Who is the New Owner?

The new owner is an institutional investor. The Industrial Workers’ Trade Union this union has collected subscriptions from its members which will eventually be used for such purposes as the support of aged members living on inadequate pensions, the provision of convalescent homes for sick members, strike pay in the event of an industrial dispute, and so on. This union wishes to invest the subscriptions where they will be reasonably safe and at the same time profitable.

Since high profitability and maximum safety do not go together, the Union will invest in a “balanced portfolio. This is a collection of shares chips’, some debenture, some rather risky shares in finance companies, etc. As part of its portfolio it instructs Broker C to purchase 500 shares in International Industries. Broker C approaches the jobber who has just bought Mrs. A’s shares and on hearing the prices 142 ½ 145 say “I will buy 500 at 145.’

The jobber has made a turn of 0-025 on the shares, yielding him a profit of 12.50. The market has performed its function and all parties, Mrs. A, Broker B, the Jobber, Broker, C, and the Industrial Workers’ Trade Union are happy with the arrangements.

How the Public Benefits from Speculation

What use is speculative activity to the ordinary members of the public who is not acting as a speculator himself? Suppose Mrs. Smith, whose husband has just died, urgently needs to sell 500 shares, but no one will buy them because the general public feels the firm she has invested in is not in too sound a position. Mrs. Smith could be in real difficulty. If a speculator steps in and buys the shares her problem will be solved. Of course the speculator will only buy them at a price which will yield a profit, so that Mrs. Smith will perhaps get rather less cash than she hoped for, but not very much less. This is because there are many speculators in competition with one another.

If the price drops a little, one of them will snap up the shares Mrs. Smith is offering. It is really the presence of speculators that makes the whole market system work. Speculators buy when others are selling, and sell when are buying, and make a little profit in the prices. While doing so they render an invaluable service to small investors by smoothing out the “booms’ and ‘slumps’ in the market.

At points B the public are losing confidence in the share. Prices are falling and a general lack of confidence may mean that the price will fall a long way. If speculators were present they would begin to sell when the share prices rose, so as to make a profit while they could. This would stop the market rising so quickly, and would smooth off the boom. In the same way, as confidence declines and prices begin to slip, the speculator will start to buy-because the shares are cheaper and therefore are a bargain.

The result of the speculators’ activities is that prices have neither risen so high nor sunk so low as they would have done otherwise, and the investors therefore gain less in a boom, and lose less in a slump. The most important thing for the small investor is not to lose his money, so in fact the moderating action of the speculators safeguards the public interest.

Sorting out the Transactions-the fortnightly Account

With about 14,500 bargains every day, worth about Rs. 12000 million, it is not surprising that a very confused picture exists before many days have gone by. Think again about Mrs.

Mrs. Smigh has given 500 shares to her broker, who has sold them to jobber B. Jobber B resold them to broker C, who sold them to jobber D five minutes later. Jobber D sold them broker E who, etc. The shares are still with Mrs. A’s broker, but they have been sold and resold hundreds of times. Sooner or later all these bargains must be settled. This is done an Account Day, which is the last day of the ‘settlement period’ that comes at the end of each Account period.

The Stock Exchange year is normally made up of 25 “Accounts, most of which last a fortnight two or three of these periods are extended to three weeks because public holidays interfere with the usual working of the market but the end of the Account a very confused situation exists as to who owns which shares. Most of the shares dealt in area bought for settlement on Account Day, which means that payment will be made and the shares delivered to their new owner at the end of the accounting period. Some securities are “brought for cash which means payment to be made by cheque on the day after the bargain was struck.

Contango Day and Making-up Day are the days when speculators can make arrangements to carry bargains over to the next accounting period. Jobbers or brokers who have been speculating and find that they are unable to fulfil their bargains may be either “bulls’ or “bears.

The optimistic bulls have bought shares hopping to sell at a profit. The time has come to fulfil their bargains. They must pay up, or sell the shares to realize the money. If they feel very optimistic that further appreciation of the shares will take place in the next fortnight, they will be unwilling to sell the shares. An arrangement is making so that each bull can sell his shares at a fixed price and immediately buy them back again at the same price for the next Account.

Really he has borrowed the money for the next fortnight, and for this service pays a sum of money called a contango for the use of the cash provided by the dealer who took in’ the shares for him. If all is well the appreciation of the shares in the next two weeks will leave him with a profit which will repay him for his trouble and the risk involved.

Meanwhile the pessimistic bears who were expecting price to fall have sold shares, because they thought prices would fall and they could buy the shares before delivery date arrived at a cheaper price than that at which they had dealt. If they have been disappointed they now have the problem of delivering shares they do not possess.

They will have to buy shares quickly, or borrow them for a fortnight. If there are bulls about anxious to sell, the bears may be able to buy; if no they will have to borrow shares and pay a charge called backwardation for the privilege. On Ticket Day the buying brokers pass to the selling brokers the names of the eventual purchasers so that transfers may be arranged.

When these transfers have been completed the payments are made and the stock delivered on the seventh working day, which is the Tuesday of the second week after the Account closed. Meanwhile dealing has been pursued just as furiously as eve for the new account, which will itself come to an end on the following Friday.

The whole, settlement produce is at present under discussion and may result, in the near future, in revised procedures and a slight change in the names of the days.

The documents used in business

Business Transactions

The word transaction’ implies a transfer of goods or services from one person to another. Any type of business deal, however simple or complicated, is a transaction. Millions of transactions take place every day.

Where the transaction involves the provision of goods or services in return for immediate payment it is called a cash transaction. Where payment is delayed until a later date it is called a credit transaction. There is therefore a dual nature to all transactions: –

(i) Payment is made for it.

(ii) The commodity, or service, is supplied.

The time interval between the happening of event (i) and event (ii) is termed the period of credit, and varies from no time at all in the case of a cash transaction two years in the case of hire-purchase transactions. The usual arrangement between firms who are doing regular business with one another is that accounts are settled monthly, so that the normal a cash transaction is one of limited credit, goods or services required during one month being settled in the first few days of the next month. In order to keep a record of these transactions every transaction must have an original document.

The most important documents are:-(i) Invoices; (ii) Credit Notes; (iii) Cheques; (iv) Orders; (v) Debit Notes; (vi) Statements; (vii) Receipts; (viii) Patty Cash vouchers; (ix) Bills of Landing; and (x) Bills of exchange.

(i) The Invoice

Definition: an invoice is a business document which is made out whenever one person sells goods to another. It can be used in the courts of law as evidence of a contract for the sale of goods. It is made out by the person selling the goods, and in larger businesses it may have as many as five copies printed on paper of different colours.

It must have the following information:-

(i) The date of the sale.

(ii) The terms on which the goods are sold, i.e. the discount that may be taken and the credit period allowed. The words Terms Net’ means no discount is allowed. The words Prompt Settlement’ means no credit period is allowed. These details would be typed in at a convenient point on the invoice.

(iii) Names and Addresses of both the interested parties to the sale.

(iv) An exact description of the goods, with quantity and unit price, and details of the trade discount given.

Many firms write “E. & 0. E.’ on the bottom of the invoice. These letters mean ‘Errors and Omissions Excepted.’ If an error or omission has been made, the firm selling the goods may put it right.

Value Added Tax-With the introduction of V.A.T., it’ became necessary for suppliers to include on all invoices likely to be used as tax invoices’ a statement of the V.A.T. charge for the supply described on the invoice.

The invoice may them be used by the supplier as proof of ‘output tax’ and by his customer as proof of ‘input tax.’

What Happens to the Four Copies?-Top copy: this is sent by post or by hand to the person buying the goods, and he sued it to enter in his Purchase Day Book. He then keeps the invoice as his copy of the contract of sale.

Second Copy: This is usually the sales Day Book copy, which is kept by the seller, entered in his Sales Day Book, and then filed to be kept as his copy of the contract of sale.

Third and fourth copies: these are sent together to the Store Department of the seller, where the storekeepers take the goods out of the store. The third copy, often called the Delivery Note, is given to the car man to take with him in cases where goods are being delivered to the buyer’s warehouse. He presented it with the parcel of goods and gets a signature on it to prove that the goods arrive safely. This copy is then taken back by the car man to the storekeeper and is filed in the stores department after being entered in the Stores Record Book.

The fourth copy is wrapped up in the parcel before it is given to the car man. It is often called the Advice Note and it enables the buyer’s storekeeper to check the contents of the parcel and record in his Stores Record Book the stores that have just arrived.

Other copies-Where a set of invoices has more than four copies, they will usually include: (a) a representative’s copy which is sent to the commercial traveller handling the order; (b) a traffic planning copy for the transport department; (c) a consignee’s copy for the actual consent, as distinct from the Head Office of the buyer’s firm; (d) a consisting copy for the Costing Department.

(ii) How long do we Keep an Invoice?

Usually for six years. Under the Limitation Act of 1939 an action in the courts on a simple contract cannot begin more than six years after the contract was made. If keep our invoices for six years the chance of the invoice being needed as legal evidence disappears. Many firms get rid of their old invoices by shredding them into packing material

(iii) Cash Discounts and Trade Discounts

There are two kinds of discount in business, Cash Discount and Trade Discount.

Cash Discount: is given to debtors who pay promptly for their goods then the time for payment arrives. It is a great inconveniences to a businessman to have debtors who are slow in setting their accounts, because means that his capital is being used by someone else.

To encourage prompt payment a cash discount is offered. Naturally this means a give this discount than to allow debts to accumulate and perhaps suffer bad debts.

Trade Discount: is quite different. It is a reduction in the catalogue price of an article, given by the wholesaler or manufacturer to the retailer, to enable him to make a profit. Take the example of a manufacturer of bicycles. He produces leaflets about his particular brand of bicycle explaining the merits of the machine.

The price is either printed on this literature or on a separate price list supplied on request, but the important point is that he, and everyone else, thinks of this particular machine as the Rs. 6280 model. When invoicing a supply of machines the simple way to invoice them is to list them at the catalogue price. The invoice might therefore read:

6 ‘Mercury’ bicycles, 26, 26-inch frame @ Rs. 6280 = Rs. 37680.

Clearly the retailer cannot sell these at catalogue price if he has bought them at the catalogue price. The manufacturer therefore deducts Trade Discount at an agreed rate, usually somewhere between 10 percent and 45 percent of the catalogue price.

Original Documents for the Settlement of Accounts

(a) The petty Cash Voucher

Every transaction to be recorded in the books of account needs an original document, and in the case of petty cash items the document concerned is the Petty Cash Voucher certifies the honesty of the petty-cash disbursement made. Petty Cash Vouchers may be receipts obtained from someone outside the business or may be an internal voucher.

The former are preferable since they give the employee less opportunity for dishonesty. Even then one cannot always be certain. In this way a check can be kept of the money actually spent. Even fraudulent conspiracies are not uncommon, as any newspaper will show. Every week one reads in the police reports about such minor cases. A van driver, who has been told to buy petrol and to ask for a receipt when he buys it, may bribe the garage employee for a receipt showing a quantity greater than that really issued and paid for.

When he shows the false receipts and is reimbursed from the petty cash, the driver is cheating his employer. This sort of practice can easily be detected if regular checks are made of the mileage per gallon.

Petty Cash Vouchers may be very small both in value and in physical size. Bus tickets, for example, are proof of money spent and are therefore valid as voucher. Where it is impossible to produce a voucher from outside the business-for instance when letter are posted-it is usual to provide an internal voucher, signed by the manager or some person in authority, to vouch for the expense. These vouchers are numbered, and the numbers are recorded in the petty-cash voucher column in the Petty Cash Book.

They are then filed away in numerical order, so that if required the auditors may inspect them.

(b) The Statement-It is a business document which a firm sends out at the end of the month to all its debtors, reminding them what they owe for the purchases they have made during the past months. The phrase To account rendered’ is used to save the trouble of listing the various invoices, debits notes, credit notes, etc.

Computerized Statements

Many firms today are using computerized forms of book­keeping. There are several computerized systems. This is because under computerized book-keeping the statement is typed automatically as a print-out by the computer from the data stored in its memory. This would be done at the most appropriate time-usually at the end of the month.