B.COM PART 1 & 2














Only such students will be eligible for admission to the B.Com. Part-1 class who have
i) Intermediate in Commerce OR
ii) Higher Secondary with Commerce OR
iii) Intermediate Arts/Higher Secondary Arts Group with Economics OR
iv) Higher Secondary or Intermediate Arts/Science/Home Economics in at least Second
Division OR
v) Diploma in Commerce, Diploma of Business Administration, Diploma of Associate
Engineer of the Technical Education Board OR
vi) Intermediate Agriculture with Economics OR
vii) Intermediate Science with Mathematics.


Saturday, October 22, 2016

Law of Equi-Marginal Utility:

(Equilibrium of the Consumer Through the Law of Equi-Marginal Utility):

Other Names of this Law:

Law of Substitution OR Law of Maximum Satisfaction OR Law of Indifference OR Proportion Rule OR Gossen's Second Law.

In the cardinal utility analysis, the principle of equal marginal utility occupies an important place.

Definition and Statement of Law of Equi-Marginal Utility:

The law of equi-marginal utility is simply an extension of law of diminishing marginal utility to two or more than two commodities. The law of equilibrium utility is known, by various names. It is named as the Law of Substitution, the Law of Maximum Satisfaction, the Law of Indifference, the Proportionate Rule and the Gossen’s Second Law.

In cardinal utility analysis, this law is stated by Lipsey in the following words:

“The household maximizing the utility will so allocate the expenditure between commodities that the utility of the last penny spent on each item is equal”.

As we know, every consumer has unlimited wants. However, the income this disposal at any time is limited. The consumer is, therefore, faced with a choice among many commodities that he can and would like to pay. He, therefore, consciously or unconsciously compress the satisfaction which he obtains from the purchase of the commodity and the price which he pays for it. If he thinks the utility of the commodity is greater or at-least equal to the loss of utility of money price, he buys that commodity.

As he buys more and more of that commodity, the utility of the successive units begins to diminish. He stops further purchase of the commodity at a point where the marginal utility of the commodity and its price are just equal. If he pushes the purchase further from his point of equilibrium, then the marginal utility of the commodity will be less than that of price and the household will be loser. A consumer will be in equilibrium with a single commodity symbolically:

MUx = Px

A prudent consumer in order to get the maximum satisfaction from his limited means compares not only the utility of a particular commodity and the price but also the utility of the other commodities which he can buy with his scarce resources. If he finds that a particular expenditure in one use is yielding less utility than that of other, he will tie to transfer a unit of expenditure from the commodity yielding less marginal utility. The consumer will reach his equilibrium position when it will not be possible for him to increase the total utility by uses. The position of equilibrium will be reached when the marginal utility of each good is in proportion to its price and the ratio of the prices of all goods is equal to the ratio of their marginal utilities.

The consumer will maximize total utility from his income when the utility from the last rupee spent on each good is the same.  Algebraically, this is:

 MUa / P= MUb / P= MUc = Pc = MUn = Pn

Here: (a), (b), (c)…. (n) are various goods consumed.

Assumptions of Law of Equi-Marginal Utility:

The main assumptions of the law of equi-marginal utility are as under.

(i) Independent utilities. The marginal utilities of different commodities are independent of each other and diminish with more and more purchases.

(ii) Constant marginal utility of money. The marginal utility of money remains constant to the consumer as he spends more and more of it on the purchase of goods.

(iii) Utility is cardinally measurable.

(iv) Every consumer is rational in the purchase of goods.


Example and Explanation of Law of Equi-Marginal Utility:

The doctrine of equi-marginal utility can be explained by taking an example. Suppose a person has $5 with him whom he wishes to spend on two commodities, tea and cigarettes. The marginal utility derived from both these commodities is as under:


Units of MoneyMU of TeaMU of Cigarettes
$5Total Utility = 30Total Utility = 30

A rational consumer would like to get maximum satisfaction from $5.00. He can spend money in three ways:

(i) $5 may be spent on tea only.

(ii) $5 may be utilized for the purchase of cigarettes only.

(iii) Some rupees may be spent on the purchase of tea and some on the purchase of cigarettes.

If the prudent consumer spends $5 on the purchase of tea, he gets 30 utility. If he spends $5 on the purchase of cigarettes, the total utility derived is 39 which are higher than tea. In order to make the best of the limited resources, he adjusts his expenditure.

(i) By spending $4 on tea and $1 on cigarettes, he gets 40 utility (10+8+6+4+12 = 40).

(ii) By spending $3 on tea and $2 on cigarettes, he derives 46 utility (10+8+6+12+10 = 46).

(iii) By spending $2 on tea and $3 on cigarettes, he gets 48 utility (10+8+12+10+8 = 48).

(iv) By spending $1 on tea and $4 on cigarettes, he gets 46 utility (10+12+10+8+6 = 46).

The sensible consumer will spend $2 on tea and $3 on cigarettes and will get maximum satisfaction. When he spends $2 on tea and $3 on cigarette, the marginal utilities derived from both these commodities is equal to 8. When the marginal utilities of the two commodities are equalizes, the total utility is then maximum, i.e., 48 as is clear from the schedule given above.

Curve/Diagram of Law of Equi-Marginal Utility:

The law of equi-marginal utility can be explained with the help of diagrams.

In the figure 2.3 MU is the marginal utility curve for tea and KL of cigarettes. When a consumer spends OP amount ($2) on tea and OC ($3) on cigarettes, the marginal utility derived from the consumption of both the items (Tea and Cigarettes) is equal to 8 units (EP = NC). The consumer gets the maximum utility when he spends $2 on tea and $3 on cigarettes and by no other alternation in the expenditure.

We now assume that the consumer spends $1 on tea (OCamount) and $4 (OQ/) on cigarettes. If CQ/more amounts are spent cigarettes, the added utility is equal to the area CQN/N. On the other hand, the expenditure on tea falls from OP amount ($2) to OC/ amount ($1). There is a toss of utility equal to the area C/PEE. The loss is utility (tea) is greater than that The loss in utility (tea) is maximum satisfaction except the combination of expenditure of $2 on tea and $3 on cigarettes.

This law is known as the Law of maximum Satisfaction because a consumer tries to get the maximum satisfaction from his limited resources by so planning his expenditure that the marginal utility of a rupee spent in one use is the same as the marginal utility of a rupee spent on another use.


It is known as the Law of Substitution because consumer continuous substituting one good for another till he gets the maximum satisfaction.


It is called the Law of Indifference because the maximum satisfaction has been achieved by equating the marginal utility in all the uses. The consumer than becomes indifferent to readjust his expenditure unless some change fakes place in his income or the prices of the commodities, etc.


Limitations/Exceptions of Law of Equi-Marginal Utility:

(i) Effect on fashions and customs: The law of equi-marginal utility may become inoperative if people forced by fashions and customs spend money on the purchase of those commodities which they clearly knows yield less utility but they cannot transfer the unit of money from the less advantageous uses to the more advantageous uses because they are forced by the customs of the country.

(ii) Ignorance or carelessness: Sometimes people due to their ignorance of price or carelessness to weigh the utility of the purchased commodity do not obtain the maximum advantage by equating the marginal utility in all the uses.

(iii) Indivisible units: If the unit of expenditure is not divisible, then again the law may become inoperative.

(iv) Freedom of choice: If there is no perfect freedom between various alternatives, the operation of law may be impeded.


Importance of Law of Equi-Marginal Utility:

The law of equi-marginal utility is of great practical importance. The application of the principle of substitution extends over almost every field of economic enquiry. Every consumer consciously trying to get the maximum satisfaction from his limited resources acts upon this principle of substitution. Same is the case with the producer. In the field of exchange and in theory of distribution too, this law plays a vital role. In short, despite its limitation, the law of maximum satisfaction is meaningful general statement of how consumers behave.

In addition to its application to consumption, it applies equally to the theory of production and theory of distribution. In the theory of production, it is applied on the substitution of various factors of production to the point where marginal return from all the factors are equal. The government can also use this analysis for evaluation of its different economic prices.

The equal marginal rule also guides an individual in the spending of his saving on different types of assets. The law of equal marginal utility also guides an individual in the allocation of his time between work and leisure. In short, despite limitations the law of substitution is applied to all problems of allocation of scarce resources.

Friday, October 21, 2016


Recording Sales of Goods on Credit

When a company sells goods on credit, it reports the transaction on both its income statement and its balance sheet. On the income statement, increases are reported in sales revenues, cost of goods sold, and (possibly) expenses. On the balance sheet, an increase is reported in accounts receivable, a decrease is reported in inventory, and a change is reported in stockholders' equity for the amount of the net income earned on the sale.
If the sale is made with the terms FOB Shipping Point, the ownership of the goods is transferred at the seller's dock. If the sale is made with the terms FOB Destination, the ownership of the goods is transferred at the buyer's dock.
In principle, the seller should record the sales transaction when the ownership of the goods is transferred to the buyer. Practically speaking, however, accountants typically record the transaction at the time the sales invoice is prepared and the goods are shipped.

FOB Shipping Point

Quality Products Co. just sold and shipped $1,000 worth of goods using the terms FOB Shipping Point. With its cost of goods at 80% of sales value, Quality makes the following entries in its general ledger:

(While there may be additional expenses with this transaction—such as commission expense—we are not considering them in our example.)
FOB Shipping Point means the ownership of the goods is transferred to the buyer at the seller's dock. This means that the buyer is responsible for transporting the goods from Quality Product's shipping dock. Therefore, all shipping costs (as well as any damage that might be incurred during transit) are the responsibility of the buyer.

FOB Destination

FOB Destination means the ownership of the goods is transferred at the buyer's dock. This means the seller is responsible for transporting the goods to the customer's dock, and will factor in the cost of shipping when it sets its price for the goods.
Let's assume that Gem Merchandise Co. makes a sale to a customer that has a sales value of $1,050 and a cost of goods sold at $800. This transaction affects the following accounts in Gem's general ledger:

Because Gem chooses to ship its goods FOB Destination, the ownership of the goods transfers at the buyer's dock. Therefore, Gem Merchandise assumes all the risks and costs associated with transporting the goods.
Now let's assume that Gem pays an independent shipping company $50 to transport the goods from its warehouse to the buyer's dock. Gem records the $50 as an operating expense orselling expense (in an account such as Delivery Expense, Freight-Out Expense, orTransportation-Out Expense). If the shipping company allows Gem to pay in 7 days, Gem will make the following entry in its general ledger:

Credit Terms with Discounts

When a seller offers credit terms of net 30 days, the net amount for the sales transaction is due 30 days after the sales invoice date.
To illustrate the meaning of net, assume that Gem Merchandise Co. sells $1,000 of goods to a customer. Upon receiving the goods the customer finds that $100 of the goods are not acceptable. The customer contacts Gem and is instructed to return the unacceptable goods. This means that Gem's net sale ends up being $900; the customer's net purchase will also be $900 ($1,000 minus the $100 returned). It also means that Gem's net receivable from this customer will be $900.
Unfortunately, companies who sell on credit often find that they don't receive payments from customers on time. In fact, one study found that if the credit term is net 30 days, the money, on average, arrived 45 days after the invoice date. In order to speed up these payments, some companies give credit terms that offer a discount to those customers who pay within a shorter period of time. The discount is referred to as a sales discountcash discount, or an early payment discount, and the shorter period of time is known as the discount period. For example, the term 2/10, net 30 allows a customer to deduct 2% of the net amount owed if the customer pays within 10 days of the invoice date. If a customer does not pay within the discount period of 10 days, the net purchase amount (without the discount) is due 30 days after the invoice date.
Using the example from above, let's illustrate how the credit term of 2/10, net 30 works. Gem Merchandise Co. ships $1,000 of goods and the customer returns $100 of unacceptable goods to Gem within a few days. At that point, the net amount owed by the customer is $900. If the customer pays Gem within 10 days of the invoice date, the customer is allowed to deduct $18 (2% of $900) from the net purchase of $900. In other words, the $900 amount can be settled for $882 if it is paid within the 10-day discount period.
Let's assume that the sale above took place on the first day that Gem was open for business, June 1. On June 6 Gem receives the returned goods and restocks them, and on June 11 it receives $882 from the buyer. Gem's cost of goods is 80% of their original selling prices (before discounts). The above transactions are reflected in Gem's general ledger as follows:

If the customer waits 30 days to pay Gem, the June 11 entry shown above will not occur. In its place will be the following entry on July 1:

Examples of Amounts Due Under Varying Credit Terms

The following chart shows the amounts a seller would receive under various credit terms for a merchandise sale of $1,000 and an authorized return of $100 of goods.
Credit TermsBrief DescriptionAmount To Be Received
Net 10 daysThe net amount is due within 10 days of the invoice date.$900
Net 30 daysThe net amount is due within 30 days of the invoice date.$900
Net 60 daysThe net amount is due within 60 days of the invoice date.$900
2/10, n/30If paid within 10 days of the invoice date, the buyer may deduct 2% from the net amount. ($900 minus $18)$882
2/10, n/30If paid in 30 days of the invoice date, the net amount is due.$900
1/10, n/60If paid within 10 days of the invoice date, the buyer may deduct 1% from the net amount. ($900 minus $9)$891
1/10, n/60If paid in 60 days of the invoice date, the net amount is due.$900
Net EOM 10The net amount is due within 10 days after the end of the month (EOM). In other words, payment for any sale made in June is due by July 10.$900

Costs of Discounts

Some people believe that the credit term of 2/10, net 30 is far too generous. They argue that when a $900 receivable is settled for $882 (simply because the customer pays 20 days early) the seller is, in effect, giving the buyer the equivalent of a 36% annual interest rate (2% for 20 days equates to 36% for 360 days). Some sellers won't offer terms such as 2/10, net 30 because of these high percentage equivalents. Other sellers are discouraged to find that some customers take the discount and ignore the obligation to pay within the stated discount period.

Thursday, October 20, 2016


Introduction to Accounts Receivable and Bad Debts Expense

If we imagine buying something, such as groceries, it's easy to picture ourselves standing at the checkout, writing out a personal check, and taking possession of the goods. It's a simple transaction—we exchange our money for the store's groceries.
In the world of business, however, many companies must be willing to sell their goods (or services) on credit. This would be equivalent to the grocer transferring ownership of the groceries to you, issuing a sales invoice, and allowing you to pay for the groceries at a later date.
Whenever a seller decides to offer its goods or services on credit, two things happen: (1) the seller boosts its potential to increase revenues since many buyers appreciate the convenience and efficiency of making purchases on credit, and (2) the seller opens itself up to potential losses if its customers do not pay the sales invoice amount when it becomes due.
Under the accrual basis of accounting (which we will be using throughout our discussion) a sale on credit will:
  1. Increase sales or sales revenues, which are reported on the income statement, and
  2. Increase the amount due from customers, which is reported as accounts receivable—an asset reported on the balance sheet.
If a buyer does not pay the amount it owes, the seller will report:
  1. A credit loss or bad debts expense on its income statement, and
  2. A reduction of accounts receivable on its balance sheet.
With respect to financial statements, the seller should report its estimated credit losses as soon as possible using the allowance method. For income tax purposes, however, losses are reported at a later date through the use of the direct write-off method.

Recording Services Provided on Credit

Assume that on June 3, KHALID Design Co. provides RS.4,000 of graphic design service to one of its clients with credit terms of net 30 days. (Providing services with credit terms is also referred to as providing services on account.)
Under the accrual basis of accounting, revenues are considered earned at the time when the services are provided. This means that on June 3 KHALID will record the revenues it earned, even though KHALID will not receive the $4,000 until July. Below are the accounts affected on June 3, the day the service transaction was completed:

In this transaction, the debit to Accounts Receivable increases KHALID's current assets, total assets, working capital, and stockholders' (or owner's) equity—all of which are reported on its balance sheet. The credit to Service Revenues will increase KHALID's revenues and net income—both of which are reported on its income statement.

Tuesday, October 18, 2016

Goods Received Note (GRN) and Goods Dispatch Note (GDN)

In order to control the activities of the business and have operations running effectively management is responsible to have controls in place. Without controls accountability will not be possible. One of the ways by which controls can be implemented is by using control documents (sometimes known as source documents as some are used to initiate accounting process so act as a “source”). For examples purchase orders, invoices, cash receipts, goods received note, goods dispatch note etc.
Goods Dispatch Note (GDN) or Goods Dispatch Note is a document that is raised by the supplier’s dispatch department responsible of sending goods out to customers. A copy of the GDN is retained by the dispatch department and one copy is sent to accounts department to process invoice to the customer. Without GDN sent to accounts department no invoice can be raised. In other words goods dispatch note acts as a source to generate invoice. These notes are usually sequentially numbered that helps identify any missing notes from the record.
Goods Delivery Note: If the same note i.e. goods dispatch note is sent with the goods to the customers and customer sign the documents as an evidence of the receipt by the customer then the same note will be named as Goods Delivery Note. So if we are really intended to differentiate between two types of documents then dispatch note only authorizes the dispatch whereas delivery note serves an additional purpose and acts as an evidence that goods have been delivered to the customer and customer acknowledges the receipt. Business, however, might raise goods delivery note and goods dispatch note separately to keep the documents meant for internal and external purposes remain distinct.
Goods Received Note (GRN) is raised by a store manager of the customer (buyer) on receiving goods from supplier. This document is for internal usage. Just like goods delivery/dispatch note that are in triplicates, goods received note are also prepared in three or more copies where one is retained by the store department and another is sent to accounts department. Accounts department uses GRN to verify the invoice sent by the supplier. No invoice will be processed by the accounts department for payment purposes unless a GRN is sent by stores manager as GRN evidences the receipt of goods.

Difference Between Debit Note and Credit Note

Purchasing and Selling of goods are very common in day to day life, and in the same way, returns of goods are also a very usual thing nowadays. Debit Note and Credit Note are used while the return of goods is made between two businesses. Debit Note is issued by the purchaser, at the time of returning the goods to the vendor, and the vendor issues a Credit Note to inform that he has received the returned goods. People are quite puzzled when they are asked to distinguish the two terms. So, here in this article, we are going to explain you the differences between a Debit Note and Credit Note.

Comparison Chart

MeaningDebit Note is a document which reflects that a debit is made to the other party's account.Credit Note is an instrument used to inform that the other party's account is credited in his books.
Use ofBlue InkRed Ink
RepresentsPositive AmountNegative Amount
Which book is updated on the basis of note?Purchase Return BookSales Return Book
EffectMinimization in account receivables.Minimization in account payables.
Exchanged forCredit NoteDebit Note

Definition of Debit Note

A commercial instrument made and issued by the purchaser and delivered to seller giving details regarding the amount debited from the seller’s account and the reasons for the same is known as Debit Note. The document provides information to the vendor that a debit has been made to his account in the buyer’s book. The reasons for debiting the account are given as under:
  • When the buyer’s account is overcharged, he sends a debit note to seller.
  • When the buyer returns the goods purchased by him, then also he delivers the debit note.
  • When the buyer undercharges the seller’s account, then he issues debit note.
The seller issues a credit note to the buyer as an acknowledgment of the Debit Note. It is written in blue ink. In general, Debit note reduces the receivables.

Definition of Credit Note

A memo prepared and issued by one party to the other party, containing the details of the amount credited to the buyer’s account and the reasons for so, is known as Credit Note. It is issued in exchange for the Debit Note. It gives the information to the buyer; that is account is credited in the vendor’s book. The note is prepared with red ink. The reasons for issuing a credit note is as under:
  • When the buyer overcharges the seller’s account, he issues the credit note.
  • When the supplier gets back the goods sold by him to the buyer, then also credit note is issued.
  • A buyer can also send credit note, in case the seller undercharges him.
The issue of credit note shows that the account payables are reduced. In general, it shows the negative amount.

Key Differences Between Debit Note and Credit Note

The following are the differences between debit note and credit note:
  1. A memo sent by one party to inform the other party that a debit has been made to the seller’s account, in buyer’s books, is known as Debit Note. A commercial document which is sent by one party to inform the other party that a credit has been made to buyer’s account, in seller’s books is known as Credit Note.
  2. Debit Note is written in blue ink while Credit Note is prepared in red ink.
  3. Debit Note is issued in exchange for Credit Note.
  4. Debit Note represents a positive amount whereas Credit Note prepares negative amount.
  5. Debit Note reduces receivables. On the other hand, Credit Note reduces payables.
  6. On the basis of the Debit Note, purchase return book is updated. Conversely, sales return book is updated with the help of a Credit Note.


Normally, a debit note is issued when there is a return outward (purchase return) while in the case of return inward (sales return) credit note is issued. In a transaction, when the buyer returns the goods to the seller, the buyer will issue a debit note and the opposite party will issue a credit note in exchange for the debit note. Hence, they are the two aspects of the same transaction.


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