Understanding Purchase and Sale in Business Studies: Modes, Procedures, and Errors, Lecture notes of English

Download Understanding Purchase and Sale in Business Studies: Modes, Procedures, and Errors and more Lecture notes English in PDF only on Docsity! BUSINESS STUDIES180 Notes PURCHASE AND SALE In your day-to-day life you require several things to satisfy your needs and wants. For example, you want milk, bread, etc. for your breakfast; clothes , cycle , medicines etc. How do you get all these things? These are all available in the market for sale and you can purchase them as and when you need them. Similarly, in business, all business enterprises are engaged in purchasing things like raw materials, machinery, etc. for production; land, building, furniture, stationery, computer etc. for office premises; and so on. Business enterprises are also engaged in selling the goods and services they produce. Thus, we find that purchase and sale are two essential activities that take place around us. Let us learn more about these in this lesson. After studying this lesson you will be able to • define purchase and sale; • explain the concept of ‘selling’ in business; • describe various modes of purchase and methods of sale; and • explain the selling procedure and the documents used in sales. 12.1 MEANING OF PURCHASE AND SALE Purchase is a process through which a person gets the ownership of some goods or properties transferred in his name from another, on payment of money. Similarly, sale is a process through which the ownership of some goods or properties is transferred from one person (seller) to another person (buyer), for a price. Thus, sale and purchase always go together. Whenever there is a sale, there is also a purchase and vice versa. So, basically in every sale and purchase there exist two parties. The first party who sells is known as the ‘seller’, and the other party who buys is known as the ‘buyer’. 12 OBJECTIVES MODULE - IV Buying, Selling and Distribution Purchase & Sale Notes BUSINESS STUDIES 181 Let us take an example. Ramesh is a shopkeeper in your locality. He goes to the city and buys ready-made garments from the wholesalers on payment of money. Here the wholesalers are the sellers and Ramesh is the buyer. After Ramesh brings the readymade garments to his shop, you go to his shop and buy a shirt for yourself paying Ramesh its price. Here you are the buyer and Ramesh is the seller. Thus, we find that in every sale and purchase the buyer pays money to the seller for buying goods or services for his use or consumption and the seller accepts money and thereby gives up his right over those goods and services. In this process the buyer either pays money immediately or at a later date. Concept of Purchasing And Selling You know that, businessmen produce goods or services for others’ use. People buy those goods and services for a price and thus, the businessmen earn money from them. This money needs to be more than the amount spent in producing the goods and services. That is how a business can earn profit. Profit is the reward for risk-taking by businessmen and it is also the return on capital invested by them. So it is required that the goods and services produced by business enterprises must be sold. Sale of goods is thus necessary for the very existence of business and its growth over time. Buyer needs to consider following before purchase (i) Identify his /her needs (ii) Attributes of the commodity/ service (iii) Price affordability (iv) Social and cultural aspects. In order to sell goods and services something more needs to be done before production is undertaken. a. It is important to identify and determine the requirement of the people and design the product or service accordingly. b. The customers must always derive satisfaction from what they buy and therefore continuous improvement of the product or service is required. c. It must be ensured that the product or service is easily available to the customers. d. The price of the product or service should be such that the customers can afford it. e. The customers should be made aware about the product or service and its related benefits both before and after sale. All the above activities taken together are called the marketing functions of any organisation. Selling as a function is different from the marketing function, although it is a part of the marketing function. MODULE - IV Buying, Selling and Distribution Purchase & Sale BUSINESS STUDIES184 Notes seller can ask for the goods to be returned and also sue the defaulting buyer for damages. It may be noted that the customer has the right to purchase the goods by paying the total remaining amount at any stage of the instalment period. This type of sale is used in case of durable and expensive items like car, motorcycle, TV ,Machinery etc. ii. Sale through Instalment Payment System : When goods are sold and payment is agreed to be made in instalments, it is known as deferred instalment plan of sale. In this case, if there is default in the payment of any instalment by the buyer, the seller cannot ask for the goods to be returned as the ownership rights pass to the buyer when goods are sold and initial payment is made. The seller can only sue the buyer in a court of law for payment of the balance due. iii. Sale on approval basis : A sale on approval is basically a conditional sale. In this type of sale, goods are delivered to the buyer on payment with the understanding that the buyer can return the goods (the whole lot or even a part of it) to the seller and claim refund within a specified period, if the goods do not meet his requirements. If the buyer does not communicate within the given time then it is assumed that the goods are sold. Sometimes this method of sale is practised with a variation. Goods are delivered to the buyer ‘on approval’ with the understanding that he may remit the price signifying approval or return the goods without any obligation. iv. Sale through tender : This method of sale is normally found in the case of purchases made by big organisations or government agencies where the quantity of goods required and the amount involved are very large. A tender is an undertaking to supply materials/goods indicating the terms and conditions of sale therein. This method of sale involves responses to tenders invited by intending purchasers with a view to selecting the supplier who offers the most competitive and favourable terms. The advertisement or notice inviting tenders are usually published in one or more newspapers and contains details regarding the goods to be purchased. Particulars and forms for submitting tenders are sometimes made available to the interested parties on applying in response to the advertisement. Tenderers are usually required to deposit an earnest money along with the tender. This ensures the seriousness of the interested parties. The general practice is to receive tenders in sealed covers so that the terms and conditions offered by the parties remain secret and MODULE - IV Buying, Selling and Distribution Purchase & Sale Notes BUSINESS STUDIES 185 are not tampered with. The sealed covers are opened in the presence of proper authorities and the most favourable tender is accepted. Thereafter, a formal contract for sale is entered into with the tenderer whose tender in acceptable, on the basis of the terms offered. v. Auction sale : An auction sale refers to the sale of certain goods openly on a specific date and time so that people may bid for the goods. The goods are sold to the highest bidder. In auction sale, the goods are displayed and there is a reserve price below which goods are not to be sold. This reserve price is fixed by the seller, which may be made known to the public or kept secret. Sometimes there is also an upset price from which the bidding starts. This may also be regarded as the minimum price below which goods are not to be sold. A bid by an intending purchaser is considered an offer and if it is the highest bid, it is accepted. Once accepted, the bidder cannot go back and must pay the price and purchase it. However, the seller has the liberty not to sell even at the highest bid. Now a days, auction sales are done more commonly through the internet. vi. Wash sales : You might have seen advertisements mentioning ‘Grand Clearance Sale – Discounts up to 70%’ or ‘Summer Sale’ or ‘Annual Sale’ etc. These sales are generally conducted to clear surplus or old stocks. Some sellers periodically arrange such sales to dispose off stock. Mostly these sellers offer heavy discount. Difference between defereed instalment method and hire-purchase method Deferred Instalment Method Hire-Purchase Method 1. It is essentially a contract for sale. 1. It is essentially a contract for hiring of goods. 2. The ownership rights passes to the 2. The ownership rights remain with the buyer immediately at the time when seller and the customer exercises his the agreement is entered into. option for purchasing the goods. 3. The buyer can return the goods at any 3. In case of default in payment the seller stage. The seller can also take back can sue the buyer for balance the goods in case of non-payment. instalments. He cannot take back possession of the goods. Similarly, the buyer cannot return the good and adjust the amount of payment due. MODULE - IV Buying, Selling and Distribution Purchase & Sale BUSINESS STUDIES186 Notes Which of the following statements are true and which are false? (i) In auction sale, goods are always sold to the highest bidder even when there is a reserve price. (ii) Sale on hire-purchase permits the buyer to return the goods at any stage. (iii) Goods delivered to the buyer ‘on approval’ basis are always paid for in advance. (iv) Earnest money payable by tenderers ensures their seriousness about the tender. (v) Wash sales refer to sale of goods at a discount just after rainy reason. 12.5 MODES OF PAYMENT When there is a sale, the buyer makes an offer to purchase goods for a price and the seller accepts the offer; or the seller makes an offer to sell goods for a price and the buyer accepts the offer. Now the payment for the goods may be immediate or deferred. Deferred payment can be instalment payment or full payment at the end of the agreed credit period. (i) Immediate payment : In case of immediate payment, the buyer makes full payment to the seller in cash. Of course he can make payment by cheque or draft or credit card or debit card, provided the seller agrees to it. Actually a seller is not bound to accept payment by cheque unless there is an express or implied agreement to that effect. This is the normal practice in retail buying and selling that involves small payment. For example, sale of goods for daily use like grocery, vegetables, readymade garments, low priced consumer durable goods, etc. are made on immediate cash payment. (ii) Deferred Instalment plan : Mostly known as ‘buy now – pay later’ plan, under this method the buyer pays a nominal amount to the seller at the time of purchase and takes possession of the goods. The balance is paid by him in instalments over a period of time. The instalment is a fixed amount payable monthly or quarterly to the seller and the total payment is equal to the unpaid amount and the interest charged on it. The interest charged on the unpaid amount normally reduces with payment of instalments. Sometimes, the seller can offer interest free instalments. If the buyer fails to pay any instalment, the seller can sue him for the unpaid amount. Let us take an example. Vinod went to the local shop to buy a colour television. The price of the TV set was Rs. 20,000/-. Under the deferred instalment plan he was required to pay 10 INTEXT QUESTIONS 12.2 MODULE - IV Buying, Selling and Distribution Purchase & Sale Notes BUSINESS STUDIES 189 (ix) Receipt of payment and settlement of accounts: The last step in the process is the receipt of the payment for goods sold. Payment is made according to the conditions agreed upon earlier. In inland trade, payment is generally made by means of money order, cheque, bank draft, bill of exchange, promissory note, etc. In case of regular customers, all outstanding dues are taken together and the customer is required to pay at regular intervals rather than on transaction basis. If full payment is received the account is said to be settled. Remittances received are duly acknowledged and sometimes the sellers also issue periodic statements of account. It shows the following items: a. The date of sale b. The amount of goods sold c. Payment received from the buyer d. Balance due from the buyer Now you have fully understood that in the process of sale of goods various steps are involved. This can be made more clear with the help of a chart as given below. (x) Rectification of errors : You have studied so far that the business transaction begins with the buyer’s enquiry about the goods to be purchased and completes when he finally settles his account with the seller. Even though the seller is very careful while sending goods and preparing invoice, there might be certain errors. These errors can be rectified by preparing Credit note or Debit note . Let us know about these two notes in detail. Credit Note : A document, which informs the buyer that his account has been credited with a particular amount. Debit Note : A document, which informs the buyer that his account has been debited with a particular amount. I. Match the columns : Column A Column B i.Quotation (a) Buy now pay later plan ii. Invoice (b) Satisfactory terms and conditions of sale iii. Deferred Instalment Plan (c) Detail transaction with the buyer iv. Deferred payment (d) Non-execution of order v. Letter of Regret (e) Amount to be received by the seller INTEXT QUESTIONS 12.3 MODULE - IV Buying, Selling and Distribution Purchase & Sale BUSINESS STUDIES190 Notes II. Which of the following statements are ‘right’ and which are ‘wrong’? (i) A customer’s account mainly keeps record of payments made by the customer. (ii) A ‘dispatch note’ is also known as ‘Letter of Advice’. (iii) The buyer must make a claim for damages immediately from the transport authority if he finds goods were damaged in transit. (iv) A credit note is intended by the seller to rectify error of excess credit given to the buyer. (v) A debit note issued by the seller informs the buyer that his account has been debited with a certain amount. III. Multiple Choice Questions i. When a person wants to buy goods in bulk, the best mode of purchase for him will be. (a) Purchase by Inspection (b) Purchase by Sample (c) Purchase by Description (d) Purchase from the nearest retailers. ii. Purchase means: (a) Transfer of ownership of goods by a seller in favor of a buyer (b) Physical possession of goods by a person from another person (c) Taking articles from a friend for use for some time period (d) Taking goods/articles on rent/hire from the owner. iii. Which factor should not be considered by a buyer before purchase? (a) Identification of buyers used (b) Attributes of the goods/commodity (c) Price affordability (d) Attributes of the Commodity possessed by the neighbour. iv. Which of the following is not a method of sale? (a) Sale on cash basis (b) Sale on Hire Purchase basis (c) Sale on Credit basis (d) Sale under Installment system v. Which of the following is not a step in the Selling Procedure? (a) Enquiry by the intending buyer (b) Receipt of order from the buyer (c) Dispatch of goods to the buyer (d) Preparation of Credit Note by the seller. MODULE - IV Buying, Selling and Distribution Purchase & Sale Notes BUSINESS STUDIES 191 Purchase is a process through which one person gets some goods or properties transferred in his name from another, on payment of money. Sale is a process through which some goods or properties are transferred from one person to another for cash or on credit. Sale and purchase always go together. Selling as a function of business includes all the activities directed towards flow of goods and services from the producer to the consumer. Goods may be purchased either by inspecting them personally or on the basis of a sample or pattern examined or on the basis of description or brand name. Methods of sale include sale on hire purchase basis, deferred instalment plan of sale, sale on approval, sale through tenders, auction sale and wash sales. Payment for purchase may be immediate, through deferred instalment plan or in the form of deferred payment at the end of the credit period. The selling routine involves enquiry, quotation, order, execution of order, invoicing, opening customer’s account, dispatch and delivery, taking delivery of goods and finally, settlement of account. Errors in sending goods or preparing the invoice may be rectified through credit note and debit note. 1. What is meant by ‘purchase’? 2. State the activities involved in selling a product. 3. What is meant by ‘Auction Sale’? 4. Explain ‘deferred instalment plan’ as a mode of payment. 5. Describe how errors in sending goods and preparing invoice may be rectified? 6. Differentiate between deferred instalment and hire purchase methods of sale. 7. What are the various modes one may adopt to make payment for purchase of a product? Explain. 8. Explain the procedure of sale through tenders. 9. Describe the different modes for purchase of a product. 10. Explain the various methods that may be adopted to sell a product. 11. State the procedure required to sell a product. 12. What steps are required after an order is executed, as part of the Routine Selling? WHAT YOU HAVE LEARNT TERMINAL EXERCISE MODULE - IV Buying, Selling and Distribution Purchase & Sale