Category: Bangalore University B.com Notes

India’s diverse and comprehensive financial services industry is growing rapidly, owing to demand drivers (higher disposable incomes, customized financial solutions, etc.) and supply drivers (new service providers in existing markets, new financial solutions and products, etc.). The Indian financial services industry comprises several key subsegments. These include, but are not limited to- mutual funds, pension funds, insurance companies, stock-brokers, wealth managers, financial advisory companies, and commercial banks- ranging from small domestic players to large multinational companies. The services are provided to a diverse client base- including individuals, private businesses and public organizations.

10 Types of Financial Services:

• Banking
• Professional Advisory
• Wealth Management
• Mutual Funds
• Insurance
• Stock Market
• Treasury/Debt Instruments
• Tax/Audit Consulting
• Capital Restructuring
• Portfolio Management

These financial services are explained below:

1. Banking

The banking industry is the backbone of India’s financial services industry. The country has several public sector (27), private sector (21), foreign (49), regional rural (56) and urban/rural cooperative (95,000+) banks. The financial services offered in this segment include:

• Individual Banking (checking accounts, savings accounts, debit/credit cards, etc.)
• Business Banking (merchant services, checking accounts and savings accounts for businesses, treasury services, etc.)
• Loans (business loans, personal loans, home loans, automobile loans, working-capital loans, etc.)

The banking sector is regulated by the Reserve Bank of India (RBI), which monitors and maintains the segment’s liquidity, capitalization, and financial health.

2. Professional Advisory

India has a strong presence of professional financial advisory service providers, which offer individuals and businesses a wide portfolio of services, including investment due diligence, M&A advisory, valuation, real-estate consulting, risk consulting, taxation consulting. These offerings are made by a range of providers, including individual domestic consultants to large multi-national organizations.

3. Wealth Management

Financial services offered within this segment include managing and investing customers’ wealth across various financial instruments- including debt, equity, mutual funds, insurance products, derivatives, structured products, commodities, and real estate, based on the clients’ financial goals, risk profile and time horizons.

4. Mutual Funds

Mutual fund service providers offer professional investment services across funds that are composed of different asset classes, primarily debt and equity-linked assets. The buy-in for mutual fund solutions is generally lower compared to the stock market and debt products. These products are very popular in India as they generally have lower risks, tax benefits, stable returns and properties of diversification. The mutual funds segment has witnessed double-digit growth in assets under management over the last five years, owing to its popularity as a low-risk wealth multiplier.

5. Insurance

Financial services offerings in this segment are primarily offered across two categories:

• General Insurance (automotive, home, medical, fire, travel, etc.)
• Life Insurance (term-life, money-back, unit-linked, pension plans, etc.)

Insurance solutions enable individuals and organizations to safeguard against unforeseen circumstances and accidents. Payouts for these products vary across the nature of the product, time horizons, customer risk assessment, premiums, and several other key qualitative and quantitative aspects. In India, there is a strong presence of insurance providers across life insurance (24) and general insurance (39) categories. The insurance market is regulated by the Insurance Regulatory and Development Authority of India (IRDAI).

6. Stock Market

The stock market segment includes investment solutions for customers in Indian stock markets (National Stock Exchange and Bombay Stock Exchange), across various equity-linked products. The returns for customers are based on capital appreciation growth in the value of the equity solution and/or dividends and payouts made by companies to its investors.

7. Treasury/Debt Instruments

Services offered in this segment include investments into government and private organization bonds (debt). The issuer of the bonds (borrower) offers fixed payments (interest) and principal repayment to the investor at the end of the investment period. The types of instruments in this segment include listed bonds, non-convertible debentures, capital-gain bonds, GoI savings bonds, tax-free bonds, etc.

8. Tax/Audit Consulting

This segment includes a large portfolio of financial services within the tax and auditing domain. This services domain can be segmented based on individual and business clients. They include:

• Tax: Individual (determining tax liability, filing tax-returns, tax-savings advisory, etc.)
• Tax: Business (determining tax liability, transfer pricing analysis and structuring, GST registrations, tax compliance advisory, etc.)

In the auditing segment, service providers offer solutions including statutory audits, internal audits, service tax audits, tax audits, process/transaction audits, risk audits, stock audits, etc. These services are essential to ensure the smooth operation of business entities from a qualitative and quantitative perspective, as well as to mitigate risk. You can read more about taxation in India.

9. Capital Restructuring

These services are offered primarily to organizations and involve the restructuring of capital structure (debt and equity) to bolster profitability or respond to crises such as bankruptcy, volatile markets, liquidity crunch or hostile takeovers. The types of financial solutions in this segment typically include structured transactions, lender negotiations, accelerated M&A and capital raising.

10. Portfolio Management

This segment includes a highly specialized and customized range of solutions that enables clients to reach their financial goals through portfolio managers who analyze and optimize investments for clients across a wide range of assets (debt, equity, insurance, real estate, etc.). These services are broadly targeted at HNIs and are discretionary (investment only at the discretion of fund manager with no client intervention) and non-discretionary (decisions made with client intervention).

Importance

It is the presence of financial services that enables a country to improve its economic condition whereby there is more production in all the sectors leading to economic growth.

The benefit of economic growth is reflected on the people in the form of economic prosperity wherein the individual enjoys higher standard of living. It is here the financial services enable an individual to acquire or obtain various consumer products through hire purchase. In the process, there are a number of financial institutions which also earn profits. The presence of these financial institutions promote investment, production, saving etc.

Hence, we can bring out the importance of financial services in the following points:

Importance of Financial Services

• Vibrant Capital Market.
• Expands activities of financial markets.
• Benefits of Government.
• Economic Development.
• Economic Growth.
• Ensures Greater Yield.
• Maximizes Returns.
• Minimizes Risks.
• Promotes Savings.
• Promotes Investments.
• Balanced Regional Development.
• Promotion of Domestic & Foreign Trade.

Ensures greater Yield

As seen already, there is a subtle difference between return and yield. It is the yield which attracts more producers to enter the market and increase their production to meet the demands of the consumer. The financial services enable the producer to not only earn more profits but also maximize their wealth.

Financial services enhance their goodwill and induce them to go in for diversification. The stock market and the different types of derivative market provide ample opportunities to get a higher yield for the investor.

Maximizing the Returns

The presence of financial services enables businessmen to maximize their returns. This is possible due to the availability of credit at a reasonable rate. Producers can avail various types of credit facilities for acquiring assets. In certain cases, they can even go for leasing of certain assets of very high value.

Factoring companies enable the seller as well as producer to increase their turnover which also increases the profit. Even under stiff competition, the producers will be in a position to sell their products at a low margin. With a higher turnover of stocks, they are able to maximize their return.

Minimizing the risks

The risks of both financial services as well as producers are minimized by the presence of insurance companies. Various types of risks are covered which not only offer protection from the fluctuating business conditions but also from risks caused by natural calamities.

Insurance is not only a source of finance but also a source of savings, besides minimizing the risks. Taking this aspect into account, the government has not only privatized the life insurance but also set up a regulatory authority for the insurance companies known as IRDA, 1999 (Insurance Regulatory and Development Authority).

Promoting savings

Financial services such as mutual funds provide ample opportunity for different types of saving. In fact, different types of investment options are made available for the convenience of pensioners as well as aged people so that they can be assured of a reasonable return on investment without much risks.

Promoting investment

The presence of financial services creates more demand for products and the producer, in order to meet the demand from the consumer goes for more investment. At this stage, the financial services comes to the rescue of the investor such as merchant banker through the new issue market, enabling the producer to raise capital.

The stock market helps in mobilizing more funds by the investor. Investments from abroad is attracted. Factoring and leasing companies, both domestic and foreign enable the producer not only to sell the products but also to acquire modern machinery/technology for further production.

Expands activities of Financial Institutions

The presence of financial services enables financial institutions to not only raise finance but also get an opportunity to disburse their funds in the most profitable manner. Mutual funds, factoring, credit cards, hire purchase finance are some of the services which get financed by financial institutions.

The financial institutions are in a position to expand their activities and thus diversify the use of their funds for various activities. This ensures economic dynamism.

Benefit to Government

The presence of financial services enables the government to raise both short-term and long-term funds to meet both revenue and capital expenditure. Through the money market, government raises short term funds by the issue of Treasury Bills. These are purchased by commercial banks from out of their depositors’ money.

In addition to this, the government is able to raise long-term funds by the sale of government securities in the securities market which forms apart of financial market. Even foreign exchange requirements of the government can be met in the foreign exchange market.

Economic development

Financial services enable the consumers to obtain different types of products and services by which they can improve their standard of living. Purchase of car, house and other essential as well as luxurious items is made possible through hire purchase, leasing and housing finance companies.

According to E.R.A. Seligman, “The term consumer credit refers to a transfer of wealth, the payment of which is deferred in whole or in part, to future, and is liquidated piecemeal or in successive fractions under a plan agreed upon at the time of the transfer”.

According to Reavis Cox, consumer credit is ‘”a business procedure through which the consumers purchase semi-durables and durables other than real estate, in order to obtain from them a series of payments extending over a period of three months to five years, and obtain possession of them when only a fraction of the total price has been paid”.

Introduction to Consumer Finance

During earlier times the trend of people was to save first and spend later. But today it has been changed to spend today and pay later. The culture, life style, spending pattern, priority of needs etc. have been changed far and wide. Earlier people used to borrow money for construction of a house, to start a business or to purchase some land, or needs of that order. But today people need money for acquiring consumer durables also.

It is felt sometimes that people give more emphasis to amenities than for permanent assets like land, house etc. A stylish house in a posh area, a car, computer, television, stereo system, a cooking range, washing machine, grinder, mobile phone etc. which only a minority used 10 years back have become part of life (or ambition) of an average civilian. As they need money for satisfying these needs naturally facilities to finance also emerge.

The branch of banking which facilitate finance for purchasing consumer durables is called ‘consumer finance’ or ‘consumer credit’. Today it has become part of life of an average Indian as they need credit in large quantity to meet their needs of various kinds. This emerging set of wants and consequent need for funds multiplies the scope and role of consumer finance.

Considering the busy nature of borrowers, fanciers provide customer friendly products and services at their doorstep on easy terms. As India is a country with billions of spend thrift untapped population, who are competing each other in acquiring newer and newer consumer durables and as an element of prestige is linked in owning these assets, it is sure that, without any set back, ‘Consumer Finance’ will have brighter future and will hit better targets in the forthcoming era of consumerism.

Meaning and Concept of Consumer Finance

Consumer finance refers to the raising of finance by individuals for meeting their personal expenditure or for the acquisition of durable consumer goods. It is an important asset based financial service in India. This include credit merchandising, deferred payments, installment buying, hire purchase, pay-out of income scheme, pay-as-you earn scheme, easy payment, credit buying, installment credit plan, credit cards, etc.

Consumer durables include Cars, Two Wheelers, LCD TVs, Refrigerators, Washing Machines, Home Appliances, Personal Computers, Cooking Ranges, and Food Processors etc. Under consumer finance scheme, the consumer or buyer pays a part of the purchase price in cash at the time of the delivery of the asset, the balance with interest over a pre­determined period of time.

The objective of consumer finance is to provide credit easily to the consumer at his door steps. Both private and public sector finance companies provide consumer finance to purchase ‘consumer goods and construction of such goods (building materials, iron rods, cement etc.). Multinational finance companies are also engaged in consumer finance in India. Usually the credit/finance is extended for a period of 2 to 5 years.

Features of Consumer Credit

1. Consumer credit is a method of financing semi-durables and durables.
2. It assists consumers to acquire assets.
3. Consumers get possession of the assets immediately when a fraction of the price is paid.
4. The balance payment is payable in installments over an agreed span of time.
5. The duration of the finance normally ranges between three months to five years,
6. It is an agreement between parties to the contract.
7. When there are only two parties to the contract, it is called a Bipartite Agreement (the customer and the dealer cum financier) and where there are three parties, such agreements are called Tripartite Agreements (the customer, the dealer and the financier.)
8. The structure of financing may by way of hire-purchase, conditional sale or credit sale. In the case of both hire purchase and conditional sale, ownership of the asset is transferred only on completion of all the terms of agreement. But in the case of credit sale ownership is transferred immediately on payment of first installment.
9. Generally advances are made on the security of the asset itself and
10. It involves down payment normally ranging from 20 to 25% of the asset price.

Forms/Types of Consumer Credit

Following are the different forms for financing consumers:

1. Revolving Credit

It is an ongoing credit arrangement. It is similar to overdraft facility. Here a credit limit will be sanctioned to the customer and the customer can avail credit to the extent of credit limit sanctioned by the financier. Credit Card facility is an excellent example of revolving credit.

2. Cash Loan

In this form, the buyer consumer gets loan amount from bank or non- banking financial institutions for purchasing the required goods from seller. Banker acts as lender. Lender and seller are different. Lender does not have the responsibilities of a seller

3. Secured Credit

In this form, the financier advances money on the security of appropriate collateral. The collateral may be in the form of personal or real assets. If the customer makes default in payments, the financier has the right to appropriate the collateral. This kind of consumer credit is called secured consumer credit.

4. Unsecured Credit

When financier advances fund without any security, such advances are called unsecured consumer credit. This type of credit is granted only to reputed customers.

5. Fixed Credit

In this form of financing, finance is made available to the customer as term loan for a fixed period of time i.e., for a period of one to five years. Monthly installment loan, hire purchase etc. are the examples.

Advantages of Consumer Finance

1. Compulsory Savings

Consumer credit promotes compulsory savings habit among the people. To make periodical installments knowingly or unknowingly, people cut short their other expenditures and save. These savings ultimately fetch them ownership of an asset in course of time. Thus consumer credit adds to the savings habit of people.

2. Convenience

Considering the nature and type of customers, consumer credit facility offers schemes to the convenience and satisfaction of the customers. Walk in and drive out, pay as you earn, everything at the door step, one time processing etc. are examples.

3. Emergencies

Consumer credit facility is available to meet personal requirements like family requirements, festival requirements, emergencies etc. The credit facility is not strictly restricted to purchasing of consumer durables alone. In ordinary course of life people come across number of urgent financial requirements, for which consumer credit offers a better solution.

4. Assists to Meet Targets

In all business activities, there will be targets to be achieved by the executives. Most people abstain/ postpone purchasing for want of sufficient fund. When the dealer themselves arrange for fund people get attracted and purchase take place in large quantity. Thus it assists to meet sales targets and profit targets.

5. Assists to Make Dreams to Reality

A car, a TV, a washing machine, a computer, a laptop, a mobile phone, etc. is undoubtedly a dream of an average human being. But people may not purchase because of fund problem. In those cases consumer credit facilitates an opportunity to possess and own those dreams on convenient terms.

6. Enhances Living Standard

Consumer credit enhances living standard of the people by providing latest articles and amenities at reasonable and affordable terms.

7. Accelerates Industrial Investments

Demand for consumer durables enhances further investment in the consumer durables industry. Thus provides more and more employment opportunities in the country.

8. Promotes Economic Development

Demand for consumer durables, further investments in consumer durables industry, increased living standard of people, improved employment opportunities and income etc. improves economic development of the country.

9. Economies of Large Scale Production

Increased demand leads to large scale production. Large scale operations lead to the economies of large scale operation. This in turn leads to lower prices.

10. National Importance

Consumer credit is of national importance in India. Unless there is such a convenient mode of financing, total demand for consumer durables will be far lesser. Poor demand lead to lower production, which in turn lead to poor employment opportunity and lower income level. All these finally land the economy in trouble.

Disadvantages of Consumer Finance

Following are the disadvantages of consumer finance:

1. Promotes Blind Buying

Facility to purchase at somebody else’s money tempts people to buy and buy goods blindly. This may land these people to debt trap within a short while.

2. Leads to Insolvency

Blind buying of goods make these people insolvent/bankrupt within a shorter span of time. This ultimately spoils their life in the long run.

3. Consumer Credit is Costlier

Along with the convenience that it offers it charge the customer for all these conveniences offered. Thus it becomes costlier when compared to other forms of finance.

4. Artificial Boom

The economic development posed by the impact of consumer credit is not real but artificial. Economy will take years to stabilize the artificial boom claimed by the proponents of consumer credit.

5. Bad Debts Risk

By whatever name called credit is always risky so is the case with consumer credit as well. Defaults are a major threat to consumer credit. Once there is a default, repossession and other legal formalities are difficult.

6. Causes Economic Instability

Artificial boom and depression leads to economic instability and causes chaos in the economic progress. It will be difficult for the real ordinary business man to identify real progress and artificial progress.

Capital market is an organized market mechanism for effective and efficient transfer of money capital or financial resources from the investing class to the entrepreneur class in the private and public sectors of the economy.

T. Parikh states, ‘By capital market I mean the market for all financial instruments, short-term and long-term as also commercial, industrial and government papers’.

Capital market is generally understood as the market for long-term funds. The capital market provides long-term debt and equity finance for the government and corporate sector.

Objectives of Capital Market

In 1955, the then Finance Minister spoke about the objectives of the capital and securities market in the Lok Sabha in this way:

The economic services which a well regulated and efficiently run capital market can render to a country with a large private sector are consider­able.

• In the first place, it is only an organized securities market (an integral part of capital market) which can provide sufficient marketability and price continuity for shares, so necessary for the needs of investors.
• Secondly, it is only such a market that can provide a reasonable measure of safety and fair dealing in the buying and selling of securities.
• Thirdly, through the interplay of demand for and supply of securities, properly organized stock exchange assists in a reasonably correct evaluation of securities in terms of their real worth.
• Lastly, through such evaluation of securities the stock exchange helps in the orderly flow and distribution of savings as between different types of competitive investments.

Importance of Capital Market

Industrial revolution made possible mass production and mass production needs massive capital which can be procured through company form of organization and company form of organization led to the development of security markets.

Hence security market or capital market is an essential prerequisite for faster industrial growth and channelizing the savings of masses who do not ven­ture to create and manage enterprise but want to be mere investors.

On the other hand, security markets help the entrepreneurs in setting up their projects which are beyond their financial capacity. Thus security market acts as a linking pin between economically deficit units and economic surplus units. Healthy, efficient and transparent functioning of the security market is therefore imperative for industrialization and economic development.

The developing countries as well as developed countries need funds for their economic development and growth. These funds are obtained from the surplus economic units or savers. A savings surplus unit can be a business, a household, Central Govt., State Govt. or local self-government whose current savings exceed consumption dur­ing a period under consideration.

On the other hand, there are deficit economic units whose consumption or investment is more than the current income.

If the investment equals the current savings for all units in an economy, then there would be no need for any economic unit to obtain funds externally from financial markets. In a modern economy, there is a gap between the investment and consumption needs as compared to the income.

Some units save more than they invest. Others invest more than they save. The capital or financial market is needed for the flow of funds from surplus to deficit units so that savings can be properly utilized by the deficit units.

A rupee saved is of little use for a country if it is not invested promptly. Money itself produces nothing until it becomes capital i.e., it is invested in capital goods. After investment in productive areas, it enhances the national product or per capita income and raises the standard of living of the masses.

A substantial amount of savings occur in the household units which are widely scattered in ru­ral, urban and metropolitan areas. Their investment criteria vary significantly while the major invest­ments are taken up in the governmental, semi-governmental and corporate sector.

The flow of savings from the household sector to these sectors necessitates the mobilisation of resources. Capital market facilitates transforming funds from the surplus units to the deficit units.

The pace of a economic development is condi­tioned, among other things, by the rate of long-term investment and capital formation. And capital formation is conditioned by the mobilization, augmentation and channelization of investable funds.

The capital market serves a very useful purpose by pooling the capital resources of the country and making them available to the enterprising investors. Well-developed capital markets augment resources by attracting and lending funds on a global scale.

The increase in the size of the industrial units and business corporations due to technological developments, economies of scale and other factors has created a situation where in the capital at the disposal of one or few individuals is quite in­sufficient to meet the investment demands.

A developed capital market can solve this problem of paucity of funds. Form organized capital market can mobilize and pool together even the small and scattered savings and augment the availability of investable funds.

While the rapid growth of joint stock companies has been made possible to a large extent by the growth of capital markets, the growth of joint stock business has in its turn encouraged the development of capital markets. A developed capital market provides a number of profitable investment opportunities for the small savers.

Functions of Capital Market

The functions of financial market which comprise capital and money market involve the exchange of one financial asset for another e.g., surplus economic units exchange money into another financial asset that provides future return in the form of interest, dividend and capital appreciation. They bring savers and borrowers together by selling securities to savers and lending that money to the borrowers.

The efficiency of finance market depends upon how efficiently the flow of funds is managed in an economy. As Prof. Schimpeter in his book, “The Theory of Economic Development”, has put it, ‘with­out the transfer of purchasing power to him an entrepreneur cannot become an entrepreneur’.

It is equally important that financial market should induce people to become entrepreneurs and motivate individuals and institutions to save more.

Capital and money markets are the means for allocating the savings in the most desirable way so that we can achieve the desired national objectives and priorities. This facilitates in the efficient production of goods and services, thus it contributes to the society’s wellbeing and raises the standard of living of not only of borrowers but also of others in the economy.

Financial markets perform this function by transmitting the nation’s savings into best possible productive uses which in turn raises the output and employment level in a country.

The proper development and growth of finance markets play a vital role for the fast growth of the economy. For meeting the growing financial needs of a developing economy, financial ark should also grow at a faster rate.

Moreover, it should be efficient and more diversified. Van Home in r book, Financial Management and Policy has rightly said. The more varied the vehicle by which savings can flow from ultimate savers to ultimate users of funds’ the most efficient the financial markets of an economy tend to be.

Financial markets satisfy the needs of both savers and borrowers. In financial markets, there are different financial instruments which are bought and sold daily. These instruments differ in liquidity, marketability, maturity, risk, return, tax concisions etc. Investors differ in their attitudes towards risk, return and liquidity.

Moreover, investors want to have a more diversified investment portfolio. Hence the greater the diversification in financial instruments in a financial market, the greater will be the efficiency in generating and transferring the savings into investment.

The financial markets not only help in transfer of savings in new industry but also provide opportunities for financial investment so as to earn income on surplus. In other words, these markets perform both financial and nonfinancial functions.

The financial markets enable financing of not only physical capital formation but also of consumption expenditure. That is why financial markets man­age the flow of funds not only between individual savers and investors but also between institutional savers and investors.

The demand for long-term funds comes from individuals, institutions, central govt., state govt., local self-govt. and private corporate sector. Funds are raised through issue of shares, debentures and bonds which constitute the new issue market.

Apart from raising funds directly from savers the deficit units obtain longterm funds from public financial institutions and investment institutions also. The supply of funds mainly comes from individuals, institutions, banks and industrial financial institutions.

The capital market plays a significant role in the financial system. Savings and investments are vital for economic development of an economy. Generally, units which save and invest are different; capital market provides a bridge by which savings of surplus units are transmitted into long-term investments by deficit units.

The pace of economic development along with other things depends upon the rate of long-term investments and capital formation in a country. The rate of capital formation depends upon the rate of savings, rate of investment and financial markets.

The capital market plays a vital role in mobilising the savings and making them available to the enterprising investors. The primary capital market helps Govt. and industrial concerns in raising funds by issuing various kinds of securities. The secondary market provides liquidity to the outstanding securities.

An active capital market through its price mechanism allocates the scarce financial resources to the most productive uses at a low cost. The system of allocation of funds works through incen­tives and penalties.

Usually the cost of capital is comparatively low for the large and efficient com­panies as their securities are subject to lesser risks. Shares of high growth companies command a premium in the market while the poor performance companies face problems in selling their securities and may have to issue securities at a discount to raise additional funds. The specified shares are more attractive than non-specified shares.

Under this system, a Cash Book is prepared which shows the receipts and payments of cash transactions and no other ledger is maintained except a rough book for recording transactions relating to personal accounts. It is actually called ‘Pure Single Entry’.

Under this method, real accounts and nominal accounts are not recognised. In short, these transactions are only recorded in Cash Book without, however, applying the principles of double entry. That is why it is said: The system which does not totally follow the principles of Double Entry System is called Single Entry System’.

For recording transactions relating to personal accounts, however, double entry system is followed, say, when cash is received from a customer—it is recorded in Cash Book first and, thereafter, in the personal account of the customer concerned, i.e., recorded in two places—like double entry basis.

Again, no entry is recorded in the books of accounts for any internal transactions, like depreciation on assets. Therefore, it may be said that Single Entry System is nothing but an admixture of Single Entry, Double Entry, and no entry.

According to R. N. Carter, Single Entry cannot be termed as a system, as it is not based on any scientific system like Double Entry System. For this purpose, Single Entry is nowadays known as Preparation of accounts from incomplete records.

Advantages of Single Entry System

Main benefits or advantages of single entry system of book keeping can be expressed as follows:-

1. Simple and Easy Method Of Recording Transaction

Single entry system does not need any special accounting knowledge and personnel to record financial transaction of the business. It can be maintained easily by the business owner. So, this system of book-keeping is simple to maintain and easy to practice.

2. Economical

This is another benefit of single entry system. It is a less costly system of recording business transactions compared to double entry system. It is economical because of limited number of transactions and limited number of books (only personal account and cash account).

3. Suitable For Small Business

Double entry system is very expensive and time consuming because of large numbers transactions and various books of accounts. So, small firms with limited financial transactions prefer single entry system of book keeping.

4. Time Saving

Single entry system is less time consuming because of limited numbers of books and less number of business transactions.

5. Easy To Determine Profit or Loss

It is very easy to ascertain profit or loss of the business under single entry system of book keeping. Profit or loss can be obtained by comparing the ending balance with the beginning of the business for the specific accounting period. 

Disadvantages of Single Entry System

Major drawbacks or disadvantages of single entry system of bookkeeping can be expressed as follows:

1. Incomplete System of Accounting

Single entry system ignores dual aspects (debit and credit) of transactions. It also ignores nominal account and real accounts. So, it is an incomplete system of recording transactions.

2. Unsystematic and Unscientific System

Single entry system does not follow proper accounting rules and principles to record the financial transactions. So, it is unsystematic and unscientific system of recording transactions which cannot be taken as authentic source.

3. No True Profit or Loss

Trial balance, trading account and profit and loss account cannot be prepared with the help of single entry system. So, correct profit or loss amount cannot be obtained in the absence of these account.

4. No True Financial Position

Balance sheet cannot be prepared with the help of single entry system because it ignores real accounts. So, true financial position of the firm cannot be revealed in the absence of balance sheet.

5. No Arithmetical Accuracy

This system ignores debit and credit principles of accounting. So, the trial balance cannot be prepared with only one aspect of transaction. Therefore, arithmetical accuracy is not possible in the absence of trial balance.

6. Unacceptable to Tax Authorities

Because of incompleteness, unscientific and lack of accuracy, tax authorities and other business agencies do not rely on single entry system.

7. Chance of Fraud and Errors

There is very high chance of occurrence of frauds and errors under single entry system because of lack of proper internal check system.

8. Unsuitable for Planning and Control

Single entry system does not provide accurate and adequate information to the management. So, it does not support top level management for future planning and effective control.

9. Not Suitable for Large Business Firms

Single entry system is not suitable for large business firms having large number of financial transactions.

Financial Accounting is concerned with providing information to external users. It refers to the preparation of general purpose reports for use by persons outside a business enterprise, such as shareholders (existing and potential), creditors, financial analysts, labour unions, government authori­ties, and the like. Financial accounting is oriented towards the preparation of financial statements which summarise the results of operations for selected periods of time and show the financial position of the business at particular dates.

Advantages

Maintain Business Record

Financial accounting records each and every transaction of business organization. It systematically maintains a proper book of accounts of all monetary transactions. Unlike human memory which has a limited capacity to remember things, financial accounting can record large amounts of transactions.

Prevention and Detection of Fraud

Avoidance and detection of frauds or errors is important role played by financial accounting. It records all financial data fairly which is used by management for analysis purposes. This data acts as proof and reduces the chances of any frauds or errors.

Present true Financial Position

Financial accounting reveals and interprets the true financial position of organizations. It records each financial aspect and supplies it from time to time to the internal management team. Managers get the real ideas of all financial resources of the organization regularly through data supplied by financial accounting. It helps them in making proper decisions for managing the overall financial position.

Helps in preparing Financial Statements

Preparation of financial statements is a must for knowing the true profit or loss and real worth of the organization. Financial accounting supplies all relevant accounting data for the preparation of financial statements like profit and loss account and balance sheet.

Comparison of Result

Financial accounting helps in comparing the performance of business organizations. It systematically records and stores financial data for many accounting years. This way comparison of present data with previous year’s data can be easily done.

Acts as legal Evidence

Financial accounting serves as legal evidence of all data and helps in settling of all business disputes. It prepares and maintains systematic books of accounts of all financial transactions which can be used for avoiding any confusion or misunderstanding.

Assists the Management

Managers depends on financial accounting for various data for taking managerial decisions. It provides the full information’s regarding all cash flows in an organization. They can easily anticipate any surplus or deficit of funds in an organization and take decisions accordingly.

Limitations of Financial Accounting

1. Supplies Insufficient Information

Financial accounting provides the information about the financial activities as a whole and not individual-wise, i.e., it does not record information relating to product-wise, department-wise etc.

2. Controlling Cost not Possible

In financial accounting control of cost is not possible since the costs are known at the end of the financial year or a specified period of time whether the expense or cost has already been incurred, i.e., nothing can be done to control either the account of expense or the cost. In other words, if it is even found that a particular cost is more, it is not possible to control it.

But the same is possible only when the cost accounting system is being introduced.

3. Historic in Nature

Since the financial accounting records all transactions relating to a particular period, it is rather historic in nature. In short, present financial information relating to a past period and not for the future although all financial decisions are taken on the basis of past financial data.

4. Recording Actual Cost

The financial accounting records the actual cost only, the historical cost of the assets. The value of assets may be changed, but record only the cost of acquisitions of such assets. In other words, financial accounting does not record the price fluctuations or change in price level. As a result it does not present the correct information.

5. Difficulty in Price Fixation

We know that the total cost of a product can be obtained only when all expenses relating to a product have been incurred. That is why it is not possible to ascertain the price of the product in advance for the purpose of estimated selling price. As total cost (i.e., fixed cost, variable cost, direct cost and indirect cost of a product) depends on many factors, all such factors cannot be supplied by financial accounting.

6. Technical Subject

Since financial accounting is a technical subject, it is not possible for a common man to understand it. Without the proper knowledge of principles and conventions of accounting it is not possible to analyse the financial data to take any financial decision. Naturally, it has got little value to a person who is not conversant with the subject.

7. Unanimity about Accounting Principles

Although there is IASC (International Accounting Standard Committee), the accountants differ in their opinion on the application of accounting principles in the same matter.

For example, some accountants prefer to use FIFO method for valuing inventory whereas others prefer to use LIFO or some other method; or, some accountants prefer to use Straight-line Method of depreciation but others prefer to use Diminishing Balance Method etc.

8. Not Possible to Evaluate Accounting Principles

Whether the existing accounting principle is sound/correct or not, that cannot be evaluated, i.e., actual performance cannot be compared with the budgeted figure as we can do in case of Standard Costing/Budgetary Control. In other words, the actual result cannot be compared with the budget.

Financial accounting presents only the result of the business through profit and financial positions, i.e., the rate of profitability. But the profit may be affected by many of outside factors which are not recorded by financial accounting.

9. Supply Quantitative Information

Financial accounting supplies quantitative information only through absolute figures which do not present always the required information although they are needful to the users. But relative financial information are more important and informative.

10. May be Manipulated

Financial accounting may be manipulated, i.e., it may be presented as per desire of the management. For example, profit sometimes may be reduced in order to evade tax and to avoid bonus to the employees. On the contrary, more profit may be shown in order to raise fresh equity shares or to pay more dividend to attract the shareholders and others.