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form 1 business studies notes

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Form 1 Business Studies Notes

INTRODUCTION TO BUSINESS STUDIES
Objectives: By the end of the topic, the learner should be able to:

–It can also be defined as the study of activities that are carried out in and around production, distribution and consumption of goods and services.
       iii) Goods: These are items that are tangible .i.e. they can be touched and felt.
Activity 1: The students to list items in the classroom that can be touched and felt
–Furniture, buildings, books, vehicles e.t.c
iv) Services: These are efforts or acts/actions or activities that may be sold and are intangible (cannot be touched nor felt).
Activity 2: The students to list items that money is paid to get but they cannot touch.
        v)  Production: Refers to the creation of goods and services or increasing their usefulness through activities such as transporting them to where they are required. People who are involved in production of goods and services are referred to as producers.
Activity 3: Using the lists of goods and services above, the students to name those involved in their production.
 vi) Distribution: Refers to the movement of goods and services from producers to the users. Some activities that take place as goods and services all moved include transportation, storage, insurance, communication, advertising.e.t.c
vii) Consumption: Refers to the act of using the goods or services produced consumption is the ultimate goal of production. The persons who uses a good or a service is referred to as a consumer.
Activity 4: The students to list the consumers of the goods and services listed in activity (1) and (2) above.
Business studies as a subject is composed of topics drawn from various disciplines such as:

Commerce
This is the study of trade and aids to trade. Trade refers to the exchange of goods and services for other goods and services or money.
Aids to trade are human activities (services) that assist trade to take place.
Economics
This is the study of how human beings strive to satisfy their endless wants using the available scarce resources.
Accounting
This refers to a systematic way of recording business activities which all used for decision making.
Office practice
This refers to all activities that are carried out in an office e.g. communication, filling, clerical work, reproduction of documents e.t.c
Entrepreneurship
This is the study of activities involved in the process of identifying a business opportunity and acquiring the necessary resources to start and run a business. The person who carries out these activities is refered to as an entrepreneur.
Importance of Business studies in society
Business studies is meant to prepare learners to function as informed consumers, producers and workers in the society.
Some of the benefits of learning business studies include:

BUSINESS AND ITS ENVIRONMENT
By the end of the topic, the learner should be able to:

Meaning of a business
This refers to any activity carried out by an individual or by an organization with the aim of making a profit.
Profit is what the business earns above what it spends in providing goods and services to the people who need them.
The term business also refers to firms or organizations that provide goods and services to make a profit.
Purpose of business (Reasons for the existence of businesses)
Business is important in any society because it is not possible for people to provide themselves with all what they need without direct or indirect aid from others. Some of the main reasons why businesses exist are:

NB: Whatever purpose a business fulfills, it has to earn a reasonable return on the invested money to survive.

TYPES OF BUSINESS ACTIVITIES
People carry out different business activities in order to earn income. Business activities are activities which involve the provision of goods or services with an aim of earning a profit.
Activities done without the intention of making profit are referred to as non-business activities. Business activities may be grouped into the following seven categories:

This involves obtaining goods from their natural setting e.g. mining, farming, lumbering, fishing, quarrying e.t.c

NOTE: Students to give examples of activities they pay money for which are not goods.

BUSINESS ENVIRONMENTS AND THEIR EFFECTS ON THE BUSINESS
Business environment refers to conditions or factors which surround and affect business operations. These factors could be within the business (internal environment) or from outside the business (external environment).
These factors affect the decisions, strategies, processes and overall performance of the business.
Activity: Discuss some factors that have a strong influence on businesses within the immediate environment.
Internal Business Environment
This comprises factors that are within the business unit itself. These factors can be controlled fully by the business. Internal environmental conditions could be either strength or weaknesses. The strengths tend to improve the performance of the firm while weaknesses tend to affect the operations of the business negatively.
Internal environment is also referred to as: micro-environment. Micro environmental factors include:

These ate targets or goals that are set by the owners or managers of a business to be achieved. The objectives will influence the following;

The management refers to the people who are responsible for directing the day-to-day operations of a business. It is the management that sets the objectives and policies of an organization.
A policy is a course of action of action for achieving set objectives, which is adopted by a business.(it is the established way of doing things in a business.

This is the formal arrangement of activities that are carried out at various levels of the organization so that objectives of the business can be achieved.
Duties and responsibilities of all the workers are defined in the business structure. Their interrelationships are also defined.
A well laid out business structure is likely to lead to success of the business since:

A poor business structure leads to business failure.

A resource refers to anything that can be used to achieve an objective. These resources include;

5.)    Research and development
Research and development is an important factor for the success of a business. Research generates new ideas, skills and better methods of doing things.
A business has to do market and consumer research regularly to find out how the consumers perceive its goods and services, and how they can improve in order to outdo their competitors.
Research also assists in the development of new and unique goods and services that may attract new consumers or maintain the loyalty of the existing ones.
6.)  Business culture
This is a combination of employees expectations, beliefs and values within the business. It is normally passed on from one generation of employees to the next. Employees acquire norms and code of conduct that is acceptable to all from the general manager down to the sweeper. A business that has a culture of involving employees in decision-making may perform better than one that does not involve its employees.
7. Owners
The owners of the business provide finances/resources to start and run the business. They also make decisions concerning operations of the business.
Appropriate decisions are likely to lead to well being of the business while poor decisions may adversely affect the business.
External Business Environment
This environment consists of all the factors which affect the operations of the business from the outside. Some of these factors offer business opportunities while others may create problems (threats).
Business have limited or no control over external environmental factors and should therefore try to do adjust in order to cope with them.
External environmental factors are also referred to as macro-environment i.e. environment that is in large scale.
External business environment can further be sub-divided into operating environment and remote environment, depending on whether the factors can be influenced to some extent or not. Those environments that can be influenced are referred to as operating environment while those that cannot be influenced are known as remote environment.

ENTREPRENEURSHIP
By the end of the topic, the learner should be able to:

Meaning of entrepreneurship
This is the process of identifying business opportunities and gathering the necessary resources to start and run a business.
An entrepreneur who identifies business opportunities and gets the necessary resources in order to start and run a business. The entrepreneur therefore creates new businesses or transform the existing ones in the face of risks and uncertainties in order to make profits.
An entrepreneur is therefore a business owner; he starts and organizes the business (the factors of production in appropriate combination)
Importance of entrepreneurship to an economy                                                                                                                                                                                               

Characteristics of an entrepreneur
A good entrepreneur should have the following characteristics:

Generating Business Ideas
For an entrepreneur, the first step in starting a business begins with an idea (business idea).
Business ideas are all about thoughts on possible businesses an entrepreneur can start or improve. It indicates among other things;

 

Sources of Business Ideas

iii. Magazines and journals-Reading magazines and journals with business information may equip an entrepreneur with new business ideas.
iv. Hobbies –These are activities pursued for pleasure but they can also serve as a source of business ideas e.g. photography.
v. Vocational training and experience-A business idea may be developed from one’s own area of training or experience e.g. a teacher may use ideas from his/her training to start a private school.
vi. Surveys and market research-This involves conducting an investigation to gather information from consumers on what products they require.
vii. Recycling/using waste products-Some waste products could be converted into useful products e.g. scrap metal for making jikos,old tyres for making sandals e.t.c
viii. Listening to what people say-By listening keenly to what people say, one can identify unsatisfied needs e.g. complaints about goods and services in the market. These complaints may form a basis of a business idea for an entrepreneur.
ix. Identifying a market gap (niche)-An entrepreneur may try to identify/spot the needs of consumers which are not being met by the existing goods and services.
x. Brain storming-An entrepreneur can engage other people in a discussion on how best to develop businesses.
xi. Listing attributes of a product-By listing the attributes of a product that is already existing in the market, one can find new use for the product.
xii. Copying/improving an existing business-This involves identifying the weaknesses of a business and trying to come up with solutions.
Business Opportunity
A good business plan is not necessarily a business opportunity. A business idea becomes a business opportunity if it is viable i.e. it can be developed into a successful/profitable business enterprise
A business opportunity is a favourable chance that an entrepreneur accepts for investment. It exists where there is a gap to be filled in the needs of the market. Examples of such gaps include:

Evaluating a business opportunity
This means assessing whether the identified opportunity is viable or not. This helps in arriving at the best decision concerning the business idea to implement
Evaluation should be done carefully, systematically and without emotions. Evaluation is necessary even where there is only one business idea. This will help in avoiding starting a business that cannot succeed.
Factors to consider when evaluating a business opportunity
The following are the factors to consider when evaluating a business opportunity.

BUSINESS PLAN
This is a written document that highlights the objectives of the business and steps to be followed in order to achieve these objectives. It indicates where the business is, where it wants to move to, how and when.
Contents of a good business plan

Need for the business plan

Factors that influence entrepreneurship practices
There are many conditions or factors which may encourage or discourage entrepreneurship. Some of these factors are:

Causes of Business success
A business is considered as being successful if it makes consistent profit and experiences progressive growth in the scale of its operations.
Some of the factors that lead to the success of business may include:

Management of finances includes:

ETHICAL ISSUES IN BUSINESS
Ethics -refers to a set of values, principles and rules of acceptable behavior which influence how individuals, groups of people and the society in general behave.
Business ethics-refers to acceptable behavior that should be displayed by business people. Business ethics helps businesses in deciding what actions are right or wrong depending on circumstances.
Ethical issues-are the moral concerns that arise in the course of carrying out business.
Need for Ethical issues in Business
The need for ethical issues in business includes the following;

-It ensures that everybody is given an equal opportunity (has equal chance) and is not discriminated against because of their sex, religion, ethnicity, social background e.t.c.

THE OFFICE

An office is a building, room or a place set aside for administrative, communication or clerical work of an organization.

Advantages of photocopying

 Disadvantages of photocopying

Functions Type of machine
(a) To create postage impressions on envelopes Franking machine
(b) To fold documents put them in envelope and seal them Composite machine
(c) To destroy sensitive but unwanted documents Paper shredder
(d) To store large volumes of data Computer
(e) To run 300 copies of an exam for students in a school Printing machine
(f) To make exam copies of a certain original document Photocopier
(g) To trim papers to the required sizes Guillotine machine
Category Example
(a) Typing office machine (i)Typewriter
(ii)Dictating machine
(b) Mailing office machine (i)Franking machine
(ii)Composite machine
(iii)Folding machine
(c) Communication office machine (i)Telephone
(ii)Telex
(iii)Cell phone
(d) Duplicating/reprographic machine (i)Photocopier
(ii)Duplicator
(iii)Printing machine

In centralized system one department is given the responsibility of keeping and managing all the files in the whole organization. This department is referred to as a registry.Decentralised filing

(a)Departmental manager

(b)Personal secretary

Advantages

HOME TRADE
TOPIC OBJECTIVES: By the end of the topic, the learners should be able to:

MEANING OF TRADE
This is the buying and selling of goods and services with the aim of making a profit.
Importance of trade:
Trade plays a vital role in any economy. The various roles played by trade in the economy include:

Classification of Trade

–It refers to the buying and selling of goods and services within the boundaries of a given country.
–It is further divided into retail trade and wholesale trade.

-This is trade that is carried out beyond the boundaries of a country
-This is trade carried out between individuals or government of different countries e.g. trade between a citizen of Kenya and a citizen of Tanzania, or trade between the government of Kenya and the government of Southern Sudan

-International trade carried out between two countries is referred to as bilateral trade and international trade carried out among many countries (more than two countries) is referred to as multilateral trade.
International trade is classified into the following;

Forms of Home Trade

-Retail trade involves the buying of goods and selling them to the final consumer. A retailer is the trader who buys goods with a view of selling them to the final consumer.
Classification of Retail Traders
Retailers are classified/categorized according to the amount of capital they need to start and operate their businesses and their sales volume. Thus retailers can be classified as;

These are retailers whose capital requirement is low and their sales volume also low. They form the majority of retail traders and all found in all parts of the country.
Small scale businesses are easy to start and in most cases they are operated as one-man’s business.
A small scale trader serves the needs of people in the immediate neighbourhood and deal mainly in fast moving goods such as foodstuffs, detergents, kerosene e.t.c
Categories and Types of small scale
These are two main categories of small-scale traders as shown below;

–Itinerant Traders (Hawkers and peddlers)
–Roadside sellers
–Open air market Traders

 

–Single shops               –Tied shops                  –Kiosks      –Mobile shops
–Market stalls               –Canteens            –Mail order stores

These are retailers who move from place to place selling their goods either on foot, by bicycles or motor cycles
-They move from town to town, door to door and from village to village selling their goods. Their goods may include clothes, utensils and foodstuffs. Customers can buy goods without having to travel to look for them
-Examples of itinerant traders are hawkers and peddlers (Hawkers move around on bicycles, handcarts or motorcycles while peddlers walk around)
-The itinerant traders require a licence from the local authorities in order to sell their goods.
Characteristics of itinerant Traders

Advantages of itinerant Traders

Disadvantages of itinerant Traders

These are traders who sell their goods at places where other people pass by and at busy places such as along busy roads, bus stages, road junctions and entrances to public buildings.
They place their goods on trays, cardboards, empty sacks and mails
They sell items such as fruits, utensils, sweets, clothing and some hardware.

Open air markets are places set aside by the government through the local authorities where people meet to buy and sell goods. Traders selling similar commodities are allocated a special area. Such markets are open on particular days of the week.
The variety of goods sold here is wide and include agricultural produce, clothing, household items, animals, foodstuffs and even furniture.
The traders move from one market to another depending on the various market days.
Advantages of small-scale retailers without shops

Disadvantages of small-scale retailers without shops

These are small scale retailers with permanent locations to operate from. They include;

These are small shops or structures found mostly in residential areas, busy streets, highly populated areas or inside building where people pass by or work
They deal in fast-moving items and groceries such as; sodas, cakes, sweets, cigarettes, and newspapers e.t.c. some kiosks also sell food

These are permanent stands found in market places, especially those operated by the various local authorities
They are of different designs depending on the goods they sell or services they offer.
They are rented or leased by individuals from local authorities
They deal in fast moving household goods though some may specialize in other products such as clothing and shoes.
Examples are stalls at Muthurwa markets, Kariokor, and most municipal markets.
Advantages of kiosks and market stalls

Disadvantages of kiosks and market stalls

–Single shops are mostly located in the trading or market centres in rural areas or in the residential areas of high towns
-They are operated from fixed premises
-They are usually run by one person who may get assistance from him/her family or employ attendance
-Some deal in one line of commodity such as houses, clothing, groceries or electronics
Advantages of single shops

Disadvantages of single shops

These are shops that mainly sell the products of one particular manufacture or are owned by a specific supplier of certain goods. The shops are owned or controlled by the manufacturer, and are thus tied to the manufacture.
The manufacture/supplier designs the organization of the shop and its appearance e.g. painting hence they look alike. The supply closely supervises the shops.
Examples of tide shops include; Bata shops which sell shoes made by Bata Company, petrol station like National, Kobil, and total e.t.c
Advantages of Tied shops

Disadvantages of Tied shops

Differences/Distinction between a tied shop and single shop                                                                                                                                           Single shop                                                        Tied shop

-Owner is free to stock whatever he/she wishes –Dealership can be withdrawn if operators stock competing products
–Owned by individual or a group of people –The owner is normally the manufacturer
–Sells products from different manufacturers –Sells products from a single manufacturer
-Design of shop according to owners wish –Shops usually have the same design
–Prices of goods determined by shop owner or different manufactures –Prices of goods set by the manufacturer
–Operators not trained by manufacturers –Operators are usually trained by manufacturer

-They stock a variety of consumable goods such as sodas, bread, tea, groceries and other things used by the people in that institution.
-They are run by the institutions management or by individuals on retail business
-Most of them operate without a license as they are considered to be part of the institution. Their hours of operation are sometimes regulated by the institution
Advantages of canteens
-Some do not pay any rent, thus they incur low overhead costs
-They often require low capital to start
-Some offer credit facilities to their customers
-They are situated at ideal location which is convenient for their customers
-They are assured of a market as they cater for people in particular institution.
Disadvantages of canteens
-The market is limited to people in a particular institution
-They do not open throughout/they open for limited hours e.g. after classes in schools
-They close down when the targeted customers are not available e.g. during school holidays.
-They may suffer from bad debts
-They are difficult to expand due to insufficient funds

Features
-They dispense goods or services once a coin or a card is inserted and instructions keyed in.
-They operate without an attendant
-They are usually placed at strategic places such as busy streets, office buildings, shopping centres and hospitals.
Advantages of vending machines

Disadvantages of vending machines

Mobile shops, like itinerant traders move from town to town or village to village selling their goods.
-They have vehicles that they have converted into a shop from which customers can buy their goods
-They visit different towns at regular intervals.
Advantages of small scale Retailers

Disadvantages of small-scale retailers

LARGE SCALE RETAILERS
Large-scale retailers have the following features/characteristics;

TYPES OF LARGE SCALE RETAILERS

Features of supermarkets

Advantages of supermarkets

Disadvantages of supermarkets

A hypermarket is a large shopping complex/centre comprising a variety of businesses managed by different people all housed in one building
Examples; village market, sarit centre, Tuskeys-Kisumu, Nakumatt mega city-Kisumu e.t.c
Features/Characteristics of Hypermarkets

Advantages of Hypermarkets

Disadvantages of Hypermarkets

Characteristics/features of chain stores

Advantages of chain stores/multiple shops

Disadvantages of chain stores/multiple shops

This is a group of single shops operating under one roof with a centralized management
Each shop/department specializes in a particular line of products and is headed by its own department manager.
Characteristics of departmental stores

Advantages of departmental stores

Disadvantages of Departmental stores

This is a type of retail business where business is carried out through the post office, telephone or email
-Ordering of the goods is done through the post office telephone or email and delivering of goods is done by post or courier
-There is no personal contact between the seller and the buyer and buyers get information from advertisements.
-Goods are dispatched on the basis of cash with order (CWD) or cash on delivery (COD).
Characteristics/features of Mail order stores
–They sell the goods through the post office
-They operate on cash with order (CWO) or cash on delivery (COD) terms
-Heavy advertisement are involved
-Customers do not visit the selling premises.
-There is no personal contact between the buyer or the seller
-All transactions are done through the post office
-They deal with goods that are less bulky, have high value, and are durable and not too fragile
-May have large warehouses
Advantages of Mail order stores

Disadvantages of Mail order stores

FUNCTIONS OF RETAILERS
These can be discussed as services rendered to consumers, wholesalers and producers
Services Rendered to consumers

Services Rendered to wholesalers

Services Rendered to producers

WHOLESALE TRADE
Wholesaling involves selling goods in large quantities to traders for resale. A wholesaler is a trader who buys goods in bulk from producers/manufactures for resale to retailers at a profit.
-There are wholesalers who carry out retailing but that do not make them retailers.
Classification of wholesalers/Types of wholesalers
Wholesalers may be classified depending on a number of factors. These factors include;

Under this classification, wholesalers may be any of the following;

The word merchandise means goods.
-The general merchandise wholesalers stock and sell a wide variety of goods e.g. hardware, clothes, cosmetics and foodstuffs. The retailers who buy from these wholesalers are thus able to get a wide variety of goods for resale.
-They are also called general wholesalers or full-line wholesalers
b)  General line wholesalers
-These are wholesalers who deal in a wide variety of goods within the same line e.g. textbooks, duplicating papers and other types of stationary.
c) Specialized wholesalers
-These are wholesalers who deal in a particular good from a given line e.g. in the line of grains, they may specialize in maize only.
ii) According to the geographical area in which they operate.
Under this category wholesalers may be;

These are wholesalers who supply goods to traders in all parts of the country.
-They establish warehouses or depots in different areas from Kenya National Trading Corporation (KNTC)
b)      Regional Wholesalers
These are wholesalers who supply goods to certain parts of the country only. They may cover a county, District, division e.t.c
iii) According to their method of operation
Under this classification, wholesalers can be:

-They neither offer transport nor credit facilities to their customers.

These wholesalers specialize in selling certain/particular products to other specialized wholesalers. They buy goods from producers or from other countries for reselling.
E.g. some wholesalers buy horticultural products from producers and sell to other wholesalers in urban areas
-Rack jobbers usually stock their goods in shelves or racks from which customers select the goods to buy. Customers may be allowed to pay for the goods after they have sold them.
d) Drop shippers
These are wholesalers who make orders for goods from manufactures/producers but do not take them from the producers premises. They then look for the buyers for the goods and supply the goods directly from the producers
Alternate classification of wholesalers
An alternative classification of wholesalers is given below:

These terms are explained as below:

Functions of a wholesaler
These can be discussed as services rendered to producers, retailers and to consumers.
Services of wholesalers to the producers

Services of wholesalers to the Retailers

Services of wholesalers to consumers

DOCUMENTS USED IN HOME TRADE
A business document is a written record which gives evidence to a stage in the transfer of goods or provision of services from one party or it is written record which gives evidence that trader or a business transaction has taken place.
A business transaction is a deal between two or more people involving exchange of goods and services in terms of money.
Business transaction may take place on cash basis; in which case goods are paid for before or on delivery or a short while after delivery
Business transaction may also take place on credit basis; which means payment is made after a specified period from the date of delivery of the goods or the provision of the services
There are various business documents that are used in various stages of business transactions as discussed below;

This is the first stage in transaction. An inquiry is a request by a prospective buyer for information on available goods and services. It is aimed at establishing the following;

Some of the documents used at this stage include;

This is a letter written by a potential buyer to the seller to find out the goods and services offered by the seller.
A letter of inquiry can be general or specific. A specific letter of inquiry seeks for information about a particular product.
Reply to an inquiry
The seller may reply to the letter of inquiry by sending any of the following documents;
-Price list  -A catalogue               -Quotation                  -A tender
i)  A price list
This is a list of items sold by the trader together with their prices. The information contained in a price list is usually brief and not illustrated and may include;
–Name and address of the seller -List of the goods and services
-The recommended unit prices of the products  -Any discounts offered
Price list show the prices of the commodities at that time.

It is normally sent by the seller to the buyer when the buyer sends a general letter of inquiry. It usually carries illustrations on the goods stocked, and could be in the form of attractive and colorful pictures
The content of a catalogue includes the following;

-Catalogues carry more information than the price list and they are more expensive to print.

The content of a quotation includes the following;
-Name and address of seller -Name and address of the buyer
-Description of goods to be supplied              -Prices of the commodities
-Terms of sale i.e. discounts, time of supply, delivery
-Total of the goods to be supplied
Quotations are normally in form of letters, but many large-scale businesses have pre-printed quotations forms which they readily send to the potential customers.

This is a document of offer to sell sent by a seller to a buyer in response to an advertised request
Tenders contain the following;
–Date when the tender advertisement was made      –Mode of payment
-Date of making document                               –Discounts given
–Name and address of prospective seller called the tenderer
–The prices at which the goods can be provided
–Period of delivery                                   –Mode of delivery
-Tenders are delivered in sealed envelopes which are opened by the buyer on a specified date
The winning tender is usually awarded on the of the lowest quoted price although the buyer is not obliged to accept this especially if quality is likely to be low
Tenders are not binding unless accepted by the buyer.

After receiving replies to inquiry in form of price list, catalogue or Quotation, a prospective buyer will study the terms and conditions stated in them, and then may decide to buy products or not.

If a prospective buyer decides to purchase an item(s), he or she then places an order
An order is a document sent by a potential buyer to a seller requesting to be provided with specified products under specified terms and conditions
-An order issued for goods is called a local purchase order (LPO)
An order issued for services is called a local service order (LSO)
Ways of making an order

-Where written orders are made, the potential buyer keeps a copy of the order for use in verifying the goods ordered when they are delivered.
–A written order may contain the following;

On receiving the order, the seller sends the buyer an acknowledgement note
An acknowledgement note is a document sent by the seller to the prospective buyer to inform him/her that the order has been received and it is being acted upon.
After sending the acknowledgement note, the seller has to decide whether to extend credit to the buyer or not. At this stage, the seller has the following options;

A proforma invoice
This is a document sent by the seller to the buyer requesting the buyer to make payment for goods or services before they are delivered. It indicates that the seller is not willing to grant the buyer credit
Functions of a proforma invoice

Circumstances under which a pro-forma invoice may be used

Documents used at the Delivery stage
After the seller has accepted the order sent an acknowledgement note and where necessary the pro-forma invoice, the seller then prepares the goods for delivery to the buyer. This can be done in the following ways;

The main documents that are used at this stage are;

-A copy of the packing note is packed with the goods to make/help the buyer have a spot check.
The contents of a packing note include;
–Description of goods packed
-Quantities of goods packed
-The means of delivery
NOTE: A packing not does not contain prices of goods. This ensures that those people involved in checking and transporting goods do not know the value of goods. This is done as a precaution against theft.

-It contains the following;
-The means of delivery                  -A description of the goods
-The quantity dispatched               -Date
-Name and address of buyer and seller
Functions of an advice note

-A delivery note is always made in triplicate (3), one copy remains with the seller and two sent to the buyer.
-When the goods reach the buyer, he/she confirms that the goods are the ones ordered for and that they are in the right condition by comparing the delivery note, the order and the goods. If the buyer is satisfied with the goods, he/she signs the two copies, retains the original and send the copy back to the seller. This serves as evidence that the goods have been received in the right condition and in the right quantities.
-Some businesses keep delivery books in which the buyer signs to indicate that goods have been received in good condition. A delivery book is used by the seller if he/she delivers goods by himself/herself as an alternative to a delivery note
The content of a delivery note includes the following;

This is a document prepared by a transporter to show that he/she has been hired to deliver specified goods to a particular buyer. This document is used when goods are delivered to the buyer by public means of transport e.g. by trains.
-The seller is the consignor, the buyer is the consignee and the goods the consignment
–The transporting company prepares the consignment note and gives the seller to complete and sign. The seller then returns the note to the transporter (carrier) who takes it together with the goods to the buyer.
-On receiving the goods, the buyer signs the consignment note as evidence that the goods were actually transported.
The content of a consignment note includes the following;

The contents of the goods received note include;

-When the goods are returned, the buyer informs the seller of the return by sending a goods returned note.
–A goods returned note is a document sent by a buyer to a seller to inform him/her that certain goods are being returned to the seller.
-Where the goods are returned because of damage, the note may be referred to as the damaged goods note.
The contents of the goods returned note include;

–When the seller receives the note together with the goods, he issues a credit note

This stage involves the seller requesting or demanding for payment from the buyer for the goods or services delivered.

 

Some of the documents used at this stage include:

This is a document sent to the buyer by the seller to demand for payment for goods delivered or services rendered.
There are two types of invoices namely:

Functions of an invoice

The contents of an invoice include the following:

The letters E and O.E (Errors and Omissions Excepted) means the seller reserves the right to correct any errors and omissions made in the invoice.
-On receiving the invoice, the buyer verifies the contents using the local purchase order and the delivery note. If the invoice is in order, the buyer makes arrangements to pay the amount stated.
Businesses which offer services issue a document called a bill, which serves the purpose of an invoice.

 

Differences Between the invoice and pro-forma invoice

The invoice The pro-forma invoice
  • It is issued after goods and services have been delivered
  • It is issued before goods and services have been delivered
  • It shows the total value of the goods or services on credit
 2)Shows the total value of goods and services to be bought
  • It is used to demand payment for products sold on credit
 3)It is used to demand for payment in advance for products to be bought
  • Used as a basis for making payment for products already bought
 4)Used as a basis for preparing payment for products not yet bought
  • Serves as a notice of payment for products bought on credit
 5) Serves as a Quotation for products to be bought.

This is a document sent by the seller to the buyer (credit buyer) to correct an overcharge. It is used to inform the buyer that the amount payable by him/her has been reduced
An overcharge is an excess amount charged beyond the right price.
Causes of overcharge may include;

-The purpose of the credit note is to reduce the total invoice amount by the amount of the overcharge.
-A credit note is usually printed in red to distinguish it from other documents.
–Contents of a credit note include;

Reasons why a seller would send a credit note to a buyer/circumstances under which a credit note is sent to a buyer.
-When there is an overcharge in an invoice
-When the original invoice had indicated items that were not supplied
-When the buyer returns empty cases/crates that had been charged in the invoice.
-When the buyer returns some goods to the seller
-If the buyer was entitled to a discount which was not given or taken care of in the invoice.

This is a document sent by the seller to the buyer to correct an undercharge on the original invoice. It is used to inform the buyer that the amount payable by him has been increased.
-A debit note acts as an additional invoice.
-An undercharge arises when amount charged on products is less than their right price.
Causes of undercharge include:

Circumstances under which a debit note will be sent to the buyer

Differences Between a debit note and a credit note

DEBIT NOTE CREDIT NOTE
  • Issued to correct an undercharge on the invoice.
  • Issued to correct an overcharge on the invoive.
  • Written on blue or black.
 2)Usually written in red
  • Issued when containers have not been returned
 3) Issued when containers have been returned.

 

Documents used at the payment stage
This is the final stage of a credit business transaction. It takes place after the invoice has been received and ascertained to be correct or where necessary, corrections made.
The documents used at the payment stage include;

This is a document issued to the buyer by the seller as proof that payment has been made.
-Payment can be done in cash, cheque, other forms of money or in kind
-The receipt also serves as a source document for making entries in books of accounts.
Contents of the receipt include;

-The issuance of a receipt by the seller to the buyer after receiving payment marks the end of the credit transaction between the seller and the buyer (where payment has been done in full)
-A receipt serves the same purpose as the cash sale slip
ii)          Statement of Account
This is a document prepared by the seller and sent to the buyer, giving a summary of all the dealings/transactions between them during a particular period of time, usually a month. It has the following details;

-Debit column-increases in the amounts payable due to credit sales or under charge correction.
-Credit column-Decrease in the amounts payable due to overcharges corrected or payments recorded.
-Balance column-Amount owing after each transaction (Balance outstanding)

-The statement of account enables the buyer to ascertain the correctness of the transactions which have taken place with the seller over the stated period.
iii) IOU
An IOU (I owe you) is a document written by the buyer and sent to the seller to acknowledge a debt.
-It does not specify date when settlement will be made.
-It acts as evidence that a debt exists.
Summary of documents used in home trade

Document sent by buyer Document sent by seller
-Letter of inquiry –Price list
–Order –Catalogue
–Goods received note –Quotation
–Goods returned note -Tender
–IOU -Acknowledgement
  -Advice note
  –Packaging note
  –Delivery note
  –Consignment note
  –Invoice
  –Pro forma invoice
  –Credit note
  –Debit note
  –Receipt
  –Statement of account

MEANS OF PAYMENTS
These are the methods or ways the buyer may use to settle debts arising from a business transaction. These are various means of payments that can be used. These means of payments can be put into the following groups;

This refers to the use of notes and coins to make payments. Currency notes and coins are issued by the central Bank of Kenya and are therefore legal tender
–Legal tender means everyone is obliged by law to accept them as a means of payment i.e. no one can refuse to accept them as they are backed by the law.Notes and coins are available in different denominations as follows;
Coins; 5cents, 50cents, sh.1, sh.5, sh.10 and sh.40
Notes; sh.10.sh.20,sh.50,sh.100, sh.200,sh.500 and sh.1000.
-Coins are suitable for settling small debts and are acceptable as legal tender up to a certain maximum e.g. 50cents coins the maximum is sh20 and sh.1 the maximum is ksh.100.
Advantages of cash as a means of payment:

Disadvantages of cash as a means of payment

Circumstances under which cash payment is appropriate

Commercial banks are financial institutions that accept deposits to and withdrawals from them.
They also lend money to customers. Examples of commercial banks include: Commercial bank of Kenya, National bank of Kenya, Barclays bank, and Co-operative bank e.t.c
-There are various means of payments provided by the commercial banks. They are:

This is a written order by an account holder with the bank (drawer) to the bank (drawee) to pay on demand a specified amount of money to the named person (payee) or the bearer
Parties to a cheque

Details on a cheque; they include:

Types of cheques

This is acheque that can be presented for payment over the counter. You present it and cash is paid to you.

 

This is acheque that bears two parallel lines on the face. This means the cheque cannot be cashed over the counter. The cheque is deposited in an account (payee’s account)
The payee then withdraws the money from his/her account
A crossed cheque can be opened by the drawer signing twice on its face.
-A crossing can be general or special
–General crossing-general crossings only contains the two parallel lines. This implies that the cheque will be paid through any bank in which it is deposited.
–Special crossings-Has other instructions included in the crossing i.e;

Dishonouring a cheque
A cheque is dishonored if the bank refuses to pay and returns the cheque to the drawer.
-A cheque can be dishonored due to the following reasons:

Advantages of using cheques

Disadvantages of using cheques

Circumstances under which a cheque is appropriate as a means of payment

-This is a cheque drawn on a bank i.e. a cheque drawn by one bank to another requesting the latter bank to pay a named person or institution a specified sum of money and charge it to the drawing bank
-It can also be drawn by a bank on the request of a customer. The customer fills in an application form obtained from a bank and hands it over to the bank together with the money she wants to transfer and a commission for the service.
-The bank then prepares the cheque and gives it to the applicant who can then send it to the payee
-A bank draft has the drawing bank’s guarantee for payment. It is therefore more readily acceptable than personal cheques.
-It is suitable when urgency is desired in the payment as it is more readily acceptable.

This is a means of payment provided by commercial banks to their current accounts holders who want to pay many people using one cheque/at the same time
-One cheque is drawn and is usually accompanied by a list of the people to be paid, the amount to be paid to each person and the addresses of the bank branches where the payment is to be made.
-The bank then ensures that a credit transfer is affected to the various bank branches and each payee is paid
-A credit transfer is usually used by employers to pay salaries to their staff members.
d)   Standing order
This is an instruction to a bank by an account holder to pay a named person or an organization a fixed amount of money at regular intervals over a specified period of time or until stopped
-It is a very useful means of payment for business people as it enables them to regularly pay their recurrent bills e.g. water, insurance, electricity, loan payment, hire purchase payment e.t.c
e) Traveler’s cheques
This is a cheque drawn by one bank to another requesting the latter to pay a specified sum of money to a named bearer, who usually would have bought that cheque from issuing bank. The cheque holder pays the value of the cheque plus the charges for the services to the issuing bank.
-Travellers cheques are usually issued in fixed denominations and are very convenient for travel purposes, hence their name. They enable a person to travel without having to carry a lot of cash. The cheques are also readily acceptable as a means of payment.
f)   Telegraphic Transfers
This is a method /means of transferring money offered by commercial banks to anybody who wants to send money to another
The sender is required to fill an application form and provide the following information among others:
-His/her name                        -The amount of money to be remitted
-Name of the payee               -The bank where the money would be paid
The applicant is charged a commission and telegraph fee. The paying bank sends a telegram to the payee who has to identify himself/herself before the payment is made
The method is fast and safe.

These are plastic cards issued by financial institutions e.g. banks that enables a person to purchase goods and services from any business that accepts them.
Debit cards are used to make payments from money held in ones accounts and are therefore an alternative to cash payments. Examples are ATM cards.

EFT is a method of transferring money from one account to another where computers are used. The sender is required to fill an electronic fund transfer form provided by the bank which instructs the bank to transfer money from his/her account to a named account.
Information is then sent to the payee’s bank electronically and the amount in the account is increased accordingly. The method is very fast.

The post office provides means of payments that can be used to transfer money from one person to another
The means of payments provided by the post office to facilitate payments includes,

A money order facilitates the transfer of money from one person to another through the post office (and/or bank)
A money order is usually for a specified sum of money usually purchased with cash from the post office
A person wishing to send money using this method visits a post office and completes an application form. Some of the details contained/given in the form include:

The application form, money to be remitted and commission for the service is handed to the post office cleark who prepares the money order and gives it to the sender who may post it or send it to the payee.
-Telegraphic money orders, the post office sends a telegram to the payee informing him/her to go to the post office and claim the money.
-Before payment is made, the payee must;

-The sender of the money is left with a counterfoil which serves as evidence that money was sent and it can be used to reclaim the money if it did not reach the payee
-Money order may be open or crossed. A crossed money order bears two parallel lines drawn diagonally on its face and must be deposited in the bank account of the payee. It cannot be cashed over the counter at the post office.
-An open money order can be presented for payment at the post office counter.
Circumstances under which money order is appropriate

This is an Electronic Fund Transfer (EFT) service offered by the postal corporation of Kenya, for sending and receiving money instantly from various destinations both locally and internationally.
-The person sending money fills in a form called ‘send form’ giving the following details;

-The sender hands over the form, the amount of money to be sent and the commission to the post office clerk for processing
-The transfer is done via the internet through a machine that gives a twelve-digit number for the transaction called the  ‘Transaction control number’(TCN).The sender then conveys this number, amount sent and pay location to the recipient and instructions to the recipient to visit the named post office for payment. This message is usually conveyed through the quickest means possible such as a telephone call
-The sender is given a copy of the processed ‘send form’ as proof that money has been sent. The post office retains the original for record purposes.
-When the receiver visits the post office, he/she will fill a ‘receiver form’ giving the following details;

The receiver then identifies himself or herself by producing an ID card or passport before receiving the money.
-The recipient/payee is then given the money, a copy of the receive form as proof of having received the money. The paying post office retains a copy as proof of payment.
Advantages of using Posta pay as a means of payment

 

–Postal orders are sold by the post office for the purpose of remitting money
-They are available in fixed denominations of sh.5, 10.20,40,60,80,100 and 200
-On buying a postal order, the sender pays for both the face value of the postal order and a commission charged for the service
-Postal orders just like money orders are issued with counterfoils that the sender will keep as evidence of remittance in case the person to whom he/she remits the money does not receive it.
The sender writes the name of the payee on the postal order as a safety measure.
Payment to the bearer can be made in any post office with postal order facilities
Postal orders may also be crossed or open (see crossed and ordinary money orders)
Circumstances under which postal orders are appropriate

Differences between postal orders and money orders

Postal orders Money orders
  • It can be cashed at any post office
  • Can only be cashed at a specific post office
  • Are in fixed denominations
 b)Varies according to the needs of the remitter
  • Does not require any application form to make a remittance
 c)Requires the filling of an application form in making remittance
  • Can be cashed by the bearer
 d)Can only be cashed by the payee
  • Value can be increased by affixing revenue stamps
  e)Value cannot be increased by affixing revenue stamps

Postage stamps may be used to pay small amounts of money. The person to whom the stamps are sent can then use them for sending mail and/or to pay someone else.

 

Premium bonds are issued by the post office in denominations of sh.10 and sh.20.They mature after a given period, after which one can cash them.
-Bearers can also enter into draws so as to win money.
-Premium bonds can be used to settle debts, but it is not a safe method because they can be cashed by anybody i.e. by the bearer.
Circumstances under which postage stamps and premium bonds are used

 Means and payments which arise from private arrangements between the sellers and the buyers
There are various business documents that originate from private agreements between buyers and sellers. The buyer acknowledges the credit and accepts to pay at specified future dates by signing some documents. These documents include;

This is unconditional order, in writing, addressed by one person to another, requiring the person to whom it is addressed by one person to

another, requiring the person to whom it is addressed to pay on demand, or at a stated future date, the sum of money on the bill to the drawer, or a named person or to a bearer.

-A bill of exchange is prepared by a creditor to a debtor when a creditor wants to be assured of payment by a debtor on a given future date or when asked to do so by the creditor
-If the buyer/debtor signs the bill “accepted” then he/she cannot deny responsibility for the debt since he/she has acknowledged responsibility for the date.
Procedure for preparing a bill of exchange
A bill of exchange is written by a person (creditor) to his debtor to seek assurance that the debtor would pay the debt.
Step 1.The creditor prepares the draft and sends to the debtor.
Step 2.The draft and after accepting the conditions laid therein, he/she signs on it and write the words “accepted”. He/she then sends it back to the creditor. At this point the draft becomes a bill of exchange.
Step 3.The creditor receives the bill and may:

Parties to a bill of Exchange

Essentials of a bill of Exchange

NOTE: A bill of exchange becomes a means of payment when it is presented (discounted) to the banks or negotiated.
Advantages of using a Bill of exchange

Disadvantages of using a Bill of Exchange

Circumstances under which a Bill of exchange is appropriate.
-When the creditor wants to be assured that the payment would be done
-Where the creditor wants money while the debtor is not able to raise it before the end of the credit period
-Where the creditor wants to use the debt to pay another debt.

Features of a promissory note

-After drawing and signing the promissory note, the debtor (borrower) sends it to the seller. (Lender)
-The seller/lender may keep it until maturity and then present it for payment or may discount it with the banks before maturity.
Similarities between a Bill of Exchange and a promissory note:

Differences between a promissory note and a bill of exchange:

Promissory note Bill of Exchange
–Drawn and signed by the debtor –Drawn and signed by the creditor
–It does not need to be accepted –It must be accepted by the debtor for it to be valid
–The drawer and drawee are one person –The drawer is the creditor and the drawee is the debtor

-IOU is an abbreviation of ‘I owe you’
-It is a written acknowledgement by a buyer of a debt arising from the purchase of goods and services on credit. It is written and signed by the buyer and sent to the seller
-If the seller accepts it, then the buyer can receive goods and services on credit.
Though the IOU does not usually indicate the specific date of payment, the buyer acknowledges the debt and accepts responsibility to pay at a suitable future date
NOTE: The use of IOU is restricted to commercial transactions involving parties who have dealt with each other for a long time; hence they know each other well.

–These are plastic cards that enable a person to purchase goods or services on credit from any business willing to accept the card
-They are both a means of payment and a term of payment

-This is a means of money transfer services provided by mobile phone service providers to their customers (subscribers)
-It can only be used to transfer money between people subscribed to the same mobile phone network e.g. from one safaricom subscriber to another safaricom subscriber, Airtel to Airtel e.t.c
-The sender must register for the money transfer service and is issued with a PIN (personal identification number)
-When money is sent, both the sender and the receiver will receive a message confirming the transfer.
-A person can send money anytime anywhere so long as he/she has value in his/her m-pesa, pesa pap account.
-Each mobile service provider has a range of value that can be transferred using this method.
-A small transaction fee is charges for the transfer i.e. for sending and withdrawing

 

Benefits of mobile money transfer services

TERMS OF PAYMENTS
These are the various agreements/conditions agreed upon between sellers and buyers regarding how debts arising from their transactions should be settled. These conditions include;
-How payment is expected
-When payment is expected
-What is included in the quoted price e.t.c.
Terms of payments are broadly categorized into two;

–This classification depends on whether the agreement is to pay for the products immediately or at a later date.

Cash terms of payment apply when a buyer is required to pay for goods or services immediately before or after delivery. They include the following:

–Mainly used in retail businesses where customers are required to pay as they get the goods or receive the service.
b)    Cash on Delivery (C.O.D)
–This is where the buyer pays for the goods (or services) as soon as they are delivered to his or her premises.
c)    Cash with order (C.W.O)
–This is where the buyer is required to pay for the goods when making the order for the goods or the services.
Circumstances under which C.O.D and C.W.O are appropriate

d) Prompt cash; This is where payment should be made within a few days (normally seven days) after delivery.
-Prompt cash period allows them to examine the goods and check the invoice to certify its corrections
ii)          Deferred payments
This means that goods or service are not paid for in full on delivery. They are instead paid in future in a lump sum or in several instalments.
The period within which a buyer is supposed to pay the seller is referred to as credit period and is expressed in terms of days.
-Terms of payments in credit transactions are usually agreed upon by the seller and the buyer depending on;

-In determining the credit worthiness of a buyer, the seller will consider;
a)  Character-The behavior of the buyer in terms of honesty, which determines the probability of the buyer honoring his /her debt obligations
b) Capacity-The buyer’s ability to pay as indicated by past business performance records or the profitability and the value of his/her assets.
c) Capital-The financial position of the buyers business or how much the buyer’s business is worth.
d) Collateral-These are the properties of value pledged by the buyer as security for the credit
e) Condition-The effect of the existing economic conditions on the buyer’s ability to pay his/her debts.
Forms of Deferred payments (credit payments)

–Under these forms, goods and services are sold to the buyer who is expected to pay for them at a future date or within a given period
-The buyer may also be required to pay for goods or services on installments.
-Discounts may be allowed to encourage the  buyer to pay on time.
-The ownership of the goods passes to the buyer immediately after entering the contract. The seller should however ensure the buyer will pay by:

Factors to consider when giving credit

NOTE: No interest is usually charged on open trade credit.
Examples of open trade credit

-Is a form of credit extended to a trader or a customer for a very short time, usually not more than a week
-It is a common form of credit between retailers and their customers.
-It is also referred to as prompt cash because payment is made within a short time.
ii) Monthly credit
–A form of credit extended when a seller allows the buyer to pay/settle his/her debt after one month
-The buyer can continue taking goods from the seller up to the end of the month.
-It is a form of credit usually allowed by retailers to salaried workers for goods such as food items and newspapers
iii)  Budget Accounts
-Are usually operated by large scale retailers to approved customers
-The retailer keeps an account of the customer in his/her books
-To operate budget accounts;

iv)Trade credit
–This is credit given by a trader to another trader when goods are bought for selling
-Payments for the goods is made after selling the goods or within an agreed period of time
v) Credit card facilities
–Plastic money (credit cards) enables the holder to obtain goods and services on credit form specific suppliers (people willing to accept the cards)
-They also enable the holders to obtain money from specific banks and other specified financial institutions
-They are available to adults of approved credit worthiness
-Some credit cards can only be used locally while others like visa cards can be used both locally and internationally.
-When a customer makes a purchase using the card, the seller electronically verifies the validity of the card and whether the credit-card holder/customer has sufficient credit to cover the purchase. If all is well, the credit card customer signs a specific form that have been filled by the trader. Such forms are usually provided by the card company to the trader. The trader and the card holder retain a copy each and the other copies are sent either to the credit card company or to the trader’s bank.
–There are therefore 3 parties to a credit card;

-At regular intervals, the credit card company sends a statement of account to each card holder showing the outstanding balance at that time. The outstanding balance should not be greater than the allowed credit limit.
-Examples of companies that issue credit cards include; Barclays card, American Express, Access cards and Visa cards.

Advantages of credit card

Disadvantages of credit cards

To Hire: Means to use someone else’s property for a payment
Hire purchase: Is a method of hiring property with an option to buy.
-The term of payment for a hire purchase are;

-Goods sold on higher purchase are durable and expensive such as; vehicles, furniture, electronics e.t.c
-The buyer can only posses the commodity but not own it.Therefore’the buyer cannot sell the goods to another person before all installments are paid
-Ownership of the goods remains with the seller. The goods are ‘on hire’ to the buyer.
-After completing the payment (after the last installment has been made), a certificate is issued to the buyer as proof of transfer of ownership
-Incase the buyer fails to make payment/defaults in payment; the seller can repossess the goods. However if the buyer has paid two thirds of the total/hire purchase price at the time of defaulting, the seller has no legal right to repossess the goods.
-The seller can only recover the remaining amount of money through a court action
-The seller must display both the cash price and the hire-purchase price on the items to enable the buyers to decide under what terms they want to buy the goods.
-A written agreement has to be entered into by both the seller and the buyer. The agreement safe-guards the intervals of all of them
-Examples of hire purchase businesses operating in Kenya include; Africa Retail Traders (ART), Kukopesha, Singer and Amedo.
-For salaried people, the hire purchase has introduced a system where the installments are deducted directly from the buyer’s salary every month. This is called the check-off system. In this system, no deposits/down payments are required. The buyer’s employer takes up the duty of remitting the deposits to the seller on a monthly basis.
Advantages of Hire purchase
To the buyer

To the seller

Disadvantages of Hire purchase
To the buyer

To the seller

-In this form of credit selling, the buyer is not required to pay a down payment. Payment for the goods is made in equal installments spread over a period of time. These installments cover interest and related costs of selling.
Other features of installment buying

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