Companies
A company is a voluntary organisation formed
You will learn
in between individuals or legal entities having a
• Private limited company.
common objective and to carry out commercial
• Public limited company.
or industrial activities. A company has a separate
legal status and can sue and be sued in its name.
Therefore, by forming a company, the company becomes a vessel for trading which
represents all the owners of the company. Companies can either be public or private. There
are two main types of companies. They are public companies and private companies.
The formation of companies requires legal and administrative work. In order to form a
company the shareholders need to agree on the purpose of the proposed company, its
shareholders and shareholding percent. Along with these, other details, such as quorum,
number and share value are laid down in the memorandum and articles of association
which forms the basis of a company. The articles of association defines the details of
directors, the management of the company, official meetings and the issuing of shares.
The memorandum of association includes all the details of the company including the
name, registered address and the detailed information of the directors. Further, it includes
the objective of the company and the details of shares along with allocation and value. A
certificate of incorporation is issued by the Registrar of Companies once all documentation
is completed. The certificate of incorporation certifies the legal status of the company
and allows the company to start trading.
Private Limited Companies
Private limited companies exist with a separate legal identity making them distinct from
their owners. This means that the liabilities of the owners are limited. The owners of the
company have shares in the company which is in an agreed proportion prior to forming the
company. As such these shares can be sold to other people with the consent of the other
shareholders in the company. Hence, the business has a continuity. As a separate entity
the business can enter into legal contracts and own assets in its name. This gives more
strength in its operations. Like any other business, the private limited company also has its
own advantages and disadvantages.
Shares are sold to raise the capital required for the business. This makes raising
finance easier compared to other businesses. Also the assurance of limitation in liability
encourages and attracts investors to invest in the business. Although the shares in a private
limited company are transferrable, the original owners are able to control the business by
restricting share distribution. That is, the shares are only transferrable with the consent of
all the other shareholders of the company.
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The legal formalities to form a private limited company can be difficult compared to
sole proprietorship or a partnership. Although raising capital is much easier through
issue of shares, the capital is still limited as the shares cannot be sold or traded to the
general public. The shares can only be transferred or sold with the consent of the other
shareholders. Further, the accounts of the company are less secretive.
Activity 4.5
Sausan is a freelance marketing contractor working in capital city Male’. She set up
her business in 2012 after being made redundant from an agency which had financial
difficulties and was closing down. She operated very successfully as a sole trader until
2015. With three years of freelancing success behind her, Sausan started to look at
ways in which she could make more money than was possible simply through charging
for her time, and also started to think about her long term future.
“I always thought that working as a sole trader would be enough for me,” she explains.
“To start with everything was very simple. But with time it became more complicated.
I’d toyed with the idea of becoming a limited company in the past but the prospect
of all that extra paperwork and the legal obligations just terrified me to be honest. It
seemed simpler to stick with the sole trader option, which suited me at the time and
the positives still outweighed the negatives.”
a) What are the reasons that Sausan was happy as a sole proprietorship?
b) Explain the challenges Sausan faced as a sole proprietorship.
c) Discuss and write in about 100 to 150 words, the advantages that Sausan will have
if she chose to have a limited company over a sole proprietorship.
Public Limited Companies
With similarities of a private limited company, public limited companies are able to sell
shares to the general public. After meeting certain conditions a private limited company can
be converted into a public limited company. This include changes in the memorandum of
association, making its accounts public and getting listed in the stock exchange. Further,
a prospect needs to be issued to the public of the offer of shares stating the amount of
capital to be raised.
A public limited company is owned by its shareholders. Although the shareholders are the
owners, the shareholders do not have the control over the operations of the company. The
company is controlled by a board of directors appointed by the shareholders at the Annual
General Meeting (AGM). This results in split of power between ownership and control. Both
shareholders and directors have their own objectives.
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The shareholders of public limited companies have limited liability. The shares can be
traded to the general public with the potential to raise limitless capital for the company.
There are no restrictions on the transfer of shares and the shares can be traded in the
stock exchange. Further, companies with high status can attract more investors.
The legal formalities and the expenses involved in issuing prospectus can make it difficult
to form the business. Tight rules and regulations are set to protect the shareholders. Thus,
public limited companies are required to publish their accounts. A large public limited
company can be difficult to control depending on the size. Further, the original owners of
the company can lose control of the company when they hold less than 51 percent shares
of the company.
Difference between Private and Public Limited Companies
The main principal difference between private and public company is that the private
company is not allowed to trade its shares freely in the market, whereas the public company
is able to trade its shares to the general public and is freely transferrable through the stock
exchange. However, a private company can become a public company through an initial
public offerings.
A private limited company can be a convenient way to do business within a known group of
people who share the same goal and objectives. However, differences in thoughts within the
shareholders can lead to destruction of the company. Although the public limited company
has a much larger number of shareholders with a wider variance in thoughts, it may not
affect the performance of the company as a public limited company is controlled by the
Board elected by the shareholders at an Annual General Meeting.
The Board is responsible for the operational performance of the company. Therefore, the
company is more focused on creating shareholder value which can result in employment
of professionals who can increase the shareholder value. The public companies are
compelled to disclose the corporate financials by publishing it. While the shares of public
companies are easily transferrable and quickly replaced by another buyer, the shares
of private companies have transfer restrictions. That is there has to be a buyer who has
interest in the business and who is acceptable to other shareholders of the company.
Another main difference is the number of shareholders each type of business could
have. Unlike a private company which has a maximum reach of 50 shareholders, a public
company does not have a restriction on the number of shareholders. Thus, a public
company can have unlimited number of shareholders.
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Activity 4.6
Fast Repair, has just announced plans to become a Public Limited Company. This will
raise capital to finance their new expansion in Addu City and Kulhudhufushi, which
is in the north and south of Maldives. Mr. Faisal who is the founder of the company
explained how by allowing more people to own the company they would raise more
finance to expand their business throughout the country.
He explained that, “We invite people to buy shares of our company, this allows them
to be owners of the business and we will share our profits. These new shareholders
can also have their opinion how the company should be run.”
He continued that he would still love to be the director of Fast Repair, but he admits
that it can be so if the shareholders wanted that to be. If they want some other
director they can vote him out and elect other directors to run the business.
The problem faced by small companies like Fast Repair is rising finance. Normally
shares will be sold to family, friends and workers in the company.
When asked why people would buy shares from Fast Repair. Mr. Faisal replied,
“We are fast growing profitable company, the more profit we make the more
the shareholders gain as dividends. Since we are a private limited company all
shareholders will benefit from limited liability.”
In an unlikely event of Fast Repair closing down due to debts, the most shareholders
would lose is the amount of money invested.
Answer the following questions.
a) How would Fast Repair raise the money they need to expand their business.
b) What does the word ‘limited’ stand for in a public limited company?
c) Who are the owners of a public limited company?
d) If Mr. Faisal is to remain at the head of the company and run the business, who
will decide that he can remain in that position, and how is this to be done.
e) What encourages people to buy shares in public limited company?
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4.3 Private Sector Business
The private sector are the areas which are not
You will learn
under the control of the state or the public sector.
• Private sector business
These businesses are profit oriented and are
• Franchise business
usually run by individuals or private companies.
There are several types of private sector business
organisations. The main types of private sector business organisations are the sole trader,
partnership, limited companies and franchises. Further, joint ventures and cooperatives
also form a part of private sector business organisations. Joint ventures are not really
considered as a business organisation in terms of proprietorship. They are collaborations
made by two or more organisations to work towards achieving a common goal. Usually joint
ventures are dissolved over a period of time when the venture project has been completed.
Nevertheless, some joint ventures can carry on with business on mutual understanding.
Franchise
A franchise is an authorisation granted by an organisation to individuals or groups towards
using its products and services in commercial activities. Through franchising businesses
are provided with opportunities to sell products and services which they might not be able
to sell or produce on their own.
Advantages and Disadvantages of Franchising
Working under a big name can provide immense benefits to the franchisee. This can
include expert advice on product marketing, increased security for the enterprise and
increased publicity in a short period of time. Also it makes it easier to have a strong position
in the market when the business is backed by a respected name in the market. When a
franchise is approved, the franchisor never leaves the side of the franchisee. This means
that all the assistance required by the franchisee is provided by the franchisor. Often some
large franchisors provide the initial setting up equipment which could be paid for in a later
date. Unlike other businesses, a franchise can
afford to be established in prime locations as
the name is already known to the prospective
customers.
Franchises are granted on strict rules and
under an agreement. This restricts flexibility
of business to the franchisee. Usually a
franchisor provides with a set of guidelines in
aspects, such as choosing vendors, setting
the layout of the location and training of
Figure 4.3.1: A franchise business operated in
the Maldives
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employees. Since the franchisee’s business is tied to the main franchise business, any
negative publicity of the main franchise business will affect sales of the franchisee. Thus,
the franchisee loses revenue on elements beyond the control of the franchisee. While
the franchised business is already established, there will be immediate customers for the
franchisee’s business. Franchising involves with provision of a lot of insight and expertise
of a business. Therefore, it may be costly to start a franchise with expensive fees towards
franchising.
Activity 4.7
When the McDonald brothers, Dick and Mac opened their first restaurant in 1940 in
San Bernardino, California, they could never have imagined the phenomenal growth
that their company would enjoy. From extremely modest beginnings, they hit on a
winning formula selling a high quality product cheaply and quickly. However, it was
not until Ray Kroc, a Chicago based salesman with a flair for marketing, became
involved that the business really started to grow. He realised that the same successful
McDonald’s formula could be exploited throughout the United States and beyond.
There are now more than 30,000 McDonald’s restaurants in over 119 countries. In
2002, they served over 16 billion customers, equivalent to a lunch and dinner for
every man, woman and child in the world! McDonald’s global sales were over $41bn,
making it by far the largest food service company in the world.
In 1955, Ray Kroc realised that the key to success was rapid expansion. The best way
to achieve this was through offering franchises. Today, over 70 percent of McDonald’s
restaurants are run on this basis. In the UK, the first franchised restaurant opened in
1986 as there are now over 1,200 restaurants, employing more than 70,000 people,
of which 36 percent are operated by franchisees.
Source: http://businesscasestudies.co.uk/mcdonalds
a) Explain why a franchising business is popular.
b) Suppose that a businessman approached to McDonald for the franchising rights
to open a franchise in the Maldives. What advantages would this franchising
business have over a fast food restaurant?
c) What benefits would McDonalds get by franchising?
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4.4 Public Sector Business
Public sector organisations are controlled by the
state and provide for the needs of the citizens. These
organisation are mainly involved in the provision of
various welfare services to its stakeholders.
You will learn
•
Public sector businesses
•
Public corporation
What are Public Corporations?
Similar to limited companies, public corporations also exist as separate legal entities
distinct from its owners and have the right to sue and be sued. Corporations usually
deliver products or services that are of concern to the citizens of the country. These
include services, such as provision of electricity, development and maintenance of public
infrastructure and the provision of municipal services.
Features of Public Corporations
The purpose and role of a public corporation is clear and precise at its formation. Since
public corporations are formed with a service motive to the public, profits are a secondary
consideration for the business. The capital required for the formation of a corporation are
provided from the state budget. However, since the corporation is a legal entity on its own
with the ability to sue and be sued, corporations are also able to raise more funds through
market borrowings, such as bank loans. A corporation is managed and controlled by a
board of members or directors appointed by the government. Therefore, limiting its flexibility
in operations.
Objectives of Public Corporations
The state employs all possible means to provide its citizens with what they require. The
objective of a public corporation can be many. However, some may stand out from the
others. Public organisations play a vital role in providing a number of services or products
which are necessities to the public. This helps in achieving an economic balance in the
community through regulatory pricing and accessibility for such products or services. When
the state engages a business in the form of public corporations, it contributes to decrease
unemployment through creation of employment opportunities in such corporations. Further,
it helps in establishing large non-profit organisations which are beyond the capacity of the
private sector.
Activity 4.8
a) Identify two public sector businesses.
b) Explain the objectives of these businesses.
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4.5 Multi-national Companies
Multi-national companies are companies that own
You will learn
and operate one or more companies, providing
• Multi-national companies.
goods and services in countries other than its
home country. These companies are also known as
international corporations. Multi-national companies
have existed since the start of international trade. Globalisation, reduced barriers to
international trade and technological advancements in communications have increased the
favourability of multi-national companies. Businesses belonging to a multi-national company
will usually be coordinated through a centralised globally managed head office.
Advantages to Multi-national Companies Operating Abroad
Companies operate in other countries for many benefits and there are many reasons
for a company to operate in a multi-national environment. Companies look for areas of
expansion when the market in which they operate has been fully exploited with no room
for expansion. Although companies may opt for exports to gain wider market share and
expand, eventually they would want to set up their own offices in the countries of export for
convenience and reliability.
A foreign established company can be a cheap
source of labour in the production of goods
and services to the main company. Also it
can be that other factors, such as land and
or resources required for the productions are
cheaper in the intended country of expansion.
This could enable the company to produce
goods and services at cheaper rates compared
to producing in the home country. Thus,
reducing the cost of production.
Figure 4.5.1: Multi-National Company
Another area which a company may look into
operated in the Maldives
is the ease of its operations including state
benefits and taxes. Taxes are levied at different levels in different countries and foreign
investments may be subjected to various benefits, such as duty exemption and low taxes.
Therefore, these establishments may enjoy higher profits.
Advantages of Multi-national Company to Host Country
The host country of a multi-national company would benefit from the tax revenues received
from the company. These revenues are utilised towards development of the country and
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provision of goods and services to its citizens. In order to minimise cost and efficiency,
multi-national companies may bring in the expert guidance required which is not available
in the host country. This results in transfer of knowledge and technology and improves
the efficiency of local companies through such initiatives. This knowledge can be in
many forms, such as technical expertise or technological advancements. Regardless of
these factors the company would require employees for its functions. Thus, increasing
the employment opportunities. In some cases, workers are paid better in foreign owned
organisations compared to local organisations depending on the laws of the country in
which the organisation operates. The increased job opportunities will reflect as a benefit
on the economy when employees of the organisation spends on goods and services in the
host country.
Disadvantages of Multi-national Company to Host Country
While multi-national companies are foreign owned companies it can be argued that the
parent company would have a greater influence over the other companies. As such, profits
made by the company are withdrawn out of the country with only a small portion of it
remaining in the host country. Thus, providing little economic advantage. Socio-cultural
influences could be brought in by multi-national companies which may affect negatively to
a host country. Further, a multi-national company may take relaxed laws and regulations
of a host country for the company’s advantage and may act against responsible behaviour.
As such, the company may blame the law and evade responsibility for any mishap. Some
argue that multi-national companies are a threat to other businesses in the local community.
This is mainly because multi-national companies are considered to have more strength
compared to local organisations in terms of critical elements, such as accessibility to large
funding sources, industrial know how, technical expertise and technological advancements.
Activity 4.9
a) Name three multi-national companies operating in the Maldives.
b) Explain the type of business involved by these multi-national companies operating
in the Maldives.
c) What are the advantages for these companies to operate in the Maldives?
d) Explain the possible disadvantage to the Maldives from these companies.
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4.6 Nationalisation and Privatisation
Depending on the circumstances and economic
You will learn
situation of a country, the state may in consideration
• Nationalisation
of the benefits, decide to nationalise or privatise an
• Privatisation
industry or organisations in a country. Between the
1946 and the early 1950’s, most of the strategic
industries and companies in the United Kingdom
were nationalised. These included the public utilities as well. The Bank of England was the
first among the nationalised organisations. With stability in the economy the nationalised
organisations were again privatised between 1979 and 1990.
What is Nationalisation?
Nationalisation is when the government takes over an industry or a company previously
owned by the private sector. It is the process of transferring or acquiring of private assets
by the government. Normally in the nationalisation process no compensation is paid
towards any net worth of the company or any potential gains that the company being
acquired may gain. In the Maldives, the most notable nationalisation was the Ibrahim Nasir
International airport which was run by a private organisation.
Arguments for Nationalisation
Natural monopoly: A natural monopoly is when there is only one efficient firm providing a
good or service. Many key industries nationalised were natural monopolies of the industry.
This happens when an organisation is already established in the market and the cost
of entering into the market is extremely high due to high costs and less viability. While a
private monopoly can easily manipulate the situation to their advantage, a government
monopoly would ideally restrict exploitation of its power.
Externalities: Private businesses are profit oriented. This makes them less concerned
about external factors which may bring less profit. For example, a private company
operating a public transport system may not consider the environmental factors of using
heavy emission vehicles which may be profitable for them to operate. Whereas although
less profitable to operate more environmental friendly hybrid vehicles could be much safer
for the environment and the citizens as a whole.
Welfare issues: Some industries or business engage in activities, such as gas and
water, which concerns the well being of a country’s citizens. It could be basic necessities
which cannot be considered as luxuries of life. By having a control over such areas the
government will be able to provide such products or services equally and affordably to its
citizens.
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Government investment: Services in some
industries require high investments to be made
over a period of time. However, private companies
may not be willing to make such investments
as one of the motives of a private organisation
is to make profit. Such investments may not
bring profits in the short-term. Therefore, these
areas where long term investments are required,
government intervention is necessary without
which the areas may not develop and may detour
its conditions.
Arguments against Nationalisation
DID YOU KNOW
In July 2015, Maldives’
Parliament passed a
constitutional amendment
legalising foreign ownership of
land; foreign land-buyers must
reclaim at least 70 percent
of the desired land from the
ocean and invest at least $1
billion in a construction project
approved by Parliament.
Source: Central intelligence
agency (US) http://www.cia.gov
Difficulty in decision making: Unlike private
organisations, public sector organisation face
difficulty in making spontaneous decision when
required. This is mainly because private organisations are able to arrive at quick decisions
to avoid any possibility of losses, whereas a government organisation may have to proceed
through committees and boards to arrive at a decision.
Lack of efficiency: Government organisations lack flexibility in utilising their assets
or resources compared to private organisations. Further, employees at government
organisations tend to be less efficient. This could be because employees in government
organisations are given low wages and it’s difficult to attract highly skilled personnel for
various jobs, leading to underutilised resources. Regardless of how efficient employees
may be, government organisations are also likely to be exposed to undesirable political
influences which may affect the efficient functioning of a business.
Absence of profit motive: Usually government organisation are run to provide goods and
services required for the citizens. Therefore, these organisation are hardly run on profit
motives. This could result in less reserves for future improvements or perhaps lead to future
losses.
Costly management: Sometimes due to internal changes it may require staff to be laid
off. However, unlike private organisation who can dismiss staff when restructuring, public
organisation are unable to dismiss staff easily due to external pressure. It could be pressure
from union or from the public.
What is Privatisation?
Privatisation is the process of selling government owned industries or companies to the
private sector. In the Maldivian context, few privatisations have occurred. For example,
Ghiyasuddin School owned by the government was turned over to Shri Educare Private
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Limited, India under the Public Private Partnership program. Privatisation can also be when
a public company is turned over to a private company with few individuals.
Arguments for Privatisation
Increased competition: When firms are privatised it would lead to competition resulting
in lowered prices of goods and services through free marker operations. Also, when there
is competition, organisations tend to invest towards enhancement of product or services
through research and development. This would increase the quality of goods and services
provided and increase the possibilities of new product development.
Improved efficiency: While the main motive of a private organisation would be to maximise
profit, it is natural that the organisation would do what is necessary to achieve that goal.
This may include things, such as restructuring of the organisation, investments in capital
assets to improve performance and possibilities to employ trained and skilled staff. Further,
it is convenient for private organisation to adapt for changes whereas public organisation
may take time.
Government revenue from sales: The goods and services provided by private
organisations are taxable. Therefore, the government would gain revenue in terms of taxes,
such as goods and services tax and business profit tax, which the government could use for
other social and welfare investments.
Arguments against privatisation
Job losses: In some cases, private sector businesses are forced to reduce costs in order
to maximise profits. While this is the case, the most commonly used method is the reduction
in labour force. This could be due to excessive labour or perhaps due to automation of
processes.
Redistribution of wealth: In theory, government assets are the wealth of the citizens as a
whole. While privatisation is the transfer of these public owned assets to private sector, the
owners of the private company would be a few rich individuals. Therefore, one can argue
that by privatising the wealth is distributed unevenly creating wider gaps between the poor
and the rich.
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Activity 4.10
In Maldives, Ibrahim Nasir International Airport was once privatised and again
nationalised by the government of the Maldives. Conversely, some schools in Male’
were privatised.
a) Explain the benefits of privatising Ibrahim Nasir International Airport.
b) Explain the arguments for nationalising the airport.
c) Discuss the possible effects of privatising a public school.
Key Terms
Business organisation: an organisation established with the purpose of producing
and selling goods and services.
Co-operatives: an organisation that exists for the benefits of its members.
Franchise: is a type of license that a party (franchisee) acquires to allow them to
have access to a business’s (the franchisor) proprietary knowledge, processes and
trademarks in order to allow the party to sell a product or provide a service under the
business’s name.
Limited liability: shareholders’ liability for the business is limited to the value of the
shares they have agreed to buy.
Multi-national company: a company having its businesses in a number of countries.
Nationalisation: The process of turning private organisation to state owned
organisations.
Partnership: between two and 20 people who form a business together. They all
contribute capital, share the financial decisions and the profits.
Private limited company: an organisation with limited liability which sells shares only
to friends, employees and members of the family.
Privatisation: the sale of public sector business to the private sector.
Public corporation: an organisation owned and controlled by the government but run
on its behalf by a board of governors.
Public limited company: an organisation with limited liability which sells shares to the
general public through the stock exchange.
Sole proprietorship: a single person business with unlimited liability.
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I Learnt
Choose two types of business organisations, prepare a detail report of 125 to 150
words: about the business, its functions and how it is operated, the market share and
their contribution to the particular industry.
Self-Assessment
Topic
What is a business
Sole proprietorship
Partnership
Limited liability
Public limited company
Private limited company
Franchise
Public corporations
Multi-national companies
Nationalisation
Privatisation
Factors that affects efficiency of labour
Role of entrepreneur
Role of stakeholder
Identify internal and external stakeholders
Responsibility of stakeholder group
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I have understood
I need help
Chapter 4 Business Organisations
Key competencies
Practising Islam: The Islamic way of life is completely built on ethical
values. It is ethics and values which drives a business regardless of its
size. It teaches to be fair and just.
Using sustainable practices: Resources can be used as appropriate in
different types of businesses. Business organisation are profit oriented.
Therefore, sustainable use of resources would lead to profit maximisation.
Understanding and managing self: The environment around consists
of various business activities. Through the learning process students
understand to relate the business activities to themselves enabling them
to make meaningful decisions.
Living a healthy life: The features, advantages and disadvantages of
various types of business activities exposes students on the importance
of maintaining positive relationships and strategies in business
operations.
Relating to people: The diverse knowledge of businesses enables
students to interact more appropriately in discussions of the subject and
allows to provide their own feedback enabling healthy discussions.
Thinking critically and creatively: Through the understanding of their
business environment students will be able to relate and analyse why
there is a need to form different types of businesses.
Making meaning: Students will be able to make their own justification
and interpretation of why businesses are required and its relation to
themselves.
Using technology and the media: In order to analyse and compare
between organisations students make use of various information bases to
apply them in presentations and discussions.
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Review Questions
Choose the best answer.
1. The best definition of a sole trader form of business organisation is:
a) The business only employs one person
b) The business is owned by one person
c) The firm has a single customer
d) There is a single firm in the industry.
2. One of the disadvantages of a sole trader business is that:
a) Capital is limited to owner’s savings and bank loans
b) Decisions take too long to make
c) As they are government owned there is no profit motive
d) The owners may disagree
3. One of the advantages of a partnership form of business organisation is that:
a) All partners always have limited liability
b) Shares can be sold on the Stock Exchange
c) The business survives the death of the partners
d) The business has access to more capital than a sole trader
4. Which of the following is NOT a feature of a private limited company?
a) Shares can be issued to raise capital
b) Shares can be bought and sold on the Stock Exchange
c) All owners of the business have limited liability
d) The business continues after the death of a shareholder
5. Which of the following statements best applies to a public limited company (plc)?
a) It is owned by the government and is in the public sector
b) It is owned by shareholders who can sell their shares in the Stock Exchange
c) It is quick and easy to set up with few legal formalities
d) Its accounts can be kept private and it receives little coverage in the business
6. One of the reasons for a business to buy a franchise is because:
a) It is always much cheaper than setting up a new business venture
b) There is complete control over important decisions
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c) The business can use its own name in advertisements
d) The risks of failure are lower as it is buying a well known business idea
7. One of the advantages to a business of selling a franchise is that:
a) The business can expand more quickly
b) The franchisor owns all of the shops
c) The businesses buying the franchise are certain to be successful
d) The products sold in each shop will be different
8. The best definition of nationalisation is:
a) Expanding a business to all parts of the country
b) When the government buys all of the assets of a private sector business
c) When a private limited company applies to become a public limited company
d)Opening a new division of the business in another country to become a multinational
Answer the following questions.
9. Two workers who are working in tourism industry are considering to become
self-employed and setting up their own business. What would be the advantage
of them setting up as a partnership rather than setting up as two sole
proprietorships?
10. Sole proprietorship has unlimited liability. Explained what is meant by unlimited
liabilities.
11. Explain who owns, controls and is responsible for any debt, in a sole
proprietorship and in a partnership.
12. Explain five types of partners in a partnership.
13. What are the advantages of a private limited company rather than a partnership
as a form of business organisation?
14. Differentiate between private sector and public sector.
15. Explain how a company is formed.
16. How can a public limited company raise money for expansion?
17. Define multi-national companies and give examples from the local economy.
18. Define nationalisation and privatisation providing local examples.
19. What arguments are in favour of privatisation?
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5
Financial Institutions
Financial institutes are an integral part of an economy. Financial institutions drive the
economy by conducting financial transactions, such as investment. It is common that
everyone deals with financial institutes, where it may by depositing money, obtaining loans
or exchange of foreign currencies. Business may deal with financial institutions more often
than an individual person.
5.1 Exchange
You will learn
•
Exchange
Exchange is the act of giving a thing in return for another.
• Barter system
Prior to the invention of money goods and services were
exchanged with other goods and services. Barter is a
system in which goods and services are exchanged for other goods and services without
the use of money. Prior to the invention of money goods and services were exchanged and
this is called a barter system.
When people are engaged in paid work they exchange their time, effort and skill for their
wage or salary. When buying goods or service people exchange their income for those
good and services. Even today exchange occurs. The difference is exchange for goods are
in monetary terms rather than goods for goods. An economic activity is driven by the need
to exchange.
Prior to the invention of money people used barter system to fulfil their needs and wants.
However, barter system had many practical difficulties. A fisherman may want to exchange
fish for hens. Then this fisherman will need to find a farmer who is ready to exchange
hens for fish. If the fisherman is lucky enough to find one who wants his fish, then they
could barter the fish with hens. But, what if the farmer wants coconuts instead of fish.
This is the major problem of barter system where one may not be able to find someone
who exactly want what he or she wanted to barter. This is called double coincidence of
wants. Barter system lacks a common unit measurement in terms of the good or service.
For example, if a person wants to exchange bananas for fish, the person may not know
how many bananas would be worth one fish. Indivisibilities of certain commodities also
give raise to issues with barter system. For example, the owner of cow may want three
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kilograms of sugar. The barter between the person having a cow and sugar will not take
place because the value of cow can be much more than three kilograms of sugar. While it
is not possible to divide a cow, no exchange will be possible between the two persons. In a
barter economy, the store of value could be done only in the form of commodities. As some
commodities are perishable in nature it lose value with time. Under barter system there is
difficulty of transferring wealth from one place to another. Wealth of the people was in the
form of commodities. Immovable properties cannot be
transferred to another place. The transfer of movable
DID YOU KNOW
property can be difficult, heavy or costly. For example, it
could be difficult to carry livestock from place to place.
Taxes were first collected in
In barter system it is difficult to make deferred payments
Egypt close to 5,000 years ago
when goods and labour were
because some of the commodities cannot be stored
offered as ways of paying
for a long time. For example, a hen that was given as
a loan may die, which makes it impossible to return
the same hen in the same condition it was borrowed.
Therefore, money can be regarded as the most convenient median of exchange for goods
and services.
Activity 5.1
Imagine there is no money and storage facilities available and you have to rely on
swapping goods with each other. You produce milk, two of your neighbours are preparing
cheese and eggs. Suppose you would like to exchange your milk with some eggs.
a) What term is given for the exchange of goods and services?
b) Explain the possible problems you may encounter.
c) Now that the egg producer wanted to swap eggs with cheese but cheese producer
does not want eggs. What are the potentially difficulty with this act of exchange.
Explain
d) Suppose milk producer was not able find a swap. Explain the consequences of
not getting a swap for the milk producer.
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5.2 Evolution of Money
You will learn
Money is anything that is acceptable to people and
organisations as a mean of payment for goods and services.
• Functions of money
Over the years money had been used in different forms. At first
• Features of money
barter system was used and in barter system live stocks were
used to exchange. Cowry shells and different forms of coins
were used before the invention of paper money. Money should have characteristics, such as
being easy to handle and ease of storage.
Figure 5.2.1: Early forms of money used in the Maldives
Activity 5.2
Barter system had many practical difficulties and people were looking for a more
convenient form of money. In today’s world, people use paperless money. Prepare a
presentation about the evolution of money.
Functions of money
A medium of exchange – Money can easily be used as a medium of exchange for goods
and services. In barter this is very difficult because transfer of large items and perishable
goods makes trading difficult. Money also facilitates trade by providing a medium of
exchange accepted by everyone and thus the use of money has removed the problem of
double coincidence of wants.
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A measure of value – Money can be used to measure fairly and consistently the relative
worth of goods and services. Today, all goods and services could be valued in monetary
terms. This enables the comparison of goods and services in a common value. In a barter
system this may not occur because it is impossible to compare the value of different
commodities consistently.
A store of value or wealth – Money is used so that we can save our earning for a later date.
In a barter system this cannot occur because often the animals and commodities may not
last. Money has solved this problem and now wealth can be stored for a long period of time.
Though money can be stored it may be not good to store money as wealth, as with time
value of money falls due to inflation.
A means of making deferred payments – Under barter system lending and borrowing were
very difficult. But with the invention of paper money people can borrow and buy goods and
services of their choice. Thus, money is an easy way of measuring debt and repaying.
Figure 5.2.2: Functions of money
A Bank note is a piece of
paper money issued and
endorsed by the central
bank of a government
where a stated sum has to
be paid on demand to the
bearer. Bank notes are used
as a medium of exchange
to buy goods and services.
It bears security features,
such as holograms and fine
prints making it difficult to
replicate and are issued in
limited supply.
Activity 5.3
Different types of things have been used as money at different times in different places.
Prepare a poster showing the history of money (in Maldives) at the various stage of
invention of paper money and other forms of money use at present.
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Activity 5.4
In the activity 5.3, your poster about money at different times in different places had
things, such as cows, shells, gold, coins and paper money (bank notes). From the forms
of money used which of the things had the functions of money. Explain your answer.
Characteristics of money
A commodity which is used as money will only be
acceptable if it possess certain characteristics. An
DID YOU KNOW
important property of money is that it should be
The first known paper
acceptable to all in exchange for goods and services
banknotes appeared in China.
without hesitation. It is inconvenient if a type of money
In all, China experienced
is accepted in some shops but not in others. Money
over 500 years of early paper
should be small and transportable. In other words
money, spanning from the ninth
something that is used as money should not be heavy
through the fifteenth century.
or bulky. It should be easy to carry around, and should
be portable. Imagine using certain types of commodity
money. What if Cows are accepted as commodity money. Can you imagine walking around
with a cow in your wallet? To make transactions easier, money can be broken down into
smaller or larger units of measure. Divisibility is an important characteristics as we need
to pay different amounts of money for different goods and services. Imagine if we have to
pay with a cow, and if part of it could be made to wards a full payment. Money should be
durable overtime and should not deteriorate. Gold and silver lasts forever and even paper
currency is durable. Imagine the case of cow as money. It is not durable as a cow may die.
Money should be fairly stable in value. If there is a constant fall in value of money then, it
will not be a good measure of value. Anything which is an excess has no economic value.
Therefore, money should be scarce. Money should be uniform in quality. The intrinsic
value of money with the same denomination should be the same.
Activity 5.5
In the activity 5.3, your poster about money at different times in different places had
things, such as cows, shells, gold, coins and paper money (bank notes).
a) From the forms of money used which of the things had the characteristics of money.
b) Explain these characteristics.
c) Which item is most suitable as money? Explain why?
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Activity 5.6
a) Examine the use of gold and bank notes as money. Explain why gold was once
used as money and why it lost its function to bank notes.
b) Analyse the advantages and disadvantages of the use of these two types of
money.
c) Evaluate the extent to which notes might cease to be used as money over 100
years, with the increased use of electronic banking.
d) Provide your choice of future money and explain why people should use it in the
future.
Activity 5.7
Today paper money is accepted as a currency over cowrie shells which was one
considered as a good medium of exchange.
a) Explain how paper money fulfills the three functions of money.
b) Explain the characteristics of good money.
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5.3 Banking System
You will learn
•
Commercial banks
A bank is a financial institute where it accept deposits and
• Central bank
provide financial services to the customers. A bank is a
• Islamic bank
mediator in the financial market. The financial institute
consists of those who demand for money and those
who supply it. Financial institutions provide financial services to consumers, firms and
government to help them save, borrow and invest money and make payments. The main
type of financial institutions is a bank. A bank is a financial intermediary because it brings
together customers who want to save money and customers who want to borrow it.
There are different types of banks, such as commercial bank, Islamic bank, central bank
and credit unions. Commercial banks are the most common type of banks providing
services to the businesses and consumers through a wide network of branches. A
commercial bank act as a financial intermediary. Commercial banks play a very important
role in promoting trade and industry by accepting deposits and providing loans.
Activity 5.8
Shaiha is a teacher. Each month she saves MVR 1000. Shaiha does this by paying
MVR 400 to pension scheme, MVR 350 to her medical insurance and MVR 250 to her
saving account.
She tries to save for her retirement, and for emergencies. Recently prices are rising
and Shaiha was not able to save as she did before. Now she is able to save only
MVR 750. However, Shaiha wants to save more as the bank have raised the interest
rate on savings.
a) What are the main ways in which savings could be made?
b) List minimum five reasons to save.
c) Name two things which can influence people to save. Justify your answer.
d) Where could people save their money? Explain why.
Functions of a commercial bank
The three main functions of a commercial bank is accepting deposits or safe keeping
money, making payments and facilitating business finance.
Banks help customers to keep their money safe. Deposits can be made into a current
account which is also called demand deposit accounts where customers can instantly
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access the money. This type of account is used mainly to receive payments and make
payments. There is no interest earned on the money deposited in a current account.
Money can be deposited as time deposits or fixed deposits. Fixed deposits usually offer
a guaranteed rate of interest for a specified time period, such as one year. Banks allow
customers to choose the length of time, or term, for the money to be deposited. Time
deposits or fixed deposits offer a high interest rate. However, in a fixed account money
cannot be withdrawn or transferred by means of a cheque on demand. Depending on the
bank policies customers need to give prior notice to the bank if money is to be withdrawn
from fixed accounts. Money can also be deposited to saving accounts. A saving account
is between current and fixed accounts. Holders of these type of account’s are paid a
reasonable interest rate provided that the customer keep the money for a specified period.
A commercial bank makes payments on behalf of their
customers. To make payments through banks, customers
can use a variety of methods. Customers can use a check
which can be used to transfer money from one account to
the other. Though check is not actual money, it is accepted
instead of money. Check can be a convenient method to
pay large amounts as carrying physical cash can be difficult.
Standing orders is another method customers can use to
make payments. Standing orders are instructions given
to the bank to make regular payments of fixed amounts,
such as rent, insurance premium etc. Direct debts also
instruct the bank to pay the bills that fall due regularly but
the amount varies each month, such as water, electricity
and telephone bills. Another method is Bank Giro Credit
Figure 5.3.1: Bank operated in
System. In this system depositors use only one cheque to
Male’
pay several bills. Usually large companies use this method
to deposit salaries of thousands of workers instead of writing a separate cheque for each
worker. Similarly, the bills of electricity, gas, telephone and water can be attached with the
bank Giro form and a cheque for the total amount can be given. Credit cards are widely
used by the depositors. This system enables card holders to purchase goods and services
from different places. Each Cardholder is given a limit for spending and card holders receive
a statement every month and no interest is charged if the account is settled in full, in the
given period of time. Interest is charged monthly on any outstanding balance.
Advancing loan is another function of a bank. Banks earns profit by saving the extra money
their customers hold. From these money they give loans and charge interest on it. There
are two ways of borrowing from the bank that is over draft and bank loan. An overdraft is
when the bank allows a customer to take out more money than in the account. Overdrafts
are up to an agreed limit, and must be paid off whenever the bank asks. Interest is charged
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daily on any outstanding balance. A bank loan is when a customer borrows a fixed sum of
money to be repaid in monthly instalments over a number of years. A fixed rate of interest
is charged. Banks provide short term and long term loans at a certain rate of interest.
When a loan is issued the customer would require to keep a security known as a collateral.
Activity 5.9
Bank of Maldives Plc was inaugurated on November 11, 1982. The Bank started
commercial operations as a joint venture bank with 60% shares held by the
Government of the Maldives (including its Agencies and Maldivian Companies) and
40% shares owned by International Finance Investment Company Limited (later IFIC
Bank Limited), Dhaka, Bangladesh.
BML was originally a joint venture between the Government of Maldives and IFIC
Bank, Bangladesh. Following divestment by IFIC in 1992, the Government assumed
a majority shareholding. The Bank is now listed on the Maldives Stock Exchange with
the Government holding 62.2%, State Owned Enterprises 4.1%, and the balance is
held by public shareholders.
Source: https://www.bankofmaldives.com.mv
a) What type of bank is Bank of Maldives (BML)?
b) Who is the main shareholder of BML?
c) What are the functions of Bank of Maldives Public Limited? Explain
d) Provide at least 4 reasons why listing on the Maldives Stock Exchange could
benefit BML.
Liquidity and profitability
Liquidity and profitability are the two main objectives of a commercial bank. The liquidity of
a bank is the ability of a bank to meet the demand for cash. A liquid asset is one which can
be converted into cash easily and quickly without losing value. Although liquid assets can
be converted into cash easily they are less profitable. Illiquid assets are highly profitable
but can be converted into cash only after a certain period of time. Liquid assets, such as
short-term loans earn low rates of return while illiquid assets, such as long term loans earn
very high rates of return. Therefore, the more the liquidity of a bank, the less its profitability.
The need to have liquid assets and the desire to earn more profits present the bank with
a problem. Therefore, banks try and arrange their lending so that they have sufficient
liquidity to meet any probable demand for cash and likewise sufficient profit to satisfy their
shareholders interest. These banks are there to make profit for their shareholders and they
are usually public limited companies.
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Activity 5.10
In today’s world most of the banks offer different types of cards to their customers.
a) List the main two types of cards offered by the bank.
b) Name four different cards used in Maldives.
c) Critically analyze the use of cards rather than physical money.
The Process of Credit Creation by Commercial Banks
Every loan creates a deposit and every deposit creates a lending. Bank deposits come into
being in one of the following three ways. That is, when a bank receives a deposit, buys a
security and makes a lending.
When a bank makes a lending out of its deposits, the process of creation of credit starts.
Assume that the bank has an initial deposit of MVR 100,000 and the cash reserve ratio
(CRR) is 10%. Then the bank will keep a reserve of MVR 10,000 and lend out MVR 90,000.
It is assumed that this lending amount will be deposited either in the same bank or another
branch of the bank or in any other bank in the country. So, MVR 90,000 will be deposited
and after keeping 10% that is MVR 9000, MVR 81,000 will be lent out. Again this will be
deposited in some other bank and the bank will keep 10% of it as CRR and lend out MVR
72,900 and this process will go on. In economic terms, this is also known as banks creating
money.
Indeed, from an initial MVR 100,000 cash deposit, the banking system has created an extra
MVR 243,900 ( i.e., MVR 90,000 + MVR 81,000 + MVR 72,900) of deposits as each bank
lend out money to their customers.
Activity 5.11
a) List seven commercial banks operated in the Maldives.
b) What are the main functions of these banks?
c) Do you think banks provide an adequate service to the public? Describe banks
services to the public.
d) What is the negative burdens of interest on the borrower?
e) Why is Islamic banking considered more fair on people who borrow money from
the banks?
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Central Bank
Central bank is at the apex of the country’s banking
system. It is the bankers’ bank. It regulates, controls
and supervises the banking activities in a country.
Every country has a central bank. The Maldives
Monetary Authority (MMA) is the central bank of
Maldives.
Functionsof Central banks
Figure 5.3.2: Maldives Monetary
Authority
Sole note issuing authority – The central bank is the currency issuing body. The currency
issued by the central bank becomes the legal tender throughout the country. Usually,
notes are transferred from the issuing department to the banking department. Then, to the
retail banks and finally to the public. In the Maldives, MMA has the sole authority to issue
currency notes.
Banker, Agent and Advisor to the government – the central bank act as the banker to
the government by receiving deposits, making loans and payments, collecting cheques and
providing foreign reserves to the government. Sometimes the government needs to spend
more money than it can raise through taxation. Therefore, the government may resort to
borrowings. The total borrowings made by a government is known as the ‘National Debt’.
As an agent to the government, it collects income from taxation, carries out the borrowing
of the central government and makes interest payments to those who hold government
debts. As an advisor, it carries out the government’s monetary policy. Monetary policy
involves using the interest rate to manage inflationary pressure in an economy. Inflation can
be caused by people and firms spending too much money on goods and services. Raising
the interest rates in the economy will make borrowing of money more expensive and
reduce the demand for borrowings. It will also make saving more attractive and increase the
demand for savings.
Banker’s Bank – The central bank acts as a banker to the commercial banks. It holds
cash reserves and deposits of commercial banks. It provides an essential link between the
government and the other banks. Other banks keep accounts with the central bank and use
them to settle debts between themselves. All banks are expected to supply the central bank
with information regarding their business, and they have to respond to directions given by
the central bank.
Lender of last resort – Central bank stands ready at any time to help the banking system
during a shortage of cash. They lend money to prevent banks from going bankrupt if they
run short of money.
Credit control – This is one of the most important functions of a Central Bank. Bank rate
(interest rate), cash reserve requirements, open market operations are the most important
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instruments used by the central bank to control credit. By changing these the Central Banks
can influence the supply of money in an economy. For instance, increase in bank rate,
increase in reserve requirement and selling securities by the central bank during inflation
would help to control supply of money and price level.
Activity 5.12
Minutes from a meeting of the US central bank show policy-makers divided over when
the next rate rise should come.
According to the minutes, some Federal Reserve members felt “economic conditions
would soon warrant taking another step”, while others believed more data was needed.
The US central bank is widely expected to raise interest rates before the end of the
year, but it is not clear when.
In its July meeting, the Fed opted to hold rates between 0.25% and 0.5%.
The cost of borrowing in the US has remained constant at this level since December
2015.
Investors and traders were looking for clues in the minutes about whether that increase
will come in September or at its final meeting in December. Most do not think the
central bank will act at its meeting in November because the timing is too close to the
US election.
Source : http://www.bbc.com/news/business, 17th August 2016
a) What function of the central bank is mentioned in the news extract?
b) Explain the other functions of the central banks.
c) Analyse the effect on the economy due to an increase in interest rate.
Activity 5.13
Use MMA website: www.mma.gov.mv and answer the following questions.
a) What is the role of MMA in helping to control or manage the Maldivian economy?
b) Can MMA control price of goods in the market. If so, to what extent. If not, why?
Explain your answer (150-200 words) with examples.
c) Prepare a presentation to explain the role of MMA. Your presentation must be 5-7
minutes.
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Islamic banking
Islamic bank is a financial institution that organises financial resources and invest it in an
islamically acceptable social and financial objectives. All the actions, such as mobilisation
and investment of funds should be conducted in accordance with the principles of Islamic
Shari’a. The four guiding principles of Islamic Shari’a is prohibition of interests or Usury,
ethical standards, moral and social values and liability and business risks.
In the Islamic banking system both charging and receiving of interest is strictly forbidden.
Therefore, Islamic banking will not take or receive interests as it infects the entire economy,
and threaten the social fabric and moral value of well-being of everyone in the society.
Islam concerns about the ethical standard of investing in a company. The Islamic banks’
investment gives serious attention to the business to be invested. Islamic banks do prior
investigations into the companies in which they invest their clients money. They will go
through company policies, the products, services they provide and the impact it will have on
society and the environment. Moral and social values are also one of the guided principles
of Islamic banking as the Qur’an call to care and support to the poor and needy. Islamic
institutions are expected to provide services to those in need through helping needy people
by giving interest free loans or helping the NGO’s to facilitate activities which could enhance
output of certain programs. In Islamic banking liability and business risk, and profits of any
business venture are borne by all the parties concerned.
There are differences between the conventional banking system and the Islamic banking
system. Islamic banking system focuses on investment, give emphasis on soundness of
the project and apply moral criteria in investment. On the contrary conventional banking
systems focus on lending, emphasises on ability to repay and apply on financial criteria.
Activity 5.14
Compare the conventional banking system and Islamic banking system. Your answer
should cover at least three guiding principles of Islam and three basic tenets of
conventional banking system.
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You will learn
5.4 Stock Exchange
Stock is capital raised by a joint stock company or corporation
or government, through the stock exchange. A shareholder
is the person or organisation who buys and holds shares in a
Joint Stock Company. If shareholders want their money back
they must sell shares to other investors. They are able
to do this through a stock exchange.
Stock exchange is a business organisation that helps
companies and government authorities to sell their
stocks and shares to people and other organisations
who have an interest to buy them. Stock exchange
mainly deals with second hand or existing securities.
•
Stock exchange
•
Functions of stock
exchange
DID YOU KNOW
First world stock exchange
was The Amsterdam Stock
Exchange which was
established in 1602 by the
Dutch East India Company
Many investors trade stocks in the hope that they will
make a capital gain from an increase in their value. But,
investors may not always fully realise the investment made on stocks. The market price of
a stock in the stock market may differ from the face value printed on the stock certificate.
It can rise or fall over time depending on stock market demand and supply. It also largely
depends on the profitability of the company or shareholders trust on the company of its
future performance.
Without stock exchanges governments and companies would be unable to raise finance
from the issue of stocks and shares. This is because investors would be reluctant to buy
stocks and shares if they could not sell them again to get their money back.
Shares on the stock exchange can only be quoted by those public companies approved by
the stock exchange council. These companies are called listed or quoted companies. This
means that these companies need to disclose certain financial information to the Stock
Exchange and the public, in order to get listing approval.
The stock market is the global market for the buying and selling of new and second hand
stocks and shares.
Activity 5.15
a) What are the listed companies under Maldives Stock Exchange?
b) Explain the functions of a stock exchange.
c) What are the advantages of listing on the stock exchange?
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Key Terms
Bank: an organisation which deals with finance.
Central bank: the government’s bank and all the bankers’ bank.
Commercial bank: financial institution offering its services to the public, government
and businesses.
Investment bank: serves mainly to large firms and act as an intermediate in
managing their shares and business takeovers.
Islamic bank: a bank mobilising its financial resources and investment in a Sharia
compliant manner.
Saving bank: serves the general public encouraging saving.
Stock exchange: regulated financial market where securities are traded.
I Learnt
In about 100–150 words write your understanding of the banking systems in the
Maldives.
Key competencies
Practising Islam: By learning the concept of Islamic banking students
will be able to relate banking system with Islamic Sharia and how to
overcome practices conflicting Islamic principles. The Holy Quran 2:275
states,
“Those who consume interest cannot stand [on the Day of
Resurrection] except as one stands who is being beaten by Satan
into insanity. That is because they say, ‘Trade is [just] like interest’.
But Allah has permitted trade and has forbidden interest. So
whoever has received an admonition from his Lord and desists may
have what is past, and his affair rests with Allah. But whoever returns
to [dealing in interest or usury] - those are the companions of the
Fire; they will abide eternally therein.”
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Understanding and Managing Self: The knowledge of money and
banks can be of assistance to students in managing their finances. This
will create interest among students to save for the future through adjusting
themselves to the situation in the most appropriate manner.
Making Meaning: Money is used daily for different purposes. Students
learning is made more meaningful through application of theory and
practice.
Relating to People: Exchange is a daily norm. For transaction to happen
there will be interaction between two or more people. This requires
communication, understanding and respecting each others opinions.
Students acquire these skills through understanding each other needs
and wants.
Self-Assessment
Topic
I have understood
I need help
Definition of exchange
Can identify examples of exchange
Difficulties of barter systems
Definition of money
Characteristics of money
Functions of money
Evolution of money
Definition of banks
What is commercial bank
Functions commercial bank
Liquidity
Credit creation by commercial bank
Definition of central bank
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Functions of central bank
Islamic banking
Definition of stock
Functions stock exchange
Review Questions
1.
Define exchange of goods and services.
2.
Explain how barter system operates.
3.
What are the difficulties of barter system? Explain it.
4.
Explain evolution of money.
5.
Use the following terms to complete the sentences in question (a) to (g).
Liquid assets
medium of exchange Rate of interest lending money
Store of value convertibles Current account deposits convertible
a) In earlier times people only accepted bank notes as money because they
were …………………….. into gold.
b) By acting as a ………………………., money removes the main disadvantage
of barter.
c) During periods of inflation, money is not a very satisfactory……………….
d) ……………………. are transferable by cheque.
e) ……………………… is the most profitable activity of the commercial banks.
f) The price of the loan is the ……………………………..
g) ……………………… are those which can easily and quickly be converted into
money.
6.
Discuss the features of money.
7.
Explain the functions of money?
8.
Which of the following are functions of the central bank.
a) Conduct monetary policy
b) Lending to the general public
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c) Supervising the stock market
d) Lending to the commercial banking system
9.
Which of the following functions of a central bank may potentially conflict with its
monetary policy role?
a) Supervisor of the banking system
b) Banker to the banking system.
c) Manager of the national debt.
d) Banker to the government
10. What is the difference between the functions of money and the characteristics of
money?
11. Explain why MVR 100 today
i)
Fulfill the four functions of money
ii) Possesses the characteristics of good money
12. Explain four services of banks?
13. Explain the terms “liquidity” “profitability” and “credit creation” by commercial
banks?
14. Explain four functions of a commercial bank
15. Discuss the importance of commercial banks in an economy
16. Explain the role of central bank in an economy.
17. Discuss importance of banks in an economy.
18. What are the differences between the Islamic banking system and traditional
banking system?
19. Define stock and stock exchange.
20. State different types of securities.
21. Discuss the importance of stock exchange?
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6
Population
According to the world population prospect 2015, the world population exceeded 7.3 billion
by 2015. Human population is the total number of people living in a specific district or
geographical area. A country’s population is an important part of its economy. This is
because economies need to have enough demand for the goods and services produced.
These demands are created by the people. An economy needs labour which is also a factor
of production. The importance of population is that decisions on provision of economic
goods and services depend on the population and its preference.
6.1 Demography
You will learn
Demography is the statistical study of human
• Population census
population. Demographers seek to understand
• Natural rate and actual rate of
population changes by investigating three main
population
demographic indicators; birth, death and migration.
Depending on the country, countries have
predetermined interval to conduct a census. Mostly,
census is conducted in either five or ten years. Some of the socio-economic data collected
through the census includes information about families or households, as well as about
individual characteristics, such as age, sex, marital status, literacy, education, employment
status, occupation and geographical location. Other information collected includes housing
and education. All this information is used to determine various social and economic
indicators.
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Table 6.1: Total Maldivian Population by Sex and Intercensal Growth Rates
Census
Total Maldivian Population
Percent
No
Year
Both
sexes
Male
Female
Male
Female
Sex Ratio
(males
per 100
females)
Average
Annual
growth rate
1
1990
213,215
109,336
103,879
51.3
48.7
105
3.43
2
1995
244,814
124,622
120,192
50.9
49.1
104
2.73
3
2000
270,101
135,200
132,901
50.8
49.2
103
1.96
4
2006
298,968
151,459
147,509
50.7
49.3
103
1.69
5
2014
344,023
174,666
169,357
50.8
49.2
103
1.65
Source: Census 2014, Maldives
Census can help countries to formulate important policies. Most of the countries conduct
census in ten year intervals. However, some countries like Japan, Australia, Ireland, New
Zealand, and Canada conduct their censuses every five years. Regardless of the frequency
or method used in conducting census, the information collected reflects similar issues in
a country. International comparisons are possible based on this information. The census
in the Maldives is conducted every five years, except for the past two years. Age-sex
structure is important for policy and planning decisions in provision of goods and services
for relevant age cohorts. The study of the sex composition of population is useful for
understanding the past trends of demographic dynamics of a society.
Table 6.2: World’s most populous ten countries as of mid-2016
Rank
1
2
3
4
5
6
7
8
9
10
County
China
India
United States
Indonesia
Brazil
Pakistan
Nigeria
Bangladesh
Russia
Japan
Population
1,373,541,278
1,266,883,598
323,995,528
258,316,051
205,823,665
201,995,540
186,053,386
171,696,855
142,355,415
126,702,133
Source: www.census.gov/popclock/
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Activity 6.1
a) List three countries around the world conducting census:
Every 5 years Every 10 years
…………………………...
………………………………
………..………………….
………………………………
……………………………
………………………………
b) Table 6.1 shows that Maldives is conducting census at a regular interval of every
five years but after 2006 there was a change of this pattern.
i) What advantages are there in conducting a regular census?
ii) What are the possible disadvantages of not conducting a regular census?
Factors Affecting Population
A country’s population can be affected by
birth rate, death rate and net migration.
Birth rate is the total number of live births
per 1,000 of a population in a year. Death
rate is the total number of registered deaths
per thousand of the population in a country
per year. Net migration is the difference
between immigration (people coming in) and
emigration (people going out) of a country.
DID YOU KNOW
Almost all the hungry people, 842 million
live in developing countries, representing
15 percent of the population of developing
countries. There are 16 million people
undernourished in developed countries.
Birth rate and death rate differ from country to county and from developing to developed
countries. Changes in birth rate may be due to many reasons. Some of the possible factors
affecting birth rates are early marriage, living standard, customs and societal beliefs, female
employment and use of contraceptives.
Early marriages: When people tend to have early marriages there is an increased
possibility of them having more children which would have a positive effect on birth rate.
Average age of marriage of women differs from country to country. According to census
2014, Maldivian women get married at the age of 22.5 years. In developing countries
when girls get marriage at an early age, it causes the birth rate to rise. In contrast, in
developed countries, girls get married at a later age. For example, in the United Kingdom,
on an average, women get married at the age of 30 years. It can be observed that in
developed countries women tend get married at a mature age. This could be due to women
being more career oriented and the increased opportunities for women in education and
employment in those countries.Therefore, the late marriages of women can result in
reduced birth rates.
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Living standard: In developed countries people enjoy better quality goods and services.
They also enjoy a number of other social benefits provided by the state. This could result in
people being involved more in economic activities resulting them to have smaller families.
In many less developed countries, people living in poor conditions may want large families
to help them produce food and work for money. Also poor living conditions and less access
to medical facilities may result in increased deaths at a young age. However, improvement
in food quality, housing, sanitation and medical care have reduced the number of children
dying which may cause a reduction in infant mortality rate in such countries.
Customs and societal beliefs: Some societies believe that it is beneficial to have large
families in hope that they can get more support once their children grow up. There are also
societies where they think a male heir is important. Therefore, some couples tend to have
babies till they get a male child. While societal beliefs may have an impact on the birth rate,
the societal beliefs of people in developed and developing countries differ.
Female employment: In some form, in every society there is female, contribution to the
economy. The amount of contribution differs from country to country. In developed countries
the contribution of women may be higher than the developing countries. This could be due
to many reasons such as female participation in higher education, availability of jobs or
less stereotyping. In some societies, certain professions are believed to be male dominant.
Therefore, making it difficult for females to compete for professions, such as engineering
and mechanical jobs, which could be believed as male domain. According to statistical data
from the National Bureau of Statistics, Maldives as of 2014, female employment in the
Maldives is increasing. However, high unemployment among the young women compared to
young men still persists. The increase in participation rates of women is attributable to the
maternity schemes and the availability of day-care facilities making it easier for women to
combine family and career. High female employment or increase in the age at which women
had their first child could be related to their workforce participation rate. If more women are
full time employed, it could affect the birth rate of a country.
Other factors: The birth rate can be said to have a direct relationship with family planning
as it controls the population. Family planning methods prevent pregnancy which reduces
birth rate. The increased awareness on various methods and through counselling services
people are more aware of family planning issues which encourage young couples to have
smaller and more manageable families. From 1960’s to 1980’s a steady population growth
was observed in the Maldives. However, a decline in population growth was seen in 1990’s.
The reason could have been the awareness programs carried out by the government of the
Maldives and Non-government organisations towards family planning.
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Activity 6.2
In about 150 words, explain the factors which may now influence the population of the
Maldives compared to 1990’s?
Natural Rate and Actual Rate of Increase in Population
It is important to understand the changes in the population over time and how it occurs.
It helps to plan ahead towards delivery of essential facilities and communal services to
the population of a region or country. Population may increase due to natural or actual
rate of increase. Natural rate of increase in population is the difference between birth rate
and death rate. The actual rate of increase is calculated after considering net migration.
Population growth varies across countries. It also differs in developing and developed
countries.
Total world population is increasing rapidly. However, not that all the countries are
experiencing a high positive growth rate. For example, in some developed countries like
United Kingdom, there is a slow growth rate and while Germany’s growth rate is declining,
Italy is experiencing a negative growth rate. Though developed countries experience a low
natural rate of increase the actual rate may increase due to immigration. Mostly developing
countries observe a high natural rate of increase due to high birth rate and low death rate.
Although remarkable achievement have been seen in the medical field resulting in reduced
death rates, the birth rate still remains high.
Activity 6.3
The table below gives birth rate and death rate for the year 2012–2014.
Table 6.3: Births and deaths 2012-2014, Maldives
Births
Deaths
2012
7431
1135
2013
7153
1120
2014
7245
1143
Source: planning.gov.mv/yearbook2015/assets/Population/3.7.pdf
a) Describe what happens to number of births and deaths for the three years.
b) Calculate the natural rate of increase for the three years.
c) What other information is required to calculate actual rate of increase in population?
d) Given that the population of 2014 is 344,023. Calculate birth rate and death rate
for the year 2014.
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Chapter 6 Population
6.2 Population Distribution
You will learn
Population distribution is important for policy planning
purposes. Planners, administrators and decision makers
• Age and sex distribution
need to know the structure and distribution of population
of population
at a given time, as well as how it would change in the
• Geographical and
near future. For example, an education planner needs
occupational distribution
to consider the population dynamics as they have to
of population
deal with a target population which is changing. It may
• Population pyramid
change number, age and sex distribution and geographical
distribution. Geographical distribution is affected by migration. Any change in distribution of
population will change the needs of the society. This is important for the policy maker and
producers who supply goods and services.
Activity 6.4
The table below shows the size of the population in administrative islands of the
Maldives from 1985 to 2014. Carefully analyse the table and answer the questions.
Table 6.4: Number of administrative islands by size of Maldivian population
Size class
(Total Maldivian
population size)
1985
1990
1995
2000
2006
2014
Total
Less than 100
100–199
200–299
300–399
400–499
500–599
600–699
700–799
800–899
900–999
1000–1999
2000–4999
5000–9999
10000+
202
2
17
29
39
30
19
13
10
6
12
17
6
1
1
202
1
13
20
30
25
24
19
14
7
8
31
7
2
1
201
1
11
10
26
27
23
16
16
9
11
38
9
3
1
200
0
11
15
22
28
19
14
12
12
8
42
12
3
1
194
5
11
18
18
20
18
12
11
12
6
47
12
3
1
188
2
5
10
18
21
17
15
15
16
9
45
16
2
2
Census Years and number of Islands
Source: Census 2014, Maldives
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a) What has happened to the number of inhabited islands over the years?
b) What are the possible reasons for this change? Explain your answer.
c) What percentage of islands have less than 1000 population.
d) As seen in the table, population is geographically dispersed. Explain the
possible challenges for the government in providing basic necessities and other
development programs to all these islands.
e) Prepare a presentation on the challenges that the government may face in
providing basic needs to the people across the nation.
Age distribution of population is the division of the
population into different age groups. In Maldives, the
population is categorised into three categories of
people; under 15 years, between 15 to 64 years and
over 65 years. This information is vital for the nation
to provide better social services for the welfare of the
citizens. For example, the government would require
Figure 6.2.1: Age distribution of a
to make projections on what a country needs, such
population
as the capacity of schools or tertiary educational
institutes, hospitals and provision of job opportunities.
Age can be divided into two broad categories; dependent age group and working age
group. Information collected about these categories would help the government in future
planning for the categories accordingly. For example, if the dependent age group is on the
rise, the government may need to revise or consider options on the provision of welfare
schemes. Similarly, if there is an expected increase in working age group then opportunities
need to be created.
Sex distribution of a population is the ratio of males to females in a population. This sex
ratio differs from country to country and indicates
the number of people of one gender for every 100
Sex distribution of population
of the other gender. For example, there are more
women than men in countries like Armenia, Belarus
and Russia. But countries like India and China have
more men. Similarly, there are more males than
females in Maldives as well. Ever since the start of
census in the Maldives, statistics show that the sex
ratio indicated more males than females.However, the
Number of males Number of females
ratio has been declining. That is during 1911 there
were 119 males for every 100 females and in 2014
Fig 6.2.2: Sex distribution
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there were 103 males for every hundred females. The decrease in sex ratio could be due to
decline in female mortality over the past years. Also it could be due to nutrition awareness,
healthcare and other services which may have extended life expectancy for both genders.
Activity 6.5
Identify three countries having more females than males. In about 50 words write an
interpretation of the sex ratio of those countries.
Geographical distribution of population refers
to the distribution of people in different regions
of a country during a given period of time. World
population distribution is uneven. Places which
are sparsely populated contain few people.
Places which are densely populated contain many
people. In the Maldives, the distribution is not
evenly spread. Urban centres are highly dense
and population is very high due to migration.
Geographical distribution of population provide the
population dynamics of regions. This can be used
to plan future services for the respective regions.
It also helps to define population distribution and
density and understand the factors that affect
them.
There are many effects of geographical distribution
of population on the economy. These may include:
Haa Alif
Haa Dhaal
Shaviyani
Noonu
Raa
Lhaviyani
Baa
Alif Alif
Kaafu
Alif Dhaalu
Faafu
Vaavu
Dhaalu
Thaa
2000-4999
Gaafu Dhaalu
Gnaviyani
5000-9999
10000-14999
15000+
Laamu
Gaafu Alif
Legend
< 2000
Meemu
Seenu
Division of labour force into small groups: As
Figure 6.2.3 Resident population by
workers are scattered to different regions of the
population size class.
country, it may be difficult to get all skilled workers
in one part of the country. Hence, the labour force is divided into small groups. This may
hinder certain economic activities in places where there is difficulty in sourcing skilled
labour.
Difficulty in providing economic and social facilities: When people are scattered across
the country, some areas might have only a small population. This can be a major problem
to provide full-fledged social and economic facilities in the area as investments may not be
feasible.
Small markets: When people are distributed across a large geographical area with few
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people residing in one place, businesses may find it difficult to serve to a small customer
base. For example, in the Maldives, there are many islands which has a population of
less than 500 people. In these small communities it would be challenging to start a viable
economic activity.
Differences in standard of living: For various reason people tend to move to urban areas.
This could result an increased standard of living in urban areas than in suburbs. It will be
difficult to develop places with less people. This can be due to difficulties in the distribution
of resources. Regions with high population could benefit from increased socio economic
benefits, such as education and healthcare services. This can be a cause of people
migrating to areas where there are more people.
Activity 6.6
Table 6.4 in Activity 6.4 shows the geographical distribution of population in the
Maldives. Discuss two effects of geographical distribution on the economy.
Occupational distribution refers to the distribution of working population among different
sectors in an economy. These sectors include primary, secondary and tertiary sector.
Primary sector is the sector of an economy making direct use of natural resources, which
includes agriculture, forestry, fishing and mining. Secondary sector produces manufactured
goods, and the tertiary sector produces services. For example, construction industry
belongs to the secondary sector and banking to the service or tertiary sector. Census 2014
revealed that there has been a dramatic change
Primary sector
in the Maldivian economy. It was seen that prior to
8%
census 2014 the Maldivian economy was dominated
by primary and secondary sector. However, the
Secondary sector
census of 2014 revealed that the service sector is
21%
the dominant sector followed by the manufacturing
sector. Some recent changes in the occupational
distribution include more women entering into work
force, a significant rise in the number of part time
Tertiary sector
71%
employees and self-employment.
Causes and Consequences of Changing
Dependent Age Group and Working Age
Figure 6.2.4: Occupational distribution
of different sectors in the Maldives.
Population is broadly distributed in 0 to 14, 15 to 64
and 65 years and above. These age groups can be divided into dependent and working age
groups. Dependent age groups differs from country to country, in some countries it is 0–15
and those older than 65. In Maldives, children below the age of 18 is legally considered as
a minor and the age of 65 as the retirement age. However, dependent age group consists
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of all those who are below the age of 15 years and who are above the age of 65 years.
These people generally depend on the working age group. The birth rate is the main cause
of changes in the dependent age group. According to Maldivian census 2014, compared
to 2006 there is a decrease in dependent age group and an increase in the working age
group. In 2006, the dependent age group was 37 percent of the population while in 2014
the dependent age group decreased to 32 percent. Meanwhile, during 2006, working age
population was 63 percent which increased to 68 percent in 2014.
2006
2014
5%
5%
27%
32%
63%
68%
Under 15
15-64
65+
Under 15
15-64
65+
Figure 6.2.5: Population by age categories in percentage, 2006 and 2014
Source: Maldives, Census 2014
An increase in birth rate will lead to an increase in the dependent age group and a
decrease in birth rate will cause a decrease in the young dependent age group. In addition
to birth rate, better healthcare has increased life expectancy at birth this will increase
number of old people.
Dependent age group is used to measure an important population indicator which is the
dependent ratio. Dependent ratio measures the number of dependents in a country or
region to the number of people in the working population. This ratio is commonly used as
a measure of potential social support needed. Dependent population is measured with
the conception that all the people in dependent age group will depend on the working age
group which is the people at the age of 15 to 64 years. It is assumed that working age
group will provide direct and indirect support to the dependent age groups. Therefore, the
dependant age group gives a rough estimate of the burden to society. Nevertheless, all the
people in the dependent age group may not need support and all the working age group
may not be doing economically active work.
Working age group consists of all those people who are above school leaving age and
below the retirement age of a country. In the Maldives, it is the age group between 15 to
64 years. The working age group have a greater importance because the younger age
group, the retired people and the unemployed people depend on them for survival. If
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the working age group is high, it can be expected that there would be an increase in the
standard of living. However, the standard of living would depend on many factors, such as
the disposable income of an individual. The working population consists of people who are
employed (either employees or self-employed) and who are seeking employment. Factors
that affect working population is migration rate, school leaving age and retirement age.
One of the key elements of working age population growth is the level of net migration.
People migrate to different places due to many reasons, such as healthcare education and
employment. Migration can be internal or external. In the Maldives, high internal migration
can be observed due to more people moving to Male’ city for better healthcare, education
and opportunities for employment. However, the immigration is higher than the emigration
resulting in high net migration. According to census 2014 there were 63,637 foreigners in
the Maldives and non-resident Maldivians were 5,589.
School leaving age also effects the working age groups. An increase in school leaving age
group will result in decrease in working age group. Similarly, a decreased school leaving
age group will increase the working age group. A change in retirement age group will also
affect the working age group. An increase in retirement age will decrease the working age
group and decreased retirement age group will increase the working age group.
An increase in working age group helps the economy in many ways. Increased working age
group means increased labour force. A large work force in a country leads to increased
national output. The government may also need to create more job opportunities. Increase
of more jobs may raise the standard of living and an increased supply of goods and
services. This may also lead to an increased demand for capital goods resulting a faster
growth rate. Through increased growth the government could earn more revenue from
direct and indirect taxes.
Ageing Population
In the Maldives, ageing population is the age group of people who are 65 years and above.
According to census 2014, people aged 65 and above comprises of five percent of the
total population of the Maldives. This figure is constant with 2006 census. It could be due
to the declining mortality rate. Mortality rate could have declined due to better healthcare
facilities and increased awareness on healthy life styles. Ageing population may increase
due to a decline in both, birth and death rate. If there is a high ageing population, it could
lead to an increase in expensive healthcare and medical attention. Aging labour force faces
difficulties in adjusting with the changes in technology, more resources have to be used to
produce goods and services needed for older people. It will also increase the government
expenditure on health and social security benefit to old people.
Population pyramid is a graph that shows the age-sex distribution of a given population.
The pyramid gives an idea of the characteristics of a population. Each age group is called a
cohort. Population pyramid can help to predict a country’s future and can provide important
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Chapter 6 Population
information about the structure of the population. It also helps policy makers and social
scientists to make sense of demographic statistics. It is a simple graph which conveys
the complex social condition of a population through its shape. Demographers use these
graphs to convey the message to policy makers about the extent of development of a given
population. A nation can make predictions of the services, such as schools, housing and
hospitals, which are required by the population.
Population pyramid can be categorised into three categories. They are expansive (young
and growing), constrictive (elderly and shrinking), and stationary (little or no population
growth). From these categories developing countries depict expansive whereas constrictive
and stationary pyramids are depicted in developed countries.
Expansive population pyramids represent populations that are young and growing.
Expansive pyramid is characterised by the typical ‘pyramid’ shape, which has a broad
base and narrow top. Countries which have expansive population pyramid will have larger
percentage of the population in the younger age cohorts, usually with each age cohort
smaller in size than the one below it. This type of population pyramid is due to larger
fertility rate and lower than average life expectancies. The population of developing nations
normally depict this shape of population pyramids. Countries which have expansive
population pyramid will have a rapid population growth. The wider base is due to high
young age group, with narrowing in the middle due to low working age group and further
narrowed due to low
80+
Male
Female
75-79
ageing population.
65-69
The low working age
60-64
55-59
group can result in a
50-54
high dependency ratio.
45-49
40-44
Also the low ageing
35-39
group can be the result
30-34
25-29
of low life expectancy.
20-24
Examples of some
15-19
10-14
countries having
5-9
expansive population
0-4
pyramid are Angola,
5
4
3
2
1
0
0
1
2
3
4
5
Afghanistan and Nepal.
Population (in millions)
Figure 6.2.6: Expansive population pyramid
Activity 6.7
Draw a sketch of the population pyramid of the Maldives. In about 100 words, briefly
describe the salient features of the pyramid.
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Activity 6.8
‘The fertility rate of a population is the single most important influence on the shape
of a population pyramid.’ In the light of your understanding of population pyramid and
fertility rate, examine this statement.
Constrictive population pyramid is used to describe an elderly and shrinking population.
This type of pyramid has smaller percentage of people in the younger age cohorts and
is typical in countries where there is high level of social and economic development. A
constrictive population pyramid shows that both birth rate and death rate is low and elderly
people are living longer due to developments in medical science and improved healthcare
provision. The constructive pyramid has an outward bulge with a narrowed top. This is
because there is a lower percentage of the population from the lower age groups and
the higher age groups. This results in less dependency age group. While more people
are engaged in economic activities, the low dependency age group may result in more
disposable income and high standard of living. Countries with a constrictive population
pyramid will have quality education and healthcare provided to a large portion of the
population. Examples of some countries with constrictive population pyramid are Italy,
Germany, and Japan.
Male
Female
100+
-95 - 99-90 - 94-85 - 89-80 - 84-75 - 79-70 - 74-65 - 69-60 - 64-55 - 59-50 - 54-45 - 49-40 - 44-35 - 39-30 - 34-25 - 29-20 - 24-15 - 19-10 - 14- 5- 9- 0- 4-
3.02.01.00.0
0.01.02.03.0
Population (in millions)
Figure 6.2.7: Constructive population pyramid
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Activity 6.9
Given below is the population pyramid of Guinea-Bissau and Ukraine 2011.
a) What does the base of the pyramids represent, explain what it means for both
countries?
b) Which pyramid shows high death rates? Explain why.
c) Population pyramid should be relatively symmetrical. Is the two pyramid symmetrical?
If there is asymmetrical distribution what would be the reason for this.
Guinea-Bissau – 2011
Male
125
100
75
50
Population (in thousands)
25
0
Female
Ukraine – 2011
Male
100+
100+
95-99
95-99
90-94
90-94
85-89
85-89
80-84
80-84
75-79
75-79
70-74
70-74
65-69
65-69
60-64
60-64
55-59
55-59
50-54
50-54
45-49
45-49
40-44
40-44
35-39
35-39
30-34
30-34
25-29
25-29
20-24
20-24
15-19
15-19
10-14
10-14
5-9
5-9
0-4
0-4
0
25
50
75
100
125
2
1.6
1.2
0.8
0.4
0
0
Female
0.4
0.8
1.2
1.6
2
Population (in millions)
Stationary, or near stationary, population pyramids
represents populations that are not growing. They are
characterised by their rectangular shape, displaying somewhat
equal percentages across age cohorts. In these nations
the birth rate and death rate remain low and more or less
constant. But, the working age group will be comparatively high.
These pyramids often characterise developed nations, where
birth rates are low and overall quality of life is high. Some
features of stationary population pyramids are that it has equal
distribution of different age groups. This is because birth rate
and death rate remains low and almost constant. Low young
age cohort, relatively high ageing groups and high working
age group can lead to high standard of living. Examples of
6
countries which has stationary or near stationary population
pyramid is Sweden, and Netherlands.
Male
Female
4
2
0
2
4
Percent of population
6
Figure 6.2.7: Stationary
population pyramid
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Activity 6.10
a) Find two countries which has a population pyramid of
i)
Expansive
ii) Constrictive
iii) Stationary
b) Draw the pyramid for each type of population pyramid.
c) Discus the features of each pyramid.
Output per head
Optimum population is the ideal number of population that a country should have with
regard to its resources. Population of a country can be studied in relation to the availability
of the economic resources, such as land capital and existing technical knowledge. A
country may be over populated, under populated or in optimum population depending on
the situation. A country is said to be under populated if it does not have enough human
resources to make the best use of its resources. In such situation, the government may
encourage immigration from other countries. When a country’s population exceeds the
optimum population, it is said to be over populated. In such conditions the resources are
insufficient for the total population and income per head or per capita income is low. Over
populated countries experience unemployment problem, low income, low standard of living,
congestion, excess
demand for goods and
services, poor housing
Point of optimum Population
and sanitation facilities.
These conditions may
pave way to poverty.
However, poor policy and
mismanagement could
also lead to the same
situations. Nonetheless,
in practice it may be
Population
difficult to determine
size
a country’s optimum
population.
Under population
Over population
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6.3 Developed and Developing Economies
When a country is developed in terms of
industrialisation and economy that country can be
You will learn
classified as a developed country. On the contrary,
countries with low per capita income and are in the
• Developing and developed
initial levels of industrialisation are classified as
countries
developing countries. In some instances developing
• Problems face by developing
countries are also referred to as less developed
countries
countries. One of the major difference among these
two categories is that developing countries generate
more income through service sector while for developed countries the main income is
generated from the industrial sector. The developed countries are highly industrialised and
self-sustaining. It is often seen that the developing countries depend on the support from
develop countries in establishing industries.
The economies of developed countries have well-developed industrial base and service
sector, modern infrastructure and high average income per person leading to improved
standard of living. Whereas, the economies of developing and less developed countries
have an underdeveloped or developing industry base, low level of economic development
and less than average living standards. Developed countries have a high per capita income,
lesser population, low birth rate and low death rate, flourishing economies and increased
welfare offers to the population. On the contrary, developing countries face many financial
problems and limitation in the offer of welfare to the population.
Problems faced by developing countries
One of the major problem faced by some of the developing countries are rapid population
growth with large scale unemployment. The standard of living will decrease when less
people work and more depend on the working age group. The growth of an economy can
be affected by its level of productivity. If the resources and labour force are underutilised
then there will be less productivity. Lack or mismanagement of natural resources may
not attract investments and result in slow economic growth. Developing countries also
face lack of educational facilities, safe drinking water, poor housing and sanitary facilities.
Lack of these facilities may affect the well being of the people in a country resulting in
low prosperity of the country. Similarly, proper infrastructure like transport is necessary to
eliminate barriers which could slow down economic activities.
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Activity 6.11
a) Compare the socio economic condition of developing and developed countries.
b) Discuss major social and economic issues in Maldives. Present your findings to
the class.
Key Terms
Birth rate: the total number of live births per 1,000 of a population in a year. Birth rate
is also known as crude birth rate.
Census: official counting of the total number of people in a regions or country.
Death rate: the number of deaths per 1000, of a population in a year. Death rate is
also known as crude death rate.
Demography: study of human population.
Developed country: a country that has a highly developed economy and advanced
technological infrastructure relative to other less industrialised nations.
Developing country: a country where there is low economic growth and low living
standards.
Infant mortality rate: the number of deaths per one thousands of live births in a given
geographical area.
Labour force: those who are working and those who are seeking employment.
Life expectancy: the average number of years a person is expected to live.
Migration: movement of people from one place to another for settlement purposes.
Net migration: difference between the number of people coming into a country
(immigrants) and the number of people leaving a country (emigrants) over a particular
period of time.
Optimum population: optimum population is the ideal number of population that a
country should have, considering its resources.
Population: total number of people living in a particular area or country during a given
period of time.
Population pyramid: graphical representation of the age and sex distribution of a
country’s population during a given period.
Working age group: the people who are above school leaving age and below the
retirement age of a country.
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Chapter 6 Population
I Learnt
In this chapter, I have learnt local statistics regarding demographic indicators. Using the
data from Census 2014, prepare a report about population and migration. Your report
should be about 200 words.
Key competencies
Practising Islam: Regardless of the burden on the economy from the
dependent age group, Islam encourages on taking care of young ones
and the elderly and to treat them with love and kindness. In one hadith,
the Prophet (peace and blessings be upon him) disavows those who
do not venerate the elderly and considers them alien to the Muslim
society: “He is not one of us who does not show mercy to our young
ones and esteem to our elderly.” (At-Tirmidhi and Ahmad).
Relating to people: Although, people living in developing and
developed countries have their differences, students understand that
we as humans are equal and treat every individual equally irrespective
of their status, caste or ethnicity.
Thinking critically and creatively: Through the learning of
demography, population distribution and status of countries students
are able to seek information of what’s happening around them while
relating it to their environment in different perspectives.
Living a healthy life: Through learning of death rate, birth rate and
population density students become aware of the causes of these
indicators and enable them to take appropriate measures for a healthy
living to avoid future disappointments.
Using technology and the media: Through various reports published
by organisations students understand the changing environment
around them in relation to changes in world population and relate
the same to their domestic environment by analysing the available
data using technology, such as internet and other various means.
Further, the analysed data is prepared in presentable format by using
appropriate software.
Understanding and managing self: Each individual has a
responsibility towards the development of the economy. Students
understand that their behaviour towards building healthy families has a
part in the economic development of the country.
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Self-Assessment
Topic
I have understood
I need help
Factors effecting population growth
Factors influencing birth rate and death rate
Migration, immigration and emigration
Factors influencing migration
Natural rate of increase in population
Age distribution of population
Difference between working age and working
population
Calculate dependency ratio
Causes of change in dependent age group,
working age group and ageing population
Importance of productive age group in an
economy
Population pyramid
Difference between developed and developing
countries
Review Questions
1. Complete the missing words:
a)The …………………… rate of growth of a population is obtained by
subtracting the ……………………… rate from the ………………… rate.
b)Developing countries tend to have low rate of ……………………. due to low
income but ……………….rates of population growth.
c)The birth rate of a country is likely to be low if a ………………………
proportion of women go to university, a ……………………….. of women work
and it is …………………… to bring up children.
d)Net immigration will tend to ……………………………. the labour force of a
country and reduce the ………………………… ratio as most immigrants are of
working age.
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2. From question (a) to (d) choose the correct answer
a) What is meant by the birth rate?
i) The number of births compare to number of infants deaths
ii) The number of children each women has on average each year
iii) The number of births per 1000 population
iv) The number of children women are expected to have each year.
b) What is meant by the death rate?
i) Number of death compare to number of births
ii) Number of registered death per thousand population
iii) Number of deaths in working age group
iv) Number of death of infants compared to total number of deaths
c)In country X there are more boys born than girls. However, there are more
women than men in the population. How can this be explained?
i) A lower death rate of men
ii) More women emigrating than men
iii) Women living longer than men
iv) Infant mortality is high
d) What is meant by sex distribution of a population
i) Proportion of working age group people
ii) The proportion of females and males in the population
iii) Number of retired people
iv) Proportion of working age females and males in the population
3. Answer the following questions:
a) Define household population, population and census. Explain these terms.
b) What are the factors affecting population?
c) Define birth rate and state four factors which affect birth rate.
d) Explain four factors which affect birth rate.
e) Define death rate and state three factors which affect death rate.
f) Explain three factors which affect death rate.
g) What is migration? Discuss the effects of migration on population
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h) Explain the reasons for migration.
i) What is the natural growth rate of population?
j) Explain age distribution of population.
k) What is dependent age group and its effects on a country’s economy?
l) What is working age group and its effects on a country’s economy?
m)What is dependency ratio and explain the effects of high dependency ratio
in a country.
n) Discuss the effects of ageing population on a country’s economy.
o) Compare the population pyramids of a developing and developed country.
p) What are the main characteristics of a developing and developed country?
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