Category: Management Notes

Management Notes

Trading Account, Meaning, Objective, Needs, Advantages, Disadvantages and Format of Trading Account

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Trading account is a key component of financial statements prepared by a business at the end of an accounting period. It is specifically designed to determine the gross profit or gross loss of a business from its core trading activities, which mainly include buying and selling goods. The trading account is prepared before the profit and loss account and helps assess how efficiently the business is managing its direct costs related to production or purchases.

The main purpose of a trading account is to show the results of trading activities by comparing net sales (total sales minus sales returns) with the cost of goods sold (COGS). The account records all direct expenses such as purchases, wages, carriage inwards, and factory expenses on the debit side, while the credit side includes net sales and closing stock. The difference between these two sides reveals the gross profit if the credit side is larger, or gross loss if the debit side exceeds the credit side.

A trading account is crucial because it helps the business understand how profitable its main operations are, before considering indirect expenses or incomes. It serves as a basis for preparing the profit and loss account, which ultimately determines the net profit. For businesses engaged in manufacturing or retailing, the trading account provides an essential performance snapshot.

Objectives of Trading Account

  • Determining Gross Profit or Gross Loss

The primary objective of a trading account is to calculate the gross profit or gross loss of the business during an accounting period. By comparing net sales with the cost of goods sold (COGS), the account reveals whether the business earned a profit from its core trading activities. This figure is essential because it indicates how efficiently the company is managing its direct costs. Without knowing gross profit, a business cannot evaluate its operational performance or prepare accurate profit and loss statements.

  • Measuring Direct Costs and Expenses

Another important objective is to measure all the direct costs and expenses involved in generating sales. These include purchases, carriage inwards, wages, fuel, power, and factory expenses. The trading account systematically organizes these costs, ensuring they are accurately recorded and matched against sales. By doing so, it ensures proper cost analysis, helping businesses understand how much it costs to produce or procure the goods sold. This clarity enables better cost control and decision-making related to pricing and production.

  • Establishing the Basis for Profit and Loss Account

The trading account lays the foundation for preparing the profit and loss account. Once gross profit or loss is determined, it is transferred to the profit and loss account, where indirect expenses and incomes are considered to calculate net profit. Without the trading account, the business would lack a clear and structured approach to financial reporting. It ensures that direct trading results are separated from indirect activities, giving a more accurate picture of overall business performance.

  • Helping in Pricing and Selling Decisions

One of the key objectives of preparing a trading account is to help management make informed pricing and selling decisions. By analyzing the gross profit margin, businesses can determine if their current pricing strategies are effective or if adjustments are needed. If the gross profit is too low, it may signal the need to increase selling prices, reduce purchase costs, or improve production efficiency. This insight is critical in maintaining competitiveness while ensuring profitability.

  • Evaluating Production Efficiency

For manufacturing businesses, the trading account helps evaluate production efficiency. By comparing the cost of production to the sales value, it becomes clear whether the production process is cost-effective or if wastage and inefficiencies are cutting into profits. Identifying such issues early allows management to take corrective actions, optimize resource utilization, and improve overall operational efficiency. The trading account acts as a diagnostic tool, providing insights into where improvements are needed within the production cycle.

  • Facilitating Inventory Control

Another objective of the trading account is to assist in inventory management. By accounting for opening stock, purchases, and closing stock, the business can accurately track the movement and value of inventory. This information is crucial for controlling stock levels, avoiding overstocking or understocking, and ensuring that capital is not unnecessarily tied up in unsold goods. Effective inventory control also helps reduce storage costs, minimize waste or spoilage, and improve cash flow management.

  • Supporting Financial Analysis and Comparison

The trading account provides valuable data that supports financial analysis and comparisons over different periods. By examining gross profit ratios across various accounting periods, businesses can identify trends, seasonal variations, or market shifts. It also allows management to compare current performance against industry benchmarks or competitors. This analytical capability helps guide long-term planning, budgeting, and strategic decisions aimed at improving the company’s market position and profitability.

  • Providing Information for Tax and Compliance

An essential but often overlooked objective of the trading account is to provide accurate financial data for tax calculation and regulatory compliance. Tax authorities often require businesses to report gross profit figures when filing tax returns. A properly prepared trading account ensures that the company’s direct incomes and expenses are transparently reported, reducing the risk of legal issues, fines, or audits. It also strengthens the company’s financial credibility with stakeholders such as investors, banks, and auditors.

Needs of Trading Account

  • Determining Core Business Profitability

The trading account is needed to assess the profitability of the business’s main operations, i.e., buying and selling goods. It helps determine whether the company is making a gross profit or incurring a gross loss before accounting for indirect expenses. Without this, management wouldn’t know if the core business activities are financially viable. This assessment ensures that owners and stakeholders can monitor trading performance separately from non-operational revenues or expenses, giving a clearer picture of how effectively the business is running.

  • Accurate Calculation of Cost of Goods Sold (COGS)

A trading account is crucial for accurately calculating the cost of goods sold, which includes opening stock, purchases, direct expenses, and adjustments for closing stock. Knowing COGS is essential because it directly affects the gross profit calculation. Without a trading account, it would be difficult to track and match costs against sales, potentially leading to distorted profit figures. The account ensures that only direct trading-related costs are considered, improving the accuracy of the financial statements.

  • Establishing the Gross Profit Margin

The business needs a trading account to establish its gross profit margin, which is a key performance indicator. This margin reveals how much the company retains from each unit of sales after covering direct costs. By monitoring this margin, management can identify pricing issues, cost inefficiencies, or areas where cost savings are needed. It also helps in setting sales targets and evaluating the success of cost-reduction strategies, making it an essential management tool.

  • Supporting Managerial Decision-Making

The trading account supports management in making informed decisions related to purchasing, production, sales, and pricing. By providing clear data on gross profit and cost components, it helps management understand whether resources are being used effectively. If gross profits are consistently low, the business may need to rethink its suppliers, revise its pricing, or invest in more efficient production methods. Without this information, decisions would be based on guesswork rather than solid financial evidence.

  • Providing a Basis for Preparing Profit and Loss Account

The trading account provides the foundation for preparing the profit and loss account, which ultimately determines the net profit or loss of the business. Without first calculating the gross profit or loss, it would be impossible to prepare complete financial statements. The separation of direct trading results (gross profit) and indirect operational costs (net profit) improves financial reporting accuracy and provides stakeholders with clearer, more detailed insights into business performance.

  • Assisting in Financial Comparisons and Trend Analysis

A trading account is essential for making financial comparisons and conducting trend analysis over time. By comparing gross profits across multiple periods, businesses can identify seasonal trends, market fluctuations, or operational inefficiencies. These insights are valuable for long-term planning, setting realistic goals, and making strategic decisions. Regular trend analysis also helps businesses benchmark their performance against industry standards, ensuring they stay competitive and responsive to market demands.

  • Improving Inventory and Stock Control

Another need for the trading account arises in inventory management. The account tracks opening stock, purchases, and closing stock, helping businesses monitor inventory levels effectively. By keeping accurate records, businesses avoid overstocking or stockouts, improve cash flow, and minimize losses due to spoilage or obsolescence. Effective stock control also ensures that the cost of goods sold is calculated correctly, preventing errors that could affect profit calculations and decision-making.

  • Fulfilling Legal and Tax Compliance Requirements

Businesses need a trading account to fulfill legal and tax compliance requirements. Tax authorities often require detailed reporting on gross profits, direct expenses, and sales figures. A properly maintained trading account ensures that the business can submit accurate financial statements, reducing the risk of fines, penalties, or audits. Additionally, external stakeholders like investors, lenders, and auditors rely on these accounts to evaluate the business’s financial health and compliance with financial regulations.

Advantage of Trading Account

  • Provides Clear Gross Profit or Loss

The trading account gives a clear view of the gross profit or loss from core operations, helping owners and managers understand if the business is making money directly from sales activities. It separates operational performance from indirect incomes or expenses, offering a focused assessment. This clarity allows businesses to track the effectiveness of buying and selling strategies, helping in better business planning. Without this, businesses may confuse gross earnings with overall net profit, making it harder to improve core performance.

  • Helps Monitor Direct Costs

A trading account helps monitor and control direct costs such as purchases, direct expenses, and stock values. By keeping a record of these elements, businesses can track if they are overspending on raw materials or facing rising purchase costs. This awareness allows for quick corrective action, like negotiating better supplier rates or improving inventory management. It ensures that cost control becomes an ongoing part of business operations, which directly boosts profitability by reducing unnecessary expenses tied to the production or sale of goods.

  • Assists in Pricing and Sales Decisions

The trading account plays a critical role in guiding pricing strategies and sales decisions. By knowing the gross profit margin, businesses can evaluate if their selling prices are adequate to cover costs and generate profit. If margins are thin, it signals a need to revise pricing or reduce costs. This information also helps in planning discounts, offers, and promotional activities. Without these figures, pricing decisions become guesses, increasing the risk of underpricing or overpricing, which can hurt profitability and competitiveness.

  • Supports Efficient Stock Management

Another advantage of the trading account is its role in managing stock efficiently. It tracks opening and closing stock, ensuring businesses know how much inventory is used or left unsold. This helps avoid overstocking, which can lead to waste, or understocking, which can cause lost sales. With better stock visibility, businesses improve cash flow, reduce storage costs, and minimize stock losses due to spoilage or theft. Proper stock management through the trading account strengthens operational control and financial health.

  • Simplifies Financial Reporting

The trading account simplifies financial reporting by summarizing key operational figures in one place. It directly feeds into the profit and loss account, making it easier to prepare final accounts accurately. External stakeholders such as auditors, tax authorities, and investors often look for this clarity when reviewing business performance. By presenting gross profit and cost details clearly, the trading account helps ensure the financial statements are reliable and transparent. This boosts the credibility of the business and enhances trust with outsiders.

  • Helps in Identifying Business Trends

The trading account enables businesses to identify sales trends, seasonal patterns, and cost behaviors over time. By comparing trading accounts from different periods, managers can detect improvements or declines in profitability and adjust strategies accordingly. For example, if gross profit consistently drops in certain months, businesses can investigate the cause and take preventive action. Understanding these trends allows for better forecasting, budgeting, and strategic planning, helping the business stay competitive and responsive in a changing market.

  • Assists in Tax Compliance

Maintaining an accurate trading account is essential for meeting tax compliance requirements. Tax authorities often require businesses to report gross profit and cost details separately. A well-prepared trading account ensures that the business can file accurate tax returns, reducing the risk of penalties, audits, or disputes with authorities. Additionally, it simplifies the preparation of statutory financial statements, helping businesses meet legal obligations efficiently. This advantage is especially valuable for businesses operating in regulated industries or with complex supply chains.

  • Enhances Decision-Making Power

Overall, the trading account enhances managerial decision-making power. With clear, reliable data on direct incomes and expenses, managers can make better operational, pricing, purchasing, and sales decisions. It removes guesswork and replaces it with fact-based insights, improving the quality of decisions. This contributes to better resource allocation, cost control, and profit maximization. Whether the decision involves cutting costs, renegotiating supplier terms, or launching new sales campaigns, the trading account offers the foundational data managers need to act confidently and effectively.

Disadvantage of Trading Account

  • Focuses Only on Direct Transactions

The trading account only focuses on direct incomes and expenses like sales, purchases, and direct costs. It ignores indirect expenses such as administrative costs, marketing expenses, and finance charges. This narrow focus can give an incomplete picture of overall business performance. Business owners may see a positive gross profit but fail to recognize that after covering indirect costs, the net profit might be low or even negative. This limitation makes it necessary to always use the trading account alongside other financial statements.

  • No Insight into Net Profit or Loss

While the trading account reveals gross profit or loss, it does not show the final net profit or loss of the business. Indirect expenses, interest, depreciation, and non-operating incomes are all excluded. Relying only on the trading account can be misleading if decision-makers assume that gross profit reflects overall business profitability. To get a complete financial view, businesses must also prepare the profit and loss account and the balance sheet. This makes the trading account only one part of a larger financial analysis.

  • Excludes Cash Flow Information

The trading account does not provide any information about cash flow — how much cash comes in or goes out of the business. Even with a strong gross profit, a business might face cash shortages due to poor receivables collection or high debt obligations. Since cash flow is essential for daily operations, the trading account’s lack of cash details limits its usefulness for short-term liquidity management. Business owners must use additional tools like cash flow statements to understand their real-time financial position.

  • Ignores Non-Trading Activities

The trading account is designed only for trading or manufacturing businesses and focuses solely on the buying and selling of goods. It ignores non-trading activities like investments, rental incomes, or interest earnings, which can significantly contribute to a business’s income. For businesses with multiple income sources, relying on the trading account alone can understate overall performance. Managers need to combine data from the trading account with other financial records to assess the full range of income and operational efficiency.

  • Provides Historical, Not Real-Time, Data

The trading account is typically prepared at the end of an accounting period, meaning it presents historical performance rather than real-time updates. Managers looking for current performance or recent trends won’t get timely insights from the trading account alone. This lag can slow down decision-making, especially in fast-moving industries where rapid adjustments are needed. Without integrating real-time sales and cost data from other sources, businesses may miss early warnings of problems or opportunities that require immediate action.

  • Limited Use for Small Service Firms

The trading account structure is best suited for businesses dealing in physical goods, such as wholesalers, retailers, or manufacturers. For small service-based firms — like consultants, software developers, or legal practices — the trading account has limited relevance. These businesses often have no inventories or purchase costs, making the format redundant. Service businesses need a profit and loss account that emphasizes service revenue, labor costs, and overheads. Using a trading account for such businesses can create confusion and lead to poor financial tracking.

  • Does Not Measure Efficiency Ratios

While the trading account shows gross profit margins, it does not directly provide key efficiency ratios, such as inventory turnover, cost-to-sales ratios, or gross margin ratios. These ratios require additional calculations, meaning the trading account alone cannot fully reveal operational efficiency or cost management effectiveness. Without these metrics, managers might miss signs of inefficiency, such as slow-moving inventory or shrinking gross margins. Additional financial analysis is required to convert trading account data into meaningful performance indicators for decision-making.

  • Can Be Manipulated Easily

One disadvantage of the trading account is that it can be manipulated if businesses deliberately overstate closing stock values, understate purchases, or inflate sales figures. These adjustments can make gross profit appear healthier than it really is, misleading stakeholders like owners, investors, or lenders. Since the trading account relies heavily on internal data, its accuracy depends on proper recordkeeping and honest reporting. Without strong internal controls and audits, the trading account can become a tool for presenting an overly optimistic business picture.

Format of Trading Account

Aspect Debit Side (Dr.) Credit Side (Cr.)
Opening Stock Shown Not shown
Purchases Shown (less returns) Not shown
Direct Expenses Shown Not shown
Gross Profit Balancing figure Not shown
Gross Loss Not shown Balancing figure
Sales Not shown Shown (less returns)
Closing Stock Not shown Shown
Other Income Not shown Shown (if any)
Balance Transfer To P&L Account To P&L Account
Total Debits = Credits Debits = Credits
Adjustment Items Purchase/Sales Returns Purchase/Sales Returns
Main Purpose Cost side Revenue side
Final Result Gross Profit/Loss Gross Profit/Loss

Items recorded on the debit side of the Trading Account:

  • Opening Stock

The value of goods or raw materials that were left unsold or unused at the beginning of the accounting period is recorded on the debit side. This ensures that the cost of goods available for sale during the period is correctly calculated.

  • Purchases

All goods purchased for resale or raw materials bought for production are recorded on the debit side. This includes both cash and credit purchases made during the period.

  • Purchase Returns (Adjusted)

If purchase returns are already deducted from total purchases, the net amount is shown here. If not, purchase returns appear on the credit side.

  • Direct Expenses

Any expenses directly related to bringing goods to a saleable condition or production are recorded here, including:

  • Wages (direct wages, not indirect staff salaries)

  • Carriage inward or freight inward

  • Customs duty

  • Import duty

  • Dock charges

  • Manufacturing expenses

  • Power and fuel costs

  • Factory rent or expenses

  • Royalty (based on production)

  • Direct Manufacturing Expenses

Costs incurred specifically for the production process, such as machine maintenance, fuel, or factory lighting, are also debited.

Items recorded on the credit side of the Trading Account:

  • Sales

The total value of all goods sold during the accounting period (both cash sales and credit sales) is recorded here. This represents the main income from trading activities.

  • Sales Returns (Adjusted)

If sales returns (goods returned by customers) have not been deducted from total sales, they are shown separately on the debit side; otherwise, only net sales are recorded here.

  • Closing Stock

The value of unsold stock at the end of the accounting period is recorded on the credit side. This represents goods that were not sold but are still part of the business assets.

  • Other Direct Income

Any direct income related to production or purchase activities, like production subsidies or factory-specific grants, may also appear here, though usually these are rare.

Management Notes

Implied Conditions and Warranties

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Express conditions and warranties are which, are expressly provided in the contract. Implied conditions and warranties are those which are implied by law or custom; these shall prevail in a contract of sale unless the parties agree to the contrary.

  1. Condition as to title

In every contract of sale, unless the circumstances of the contract are such as to show a different intention, there is an implied condition on the part of the seller, that:-

  • In case of a sale, he has a right to sell the goods, and
  • In case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass.

The words ‘right to sell’ contemplate not only that the seller has the title to what he purports to sell, but also that the seller has the right to pass the property. If the seller’s title turns out to be defective, the buyer may reject the goods.

  1. Condition as to Description

In a contract of sale by description, there is an implied condition that the goods shall correspond with the description. The term ‘ sale by description’ includes the following situation:-

  • Where the buyer has not seen the goods and buys them relying on the description given by the seller.
  • Where the buyer has seen the goods but he relies not on what he has seen but what was stated to him and the deviation of the goods from the description is not apparent.
  • Packing of goods may sometimes be a part of the description. Where the goods do not conform to be method of packing described (by the buyer or the seller) in the contract, the buyer can reject the goods.

  1. Condition as to Quality or Fitness

Where the buyer, expressly or by implication, makes known the seller the particular purpose for which goods are required, so as to show that the buyer relies on the seller’s skill or judgment and the goods are of a description which it is in the course of the seller’s business to supply (whether or not as the manufacturer of producer), there is an implied condition that the goods shall be reasonably fit for such purpose. In other words, this condition of fitness shall apply, if:

  • The buyer makes known to the seller the particular purpose for which the goods are required,
  • The buyer relies on the seller’s skill or judgment,
  • The goods are of a description which he sellers ordinarily supplies in the course of his business, and
  • The goods supplied are not reasonably fit for the buyer’s purpose.

  1. Condition as to Merchantability

Where the goods are bought by description from a seller, who deals in goods of that description (whether or not as the manufacturer or producer) there is an implied condition that the goods shall be of merchantable quality.

Merchantable quality ordinarily means that the goods should be such as would be commercially saleable under the description by which they are known in the market at their full value.

  1. Condition as to Wholesomeness

In case of sale of eatable provisions and foodstuff, there is another implied condition that the goods shall be wholesome. Thus, the provisions or foodstuff must not only correspond to their description, but must also be merchantable and wholesome. By ‘wholesomeness’ it means that goods must be for human consumption.

  1. Condition Implied by Custom or Trade Usage

An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade. In certain sale contracts, the purpose for which the goods are purchased may be implied from the conduct of the parties or from the nature or description of the goods. In such cases, the parties enter into the contract with reference to those known usage. For instance, if a person buys a perambulator or a medicine the purpose for which it is purchased is implied from the thing itself; the buyer need not disclose the purpose to the seller.

  1. Conditions in a Sale by Sample

A contract of sale is a contract for sale by sample where there is a term in the contract, express or implied to that effect. Usually, a sale by sample is implied when a sample is shown and the parties intend that the goods should be of he kind and quality as the sample is.

  1. Conditions in a sale by Sample as well as by Description

A vast majority of cases where samples are shown, are sales by sample as well as by description. In a contract for sale by sample as well as by description, the goods supplied must correspond both with the sample as well as with the description.

Implied Warranties

A condition becomes a warranty when:

(i) the buyer waives the conditions or opts to treat the breach of the condition as a breach of warranty.

(ii) The buyer accepts the goods or a part thereof, or is not in a position to reject the goods.

  • Implied Warranty of Quiet Possession: In every contract of sale, unless there is a contrary intention, there is implied warranties that the buyer’s shall have and enjoy quiet possession of the goods. If the buyer’s right to possession and enjoyment of the goods is in any way disturbed as consequences of the seller’s defective title, the buyer may sue the seller for damages for breach of this warranty.
  • Implied Warranty of Freedom from Encumbrances: The buyer is entitled to a further warranty that the goods shall be free from any charge or encumbrance in favor of any third party not declared or known to buyer before or at the time when the contract is made. If the buyer is required to discharge the amount of the encumbrance it shall be a breach of this warranty and the buyer shall be entitled to damages for the same.
Management Notes

Sales and Agreement to Sell, Essential of a Valid Sale Contract

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The concepts of Sale and Agreement to Sell are governed by Section 4 of the Sale of Goods Act, 1930. These concepts form the foundation of contracts involving the transfer of ownership of goods. A contract of sale is a contract whereby the seller transfers or agrees to transfer the ownership of goods to the buyer for a price. Depending upon when the ownership passes from the seller to the buyer, the contract may be classified as a sale or an agreement to sell.

A Sale takes place when the ownership or property in goods is immediately transferred from the seller to the buyer at the time of making the contract. The seller loses ownership, and the buyer becomes the legal owner of the goods. Since ownership passes immediately, the risk associated with the goods also generally passes to the buyer. For example, if A sells a laptop to B and ownership is transferred immediately upon payment and delivery, it constitutes a sale.

An Agreement to Sell occurs when the transfer of ownership is to take place at a future date or upon the fulfillment of certain conditions. In this case, the seller agrees to transfer the property in goods later, and ownership remains with the seller until the specified time or condition is fulfilled. For example, A agrees to sell a car to B after receiving the full payment next month. This is an agreement to sell.

Thus, a sale creates immediate ownership rights, whereas an agreement to sell creates a future obligation to transfer ownership. An agreement to sell becomes a sale when the stipulated conditions are fulfilled or the specified time arrives.

Essential of a Valid Sale Contract:

1. Two Parties (Buyer and Seller)

A valid contract of sale requires at least two distinct parties, namely a buyer and a seller. According to Section 4 of the Sale of Goods Act, 1930, one party transfers or agrees to transfer the ownership of goods, while the other party pays or agrees to pay the price. A person cannot buy and sell goods to himself. Both parties must be legally competent to contract as required under Section 11 of the Indian Contract Act, 1872. The existence of two separate parties is essential for creating mutual rights and obligations under a contract of sale.

2. Transfer of Ownership in Goods

The primary objective of a contract of sale is the transfer of ownership or property in goods from the seller to the buyer. According to Section 4 of the Sale of Goods Act, 1930, the seller must transfer or agree to transfer ownership of goods for a price. In a sale, ownership passes immediately, while in an agreement to sell, ownership passes at a future date or upon fulfillment of specified conditions. Without the transfer or intended transfer of ownership, the transaction cannot be regarded as a valid contract of sale under the law.

3. Goods Must Be the Subject Matter

A valid sale contract must relate to goods. According to Section 2(7) of the Sale of Goods Act, 1930, goods include every kind of movable property other than actionable claims and money. The subject matter may consist of existing goods, future goods, or contingent goods. Immovable property such as land and buildings does not fall within the scope of a contract of sale under this Act. The goods must be identifiable and capable of ownership transfer. Therefore, the existence of goods as the subject matter is an essential requirement.

4. Price Must Be in Money

A contract of sale requires consideration in the form of money. According to Section 2(10) of the Sale of Goods Act, 1930, the price means the money consideration for the sale of goods. If goods are exchanged entirely for other goods, the transaction becomes a barter and not a contract of sale. The price may be fixed by the contract, determined according to an agreed method, or fixed in a manner provided by law. Therefore, monetary consideration is an essential element distinguishing a sale from other forms of exchange.

5. Competency of Parties

The parties entering into a contract of sale must be competent to contract. As provided under Section 11 of the Indian Contract Act, 1872, a person must have attained the age of majority, be of sound mind, and not be disqualified by law. A sale contract entered into by an incompetent person may be void or unenforceable. Competency ensures that the parties understand the nature and consequences of the transaction. Therefore, legal capacity of the buyer and seller is an essential requirement for a valid sale contract.

6. Free Consent of Parties

A valid contract of sale must be based on the free consent of the parties. According to Sections 13 and 14 of the Indian Contract Act, 1872, consent is free when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake. Both the buyer and seller must agree upon the same thing in the same sense. If consent is obtained through unlawful means, the contract may become voidable or void. Free consent ensures fairness and genuine agreement between the parties to the sale transaction.

7. Lawful Consideration and Lawful Object

The consideration and object of the sale contract must be lawful. According to Section 23 of the Indian Contract Act, 1872, consideration or object is unlawful if it is forbidden by law, fraudulent, immoral, or opposed to public policy. A contract for the sale of prohibited goods or for an illegal purpose is void. The law recognizes only those transactions that are consistent with legal and ethical standards. Therefore, lawful consideration and a lawful object are essential elements of a valid contract of sale.

8. Goods Must Be Transferable

The goods involved in a sale contract must be capable of being legally transferred from the seller to the buyer. The seller must have ownership or authority to transfer ownership of the goods. If the goods are non-transferable by law or the seller lacks the right to transfer them, the contract may not be enforceable. The principle of “Nemo Dat Quod Non Habet” generally applies, meaning no one can transfer a better title than he himself possesses. Thus, transferability of goods is necessary for a valid sale contract.

9. Possibility of Performance

The contract must be capable of performance. According to the principles contained in Section 56 of the Indian Contract Act, 1872, agreements to do impossible acts are void. The goods must exist or be capable of coming into existence, and the obligations of the parties must be capable of fulfillment. If the subject matter is destroyed before the formation of the contract or becomes impossible to deliver, the contract may become void. Therefore, possibility of performance is an important requirement for a valid sale contract.

10. Compliance with Legal Formalities

A valid sale contract must comply with any legal requirements prescribed by law. The Sale of Goods Act, 1930 allows contracts of sale to be made in writing, orally, or partly in writing and partly orally. However, certain transactions may require documentation under other laws for evidentiary or regulatory purposes. Compliance with statutory requirements ensures legal recognition and enforceability of the contract. Proper observance of legal formalities helps prevent disputes and provides proof of the terms agreed upon by the parties.

Key differences between Sale and Agreement to Sell:

Basis of Comparison Sale Agreement to Sell
Meaning Executed Contract Executory Contract
Ownership Transfer Immediate Future
Nature Absolute Conditional
Transfer of Property Completed Pending
Risk Transfer Immediate Future
Legal Status Completed Sale Future Sale
Rights in Goods Proprietary Right Personal Right
Ownership Holder Buyer Seller
Breach by Seller Suit for Ownership Suit for Damages
Breach by Buyer Price Recovery Damages Recovery
Insolvency of Buyer Seller’s Loss Seller Protected
Insolvency of Seller Buyer Protected Buyer’s Loss
Goods Status Specific Goods Future/Contingent Goods
Performance Completed To be Performed
Applicable Section Section 4(3) Section 4(3)
Management Notes

Sales of Goods Act 1930: Scope of Act

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Sale of Goods Act, 1930 is a key piece of legislation that governs contracts relating to the sale and purchase of goods in India. It defines the rights, duties, remedies, and liabilities of both buyers and sellers, ensuring that transactions involving movable property are carried out fairly and legally.

Historical Background:

Originally, the law relating to the sale of goods was part of the Indian Contract Act, 1872 (Chapter VII). In order to provide clarity and a separate legal framework, it was carved out and enacted as a distinct law on 1st July 1930. The Act is largely based on the English Sale of Goods Act, 1893 and applies to the whole of India.

Scope of the Act:

The Act governs only movable goods, not immovable property or services. It applies to all forms of sale contracts, whether oral or written. It covers:

  • Conditions and warranties

  • Transfer of property

  • Performance of the contract

  • Rights of an unpaid seller

  • Remedies for breach of contract

Key Definitions under the Act:

  1. Goods: Every kind of movable property other than actionable claims and money. Includes stock, shares, crops, etc.

  2. Buyer: A person who buys or agrees to buy goods.

  3. Seller: A person who sells or agrees to sell goods.

  4. Contract of Sale: An agreement where the seller transfers or agrees to transfer the ownership of goods to the buyer for a price.

  5. Price: The money consideration for the sale of goods.

Types of Goods:

  1. Existing Goods: Owned or possessed by the seller at the time of contract.

  2. Future Goods: To be manufactured or acquired by the seller after the contract.

  3. Contingent Goods: Depend on the occurrence or non-occurrence of a future event.

Essentials of a Valid Contract of Sale:

  • Involves two parties: buyer and seller

  • Transfer of ownership (immediate or future)

  • Movable goods as subject matter

  • Price as monetary consideration

  • Voluntary consent and lawful object

Transfer of Ownership:

Ownership of goods passes from seller to buyer when:

  • Goods are ascertained

  • The contract is unconditional

  • Delivery is complete or as agreed

This is crucial because risk follows ownership—once the property is transferred, the buyer bears the risk of loss or damage.

Management Notes

Breach of Contract

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A breach of contract is a violation of any of the agreed-upon terms and conditions of a binding contract. The breach could be anything from a late payment to a more serious violation such as the failure to deliver a promised asset. A contract is binding and will hold weight if taken to court. To successfully claim a breach of contract, it is imperative to be able to prove that the breach occurred.

A breach of contract is when one party breaks the terms of an agreement between two or more parties. This includes when an obligation that is stated in the contract is not completed on time you are late with a rent payment, or when it is not fulfilled at all a tenant vacates their apartment owing six-months’ back rent.

Types of Breach of Contract

  1. Partial Breach

A partial breach, or failure to perform or provide some immaterial provision of the contract, may allow the aggrieved party to sue, though only for “actual damages.”

For example:  A homeowner hires a contractor to put a pond in his backyard, showing the contractor the black liner her would like installed under the sand. The contractor instead installs a blue liner of the same design and thickness, which is totally hidden from view. The contractor may have breached the precise terms of the contract, but the homeowner cannot ask that the contractor be ordered to take out the pond and start over with the black liner.

The homeowner could ask that the contractor be ordered to refund the difference in price between the requested black liner and the installed blue liner. In this case, because the color of the liner has no affect on functionality, and the price was basically the same, the difference in value, or “actual damages,” is zero.

  1. Material Breach of Contract

Failure of one party to perform his obligations under the contract in such a way that the value of the contract is destroyed, exposes that party to liability for breach of contract damages. For example, if the contractor in the above example had used thin plastic not intended for the rigors of maintaining a pond, which could not be expected to last as long as the pond liner, the homeowner might recover the actual cost to correct the material breach, which would include removing the pond and replacing the liner.

A material breach of contract may relieve the aggrieved party of his own obligations under the contract, and give him the right to sue for damages. Such a total breakdown of the material provisions of a contract may be referred to as a “fundamental” or “repudiatory” breach.

  1. Anticipatory Breach of Contract

Anticipatory breach, also known as “anticipatory repudiation,” occurs when one party to a contract stops acting in accordance with the contract, leading the other party to believe he has no intention of fulfilling his part of the agreement. In this case, the breaching party may give such an impression by his actions, or failure to act, such as failing to produce an ordered item, refusing to accept payment, or somehow making it obvious that he cannot or will not fulfill the terms of the contract. An anticipatory breach of contract enables the non-breaching party to end the contract and sue for breach of contract damages without waiting for the actual breach to occur. For example:

Jane agrees to sell her antique sewing machine to Amanda, and the two agree on the purchase price of $1,000, the sale to occur on May 1st. On April 25th, Amanda tells Jane that she cannot come up with the money on time. Following this communication, Jane can reasonably assume that Amanda is in anticipatory breach. This enables Jane to sell the sewing machine to someone else, or potentially file a lawsuit against Amanda for breach of contract.

  1. Specific Performance

In certain cases, an aggrieved party may not be made whole through the award of monetary damages. He may instead request the court to order “specific performance” of the terms of the contract. Specific performance may be any court-ordered action, forcing the breaching party to perform or provide exactly what was agreed to in the contract. Specific performance is most often ordered in a contract involving something for which a value is difficult to determine, such as land or an unusual or rare item of personal property.

Sometimes the process for dealing with a breach of contract is written in the original contract. For example, a contract may state that in the event of late payment, the offender must pay a $25 fee along with the missed payment. If the consequences for a specific violation are not included in the contract, then the parties involved may settle the situation among themselves, which could lead to a new contract, adjudication, or another type of resolution.

Management Notes

Essential Elements of a Valid Contract

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A contract is an agreement enforceable by law. According to Section 10 of the Indian Contract Act, 1872, an agreement becomes a valid contract when it fulfills certain essential conditions prescribed by law. These elements ensure that the contract is legally binding and enforceable in a court of law. If any of these essential elements is absent, the agreement may be void, voidable, or unenforceable. The following are the essential elements required for the formation of a valid contract under the Act.

1. Offer and Acceptance

A valid contract begins with a lawful offer made by one party and its acceptance by another. An offer is a proposal made with the intention of obtaining the assent of another person. Acceptance must be absolute, unconditional, and communicated to the offeror. The acceptance should correspond exactly with the terms of the offer. A valid agreement comes into existence only when the offer is accepted properly. The rules relating to offer and acceptance are contained in Sections 2(a), 2(b), and 3 to 9 of the Indian Contract Act, 1872.

2. Intention to Create Legal Relations

For an agreement to become a valid contract, the parties must intend to create legal obligations. Agreements made in social or domestic settings generally do not give rise to legal relations. However, business and commercial agreements are presumed to create legal obligations. The law recognizes only those agreements where the parties intend that their promises should be legally enforceable. This element distinguishes contracts from mere social arrangements. The existence of such intention ensures that parties can seek legal remedies if contractual obligations are not fulfilled.

3. Lawful Consideration

Consideration means something given or promised in return for a promise. According to Section 2(d), consideration may consist of an act, abstinence, or promise. A contract without consideration is generally void under Section 25, except in certain specified cases. The consideration must be lawful and should not be illegal, immoral, or opposed to public policy. Consideration forms the basis of mutual exchange between parties and makes the agreement binding. It ensures that each party receives something of value in return for its promise.

4. Capacity of Parties

The parties entering into a contract must be competent to contract. According to Section 11, a person is competent if he has attained the age of majority, is of sound mind, and is not disqualified by law. Minors, persons of unsound mind, and persons disqualified by law cannot enter into valid contracts. This requirement ensures that parties understand the nature and consequences of their actions. Contracts entered into by incompetent persons are generally void and cannot be enforced by law.

5. Free Consent

Consent is an essential element of a valid contract. According to Sections 13 and 14, consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake. If consent is obtained through any of these means, the contract may become voidable or void. Free consent ensures that parties voluntarily agree to the terms of the contract without pressure or deception. It protects individuals from unfair practices and promotes fairness in contractual dealings.

6. Lawful Object

The purpose or object of a contract must be lawful. Under Section 23, a contract is void if its object is forbidden by law, fraudulent, immoral, causes injury to another person, or is opposed to public policy. The law does not recognize agreements made for illegal purposes. This element ensures that contracts support lawful and ethical conduct in society. A lawful object is necessary to maintain public order and prevent the enforcement of agreements that could harm individuals or society.

7. Certainty of Terms

The terms of a contract must be clear, definite, and certain. Agreements with vague, ambiguous, or uncertain terms cannot be enforced by courts. The rights and obligations of the parties should be clearly stated so that there is no confusion regarding performance. Section 29 provides that agreements whose meaning is uncertain or incapable of being made certain are void. Certainty of terms helps avoid disputes and enables courts to determine the intentions of the parties accurately when enforcing contractual obligations.

8. Possibility of Performance

A valid contract must be capable of being performed. Agreements involving impossible acts are void under Section 56 of the Indian Contract Act. The impossibility may be physical, legal, or practical in nature. For example, an agreement to perform an unlawful act or an act that cannot be carried out is void. This requirement ensures that contractual obligations are realistic and achievable. The law does not compel parties to perform acts that are impossible from the beginning.

9. Not Expressly Declared Void

An agreement must not belong to a category expressly declared void by the Act. Certain agreements, such as agreements in restraint of marriage (Section 26), restraint of trade (Section 27), restraint of legal proceedings (Section 28), and wagering agreements (Section 30), are declared void. Even if all other essential elements are present, such agreements cannot become valid contracts. This provision prevents the enforcement of agreements considered harmful to individuals, business interests, or public welfare.

10. Legal Formalities

Some contracts must comply with specific legal formalities to be enforceable. Depending on the nature of the contract, the law may require writing, registration, stamping, or attestation. Although most contracts can be made orally, certain agreements must satisfy prescribed legal requirements. Failure to comply with such formalities may render the contract unenforceable. Observance of legal formalities provides authenticity, certainty, and legal validity to contractual transactions and helps prevent disputes regarding the existence or terms of the contract.

Management Notes

Characteristics of Negotiable Instrument

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A negotiable instrument has the following characteristics.

  1. Property

The possessor of the negotiable instrument is presumed to be the owner of the property contained therein. A negotiable instrument does not merely give possession of the instrument but right to property also. The property in a negotiable instrument can be transferred without any formality. In the case of a bearer instrument, the property passed by mere delivery to the transferee. In the case of an order instrument, endorsement and delivery are required for the transfer of property.

  1. Title

The transferee of a negotiable instrument is known as holder in due course.’ A bonafide transferee for value is not affected by any defect of title on the part of the transferor or of any of the previous holders of the instrument. This is the main distinction between a negotiable instrument and other subjects of ordinary transfer. The general rule of nemo dat quod non habet does not apply to negotiable instruments.

  1. Rights

The transferee of the negotiable instrument can sue in his own name, in case of dishonor.

A negotiable instrument can be transferred any number of times till it is at maturity. The holder of the instrument need not give notice of transfer to the party liable on the instrument to pay.

  1. Presumptions

Certain presumptions apply to all negotiable instruments e.g. a presumption that consideration has been paid under it.

  1. Prompt Payment

A negotiable instrument enables the holder to expect prompt payment because a dishonor means the ruin of the credit of all persons who are parties to the instrument.

Examples of negotiable instruments

(a) Negotiable instruments recognized by statute

(i) Bills of exchange

(ii) Promissory notes.

(iii) Cheques

(b) Negotiable instruments recognized by usage or custom :

(i) Hundis

(ii) Share warrants.

(iii) Dividend warrants

(iv) Banker’s drafts.

(v) Circular notes.

(vi) Bearer debentures.

(vii) Debentures of Bombay port trust.

(viii) Railway receipts.

(ix) Delivery orders.

The list of negotiable instruments is not a closed chapter. With the growth of commerce, new kinds of securities may claim recognition as negotiable instruments.

Example of Non-negotiable instruments

(i) Money orders.

(ii) Deposit receipts.

(iii) Share certificates

(iv) Dock warrants.

(v) Postal orders.

Management Notes

Consumer Protection Act 1986, Objectives, Central Council, State Council

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Consumer Protection Act of 1986 was enacted in India to safeguard consumer rights and interests, providing a legal framework to address consumer grievances and enforce fair practices. This Act established redressal mechanisms, including Consumer Courts at the district, state, and national levels, offering consumers a fast, efficient, and affordable way to resolve disputes against unfair or restrictive trade practices.

Objectives of the Consumer Protection Act, 1986:

  • Protect Consumer Rights:

Act aims to safeguard consumers from exploitation and unfair trade practices, providing a secure platform to uphold their rights.

  • Encourage Fair Practices:

By regulating trade practices, the Act discourages deceptive advertising, adulteration, and misleading labeling, promoting ethical business practices.

  • Promote Consumer Awareness:

Act encourages awareness by educating consumers about their rights, empowering them to make informed choices and stand up for justice.

  • Provide Redressal Mechanism:

Act establishes a simple, fast, and cost-effective dispute resolution mechanism at different administrative levels, from district to national, for handling consumer complaints.

  • Compensate for Deficiencies in Services and Goods:

It enables consumers to seek compensation for substandard goods and services, including defective products, inadequate services, or unfair practices.

  • Prevent Exploitation:

The Act addresses various forms of consumer exploitation, ensuring businesses maintain quality standards and fair pricing.

Consumer Protection Councils under the Act:

The Consumer Protection Act, 1986, introduced three main Consumer Protection Councils: the Central Council, the State Council, and the District Council. Each Council has specific responsibilities and organizational structures aimed at protecting and promoting consumer rights.

Central Consumer Protection Council

Establishment: The Central Consumer Protection Council (Central Council) is set up by the Central Government to promote and protect consumer rights at the national level.

Objectives: The Central Council is primarily concerned with safeguarding the rights of consumers, ensuring that these rights are implemented and respected nationwide. It addresses consumer issues and creates awareness among the public.

Composition:

  • The Central Council is headed by the Minister of Consumer Affairs, who acts as its Chairman.
  • Other members include representatives from various sectors such as trade, industry, and consumer organizations, as well as members of Parliament and government officials.
  • The Council can also appoint subject experts to advise on specific issues.

Functions:

  • Promoting Consumer Rights: The Council promotes six fundamental consumer rights, including the right to be protected, informed, and heard, among others.
  • Advising on Consumer Policies: The Council advises the government on policy matters related to consumer protection and laws.
  • Creating Consumer Awareness: It undertakes initiatives to create widespread consumer awareness and addresses issues through public outreach programs.

State Consumer Protection Council

Establishment: Each state government is responsible for establishing a State Consumer Protection Council (State Council) to focus on state-specific consumer issues.

Objectives: The State Council’s role mirrors that of the Central Council but on a smaller scale, focusing on protecting and promoting consumer rights within the state.

Composition:

  • The State Council is chaired by the State Minister in charge of consumer affairs.
  • Members include representatives from the government, consumer organizations, trade, industry, and occasionally members of the state legislature.

Functions:

  • Addressing State-Specific Consumer Issues: The State Council addresses consumer grievances and issues that are specific to the state, such as local trade malpractices.
  • Policy Recommendations: The State Council provides recommendations to the state government on matters related to consumer protection and necessary legal amendments.
  • Promoting Consumer Education: It supports state-wide initiatives to educate consumers about their rights and available grievance redressal mechanisms.

District Consumer Protection Council

While the District Council is less prominent compared to the Central and State Councils, it operates at the district level to address consumer issues specific to local areas. Each district may have representatives that coordinate with state authorities, ensuring that consumer issues are addressed even at a grassroots level.

Rights Covered Under the Consumer Protection Act, 1986

The Act ensures six key consumer rights:

  1. Right to Safety: Protection from hazardous goods and services.
  2. Right to be Informed: Accurate information on goods and services, including labeling and pricing.
  3. Right to Choose: Access to a variety of goods and services at competitive prices.
  4. Right to be Heard: Representation in decision-making processes that affect consumers.
  5. Right to Redressal: Compensation or corrective measures in case of harm caused by unfair practices.
  6. Right to Consumer Education: Information and programs to educate consumers on their rights and responsibilities.

Consumer Dispute Redressal Forums:

The Act also established a three-tiered structure for addressing consumer disputes:

  • District Consumer Disputes Redressal Forum (District Forum):

Handles claims up to a specified monetary limit, offering a local platform for dispute resolution.

  • State Consumer Disputes Redressal Commission (State Commission):

Addresses claims beyond the District Forum’s jurisdiction and appeals against its decisions.

  • National Consumer Disputes Redressal Commission (National Commission):

Handles cases beyond the State Commission’s financial jurisdiction and appeals against state decisions.

Amendments and Evolution of the Act

Since its inception in 1986, the Consumer Protection Act has been amended to keep up with the changing consumer landscape, ensuring continued relevance. The Consumer Protection Act, 2019 replaced the 1986 Act, broadening its scope by introducing newer frameworks such as online dispute resolution, stricter penalties, and more transparent processes to address grievances more effectively.

Management Notes

Consumer

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Consumer is a person or a group who intends to order, orders, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, not directly related to entrepreneurial or business activities.

Consumer Goods Sector

The consumer goods sector is a category of stocks and companies that relate to items purchased by individuals and households rather than by manufacturers and industries. These companies make and sell products that are intended for direct use by the buyers for their own use and enjoyment. This sector includes companies involved with food production, packaged goods, clothing, beverages, automobiles, and electronics.

Consumer goods can be broadly categorized as durable or nondurable, and the overall consumer goods sector can be broken down across many different industries. While some product types, such as food, are necessary, others, such as automobiles, are considered luxury items. In general, when the economy is growing, consumer demand grows and the sector will see an increased demand for higher-end products. When consumer demand shrinks, there is an increased relative demand for value products.

Many companies in the consumer goods sector rely heavily on advertising and brand differentiation. Performance in the consumer goods sector depends heavily on consumer behavior. Developing new flavors, fashions, and styles and marketing them to consumers is a priority.

Modern Internet technology has had an enormous and ongoing impact on the consumer goods sector. The ways products are manufactured, distributed, marketed, and sold have all evolved dramatically over the past few decades.

Subsectors

The consumer goods sector includes a diverse array of varied industries. Everything that consumers buy and use can fall into this category, so understanding how their different characteristics can affect industry performance can be important. Broadly, this sector can be divided into durable and nondurable goods. Many nondurable goods can be considered fast moving consumer goods, which are packaged goods with high sales volume, rapid inventory turnover, and often short shelf lives, such as foods. Durable goods include many big-ticket consumer goods, such as cars, major appliances, and household electronics.

Marketing and Branding

Marketing, advertising, and brand differentiation are key considerations for companies in the consumer goods sector. Many consumer goods sector companies are faced with a range of close competitors, substitute goods, and potential rivals. Competition on price and quality is often fierce, so brand identification and differentiation are critical to consumer goods sector companies’ performance.

Technology

Technological advancement is at the heart of consumer goods sector industry trends. Technological advancement has revolutionized supply chains, marketing, and the products themselves in this sector. Continuous and interconnected supply chains are driving operational efficiencies. Using new technologies, many consumer goods sector companies are engaging with consumers in more direct and innovative ways. Consumers research, purchase, and engage with brands digitally, and companies in this sector have to take this into account in their strategies. Consumer participation in brands has moved beyond just buying and consuming the products, with continuous consumer feedback and on-demand access to consumer data in real time. Connectedness and interoperability of consumer products have become key selling points for companies in this sector.

Management Notes

Goods and Services

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Goods and services are often pronounced in the same breath. These are offered by the companies to the customers to provide utility and satisfy their wants. At present, the success of the business lies in the combination of best quality of goods and customer oriented services. ‘Goods’ are the physical objects while ‘Services’ is an activity of performing work for others.

Goods implies the tangible commodity or product, which can be delivered to the customer. It involves the transfer of ownership and possession from seller to the buyer. On the other hand, services alludes to the intangible activities which are separately identifiable and provides satisfaction of wants.

One of the main difference between goods and services is that the former is produced and the latter is performed.

Goods

Goods refer to the tangible consumable products, articles, commodities that are offered by the companies to the customers in exchange for money. They are the items that have physical characteristics, i.e. shape, appearance, size, weight, etc. It is capable of satisfying human wants by providing them utility. Some items are made for one-time use by the consumer while some can repeatedly be used.

Goods are the products which are traded on the market. There is a time gap in the production, distribution, and consumption of goods. When the buyer purchases goods and pays the price, the ownership is passed from seller to buyer.

Products are manufactured in batches, which produces identical units. In this way, a particular product offered by the company will have the same specifications and characteristics all over the market.

Example: Books, pen, bottles, bags, etc.

Services

Services are the intangible economic product that is provided by a person on the other person’s demand. It is an activity carried out for someone else.

They can only be delivered at a particular moment, and hence they are perishable in nature. They lack physical identity. Services cannot be distinguished from the service provider. The point of sale is the basis for consumption of services. Services cannot be owned but can only be utilized. You can understand this by an example: If you buy a ticket for watching a movie at the multiplex, it doesn’t mean that you purchased the multiplex, but you have paid the price of availing services.

Service receiver should fully participate when the service is provided. Evaluation of services is a relatively tough task because different service providers offer the same services but charges a different amount. It may be due to the method they provide services is different or the parameters they consider in valuing their services vary.

Example: Postal services, banking, insurance, transport, communication, etc.

Goods

Services
Meaning Goods are the material items that can be seen, touched or felt and are ready for sale to the customers. Services are amenities, facilities, benefits or help provided by other people.
Nature Tangible Intangible
Transfer of ownership Yes No
Evaluation Very simple and easy        Complicated
Return Goods can be returned.   Services cannot be returned back once they are provided.
Separable Yes, goods can be separated from the seller. No, services cannot be separated from the service provider.
Variability Identical Diversified
Storage Goods can be stored for use in future or multiple use. Services cannot be stored.
Production and Consumption There is a time lag between production and consumption of goods. Production and Consumption of services occurs simultaneously.

Differences between Goods and Services

The basic differences between goods and services are mentioned below:

  1. Goods are the material items that the customers are ready to purchase for a price. Services are the amenities, benefits or facilities provided by the other persons.
  2. Goods are tangible items i.e. they can be seen or touched whereas services are intangible items.
  3. When the buyer purchases the goods by paying the consideration, the ownership of goods moves from the seller to the buyer. Conversely, the ownership of services is non-transferable.
  4. The evaluation of services is difficult because every service provider has a different approach of carrying out services, so it is hard to judge whose services are better than the other as compared to goods.
  5. Goods can be returned to or exchanged with the seller, but it is not possible to return or exchange services, once they are provided.
  6. Goods can be distinguished from the seller. On the other hand, services and service provider are inseparable.
  7. A particular product will remain same regarding physical characteristics and specifications, but services can never remain same.
  8. Goods can be stored for future use, but services are time bound, i.e. if not availed in the given time, then it cannot be stored.
  9. First of all the goods are produced, then they are traded and finally consumed, whereas services are produced and consumed at the same time.

Generally, companies keep a stock of goods with itself to fulfill an urgent requirement of goods. It also keeps track of the quantity of goods at the beginning and the end. In contrast to services are delivered as per the request of the customer itself. In short, the production of services depends on the customer’s demand. Both are subject to tax like Value Added Tax (VAT) is levied on goods while service tax on services provided.

Sometimes products offered by the companies in such a way that it‘s hard to segregate goods and services like in the case of a restaurant, you pay for the food you eat as well as for the add-on services of the waiters, chef, watchman and so on.

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