Thursday, 24 November 2011

What is foreign exchange Discuss the different methods of international payment

N.E. Evitt Says, " The means and methods by which rights to wealth expressed in terms of the currency of one country are converted into rights to wealth in terms of the other country's currency is known as foreign exchange" So the term foreign exchange rates to the principles that determine the rate of exchange. We know that money of one country for making payments. So there are different methods which are adopted to make international payment, through the banking system.

Following are the main methods :
1. Letter Of Credit :-
A letter of credit is a document issued by the importers bank to exporter authorizing him to draw drafts on the bank payable on demand on the specified terms and conditions. It is very useful instrument the international trade.

2. Mail Transfer (M.T) :-
The payment can be also made in other country by mail transfer. Here the selling office of the bank sends instructions in writing by mail to the paying bank for the payment of a specified amount of money. The payment is made of money. The payment is made by debiting to the buyers account.

3. Telegraphic Transfer (T.T) :-
It is quickest method of making inter national payments. Telegraphic transfer is an order by telegram to a bank to pay a specified sum of money to the specified person. But this type of transfer is more costly as compared to other mean.

4. Foreign Bank Draft :-
It is the simple method of international cash payment. The foreign bank draft is an order drawn by a bank on its foreign branch or correspondent to pay specific sum of money on demand to bearer or to the person designated by the purchaser the draft.

5. Personal Cheques :-
This method is not used commonly for making the international payments. A debtor with the approval of a foreign creditor may send him the cheque drawn on his own bank and also payable in the currency of his own country.

6. Money Order :-
The payment can be made to a person who is living in other country through money order. The payee receives a specific amount sent by the payer in the currency of his own country.

7. Travellers Cheque :-
Travellers cheque is an order drawn by a bank upon itself to pay a specified sum of money on demand the purchaser of the cheques. The paying bank after comparing the signatures of purchase, which he has signed at the time of the purchasing of cheques and makes the payment.

8. Travellers Letter Of Credit :-
These are used to finance foreign travel. These are addressed to a banks in foreign countries authorizing the person to whom it is issued to draw drafts on the issuer. The total amount and time limit is written on the each letter.

9. Open Account :-
According to this method, goods are sold on our open account. If an exporter has full confidence on the importer he can sell the goods in another country on our open account without getting any surety for the third party. In this case there is a risk of repayment.

10. Dealers Of Foreign Exchange :-
In every country foreign exchange dealers purchase and sell the foreign currency from the visitors of the other countries and pay them in the home currency for meeting their local money demands and sell the foreign notes and coins to the persons visiting foreign countries at the official rate.

11. A Bill Of Exchange :-
The bill of exchange is the main and most effective method of transferring payments between the two parties located in different countries. It is a written order addressed by one person to an other. The creditor orders to the debtor to pay a particular amount to the payee.


Wednesday, 23 November 2011

Various exchange rate systems or Distinguish between fixed and flexible and managed exchange rates systems and discuss their merits and demerits

It has greater importance in foreign trade. When any country imports the commodity from any other country, it has to make the payment, in terms of foreign currency. The foreign exchange rate determines the prices of foreign country's currency in terms of our currency.
Now question arises that how this rate is determined? Following are the three international monetary systems which prevail in the world.

In this system countries defined their currencies in terms of a fixed amount of gold. All the countries which are on gold standard they fix the rate among themselves on gold standard. Any how in this system exchange rates between the two or more than two countries are determined by the Government of the countries.

For Example : India and Pakistan are on gold standard. The price of gold is fixed Rs. 10,000 for one gram in India and in Pakistan price is 5,000 for one gram the rate of exchange between the two countries will be fifty paisa of Pakistan equal to one rupee of India.
Such type of gold standard system was finished before the second world war. Under the new system the value of the currency is fixed by the central bank of the country.

Merits :-
1. It helps to promote the international trade.

2. It ensures the certainty.

3. It inspires confidence among the traders.

Demerits :-
1. It may create disequilibrium in a country's balance of payment.

2. Under this system currency of the country may be over valued or under valued.

The rate at which national currency freely exchanges in relation to foreign currency is called floating exchange rate.
Under this system foreign exchange rate is determined by the market force of demand and supply for foreign exchange. In this system there is no intervention of the government. Exchange rate fluctuates according the market forces. The disequilibrium in the balance of payment is automatically removed.

Example : Suppose India has an excess of imports from America. India importer will purchase the dollar to make the payment, the value of dollar will increase in terms of Indian rupee. Now the American goods will become more expensive for Indian. Bur Indian product will become cheaper for Americans. Now the exports from India to American will increase. Again the equilibrium between imports and exports will take place.

Merits :-
1. It is a self regulatory system.

2. It removes the problem of disequilibrium in the balance of payment.

Demerits :-
1. It is unpredictable.

2. It increases the cost of business.

3. Fluctuation in exchange rates makes the business risky.

Under this system currency is allowed to float on foreign exchange market but govt. may intervene from time to time in the market to keep the value of the currency at the proper level.

Merits :-
1. It is flexible rate.

2. It adjusts the balance of payment automatically.

3. It provides stable terms of trade.

4. It reduces speculation and uncertainty in exchange rates.


Write a note on mechanism free gold standard and special drawing rights

When gold is allowed to move freely from one country to another country, it is called free gold standard. There is no room for Govt. or private authority over the media of exchange. The exchange rates are determined among the gold standard countries close to the gold parties. The gold moves inside the country according to its import and export condition. As the imports one country increases, its out flow of gold will also increase on other side if exports exceeds then the imports the inflow of gold will increases. When two gold standard countries are on full gold standard and their merchants are doing a free trade then mechanism takes place which restores the equilibrium in their balance of payment.
As the exports of one country will exceed than imports, we will say that its balance of payment is favorable. Due to this there will be inflow of gold. So total quantity of money in circulation will expand. Incomes and prices will rise. When prices of goods will increase, the demand for goods from other country will fall. So exports will be reduced. On other side imports will increase and there will be rise in the out flow of gold. The balance of payment will be in equilibrium position.
There is an opposite effect on the other country. As one country balance of payment is favorable it has a negative effect on the balance of payment of other country. There will be an outflow of gold. Supply of money, prices, incomes will fall. Again exports will increase, imports will fall and balance of payment will become favorable. So there is an automatic system which brings an equilibrium in the balance of payment of both the countries.
Following conditions are necessary for the success of this system.

1. Free trade between the two countries.

2. Economic structure of both the countries should be very elastic.

3. There should be contraction of credit when there is out flow of gold.

4. There should be expansion when there is inflow of gold.

It is a new type of international money. In 1967 International Monetary Fund (IMF) created this scheme. It was introduced to solve the problem of international liquidity. Anew reserve asset of gold was established by the IMF in addition to the traditional asset. This money is allocated to the member countries according to their quotas.

1. These are issued by IMF.

2. IMF creates the SDR's as the central bank issues its currency.

3. These are paper substitute for gold.

4. These are used only to settle the international payments.

5. These are allocated to the member countries according to their quotas.

6. Every member can use 70% of its quota during the five years. While 30% is a reserve quota which can be used in case of emergency.

7. IMF pays interest if any country holds excess than its quota.

8. IMF charges interest if any country holds less than its quota.

9. IMF can create new SDR's according the requirements.

10. The SDR's are transferable assets.

11. A country can use it to meet the deficit in the balance of payment.


What are the advantages and disadvantages or merits and demerits of gold standard

Gold standard had worked successfully in different parts of the world between 1816 to 1914. Following are the main advantages of gold standard.

1. Inspires Confidence :-
Gold standard receives the confidence of the public much more easily and quickly than any other standard.

2. Price Stability :-
Gold standard provides stable price level in the country. When the country is on gold standard, currency can not be over issued. So prices remain stable and there is no danger of hyper inflation.

3.Universally Acceptable :-
Gold standard provides currency which is universally acceptable. Because gold possesses all the qualities of good money material and it is also accepted as a value measure in all the world.

4. Importance For International Trade :-
Gold standard is very useful for the settlement of international transactions. In international dealings gold standard provides stability of exchange rates.

5. Objective Standard :-
Gold standard is an objective standard. It can not be secretly tempered with by the independent will of the government.

6. Automatic Standard :-
Gold standard is an automatic standard. The deficit or surplus in the balance of payment is automatically brought into balance by import or export of gold.

7. Simple Working :-
There is no complication in this system. It is so simple that a common man can easily understand its working.

8. Stability In Exchange Rate :-
It ensures stable exchange rate for all the countries which are on gold standard. If some time there is difference in the mint par and market rate of exchange it is automatically corrected by the import and export of gold.

After the world war most of the countries on on gold standard did not obey the rules of gold standard and even all the new forms of gold standard failed to function smoothly. Following are the main defects of this system.

1. A Fair Weather Standard :-
One serious defect in this system is that it a "Fair weather Friend. It works smoothly in the period of peace, and prosperity while in the period of war and economic crises it has always failed.

2. Expensive Standard :-
Gold standard is an expensive standard because a lot of precious metal is wasted. It is a luxury which all the countries can not afford.

3. Sacrifice Of Internal Stability :-
Gold standard sacrifices the internal stability to external stability. In order to stabilize the external value of the currency, one country has to adjust its internal prices according the prices prevailing in other countries.

4. State Anarchy :-
Hawtery calls the gold standard the state anarchy in world credit control. He says that if some gold using countries are in the grip of inflation the germs of inflation may spread to other countries. Similarly definition can also take place.

5. Change In Gold Out Put :-
The changes in out put of gold can bring changes in the prices level. With the discovery of gold prices will rise and due to the fall in out put prices will fall according the quantity theory of money.

6. Automatic Operation Is A Demerit :-
The automatic working of the economic system under gold standard is not considered merit but as a demerit.

Example : Let us suppose that due to any reason the demand of Indian goods increases, it would enable India the import of gold as a result of favorable balance of payment. Now this import of gold will increase the total supply of money in the country. Prices and income level will rise and if this process remains continue for long period it will become the cause of hyper inflation.

7. Adoption Of An Independent Monetary Policy :-
In the gold standard it is not possible for one country to adopt an independent monetary policy. If a country wishes to remain on gold standard and it must adopt a policy of deflation when gold flows out and policy of inflation when gold flows into the country ignoring its internal economics situation.


Define gold standard or Distinguish between the various forms of the gold standard also discuss their merits and demerits

When the unit of money is exclusively defined by law as a certain amount of gold, of specified weight and fineness and when all forms of money with in a monetary system are kept at markets is called gold standard.

1. Full Gold or Gold Currency Standard :-
In this currency standard the units of currency are full bodied gold coins. A certain amount of gold of specified weight and fineness is declared by law.

2. Free Coinage :-
People are allowed to get the bullion converted in unlimited quantity into standard gold coins with or without charge. Gold can be melted by the people, there is no restriction.

3. Freedom Of Purchase And Sales :-
People are at liberty to purchase, sale, import or export the gold. There is no limitation.

4. Legal Tender :-
Gold is declared a legal tender money. People accept it on the basis of the metals utility.

5. Convertibility :-
Other forms of money can be converted at par in gold coins. So it provides security to other forms of money. People accept the other forms of money because its purchasing power is equal to the gold coins. Due to shortage of gold this system could not be maintained in first world war.

Gold bullion standard was introduced in 1925 in England. But structure of gold standard is now different than 1914. Its main characteristics are following :

1. Gold Coins Do Not Circulate :-
The actual currency consists of paper currency notes and other token coins, while gold coins do not circulate. But central bank is under obligation to convert them in to gold bullion.

2. Coinage Of Gold Is Not Free :-
The holder of gold is not entitled to get it converted in to gold coins.

3. Purchase/Sale Of Gold :-
Govt. purchases and sells the gold at a fixed price. The seller of gold is paid in other forms of money, which may be paper or bank money.

4. Gold Reserves :-
Gold reserves are held in the form of bullion bars by the central bank.

5. No Restriction On Use :-
There is no restriction on the use of gold bullion on the individuals. The people can even export the gold.
Govt. purchases and sells the gold at a fixed price. The seller of gold is paid in other forms of money, which may be paper or bank money.

4. Gold Reserves :-
Gold reserves are held in the form of bullion bars by the central bank.

5. No Restriction On Use :-
There is no restriction on the use of gold bullion on the individuals. The people can even export the gold.

This standard was adopted due to the following reasons, in Britain, France, U.S.A and India.

1. Economy In The Use Of Gold :-
It economizes the use of gold, because gold coins are not circulated in the country.

2. No Wear And Tear :-
When gold coins circulate then a lot of gold is wasted in wear and tear.

3. No Demand Of Gold :-
A gold is not demanded in exchange for notes. Gold can be held by central bank of the country.

4. Prestige Restored :-
When gold is kept in the hands of the Govt. it gives full support in the effective monetary management of the economy.

5. Automatic System :-
The expansion and contraction of currency is automatically maintained by the sale and purchase of gold. When Govt. purchases the gold, the currency in circulation contracts.

Definition : The arrangement of purchase gold drafts which are convertible into gold abroad from the central bank is known as gold exchange standard. It is an advanced form of gold standard and its main requisites are following.

1. Gold Coins Do Not Circulate :-
In this standard gold coins do not circulate in the country.

2. Internal Currency Is Not Convertible :-
The internal currency may be paper notes but these are not convertible in to gold.

3. Case Of Gold Exchange Country :-
The currency of the gold exchange country is however freely convertible into the currency of gold standard country.

4. Reserves Are Kept In Other Forms Of Money :-
The reserves of gold exchange country are kept in the form of bank deposits, treasury bills and other liquid assets in those countries which are on gold.

5. Stable Exchange Rates :-
In this standard, exchange rate stability is secured and international payments are facilitated.

6. Economical :-
This system is very economical and lot of precious gold is saved.

1. Complicated System :-
It is very difficult and complicated system and common man can not understand it.

2. Not Elastic :-
It is not an elastic system, specially the contraction of currency is very difficult affair.

3. Reserve Duplication :-
It creates unnecessary duplication of reserves sometimes the balances were kept in gold standard reserves, paper currency reserves, and Govt. balances.

4. Conversion Problem :-
There is also a danger of depository country to default on its promise to convert the currency into gold at a predetermined rate.

5. Deficit or Surplus Problem :-
If a country on gold exchange standard develops a cronic deficit or surplus it leads to speculative activities which are harmful for the economy in long run.


Tuesday, 22 November 2011

Define bi-metallism what are the advantages and disadvantages or merits and demerits of bimetallism

The monetary system where both gold and silver are standard metals and their ratio of exchange is fixed and maintained by law and they are also unlimited legal tender is called Bimetallism.

Following are the important advantages of this system.

1. Price Stability :-
In case of adoption of dual system stability in the price level can be achieved easily if at one time the total out put of gold falls, the supply of silver can be increased. If the supply of gold increases then the supply of silver can be decreased. Thus we find that this system can ensure the price stability.

2. Shortage Of Metal :-
If one metal like gold is used as currency by all the world, then the supply would fall short of the currency requirement of the whole world. So this system is the most suitable.

3. Facility For International Trade :-
Bi-metallism facilities international trade because ratio of exchange between gold and silver can be established easily, with all the countries which are on gold or silver standard.

4. Facility For Govt. :-
When there are two metals used as joint standard, the Govt. can easily meet its requirement.

5. Easy For Bank :-
The bi-metallism makes it easy for the banks to keep the necessary cash reserves against liabilities.

6. Depreciated Metal Value Does Not Fall :-
Bimetallism is very helpful in arresting the price of the value of the depreciated metal.

Following are the main defects of this system :

1. Difficulty In Maintaining The Mint Ratio :-
It is very difficult to maintain the mint ratio between gold and silver in the face of over fluctuating market ratio of exchange.

2. Single Country Can Not Adopt It :-
Normally it is not possible to adopt bi-metallism in a single country because the mint ratio and market ratio of exchange can create confusion in the gold bullion market. Sometimes gold currency can be overvalued and some times silver can be over valued. However if the whole world adopts bimetallism and fixes the same ratio of exchange between gold and silver then there are chances of maintaining bimetallic standard.

3. Create Confusion And Uncertainly :-
When there will be instability in the ratio of monetary standard it creates confusion and uncertainty in business transaction. The debtor would like to pay in that standard metal which is under valued, while the creditor will demand in the over valued metal.


Define monetary standard and monetary system

Monetary standard is the unit of account by which we measure the value of all kinds goods and services. The monetary standard or standard money can be gold, silver or paper. If the unit of account is gold we will say that it is a gold standard.

Monetary system includes in its scope the designation of the unit of account plus the whole Govt. Mechanism established to regulate the creation of money and to control its quality in circulation. The monetary system is designed in every country according the domestic and international requirements.

A commodity standard is that monetary unit which has its standard value equal to the value of a designated quantity of a particular commodity or of a group of commodities. The commodity standard can be established in gold or silver or in both.

According to Kent, "A monetary system in which the value or purchasing power of the monetary unit is not kept equal to the value of a specified quantity particular commodity or of a group of a commodities".
It has three distinguished features.
i. It has little or no value within itself as a commodity.

ii. It is not redeemable in any commodity in quantity substantially equal value to its own stated value.

iii. Its purchasing power per unit is not maintained at par with that of any other commodity unit. Fiat money is usually a paper money or credit money.

When the value of monetary unit is fixed and maintained in terms of one standard metal only, it is called monometallism. If the standard of money unit is gold the country is said to have a gold standard. If the unit of money is silver then it will be called silver standard.

Under silver standard the monetary unit is given fixed quantity of silver and all other forms of money are maintained at par by making it convertible into silver at the fixed rate. Silver is allowed to move freely inside and outside the country.


What are the different principles and methods of note issue Discuss their advantages and disadvantages

There are two principles of note issue. First is the currency principle and the second is banking principle. There are different views about these principles. One school of thought says that there should be full convertibility of notes into gold bullion. The second gives importance to the elasticity of supply. Now we discuss these two principle.

The lover of this principle say that paper money is better than the metallic money but there should be 100% backing of gold reserves. They say that in order to maintain the prestige of paper money gold should be available for the conversion of notes when presented.

i. Safety And Security :-
The advantage of this system is that it gives full safety and security to the paper currency.

ii. No Danger Of Over Issue :-
There is no danger of over issue of the currency. So it is an effective check on inflation.

i. Inelastic :-
The disadvantage of this principle is that it makes the supply of money inelastic. According to this principle paper currency can only be printed and issued if there is a 100% gold cover available against it. So this system can not meet the requirement of trade and industry.

ii. Lock Up Of Gold :-
A huge amount of gold is unnecessarily locked up which can be used in other productive projects.

According to this principle there is no need of reserve requirements of gold and silver for the notes issued. The banks are authorized to regulate the note issue keeping in view the need of the business in the country. The banks themselves will maintain adequate reserves of gold for meeting their obligations of note. If there is an over issue of notes, the excess money will be automatically presented for cash payment and proper ratio will be maintained between the supply of money and the gold reserves.

The merit of this principle is that it secures elasticity in the issue of currency.

Not Safe :-
The demerits of this principle is that it is not a safe. In the history of England banking, many times over issuance of money created problems for the economy.

Conclusion :-
After discussing both the principles we can say that both are defective. For a sound system of not issue security and elasticity must go side by side. Keeping in view the above defects modern world have devised new methods of regulating note issue.

Fixed Fiduciary System :-
Under this system the central bank of the country is permitted to issue bank notes of a given amount without giving gold and silver cover. The fixed quantity of notes allowed by law to be issued is to be backed by Govt. securities only. This is named the fiduciary limit. The amounts of notes circulated in excess of the fiduciary limit must be 100% backed by gold.

1. Elastic System :-
The first advantage of this system is that it makes the supply of money elastic.

2. Safety :-
It also gives maximum safety because notes can not be issued in excess of the fiduciary limit unless they are 100% covered by gold.

3. Check On Inflation :-
The inflation can be effectively checked.

1. High Fiduciary Limit :-
If fiduciary limit is high or it has been increased with the passage of time then people will loose confidence in the currency.

1. Great Britain is considered the home of this system of note issue and it has successfully survived since 1844.

2. Japan and Norway are also practicing this system of note issue even today.

According to this system the central bank is required by law to keep a fixed percentage varying from 25 to 40 percent against the note issue. The essential feature of this system is the provision of proportional metallic reserves against the notes in circulation. The reserve ratio may be allowed to drop below the legal minimum.

1. It was adopted by France and reserve ratio was 30%.

2. Germany adopted it keeping 40% of gold against the note issue.

3. The federal reserve Bank of U.S.A has also adopted it with slight modification.

1. Elastic System :-
The main advantage of this system is that it makes the supply of money elastic.

2. Lock Up Of Gold :-
The defect with this system is that it locks up the gold reserves unnecessarily. So we cannot use it for other purpose.

3. Exchange Management or Modified Proportional Reserve System :-
J.M. Keynes has suggested modified form of proportional reserve system and calls it exchange management. According to this system the central bank is required by law to keep the percentage required against the note issue in the form of gold, foreign bills or cash at some foreign banks where gold standard prevails.

This method is followed in India, Pakistan and in many European Countries. The state bank of Pakistan has to keep 30% of gold silver or approved foreign exchange against the note issue. This method of note issue economies the use of gold and also makes the currency system elastic.


History of coinage in Pakistan

In the ancient times metals like gold, silver, iron, pots and axes were used as a medium of exchange in the old India. We find in the history that gupats, King Altamash and Mohammad Bin Tughlaq tried their best to introduce coins in the country. Sher Shah Suri introduced the silver rupee and copper coin. Akbar and Aurangzeb also contributed in this process.
After the fall of Mughal Empire the state was divided in to small states. Every state has its own coins. There were more than 1000 different coins of various types in the subcontinent when English came in the India, they introduced the standard coins in 1818. The coinage of gold standard remained continued. The ratio of exchange one gold coin was equal to 15 silver rupees. People started hoarding and melting the silver coins during the world war second because its face value was equal to the original value of metal. The British Government demonetized silver rupee in 1941 and 1943. A pure nickle rupee was introduced in 1946. Later on the independence reserve bank of India issued the coins till June 30, 1948. Which were used as a legal tender money upto one year. Now a days two rupee, one rupee, two rupee and five rupee coins are circulating in the country. Govt of Pakistan had finished the two rupee and one rupee note in circulation from 1st January 2002.


What is coinage? discuss the various kinds of coinage

It means the process of manufacturing metals in to certain shapes to maintain the uniformity in all the coins of same kind. In the old ages gold and silver metals were commonly used as a media of exchange. There were many problems in the transactions of metals. So to remove these problems the government has taken over the sole power of coinage money. Now government converts the metal into standard coins. Now a days it is very easy medium of exchange and tempering with the metallic currency is very difficult.

Following are the important types of coinage :

1. Free Coinage System :-
If the people are allowed to take metals to the mint for the conversion in to standard coins without limit it is called free coinage system. Before 1933 this system was prevailing in U.K and U.S.A.

2. Limited Coinage System :-
When Govt. imposes limits on the conversion of metal in to standard coins, it is called limited coinage system. Government keeps in view the currency requirement of the country. Government imposes limits on the free coinage of other metals. Sometimes fee is also charged. The face value is greater than its original value.

3. Gratuitous Coinage System :-
When Govt. does not charge any fee for minting coins it is called gratuitous coinage. This system is adopted at that time when the intrinsic value of bullion is to be brought at par with its face value.

4. Non Gratuitous Coinage System :-
In this system Government charges fee for converting metal in to coins. Sometimes, it charges only minting cost (brassage) and sometimes more than the cost seignior-age.

5. Debasement Of Coinage System :-
When there is a difference in the face value of coin fixed by law and the original value of metallic it is called debasement.


Describe the various forms of money

The money is generally classified under three main heads :

Now we discuss these in details :

It consists of coins made of gold. Silver, copper or nickel. It varies in weight fineness and value. All coins are stamped with dye. It has two kinds :

i. Full Bodied Money :-
The full bodied money is that whose face value is equal to the value of metal contained in it.

ii. Token Money :-
Its face value or printed value is higher than value of the metal contained in it.

Any means of payment which has state sanctioned behind it and a debtor can legally compel his creditors to accept. It is called legal tender money.

i. Limited Legal Tender :-
Legal tender money is that which a creditor can accept in settlement of claims upto certain limit only. So legal tender money can be forced upon others in payments up to certain extent.

ii. Unlimited Legal Tender :-
Unlimited legal tender money is that which can be forced upon others in payment upto unlimited extent.

Paper money consists of notes issued by the Central Bank and by the Govt. For example one Rupee note is issued by Govt. and other notes are issued by the state bank. It has three kinds :

i. Convertable Paper Money :-
Convertable paper money is that money which is fully backed by the equivalent metallic reserves. The holder bank note can easily get it converted into metallic money on demand.

ii. Inconvertible Paper Money :-
It is that paper money which can not be converted in to full bodied coins, gold, silver or any other form of money.

iii. Fiat Paper Money :-
Fiat money is composed of token coins and convertible paper money. It circulates because Govt. has declared it legal tender money. So in this way it becomes fiat money.
At present age all types of money excluding bank deposits are termed as fiat money.

iv. Standard Money :-
It presents the money of account. By money of account is meant the monetary unit in which the prices, denotes and other transactions are expressed.

The term bank money applies to that near money which is not legal tender currency but is accepted as a medium of exchange on account of confidence in the issuing authority. Bank money chiefly consists of cheques, bill of exchange and drafts.

i. Cheque :-
A cheque is an order on a bank by its client to pay a sum of money to himself or to a third party on demand. There are three kinds of it.
1. Bearer Cheque
2. Order Cheque
3. Crossed Cheque

ii. Bill Of Exchange :-
A bill of exchange is an order from a drawer to a drawee to pay a certain sum of money mentioned on the bill to the former or to the bearer at a fixed future date.

iii. Draft :-
A draft is a cheque drawn by a bank on its own branch or on the branch of another bank at a different place requesting it to pay on demand a specified amount to the persons named in it.


Advantages and disadvantages of paper money

Mr. Hanson has defined the paper money in the following words, " Paper money means the paper instruments such as bank notes, cheques, bill and other forms which take the place of money and circulate as a medium of exchange.

On the following grounds paper money is preferred on metallic money.

Following are the main advantages of paper money :

1. Portability :-
Notes are easily portable. It is very easy for making the payments in different placers and it is preferred than the metallic money.

2. High Value In Small Bulk :-
No any sort of money can be compared with our modern notes because its weight is minimum and value is high.

3. Economical In Cost :-
The printing of paper money is very quick, cheap, and economical as compared the metallic money.

4. Saving Of Precious Metals :-
The use of paper money has saved a lot of precious metals like gold and silver. The wear and tear of these metals also saved. The precious metals can be used for the productive purposes.

5. Easy In Counting :-
Paper currency can be counted more easily than coins. The counting of metallic money is a very difficult job.

6. Easily Recognizable :-
The paper money is easily recognizable. There is no botheration of testing the genuineness of the money material.

7. Uniform Quality :-
The paper money has another advantage that has a uniform quality and the holder least bothers for possession of new or old money.

8. Useful In Emergency :-
The government can increase its resources by printing of more notes and can meet its requirements.

9. Elastic Supply :-
The volume of paper money can be very easily expanded in accordance with the needs of the country. While the metallic money supply is in elastic.

10. Useful For Development :-
Paper or credit money is very useful for trade and industrial sector. If any person wants to establish factory or wants to import any commodity it facilities him.

11. Stability :-
The value of metalic money changes with the passage of time. But the paper money value remains stable because its weight can not reduce by using it.

12. Easy Payment :-
Through paper money you can make the payments in million rupees, easity. While it is very difficult to make such payments in metalic money.


1. Restricted Acceptability :-
The acceptance of paper money is limited upto the domestic country while other countries of the world are not ready to accept in case of payments.

2. Fluctuations In The Rate Of Exchange :-
In case of metallic money the value of domestic currency in terms of foreign currencies, rate of exchange remains stable while in case of paper money it remains fluctuating. The devaluation of one country also brings changes in the rate of exchange.

3. Demonetization Of Paper Money :-
If the Govt. demonetizes the paper money the paper holder will have a worthless pieces of paper in his hand.

4. Lack Of Durability :-
The paper money lacks the essential quality of durability of money. It can be easily destroyed, and then it will have no value.

5. Danger Of Inflation :-
The serious defect in paper money is that there is always danger of its over issue. Generally the less developing countries make the difficult budget and this deficit is met by the issuance of paper money. The price level rises and country faces the inflation.

6. Less Stability :-
There is less stability of value in paper money as compared to metallic money. Some times it is over issued and people loose confidence in the value of money and they keep their savings in terms of gold and silver.

No doubt paper currency has also some disadvantages but it is a fact that its advantages are more weighty.


Monday, 21 November 2011

What are the qualities of good money material

Following are the main qualities of good money material. Any thing which is generally accepted as a medium of exchange it may be coin o paper is money.

1. General Acceptability :-
The essential quality of good money material is that it should be acceptable without any hesitation in exchange for goods and services.

2. Stability Of Value :-
Money should be stable in value. If the value of money fluctuates swiftly then it is unless money. Because money is the standard by which we measures the value of all other commodities.

3. Transportability :-
The commodity chosen as money should be easily transportable without any depreciation.

4. High Value Small Weight :-
A good money value should be high but weight should be small. So it will be easy in sending from one place to another.

5. Store ability :-
A good money material is that which can be store able without any depreciation. If money material is perishable then it can not serve as a good money material.

6. Divisibility :-
The commodity chosen as a money should be capable of being re-united without loosing its value.

7. Homoginity :-
The commodity selected as money should be of a uniform quality and capable of standardization.

8. Cognizability :-
It is the basic condition of perfect money that it should be easily recognizable by the eye, ear or the touch.

9. Malleability :-
A commodity selected to serve as a money should be capable of being moulded and stamped.

10. Economical :-
The money material should be such that unnecessary expenditure may not be wasted on its preparation.

11. Elastic Supply :-
The supply money should be elastic. If demand of money increases its supply may be increased easily.

After discussing the qualities of good money material, we can say that gold and silver are the only metals which satisfy some condition of standard coinage.

Any how we can say that any thing which command confidence of the people and is accepted as a medium of exchange is called money.
In the words of Samuelson "Money is a medium of exchange enabling us to transact our national income and product without resource to hopelessly inefficient barter".


What is the role of money in a capitalistic economy and socialistic economy

Today money is considered one of the out standing inventions of the entire history of mankind. The introduction of money has eliminated all the difficulties of barter system in which goods have to be exchanged for goods. Money facilities trade by acting as a medium of exchange and standard of value. It has made easy to save wealth for future. It has played a significant role for the specialization in business through division of labour. Although money itself creates nothing but it is very helpful in the process of production, consumption and exchange.

1. Importance For Producer :-
The use of money enables entrepreneur to concentrate attention upon the technical problems of his business. Without money it is not easy for the producer to distribute product which is not divisible like "Bus" or motor car among the four factors of production.
The price mechanism controls the capitalistic economy. In a free enterprise economy many decisions like " What to produce , how to produce, where to produce and for whom to produce are guided by the profit motives. Money prices reflect the aggregates of individual demands and supplies."

2. Importance For Consumer :-
People can sell and buy the goods and services which they need by parting with money. In the absence of money a great variety of things would never have entered in our consumption list and our satisfaction would have been at the lowest level.

3. Exchange Transaction :-
The use of money has successfully removed the disadvantage of barter. Money has greatly stimulated the exchange of goods.

4. Distribution Of National Income :-
Every year we produce the certain amount of goods and services by combining the four factors of production. The reward of each factor like rent, wages, profit and interest is paid in terms of money.

5. Importance In The Field Of Public Finance :-
Money performs a valuable services in the field of public finance. The government can easily increase the revenue through the medium of money and can spend it for the betterment of the society.

6. Attainment Of High Level Of Production And Employment :-
If the money is properly managed, it ensures rising level of production, income and employment in the country.

A socialistic economy also can not operate smoothly and with maximum efficiency without money. After the revolution of 1917 in Russia, Govt. experimented for a short period with a moneyless system but it was found that the system could not work at all and it was given up soon after.

The basic feature of socialistic economy is that all means of production are owned and managed by state. The individuals can not possess profit earning properties. The operation of the economy is controlled by the state and not by the price mechanism. As a matter of fact-socialistic economy will remain a monetary economy. In a socialistic society persons would be paid money wages for their services. These wages would be used for the purchase of Govt. produced goods. Prices would be fixed by the Govt. which would ensure that total demand would be equal to the total supply. In order to determine the order of priority and for the selection of the most efficient and economical method for the production, the importance of various projects and costs of various methods of production must be determined. The calculations of such costs can only be made in monetary terms.

"The entire structure of capitalistic economy would collapse if you withdraw money. If all the money suddenly disappear from the economy the wheels of economy would halt."

"That money is pivot around which economic science clusters."

In the short not only is the use of money necessary for a capitalistic economy but even for a socialistic economy as experience shows it is indispensable.


What is barter system? what were the main difficulties of the barter system

The direct exchange of one commodity or service for another without the use of money is termed "Barter" in economics. Barter system is that in which no money exist. In other words it is moneyless economy up to some extent it is still available in our villages. The village, Blacksmith and Carpenter usually receive his reward in terms of wheat from the farmers.
Barter is workable in backward as well as advanced countries. Now a days due to exchange difficulties some advanced countries are entering into a barter deal with other countries. Now this system has been given up by the civilized world due to the following reasons.

Following are the main defects of this system :

1. Lack Of Double Coincidence Of Wants :-
The direct exchange of one commodity for an other requires direct satisfaction of both the parties. So the main disadvantage of this system is the lack of double coincidence of wants. For example one cow would be exchanged for four sheep. It is necessary that a person with the cow should find the man who wants to exchange sheep with the cow. So arranging for such an exchange would be very difficult.

2. Lack Of Common Standard Of Value :-
All the goods which are be exchanged are not of the same value, so it is very difficult to determine the ratio of exchange between the different goods.

3. Lack Of Subdivision :-
In case of goods which are indivisible the value loss will be suffered. For example, if the owner of a cow wants to purchase a hen then it will be not possible for him to give a small part of cow to the owner of a hen. In this case he will suffer a loss.

4. The Difficulty In Strong Wealth :-
It is very difficult to store goods particularly perishable goods for a long period. They loose their value as time passes.

5. Difficulty For Future Payments :-
Under this system it is very inconvenient to lend goods to other people. With the lapse of time the value of goods may fall. So one would like to suffer a loss.

6. Difficulties For Finance Minister :-
Under barter system, goods can not be collected as a tax, because these can not be kept in a store for a longer period.

7. Difficulties For Transfer Of Wealth :-
Under this system transfer of wealth also becomes a problem for the people. For example one person wants to take one thousand cow from Gujrat to Ahmadabad, how much difficulty he would feel?
Now by the use of money all these difficulties have been removed.

8. Lack Of Specialization :-
Under the barter system a high degree of specialization is not possible. A person cannot yet the skill of specialization the particular field as we find in the present system of production.

Money has removed the difficulties of barter system in the following ways :

1. Common Measure Of Value :-
now goods and services are purchased and sold with the help of money and it is used as a common measure of value. We can compare the price of various goods easily.

2. Solves The Future Payments Problem :-
Now it is very easy to sell the present goods on credit because we can easily fix the amount of future payment due to money.

3. Easy Transfer :-
Money can be easily transferred from one place to another. A man who have a money can easily purchase anything at any time.

4. Economic Development :-
With the use of money trade and industry has been expanded and process of economic development has been increased.

5. Balance In Demand And Supply :-
Prices play very important role in bringing the the demand equal to supply. As price of any commodity increases, producer increases the supply.

6. Importance For The Banks :-
Money is very important for establishing the financial institutions like banks which deals with the currency and other money assets like shares and bonds.

7. Flow Of Money :-
There is a circular flow of money and money flows from firms to the house holds and then again to firms.


Define Money What are the functions of money? Money is that what money does

Money pays very important role in the economy of the country. In the old age, different things like gold and silver coins were used as a money. In the present age bank notes and credit money are used to pay for goods and services.
Money is one of the greatest discoveries of the modern age. It occupies a unique position in the social and economic life of a man. A man works for money to enjoy the maximum facilities. Money by itself is not wealth it is a mean to acquire the wealth like different things in the world. It will not feed you unless you will spend it.

Various definitions have been offered but Crowther's definition is more comprehensive. He says, "Money can be defined as any thing that is generally accepted as a means of exchange and at the same time acts as a measure and as a store of value".

1. General Acceptability :-
It is an essential quality of money that it should be acceptable as a means of payment.

2. Measure Of Value :-
The economy can not work efficiently unless money serves as a standard of value.

3. Store Of Value :-
Money should also store the value. There are so many instruments which are included in the money. In a present age Currency, Deposits, Prize Bonds and Treasury Bills are included in money. These instruments are very useful in storing the value.

Following are the important functions of money :

1. Medium Of Exchange :-
Money serves as a medium of exchange. It passes from hand to hand in exchange for goods and services. Goods buy money and money buys goods.

2. Standard Of Value :-
The unit of money measures the value of different goods. When we say that one Kg. sugar price is Rs. 10 in other words the value of one Kg. sugar is Rs. 10. So money provides an easy means of measuring the value as compared to other goods.

3. Store Value :-
Perishable goods can not be stored for a longer period. In this case money has an advantage over goods. So money provides an easy means of storing wealth as compared to other goods.

4. Standard Of Deferred Payments :-
In case of transactions involving future payments money enables the exchange of present goods for future goods.

5. Money As A Liquid Asset :-
Money is the liquid asset because it can be used at any time. We can purchase any thing or we can save it for future or we can do the investment, there is no problem in using it.

6. Transfer Of Value :-
Money fulfills the purpose of transferring the value from one place to another. For example it is not possible to transfer one building physically from one city to another city. So in the shape of money it can be transferred.

7. Guarantor Of Solvence :-
Money being immediately useable serves the purpose of meeting any or all money obligations or debits. So money being the most liquid of all assets also serves as a guarantor of solvency in other words ability to meet financial obligations.

8. Helps For Expanding The Economy :-
Money is very useful in expanding the trade, industry and production and improved the economic condition of countries.

9. Distribution Of Wealth :-
Money is very useful for the distribution of national income among the various factors the production and it brings justice to pay the reward to each factor according to its contribution.

10. Roll In Credit System :-
Without money banks can not create credit money on the basis of their cash reserves. Change in the volume of money is brought by increasing or decreasing the money supply.


Define dividend and what are the duties of auditor relating to dividends

The return on investment in share is called dividend. It is the part of the profit earned by the company.
Dividend rate approved in the general meeting by the shareholders.

Following are the important duties of the auditor :

1. Rules Of Company :-
The auditor should check the rules of a company. He should examine that articles of association and companies ordinance allow the management to propose dividends out of revenue profits.

2. Rate Of Dividend :-
The auditor should check that rate of dividend must not be above the rate of profit. It should also not exceed the market rate.

3. Reasonable Profit :-
The auditor should check that amount of revenue profits is reasonable. If it is not reasonable then dividend should not be paid.

4. Account :-
Dividend amount is payable with in the days. The auditor should check that dividend account is opened in the bank or not. The amount equal to dividend must be deposited.

5. Tax :-
It is also the duty of the auditor that he should check the tax payable or dividend is paid to the Govt. or not ? The payment of tax is a legal formality.

6. Not Collected :-
Sometimes shareholders fail to collect the amount from the banks. The auditor should check such amount because it is stated in the balance sheet as liability.

7. Profit & Loss Account :-
The profit and loss appropriation account must be checked by the auditor. He should note the amount of dividend recorded in it.

8. Account Statement :-
The auditor examines that amount of dividend paid and due prepares reconciliation statement of dividend account. He should make detailed checking in case of discrepancy. The errors can be detected.

9. Warrant :-
To register the shareholder management issues dividend warrants. Such amount can be claimed by the shareholders from the bank. The auditor should check these warrants has been issued or not?

10. Check The Decision :-
The auditor should check the directors decision about dividend proposal. He should check the minutes of the directors meeting about the consent of the directors.


What are capital profits? Are these available for distributor as dividend

Those which are not entered during the course of business are called capital profits or non trading profits. It has the following types :

1. Profit realized on sale of fixed assets.

2. Premium received on the issue of debentures and shares.

3. Amount of credit on re-issue of fortified shares.

4. Profit obtained by regarding its own debenture.

5. Profit prior to incorporation.

In case of divisible profits legal point of view is much wider then the commercial view. Its object is to make good all losses whether revenue or capital before determining the profits.

Generally capital profits are not used for the distribution of dividends. However these can be distributed in the following circumstances.

1. If it is permitted by the articles of association of company.

2. The profit is realized one.

3. If their distribution would not leave the company insolvent in the sense that it is unable to pay its debts as and when they fall due for payment.

4. If profit remains after the revaluation of all the assets.


i. Lubbock Vs British Bank of South America (1892).

ii. Foster Vs New Trinidad Lak Asphalte Co. Ltd. (1901).

5. Capital profits can be utilized for the distribution in the form of bonus shares, since the assets are not reduced in any way.


Friday, 18 November 2011

Determination of profits how these effect the different parties

The amount of income which is excess than the expenditure of the business during a given period is called profit.
Profit = Total revenue - Total expenditure

Profit determination is very important for the various parties. If profits are not determined properly, these affect the following parties adversely.
1. Shareholders.
2. Proprietor.
3. Managers.
4. Income tax department.
5. Director if they are paid on the percentage of profit .
Determination of profit is a very difficult job. Various difficulties are being found in they way of profit determination. While collecting the correct profits following problems are being faced.

1. Valuation Of Liabilities :-
It is a very careful job to asses the value of liabilities at the close of the period. What should be the assessment rate of various liabilities. If the various liabilities are not valued at uniform rates then it may affect the profit of the business.

2. Valuation Of Assets :-
It is also difficult to asses the value of the assets at the end of the period. Uniform rate of assessment should be applied. In case of fixed assets what, should be the rate of depreciation. It may be estimated only.

3. Stock In Trade Valuation :-
For the valuation of stock in trade there is difference of opinion among the people. "Cost or market price which ever is lower". Principle is followed but different companies take different meanings of it.

4. Deferred Revenue Expenditure :-
Sometimes above terms might have been debited to the current year's profit and loss account and due to this profit of the current year will be shown lower than the actual.

5. Opinion About Intangible Assets :-
There is no uniform opinion about the valuation of goodwill patent rights etc.

Importance of the proper determination of profits may be judged by the following of facts. If the profits are not calculated correctly then it will affect the parties in the following way :

1. Effect On Shareholders :-
If the profits are understated the shareholders will obtain less profit then the actual they were entitled.

2. Effect On The Investors :-
Those investors who are interested to do the investment in the company. They are misguided if the profits shown are not correct. Because investor always keep an eye on the profit of the company.

3. Effect On The Value Of Share :-
In case of overstatement profit will increase the value of shares in the market. Directors may play unfair game by selling the shares at high rate.

4. Effect On Managers :-
In case of understatement of profits commission of the managers will be reduced. Because if profit is high commission will increase and if profit reduces commission will also reduce.

5. Effect On Bonus Amount :-
Company also give bonus to their employees. If earns profit. If aggregate profit is high bonus amount will also be high. If less profit it shown then bonus amount will also reduce.

6. Effect On Directorship :-
If excess profits are shown than the actual profit it means that some pan of capital is also distributed in the shape of dividend. It means that capital of the company is reduced without the approval of the court. In this case directors of the company are liable to pay such amount to the company which is paid as a dividend.

7. Effects On Creditors :-
If the excess profit is shown and distributed. It means that capital is reduced or assets of the company are reduced. When assets are reduced that means security given to the creditors and debenture holders reduced. Its ultimate result mil be the liquidation of the company.

8. Effects On Income Tax Revenue :-
If the profit is understated in the balance sheet it will reduce the income tax revenue of the government.

9. Effects On Financial Institutions :-
In case of overstated profits banks and other financial institutions which are providing credit to the company will also be affected adversely.

10. Effects On Auditor :-
It is the duty of the auditor that he should submit the true and fair report about the affairs of the company shown in the balance sheet is incorrect then auditor will be held responsible for that.


Define divisible profits and explain the main principles of divisible profit

According to black and white publishing company (1901) "Profit available for dividend means net profits after making any deduction which the directors can duly make."

Profit which can be distributed legally in the form of dividends to the shareholders of the company are called divisible profits.

There is no any particular rule about the determination of profit. By company law has laid down the following rules or principles which guides us to determine the divisible profits.

Following are the important principles of divisible profits :

1. According The Company Rules :-
The articles of association are the rules of the company. The directors are entitled to distribute the profits under rules. They also follow the company law. The dividend can be paid out of revenue profit.

2. Follow The Court Cases :-
While calculating the divisible profits, the court cases must be kept in mind. The auditors must know the decisions of the courts announced time to time.

3. Profit Not Out Of Capital :-
The capital can not be used to pay dividend. The revenue profits can be used for the payment of dividend.

4. Approval Of Shareholders :-
In the annual general meeting shareholders may approve the rate of profit recommended by the directors. So divisible profits can be used to pay as dividend after approval.

5. Right Of Proposal :-
The directors can purpose the rate of dividend out of divisible profits. After completing the legal formalities the directors can decide the dividend.

6. Undistributed Profit :-
It is the right of the directors to use such profit for the payment of dividend at the end of a year. It is a revenue of the provision year.

7. Depreciation :-
Before declaring revenue profits the depreciation on fixed assets must be charged. In manufacturing company it is compulsory to charge depreciation before the declaration of profits.

8. Secrete Reserves :-
If according the articles association it is allowed to create and use the such reserves then these can be used for the payment of dividends.

9. Capital Profits :-
Under certain conditions the capital profit can be used to pay dividend but articles association should allow the distribution of capital profit as dividend.

10. Capital Loss :-
Inspite of capital loss the dividend can be paid out of revenue profits. The capital profit must be used to eliminate capital loss first and then surplus can be used to pay dividends.

11. Loss Of Provision Year :-
If a company suffers a loss in one year but earns profit next year. Such loss can be adjusted by the company from benefit of the current year.

12. Revaluation Of Assets :-
After the revaluation of asset, if it becomes surplus then it can be used after realization. Profit may be paid after selling the assets.

13. Revenue Profits :-
According the principle of divisible profit dividend must be paid out of revenue profit. But it is essential that calculation should be correct.

14. Asset Goodwill Written Down & Up :-
If a company has written down good will out of profits, it may also write up this asset, with the appreciation. But the value written up should not excess than the true value.


Wednesday, 16 November 2011

Write a note on the following, 1. Sinking fund 2. Depreciation fund 3. Reserve fund 4. Intangible assets 5. Capital expenditure 6. Revenue expenditure

It is accounting term for cash set a side out of the profits for the particular purpose and invested so that the correct amount of money will be available at the time of need may be used for the payment of liability or replacing the old assets. This amount can not be used for paying the dividend to the shareholders.

Note :-
i. Provision for depreciation for the wasting assets should be made by debiting the revenue accounts.

ii. When provision is made to repay the loans, or for redemption of debentures the profit and loss account is debited.

iii. If any profit is made on selling the investments representing the sinking fund, it should be transferred to general reserve. In case of loss it may be debited to the profit and loss account.

Every year an equal amount is written off and revenue account is debited. On the other hand depreciation account fund is credited during the estimated life of the asset. The amount of depreciation fund is invested in guilt edged securities.

The word fund is related to reserve. When reserve is represented by reliable investments outside the business it is known as reserve fund.

The assets which can not be seen with eyes and can not be touched with hands are called intangible assets. Such assets have no physical existence.

Example :-
1. Good will.
2. Prepaid expenses etc.

The amount of capital which is spent in the business is called capital expenditure it has the following kinds :

1. Amount of capital spent during the formation of company.

2. Amount spent on improvement of fixed assets.

3. Capital spent on increasing the earning capacity.

4. Capital spent for reducing the cost of production.

5. Capital spent for purchasing the fixed assets.

The amount spent for the following purpose is called revenue expenditure.

1. expenditure made on maintaining the fixed assets is included in the revenue expenditure.

2. Expenditure made on the purchase of floating assets is also called revenue expenditure.

3. Expenses to carry on the business such as telephone and electricity charges are also include in the revenue expenditure.


Write a note on the following, 1. Contingent liability 2. Contingent assets 3. Provision 4. General reserves 5. Revenue reserve 6. Capital Reserve

It is a liability which is not a natural liability but happening of an uncertain event it may become an actual liability. it may be due to past dealings or action obligation when contingent liability becomes actual liability, it may involve the company in loss. In case of loss it is necessary that an adequate reserves should be kept for it.

Example :-
1. Bill discounted but not matured.

2. Claims against the company the not acknowledged as debt.

3. A guarantee given by the company on behalf of others.

4. Arrears of dividends on cumulative preference shares.

5. In called amount on shares in other companies.

Verification :-
1. Auditor should see that such unknown and known liabilities are brought into account on the date of the balance sheet.

2. Auditor should see that such liabilities are shown on the balance sheet by way of foot notes.

3. Auditor should obtain a certificate from the responsible officer that such all liabilities are brought into account on the date of balance sheet.

4. He should also check that sufficient reserve has been allocated for such liability which is likely to result in a loss being sustained.

Those assets which comes into existence on happening of a certain events are called contingent assets. Assets is conditional with the asset can not be available.

The term provision means :
1. Any amount written off or retained by way of providing for any unknown liability.

2. The amount of which can not be find out with substantial accuracy.

3. The amount retained by way of providing for depreciation renewals, or diminution in the value of assets.

Example :-
i. Provision of taxation.
ii. Provision for depreciation etc.

Amount set a side out of the profits and others surpluses retained in the business to increase the working capital and to improve the financial position of the business. Such type of reserve may be considered as the "Undistributed Profit."
The general reserve may be created only in case of profit. It is usually treated as revenue reserve.

It represent all amounts set a side which are regarded by the directors as being free for distribution through the profit and loss appropriation account.

Example :-
i. Development Reserve.
ii. Investment Reserve.
iii. General Reserve etc.

The reserve capital denotes the uncalled capital which the shareholders can not be called upon to pay unless the company goes into liquidation capital reserve represent capital items are not free for distribution.


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