UNIT-3: Market Structures, Product Life-Cycle (PLC), Pricing and Financial

Accounting
Market Structures: Definition & common features of market and classifications of
markets. Evaluation of market structures-Perfect Competition, Monopoly, Monopolistic
Competition and Oligopoly.
Product Lifecycle and Pricing: Definition, various stages of PLC, and Life-Cycle Costs;
objectives and methods of pricing.
Introduction to Financial Accounting: Definition, basic principles and double-entry
book-keeping, practice of accounting process-Journal, ledger, trial balance and final
accounts (simple problems)

DEFINITION OF MARKET
“Market is not a geographical meeting place but as any getting together of buyers
and sellers, in person, by mail, telephone, telegraph and internet or any other
means of communication”
------ Prof. Mitchel
The essential features/characteristics/elements of a market are:
(1) An Area:
In economics, a market does not mean a particular place but the whole region
where sellers and buyers of a product ate spread. Modem modes of communication
and transport have made the market area for a product very wide.

(2) One Commodity:

In economics, a market is not related to a place but to a particular product.

Hence, there are separate markets for various commodities. For example, there are
separate markets for clothes, grains, jewellery, etc.

(3) Buyers and Sellers:

The presence of buyers and sellers is necessary for the sale and purchase of a
product in the market. In the modem age, the presence of buyers and sellers is not
necessary in the market because they can do transactions of goods through letters,
telephones, business representatives, internet, etc.

(4) Free Competition:

There should be free competition among buyers and sellers in the market. This
competition is in relation to the price determination of a product among buyers and
sellers.

(5) One Price:

The price of a product is the same in the market because of free competition among
buyers and sellers.
1.1. 3.3.2 CLASSIFICATION OF MARKETS: Market can be classified on the
basis of location, time, form of products or services, quantity of product, control,
transactions and competition. Types of market are as following:

1.2. Evaluation of Market Structures:

(A) Markets Based on Location:

1. Local Market: The market where the products and services are produced and
sold at the same place, it is called Local market. For example; market for clay
utensils, market of handmade items as they are limited to the respective city or
village.

2. Regional Market: When the selling of the products and services is limited to a
region or state, then is called Regional Market. It means that the market is limited
to particular state which are spread in various regions of a state. For example;
market of regional newspaper.
3. National Market: When the products and services are purchased and sold
throughout the country or nation, then the market is called National Market.
Such type of market is spread throughout various states. For example; Dairy
products, Sari market, Hindi novels.

4. International Market: International market is extended to various country of

the world. The sales and purchase in this market is generally referred to as ‘Import-
export’. For example; Market of mobiles phones, electronics items, english novels
etc. Due to new innovations, better transportation and communication facilities,
there is a change in the classification based on the location and geographical area.
The same items and services can be of both regional and national market
 simultaneously.

(B) Market Based on Quantity: The market based on quantity is classified into
two main parts:

1. Wholesale Market: The sales and purchase of goods and services take place
on large scale, so it is called wholesale market. Wholesale traders are intermediate
between producer and retail traders.

2. Retail Market: The sales and purchase take place at a small scale, so it is
called Retail market. Thus, the retail traders become an important link and provide
the goods and services to the customers as they buy them from wholesalers.

(C) Market Based on Competition: Normally there are two major market
based on competition:

1. Perfect Markets: The markets where large number of sellers and large number of buyers
existed to exchange goods and services for profit are called perfect markets. This can be also
considered as hypothetical market where competition is at its greatest possible level. Neo-
classical economists argued that perfect competition would produce the best possible
outcomes for consumers, and society. Perfect markets are said to exist in perfect competition
and should satisfy certain conditions. Here is a set of market conditions which are
assumed to prevail in the discussion of what perfect competition might be if it were
theoretically possible to ever obtain such perfect market conditions.
PERFECT COMPETITION
Meaning and Definition
A Perfect Competition market is that type of market in which the number of buyers
and sellers is very large, all are engaged in buying and selling a homogeneous
product without any artificial restrictions and possessing perfect knowledge of the
market at a time.

In other words it can be said—”A market is said to be perfect when all the potential
buyers and sellers are promptly aware of the prices at which the transaction take
place. Under such conditions the price of the commodity will tend to be equal
everywhere.”

In this connection Mrs. Joan Robinson has said—”Perfect Competition prevails

when the demand for the output of each producer is perfectly elastic.”
According to Boulding—”A Perfect Competition market may be defined as a large
number of buyers and sellers all engaged in the purchase and sale of identically
similar commodities, who are in close contact with one another and who buy and
sell freely among themselves.”
Characteristics of Perfect Competition:
The following characteristics are essential for the existence of Perfect
Competition:
1. Large Number of Buyers and Sellers:
The first condition is that the number of buyers and sellers must be so large that
none of them individually is in a position to influence the price and output of the
industry as a whole. In the market the position of a purchaser or a seller is just like
a drop of water in an ocean.

2. Homogeneity of the Product:

Each firm should produce and sell a homogeneous product so that no buyer has
any preference for the product of any individual seller over others. If goods will be
homogeneous then price will also be uniform everywhere.

3. Free Entry and Exit of Firms:

The firm should be free to enter or leave the firm. If there is hope of profit the firm
will enter in business and if there is profitability of loss, the firm will leave the
business.

4. Perfect Knowledge of the Market:

Buyers and sellers must possess complete knowledge about the prices at which
goods are being bought and sold and of the prices at which others are prepared to
buy and sell. This will help in having uniformity in prices.

5. Perfect Mobility of the Factors of Production and Goods:

There should be perfect mobility of goods and factors between industries. Goods
should be free to move to those places where they can fetch the highest price.

6. Absence of Price Control:

There should be complete openness in buying and selling of goods. Here prices are
liable to change freely in response to demand and supply conditions.

7. Perfect Competition among Buyers and Sellers:

In this purchasers and sellers have got complete freedom for bargaining, no
restrictions in charging more or demanding less, competition feeling must be
present there.

8. Absence of Transport Cost:

There must be absence of transport cost. In having less or negligible transport cost
will help complete market in maintaining uniformity in price.

9. One Price of the Commodity:

There is always one price of the commodity available in the market.
MONOPOLY
Meaning:
The word monopoly has been derived from the combination of two words i.e., ‘Mono’
and ‘Poly’. Mono refers to a single and poly to control.

In this way, monopoly refers to a market situation in which there is only one seller
of a commodity.

There are no close substitutes for the commodity it produces and there are barriers
to entry. The single producer may be in the form of individual owner or a single
partnership or a joint stock company. In other words, under monopoly there is no
difference between firm and industry.

Monopolist has full control over the supply of commodity. Having control over the
supply of the commodity he possesses the market power to set the price. Thus, as a
single seller, monopolist may be a king without a crown. If there is to be monopoly,
the cross elasticity of demand between the product of the monopolist and the
product of any other seller must be very small.

Definitions:
“Pure monopoly is represented by a market situation in which there is a single seller
of a product for which there are no substitutes; this single seller is unaffected by
and does not affect the prices and outputs of other products sold in the economy.”
Bilas

“Monopoly is a market situation in which there is a single seller. There are no close
substitutes of the commodity it produces, there are barriers to entry”. -
Koutsoyiannis

“Under pure monopoly there is a single seller in the market. The monopolist
demand is market demand. The monopolist is a price-maker. Pure monopoly
suggests no substitute situation”. -A. J. Braff

“A pure monopoly exists when there is only one producer in the market. There are
no dire competitions.” -Ferguson

“Pure or absolute monopoly exists when a single firm is the sole producer for a
product for which there are no close substitutes.” -McConnel

Features:
We may state the features of monopoly as:
1. One Seller and Large Number of Buyers:
The monopolist’s firm is the only firm; it is an industry. But the number of buyers is
assumed to be large.
2. No Close Substitutes:
There shall not be any close substitutes for the product sold by the monopolist. The
cross elasticity of demand between the product of the monopolist and others must
be negligible or zero.

3. Difficulty of Entry of New Firms:

There are either natural or artificial restrictions on the entry of firms into the
industry, even when the firm is making abnormal profits.

4. Monopoly is also an Industry:

Under monopoly there is only one firm which constitutes the industry. Difference
between firm and industry comes to an end.

5. Price Maker:
Under monopoly, monopolist has full control over the supply of the commodity. But
due to large number of buyers, demand of any one buyer constitutes an infinitely
small part of the total demand. Therefore, buyers have to pay the price fixed by the
monopolist.

Nature of Demand and Revenue under Monopoly:

Under monopoly, it becomes essential to understand the nature of demand curve
facing a monopolist. In a monopoly situation, there is no difference between firm
and industry. Therefore, under monopoly, firm’s demand curve constitutes the
industry’s demand curve. Since the demand curve of the consumer slopes
downward from left to right, the monopolist faces a downward sloping demand
curve. It means, if the monopolist reduces the price of the product, demand of that
product will increase and vice- versa. (Fig. 1).
In Fig. 1 average revenue curve of the monopolist slopes downward from left to right.
Marginal revenue (MR) also falls and slopes downward from left to right. MR curve is
below AR curve showing that at OQ output, average revenue (= Price) is PQ where as
marginal revenue is MQ. That way AR > MR or PQ > MQ.

MONOPOLISTIC COMPETITION

In monopolistic competition, the market has features of both perfect competition

and monopoly.

A monopolistic competition is more common than pure competition or pure monopoly.

In order to understand monopolistic competition, let’s look at the market for soaps
and detergents in India. There are many well-known brands like Lux, Rexona, Dettol,
Dove, Pears, etc. in this segment.
Since all manufacturers produce soaps, it appears to be an example of perfect
competition. However, on close scrutiny, we find that each seller varies the product
slightly to make it different from its competitors.
Hence, Lux focuses on making beauty soaps, Liril on freshness, Dettol on antiseptic
properties, Dove on smooth skin, etc. This allows each seller to attract buyers to itself
based on some factor other than price.
This market has a mix of both perfect competition and monopoly and is a classic
example of monopolistic competition.

Features of Monopolistic Competition

1. Large number of sellers: In a market with monopolistic competition, there are
a large number of sellers who have a small share of the market.
2. Product differentiation: In monopolistic competition, all brands try to
create product differentiation to add an element of monopoly over the competing
products. This ensures that the product offered by the brand does not have a
perfect substitute. Therefore, the manufacturer can raise the price of the
product without having to worry about losing all its customers to other brands.
However, in such a market, while all brands are not perfect substitutes, they are
close substitutes for each other. Hence, the seller might lose at least some
customers to his competitors.
3. Freedom of entry or exit: Like in perfect competition, firms can enter and exit
the market freely.
4. Non-price competition: In monopolistic competition, sellers compete on factors
other than price. These factors include aggressive advertising, product
development, better distribution, after sale services, etc. Sellers don’t cut the
price of their products but incur high costs for the promotion of their goods. If
 the firms indulge in price-wars, which is the possibility under perfect
competition, some firms might get thrown out of the market.
5. Selling Cost: Another feature of the monopolistic competition is that every firm
tries to promote its product by different types of expenditures. Advertisement is
the most important constituent of the selling cost which affects demand as well
as cost of the product. The main purpose of the monopolist is to earn maximum
profits; therefore, he adjusts this type of expenditure accordingly.

6. Lack of Perfect Knowledge: The buyers and sellers do not have perfect
knowledge of the market. There are innumerable products each being a close
substitute of the other. The buyers do not know about all these products, their
qualities and prices.
Therefore, so many buyers purchase a product out of a few varieties which are
offered for sale near the home. Sometimes a buyer knows about a particular
commodity where it is available at low price. But he is unable to go there due
to lack of time or he is too lethargic to go or he is unable to find proper
conveyance. Likewise, the seller does not know the exact preference of buyers
and is, therefore, unable to get advantage out of the situation.

7. Less Mobility: Under monopolistic competition both the factors of production

as well as goods and services are not perfectly mobile.

8. More Elastic Demand/Downward sloping curve: Under monopolistic

competition, demand curve is more elastic. In order to sell more, the firms
must reduce its price.

Oligopoly Markets:
Oligopoly as a market structure is distinctly different from other market forms. The word
Oligopoly is derived from two Greek words – ‘Oligi’ meaning ‘few’ and ‘Polein’ meaning ‘to
sell’. Oligopoly is defined as a market structure with a small number of firms, none of which
can keep the others from having significant influence. An Oligopoly market situation is
also called ‘competition among the few’. In this article, we will look at Oligopoly definition
and some important characteristics of this market structure.

Few firms Under Oligopoly, there are a few large firms although the exact number of firms is
undefined. Also, there is severe competition since each firm produces a significant portion of
the total output.

Barriers to Entry

Under Oligopoly, a firm can earn super-normal profits in the long run as there are barriers
to entry like patents, licenses, control over crucial raw materials, etc. These barriers prevent
the entry of new firms into the industry.
Non-Price Competition

Firms try to avoid price competition due to the fear of price wars in Oligopoly and hence
depend on non-price methods like advertising, after sales services, warranties, etc. This
ensures that firms can influence demand and build brand recognition.

Interdependence

Under Oligopoly, since a few firms hold a significant share in the total output of the industry,
each firm is affected by the price and output decisions of rival firms. Therefore, there is a lot
of interdependence among firms in an oligopoly. Hence, a firm takes into account the action
and reaction of its competing firms while determining its price and output levels.

Nature of the Product

Under oligopoly, the products of the firms are either homogeneous or differentiated.

Selling Costs

Since firms try to avoid price competition and there is a huge interdependence among firms,
selling costs are highly important for competing against rival firms for a larger market share.

No unique pattern of pricing behaviour

Under Oligopoly, firms want to act independently and earn maximum profits on one hand and
cooperate with rivals to remove uncertainty on the other hand.

Depending on their motives, situations in real-life can vary making predicting the pattern of
pricing behaviour among firms impossible. The firms can compete or collude with other firms
which can lead to different pricing situations.

Indeterminateness of the Demand Curve

Unlike other market structures, under Oligopoly, it is not possible to determine the demand
curve of a firm. This is because on one hand, there is a huge interdependence among rivals.
And on the other hand there is uncertainty regarding the reaction of the rivals. The rivals can
react in different ways when a firm changes its price and that makes the demand curve
indeterminate.

Firms behaviour under Oligopoly: Based on the objectives of the firms, the magnitude of
barriers to entry and the nature of government regulation, there are different possible
outcomes in relation to a firm’s behavior under Oligopoly. These are:
 Stable prices
 Price wars
 Collusion for higher prices

Further, Oligopoly can either be collusive or non-collusive. Collusive oligopoly is a market

situation wherein the firms cooperate with each other in determining price or output or both.
A non-collusive oligopoly refers to a market situation where the firms compete with each
other rather than cooperating.

(D) Market on the basis of Time:

1. Very short period market: It refers to that type of market in which the
commodities are perishable (can be used/ consumed once) and supply of
commodities cannot be changed at all as factors like labour, capital and
organization are fixed. For example; commodities like vegetables, flowers, fish,
eggs, fruits, milk, etc. are perishable goods and the supply of which cannot be
changed in the very short period.

2. Short-period Market: Short period is a period which is slightly longer than the
very short period and supply can be increased by increasing employment
considering the given fixed capital equipment.
3. Long-period Market: The supply of commodities may be increased by making
changes to even fixed factors of production and the output adjustments can be
made accordingly.

4. Very long-Period or secular period: The time period is very long and the secular
change is recorded over the period in the population, supply of raw material.

(E) Market on the basis of Nature of Transactions:

1. Spot Market: Spot markets refer to those markets where goods are physically
transferred on the spot.

2. Future Market: Future Market is related to those transactions which involve

contracts of the future date.

(F) Market on the basis of Regulation:

1. Regulated Market: In this market, transactions are statutorily regulated so as to

put an end to unfair practices. Such markets may be established for specific
products or a group of products. For example; stock exchange.

2. Unregulated Market: It is also called as free market as there are no

restrictions on the transactions.
Differences between Perfect Competition and Monopoly

Point of
Perfect Competition Monopoly
difference
Number of There are large number of
There is a single seller/ firm
firms/ sellers firms/ sellers
Price taker/
Firms are price takers Firm is price maker
maker
MR & AR MR=AR AR>MR
The seller can sell any number The seller can sell
Change in
of goods at the prevailing price additional units only by
price
without changing the price reducing the price
Situation of MR and AR are parallel to x- Both MR and AR are
MR and AR axis downward sloping
There is freedom of entry and
Freedom There is no freedom of entry
exit for firms
MC and AR MC = AR (price) MC< AR
Price Same price is charged from There is price
discrimination every customer discrimination
The firm earns super-
The firm earns only normal
Long-run normal profit in the long-
profit in the long-run
run
Optimum Goods are produced at Goods are produced below
scale optimum scale optimum scale
Shape of Demand curve is Horizontal to Demand curve is sloping
demand curve x-axis downwards from left to right
Nature of
Elastic nature Inelastic nature
demand curve
Selling cost Nil Informative
Mobility of
Factors of production are Factors of production are
factors of
mobile not mobile
production
Relationship
Firm and industry are one
between firm Each firm is a part of industry
and the same
and industry
Public utilities like railways,
Examples Financial markets
RBI etc

Differences between Perfect Competition and Monopolistic Competition

 Point of
Perfect Competition Monopolistic Competition
difference
There are many firms but
Number of There are large number of
lesser than firms in perfect
firms firms in the market
competition
Non price competition is
Non-price Non-price competition is present
competition perfect Eg:- after sales service, a gift
etc
Nature of There are homogeneous There is product
product product differentiation
Shape of Shape of the demand curve
Shape of the demand curve is
demand is sloping downwards from
horizontal to x-axis
curve left to right
Price taker/
Firms are price takers Firm is price maker
maker
MR and AR are parallel to x- Both MR and AR are
Situation of
axis and downward sloping and MR <
MR and AR
MR = AR AR
Mobility of
There is perfect mobility of There is no perfect mobility
factors of
factors of production of factors of production
production

MC and AR MC = AR (price) MC< AR

Selling cost Nil There are high selling cost

Optimum Goods are produced at Goods are produced below
scale optimum scale optimum scale
Average Average revenue of all the firms Average revenue of different
revenue are the same firms is different

Substitutions No substitutes Close substitutes

Perfect knowledge to the Imperfect knowledge to the

Knowledge of
buyers regarding market buyers regarding market
the buyers
conditions conditions

Same price is charged from Different prices are charged

Price
every customer based on product features

Electronic goods,
Examples Financial markets restaurants, retail services
etc

• Product Lifecycle (PLC):

.1. Definition and Stages of PLC:
Product life cycle (PLC) is the cycle through which every product goes through
from introduction to withdrawal or eventual demise. PLC can alert a company as to
the health of the product in relation to the market it serves. PLC also forces a
continuous scan of the market and allows the company to take corrective action
faster.

The product life cycle is the process a product goes through from when it is first
introduced into the market until it declines or is removed from the market. The life
cycle has four stages
- introduction, growth, maturity and decline. While some products may stay in a
prolonged maturity state, all products eventually phase out of the market due to several
factors including saturation, increased competition, decreased demand and
dropping sales. Additionally, companies use PLC analysis (examining their product's
life cycle) to create strategies to sustain their product's longevity or change it to
meet with market demand or developing technologies. Generally, there are four
stages to the product life cycle, from the product's development to its decline in
value and eventual retirement from the market.

1. Introduction:

Once a product has been developed, the first stage is its introduction stage. In this
stage, the product is being released into the market. When a new product is
released, it is often a high- stakes time in the product's life cycle - although it does
not necessarily make or break the product's eventual success. During the
introduction stage, marketing and promotion are at a high - and the company often
invests the most in promoting the product and getting it into the hands of
consumers.

It is in this stage that the company is first able to get a sense of how consumers
respond to the product, if they like it and how successful it may be. However, it is
also often a heavy- spending period for the company with no guarantee that the
product will pay for itself through sales.

Costs are generally very high and there is typically little competition. The principle
goals of the introduction stage are to build demand for the product and get it
into the hands of consumers, hoping to later cash in on its growing
popularity.

2. Growth

By the growth stage, consumers are already taking to the product and increasingly
buying it. The product concept is proven and is becoming more popular - and
sales are increasing. Other companies become aware of the product and its space in
the market, which is beginning to draw attention and increasingly pull in revenue. If
competition for the product is especially high, the company may still heavily invest in
advertising and promotion of the product to beat out competitors. As a result of the
product growing, the market itself tends to expand. The product in the growth
stage is typically tweaked to improve functions and features.

As the market expands, more competition often drives prices down to make the
specific products competitive. However, sales are usually increasing in volume and
generating revenue. Marketing in this stage is aimed at increasing the product's
market share.
3. Maturity

When a product reaches maturity, its sales tend to slow or even stop - signaling
a largely saturated market. At this point, sales can even start to drop. Pricing at this
stage can tend to get competitive, signaling margin shrinking as prices begin falling
due to the weight of outside pressures like competition or lower demand. Marketing
at this point is targeted at fending off competition, and companies will often develop
new or altered products to reach different market segments.

Given the highly saturated market, it is typically in the maturity stage of a product
that less successful competitors are pushed out of competition - often called the
"shake-out point."

In this stage, saturation is reached, and sales volume is maxed out. Companies
often begin innovating to maintain or increase their market share, changing or
developing their product to meet with new demographics or developing
technologies. The maturity stage may last a long time or a short time depending
on the product.

4. Decline

Although companies will generally attempt to keep the product alive in the maturity
stage as long as possible, decline for every product is inevitable. In the decline
stage, product sales drop significantly and consumer behaviour changes as there
is less demand for the product. The company's product loses more and more
market share, and competition tends to cause sales to deteriorate.

Marketing in the decline stage is often minimal or targeted at already loyal

customers, and prices are reduced. Eventually, the product will be retired out of the
market unless it is able to redesign itself to remain relevant or in-demand. For
example, destruction of land phones, Walkman, Type writers, Tape recorders,
VCR, Real Cameras, etc.

.2. Lifecycle Costs:

Life-Cycle Costs are all the costs associated with the product for its entire life cycle.
Product life cycle costing traces costs and revenues of each product over several
calendar periods throughout their entire life cycle. There are three types costs
associated with product life cycle can be categorised as Initial costs, Operating
costs, & Disposal costs. In other way the costs are included in different stages of
the product life cycle.

 Development phase - R&D cost/Design cost.

 Introduction phase – Promotional cost/Capacity costs.
• Growth phase/Maturity – Manufacturing cost/Distribution costs/Product support
cost.
 Decline/Replacement phase – Plants reused/sold/scrapped/related costs.

Objectives of Lifecycle costing:

 This assists management to smartly manage total cost throughout product’s life
cycle.
 To identify areas in which cost reduction efforts are likely to more effective.
 To estimate the cost impact of various designs, and support options.

Benefits:

The following are the benefits of product life cycle costing:

(i) It results in earlier actions to generate revenue or to lower costs than otherwise
might be considered.
(ii) It ensures better decision from a more accurate and realistic assessment of
revenues and costs, at-least within a particular life cycle stage.

(iii) It promotes long-term rewarding.

(iv) It provides an overall framework for considering total incremental costs over the
life span of the product.

PRICE
PRICING METHODS

1. Cost-based Pricing Methods:

a. Cost Plus Pricing: This is also called ‘full cost or mark up’. Here the average
cost at normal capacity of output is ascertaining and then a conventional
 margin of profit is added to the cost to arrive at the price. In other words, find
out the product unit’s total cost and add a percentage of profit to arrive at the
selling price.
b. Marginal Cost Pricing: In marginal cost pricing, selling price is fixing in
such a way that it covers fully the variable or marginal cost and contributes
towards recovery of fixed costs fully or partly, depending upon the market
situations. In times of stiff competition, marginal cost offers a guideline as to
how far the selling price can be lowered
2. Competition-based Pricing:
a. Sealed Bid Pricing: This method is more popular in tenders and contracts.
Each contracting firm quotes its price in a sealed cover called ‘tender’. All the
tenders are opened on a scheduled date and the person, who quotes the lowest
price, other things remaining the same, is awarded the contract. The objective
of the bidding form is to bag the contract and hence it will quote lower than
others.
b. Going rate pricing: Here the price charged by the firm is in tune with the
price charged in the industry as a whole. In other words, the prevailing
market rate at a given point of time is taken as the basis to determine the
price.
3. Demand-based Pricing:
a. Price discrimination: Price discrimination refers to the practice of charging
different prices to customers for the same goods. The firm uses its discretion to
charge differently the different customers. It is also called Differential Pricing.
The objects of Price Discrimination are to
 Develop a new market including for export,

 Utilize the maximum capacity,

 Share consumer’s surplus along with consumer, not leaving it totally to him,

 Meet competition,

 Increase market share.

b. Perceived value pricing: Perceived value pricing refers to where the price is
fixed on the basis of the perception of the buyer of the value of the product.

4. Strategy-based Pricing:
a. Market Skimming: When the product is traduced for the first time in the
market, the company follows this method. Under this method, the company
fixes a very high price for the product. The main idea is to charge the customer
maximum possible. This strategy is mostly found in case of technology products.
b. Market penetration: This is exactly opposite to the market skimming
methods. Here the price of the product is fixed so low that the company can
increase its market share. The company attains profits with increasing
volumes and increase in the market share. More often, the companies believe
that it is necessary to dominate the market in the long-run than making profits
 in the short-run. This method is more suitable where market is highly price-
sensitive.
c. Two-part pricing: The firm with market power can enhance profits by the
strategy of two-part pricing, Under this strategy, a firm charges a fixed fee
for the right to purchase its goods, plus a per unit charge for each unit
purchased. Entertainment houses such as country clubs, athletic clubs, golf
courses, and health clubs usually adopt this strategy.
d. Block pricing: Block pricing is another way a firm with market power can
enhance its profits. We see block pricing in our day-to-day very frequently. Six
Lux soaps in a in a single pack or five magi noodle in a single pack illustrates
this pricing method.
e. Commodity bundling: Commodity bundling refers to the practice of bundling
two or more different products together and selling them at a single
‘bundle price’. The package deals offered by the tourist companies, airlines
hold testimony to this practice. The package includes the airfare, hotel, meal,
sightseeing and so on at a bundled price instead of pricing each of these services
separately.
f. Peak load pricing: During seasonal period when demand is likely to be
higher, firm may enhance profits by peak load pricing. The firm’s philosophy is
to charge a higher price during peak times than is charged during off-peak
times. The pricing is done in such a way that the business is not lost to the
competitors. The firm following such a strategy covers the likely losses during
the off-peak times from the likely profits from the peak times.
g. Cross subsidization: In cases where demand for two products produced
by firm interrelated through demand or cost, the firm may enhance the
profitability of its operations though cross subsidization. Using the profits
generated by established products, a firm may expand its activities by
financing new product development and diversification into new product
markets.
h. Transfer pricing: Transfer pricing is an internal pricing technique. It refers to
a price at which inputs of one department are transferred to another, in order to
maximize the overall profits of the company.

3. Financial Accounting:
3.1. Introduction for Financial Accounting:
The number of transactions in an organization depends upon the size of the organization.
In small organization, the transactions generally will be in thousands and in big organizations
they may be in lakhs. As such it is humanly impossible to remember all these transactions.
Further, it may not be possible to find out the final result of the business without
recording and analyzing these transactions. Accounting came in to practice as an aid to
human memory by maintaining a systemic record of business transactions.
History of Accounting: Accounting is as old as civilization itself. From the ancient relics
of Babylon, it can be will proved that accounting did exist as long as 2600 B.C.
However, in modern form accounting based on the principles of Double Entry System came
into existence in 17th Century. Fra Luka Paciolo, a Franciscan monk and mathematician
published a book De computic et scripturies in 1494 at Venice in Italyl. This book was
translated into English in 1543. In this book he covered a brief section on ‘book-
keeping’.
Origin of Accounting in India: Accounting was practiced in India thousand years ago
and there is a clear evidence for this. In his famous book Arthashastra Kautilya dealt with
not only politics and economics but also the art of proper keeping of accounts.
However, the accounting on modern lines was introduced in India after 1850 with the
formation joint stock companies in India. Accounting in India is now a fast-developing
discipline. The two premier Accounting Institutes in India viz., chartered Accountants of
India and the Institute of Cost and Works Accountants of India are making
continuous and substantial contributions. Accounting is considered as the language of
business. There are three branches of accounting.
1. Management Accounting: Its aim to assist the management in taking correct policy decision
and to evaluate the impact of its decisions and actions. The data required for this purpose
are drawn accounting and cost-accounting.
2. Cost Accounting: The purpose of this branch of accounting is to ascertain the cost of a
product / operation / project and the costs incurred for carrying out various activities. It
also assist the management in controlling the costs. The necessary data and
information are gatherr4ed form financial and other sources.
Financial Accounting: After spending the money for the business, financial accounting exists
and this this considered as “The art of recording, classifying and summarizing in a
significant manner and in terms of money transactions and events, which are in part at
least, of a financial character and interpreting the results thereof.”

3.2. Principles of Financial Accounting:

Accounting is a system evolved to achieve a set of objectives. In order to achieve the goals,
we need a set of principles or guidelines. These principles are termed here as “Basic
Accounting Concepts” and “Accounting Conventions”.

The term concept means an idea or thought. Basic accounting concepts are the
fundamental ideas or basic assumptions underlying the theory and profit of financial
accounting. These concepts help in bringing about uniformity in the practice of
accounting. In accountancy following concepts are quite popular.
1. BUSINESS ENTITY CONEPT: In this concept “Business is treated as separate from
the proprietor”. All the Transactions recorded in the book of Business and not in the
books of proprietor. The proprietor is also treated as a creditor for the Business.

2. GOING CONCERN CONCEPT: This concept relates with the long life of Business.
The assumption is that business will continue to exist for unlimited period unless it is
dissolved due to some reasons or the other.

3. MONEY MEASUREMENT CONCEPT: In this concept “Only those transactions

are recorded in accounting which can be expressed in terms of money, those transactions
which cannot be expressed in terms of money are not recorded in the books of
accounting”.

4. COST CONCEPT: Accounting to this concept, can asset is recorded at its cost in
the books of account. i.e., the price, which is paid at the time of acquiring it. In balance
sheet, these assets appear not at cost price every year, but depreciation is deducted and they
appear at the amount, which is cost, less classification.

5. ACCOUNTING PERIOD CONCEPT: every Businessman wants to know the result

of his investment and efforts after a certain period. Usually one-year period is regarded as
an ideal for this purpose. This period is called Accounting Period. It depends on the
nature of the business and object of the proprietor of business.

1. DUAL ASCEPT CONCEPT: According to this concept “Every business transactions

has two aspects”, one is the receiving benefit aspect another one is giving benefit aspect.
The receiving benefit aspect is termed as “DEBIT”, where as the giving benefit aspect is
termed as “CREDIT”. Therefore, for every debit, there will be corresponding credit.
6. MATCHING COST CONCEPT: According to this concept “The expenses incurred
during an accounting period, e.g., if revenue is recognized on all goods sold during a period,
cost of those good sole should also Be charged to that period.

7. REALISATION CONCEPT: According to this concept revenue is recognized when a

sale is made. Sale is Considered to be made at the point when the property in goods
posses to the buyer and he becomes legally liable to pay.

ACCOUNTING CONVENTIONS

Accounting is based on some customs or usages. Naturally accountants here to adopt

that usage or custom. They are termed as convert conventions in accounting. The
following are some of the important accounting conventions.

1. FULL DISCLOSURE: According to this convention accounting reports should disclose

fully and fairly the information. They purport to represent. They should be prepared
honestly and sufficiently disclose information which is if material interest to
proprietors, present and potential creditors and investors. The companies ACT, 1956
makes it compulsory to provide all the information in the prescribed form.

2. MATERIALITY: Under this convention the trader records important factor about
the commercial activities. In the form of financial statements if any unimportant information
is to be given for the sake of clarity it will be given as footnotes.

3. CONSISTENCY: It means that accounting method adopted should not be changed

from year to year. It means that there should be consistent in the methods or principles
followed. Or else the results of a year Cannot be conveniently compared with that of
another.

4. CONSERVATISM: This convention warns the trader not to take unrealized income in
to account. That is why the practice of valuing stock at cost or market price, which ever is
lower is in vague. This is the policy of “playing safe”; it takes in to consideration all prospective
losses but leaves all prospective profits.

3.3. Double-entry Book-keeping:

According to G.A. Lee the accounting system has two stages.

2. The making of routine records in the prescribed from and according to set rules of
all events with affect the financial state of the organization; and
The summarization from time to time of the information contained in the records, its
presentation in a significant form to interested parties and its interpretation as an aid to
decision making by these parties. First stage is called Book-Keeping and the second one
is Accounting.

Book – Keeping: Book – Keeping involves the chronological recording of financial

transactions in a set of books in a systematic manner.

Accounting: Accounting is concerned with the maintenance of accounts giving stress to

the design of the system of records, the preparation of reports based on the recorded date
and the interpretation of the reports.

Double-entry Book-keeping system: Modern accounting system is based on double

entry system which is based on the fundamental accounting equation, Assets = Liabilities +
Equity.

This system believes an assumption of every transaction has two aspects which are to
be considered as incoming aspect and outgoing aspect. To identify and balance these two
aspects the words ‘Debit’ and ‘Credit’ are created with the above meanings. According the
double- entry bookkeeping principle, “Every debit has its corresponding credit”. To
meet this principle, it is required to record every transaction twice in the book of
accounts.

Thus, three classes of accounts are maintained for recording all business
transactions.

1. Personal Accounts: Accounts which are transactions with persons are called
“Personal Accounts”. A separate account is kept on the name of each person for recording
the benefits received from ,or given to the person in the course of dealings with him. E.g.:
Krishna’s A/C, Gopal’s A/C, SBI A/C, Nagarjuna Finanace Ltd.A/C, Roy & Sons A/C ,
HMT Ltd. A/C, Capital A/C, Drawings A/C etc.

2. Real Accounts: The accounts relating to properties or assets are known as “Real
Accounts”
.Every business needs assets such as machinery , furniture etc, for running its activities
.A separate account is maintained for each asset owned by the business. E.g.: cash A/C,
furniture A/C, building A/C, machinery A/C etc.

3. Nominal Accounts: Accounts relating to expenses, losses, incomes and gains are known
as “Nominal Accounts”. A separate account is maintained for each item of expenses,
losses, income or gain. E.g.: Salaries A/C, stationery A/C, wages A/C, postage A/C,
commission A/C, interest A/C, purchases A/C, rent A/C, discount A/C, commission
received A/C, interest received A/C, rent received A/C, discount received A/C.
Before recording a transaction, it is necessary to find out which of the accounts is to
be debited and which is to be credited. The following three different rules have been laid
down for the three classes of accounts….

1. Personal Accounts: The account of the person receiving benefit (receiver) is to be debited
and the account of the person giving the benefit (given) is to be credited.

Rule: “Debit----The Receiver Credit---The Giver”

2. Real Accounts: When an asset is coming into the business, account of that asset is to
be debited. When an asset is going out of the business, the account of that asset is to be
credited.

Rule: “Debit----What comes in Credit---What goes out”

3. Nominal Accounts: When an expense is incurred or loss encountered, the

account representing the expense or loss is to be debited. When any income is earned or
 gain made, the account representing the income of gain is to be credited.

Rule: “Debit----All expenses and losses Credit---All incomes and gains”

3.4. Practice of Accounting Process:

Business is the organized efforts of enterprises to supply goods & services to
consumers for

3.4.1 Journal Book:

The first step in accounting therefore is the record of all the transactions in the books
of original entry viz., Journal and then posting into ledges. The word Journal is derived from
the Latin word ‘journ’ which means a day. Therefore, journal means a ‘day Book’ in day-to-
day business transactions are recorded in chronological order.

Journal is treated as the book of original entry or first entry or prime entry. All the
business transactions are recorded in this book before they are posted in the ledges. The
journal is a complete and chronological (in order of dates) record of business transactions.
It is recorded in a systematic manner. The process of recording a transaction in the
journal is called “JOURNALISING”. The entries made in the book are called “Journal
Entries”.

The proforma of Journal is given below.

Date Particulars L.F. * Debit Rs. Credit Rs.

1998 Jan Purchases account to cash 10,000/- 10,000/-
1 account(being goods
purchased for cash)
* Ledger Folio(page) Number

3.4.2 Ledger Accounts:

All the transactions in a journal are recorded in a chronological order. After a certain
period, if we want to know whether a particular account is showing a debit or
credit balance it becomes very difficult. So, the ledger is designed to
accommodate the various accounts maintained the trader. It contains the final or
permanent record of all the transactions in duly classified form. “A ledger is a
book which contains various accounts.” The process of transferring entries
from journal to ledger is called “POSTING”. Posting is the process of entering in
the ledger the entries given in the journal. Posting into ledger is done periodically,
may be weekly or fortnightly as per the convenience of the business. The following
are the guidelines for posting transactions in the ledger.

1. After the completion of Journal entries only posting is to be made in the ledger.
2. For each item in the Journal a separate account is to be opened. Further, for each
new item a new account is to be opened.

3. Depending upon the number of transactions space for each account is to be

determined in the ledger.

4. For each account there must be a name. This should be written in the top of the
table. At
the end of the name, the word “Account” is to be added.

5. The debit side of the Journal entry is to be posted on the debit side of the account,
by
starting with “TO”.

6. The credit side of the Journal entry is to be posted on the debit side of the account,
by
starting with “BY”.

Proforma for ledger:

Dr. Cr.
Date Particular J.F. Amount Date Particular J.F. Amount
s s

3.4.3 Trial Balance:

The first step in the preparation of final accounts is the preparation of trail
balance. In the double entry system of bookkeeping, there will be credit for every
debit and there will not be any debit without credit. When this principle is followed
in writing journal entries, the total amount of all debits is equal to the total
amount all credits.
A trail balance is a statement of debit and credit balances. It is prepared on a
particular date with the object of checking the accuracy of the books of accounts.
It indicates that all the transactions for a particular period have been duly entered
in the book, properly posted and balanced. The trail balance doesn’t include
stock in hand at the end of the period. All adjustments required to be done at the
end of the period including closing stock are generally given under the trail
balance.

DEFINITIONS: SPICER AND POGLAR :A trail balance is a list of all the balances
standing on the ledger accounts and cash book of a concern at any given date.

A trail balance is a statement of debit and credit balances extracted from the ledger
with a view to test the arithmetical accuracy of the books. Thus a trail balance is a list
of balances of the ledger accounts’ and cash book of a business concern at any
given date.

PROFORMA FOR TRAIL BALANCE:

Trail balance for MR…………………………………… as on …………

NO NAME OF DEBIT CREDIT

ACCOUNT AMOUNT(RS.) AMOUNT(RS.)
(PARTICULARS)

Specimen of Trail Balance

1 Capital Credit Loan

2 Opening stock Debit Asset
3 Purchases Debit Expense
4 Sales Credit Gain
5 Returns inwards Debit Loss
6 Returns outwards Debit Gain
7 Wages Debit Expense
8 Freight Debit Expense
9 Transport expenses Debit Expense
10 Royalties on production Debit Expense
11 Gas, fuel Debit Expense
12 Discount received Credit Revenue
13 Discount allowed Debit Loss
14 Bas debts Debit Loss
15 Dab debts reserve Credit Gain
16 Commission received Credit Revenue
17 Repairs Debit Expense
18 Rent Debit Expense
19 Salaries Debit Expense
20 Loan Taken Credit Loan
21 Interest received Credit Revenue
22 Interest paid Debit Expense
23 Insurance Debit Expense
24 Carriage outwards Debit Expense
25 Advertisements Debit Expense
26 Petty expenses Debit Expense
27 Trade expenses Debit Expense
28 Petty receipts Credit Revenue
29 Income tax Debit Drawings
30 Office expenses Debit Expense
31 Customs duty Debit Expense
32 Sales tax Debit Expense
33 Provision for discount on debtors Debit Liability
 34 Provision for discount on creditors- Debit Asset
35 Debtors Debit Asset
36 Creditors Credit Liability
37 Goodwill Debit Asset
38 Plant, machinery Debit Asset
39 Land, buildings Debit Asset
40 Furniture, fittings Debit Asset
41 Investments Debit Asset
42 Cash in hand Debit Asset
43 Cash at bank Debit Asset
44 Reserve fund Credit Liability
45 Loan advances Debit Asset
46 Horse, carts Debit Asset
47 Excise duty Debit Expense
48 General reserve Credit Liability
49 Provision for depreciation Credit Liability
50 Bills receivable Debit Asset
51 Bills payable Credit Liability
52 Depreciation Debit Loss
53 Bank overdraft Credit Liability
54 Outstanding salaries Credit Liability
55 Prepaid insurance Debit Asset
56 Bad debt reserve Credit Revenue
57 Patents & Trademarks Debit Asset
58 Motor vehicle Debit Asset
59 Outstanding rent Credit Revenue

3.4.4 Final Accounts-Trading Account:

In every business, the businessman is interested in knowing whether the business
has resulted in profit or loss and what the financial position of the business is at a
given time. In brief, he wants to know (i) The profitability of the business and (ii)
The soundness of the business.
The trader can ascertain this by preparing the final accounts. The final accounts are
prepared from the trial balance. Hence the trial balance is said to be the link
between the ledger accounts and the final accounts. The final accounts of a firm
can be divided into two stages. The first stage is preparing the trading and profit
and loss account and the second stage is preparing the balance sheet.

The first step in the preparation of final account is the preparation of trading
account. The main purpose of preparing the trading account is to ascertain gross
profit or gross loss as a result of buying and selling the goods.

Trading account of Mr……………………. for the year ended ……………………

 Finally, a ledger may be defined as a summary statement of all the transactions
relating to a person, asset, expense or income which have taken place during a
given period of time. The up-to-date state of any account can be easily known by
referring to the ledger.

3.4.5 Final Accounts-Profit & Loss Account:

The business man is always interested in knowing his net income or net
profit.Net profit represents the excess of gross profit plus the other revenue
incomes over administrative, sales, Financial and other expenses. The debit side
of profit and loss account shows the expenses and the credit side the incomes. If
the total of the credit side is more, it will be the net profit. And if the debit side is
more, it will be net loss.

Proforma of Profit & Loss Account

Profit & Loss of as on _-

3.4.6 Final Accounts-Balance Sheet:
The final step of final accounts is the preparation of balance sheet. It is prepared
often in the trading and profit, loss accounts have been compiled and closed. A
balance sheet may be considered as a statement of the financial position of the
concern at a given date.

DEFINITION: A balance sheet is an item wise list of assets, liabilities and

proprietorship of a business at a certain state.

J.R.botliboi: A balance sheet is a statement with a view to measure exact financial

position of a business at a particular date.

Thus, Balance sheet is defined as a statement which sets out the assets and
liabilities of a business firm and which serves to as certain the financial position of the
same on any particular date. On the left-hand side of this statement, the liabilities
and the capital are shown. On the right-hand side all the assets are shown.
Therefore, the two sides of the balance sheet should be equal. Otherwise, there is

an error somewhere.
BALANCE SHEET OF …………… …AS ON ………………………